Irdai advises firms about minimum rate rule for reinsurance treaties

Regulator's instruction is about burning or break-even cost calculated to estimate the expected losses for a policy

The industry regulator has asked non-life insurers and reinsurers to ensure that the burning costs rate published by the Insurance Information Bureau (IIB) for fire and engineering risks are not applied in reinsurance treaties in the Indian market starting from April 1 next year.

Burning or break-even cost for reinsurers is calculated by estimating the expected losses for a policy based on the average for past years, after allowing for claims inflation, exposure changes and any other amendments needed to make past claims data relevant to today's situation.

The Insurance Regulatory Development Authority of India (Irdai) gave the instruction after observing that reinsurance treaty agreements in many instances include, as a precondition or prescription, the requirement to apply IIB’s average burning costs as minimum risk rates.

“Such prescription by any reinsurer that effectively creates or reinstates a market (price) tariff is not in line with the de-tariffed pricing regime currently in vogue and would distort the level playing field intended to be provided by the Authority,” said Irdai.

According to Irdai, treaty arrangements where IIB published burning costs are treated as minimum risk rates do not acknowledge individual risk quality or loss history and discourage risk management along with the loss mitigation investments of insurance buyers.

While every reinsurer has the freedom to price its reinsurance product and freely negotiate terms of trade with its counterparties i.e., insurers, who are called cedants, the terms of trade of the treaty should not be an impediment on the freedom of the cedant to freely compete, negotiate, price and assume risks via its own contracts of insurance with its clients i.e., ‘insurance buyers’, the regulator said.

The regulator had previously clarified that that the IIB published broad-occupancy market average burning costs (commonly now referred to as “IIB rates”) for Fire and Allied perils and these were not to be interpreted/ operated as a minimum mandated rate, after it received feedback that such a practice was prevalent in the industry.

“The Authority has been working on reforms in the non-life insurance sector to enable ease of business from the viewpoint of Insurers as also to enable choice for insurance buyers/ consumers and create a free-market regime that fosters prudent risk management and loss control”, Irdai said in a circular.