Soon, insurance companies in India will not be able to pass on a majority of their risk to reinsurers. The Insurance Regulatory and Development Authority (Irda) is set to specify the retention limit in this regard for insurance companies.
In a communication to the CEOs of insurers, Irda said companies operational for more than 10 years would not be able to cede more than 30 per cent of their premiums to reinsurance companies. Those operating for less than 10 years would have to retain half the risk in their books. There were no such caps till now.
According to sources in the sector, most insurers retain nearly half of risk and move out the rest. Companies, generally, pass on or cede a part of their risk to reinsurance companies against a ceding commission. Under these agreements, reinsurers would bear the claims arising out of these risks.
According to Irda, with most of the risk passed on to the reinsurers, an insurer is eventually acting as “service provider” rather than “risk bearing insurer”.
“If an insurer has low retention limit, then such insurers only act as an insurance service provider than as a risk bearing insurer. This amounts to fronting. Fronting insurers only rely on ceding commission without developing national retention capacity and underwriting expertise necessary for development of a viable domestic insurance industry,” it has said in a recent letter to the insurers.
The regulator said each insurer should formulate its retention policy for each type of product, based on emerging claims experience, financial standing, underwriting capacity and so on in the annual reinsurance programme it gives to the authority. “In addition, the insurer shall clearly demonstrate that such reinsurance arrangements are prudent and in the best interests of with-profit policyholders, in terms of minimising the cost to the with-profit funds.”
Insurers are divided on the latest mandate. “Reinsurance being the tool to manage a company’s risk, it depends from company to company as to how much risk premium they wish to cede with reinsurers,” said G N Agarwal, chief actuary, Future Generali Life Insurance Company. “It’s not a very good move for the industry because the regulator has suggested a cap on how much premium can be ceded. The regulator shouldn’t have intervened in the risk management business because every insurer has a different risk book and the company will have to cede premium accordingly. This may even lead companies having larger risks to suffer losses.”
According to G V Nageswara Rao, managing director and CEO, IDBI Life Insurance, as the regulator was trying to improve local capacity, the suggested cap was fair. “Most companies try to retain more risk on their own books and pass on a small portion to the reinsurers.
But, for smaller companies who don’t have enough risk appetite, this limit on ceding premium could pose a problem on their books,” he added.