A big step forward in reinsurance sector

Comments from stakeholders and others would assist in making the guidelines congruent with the reforms proposed by the govt

After a wait of seven years, the new government has amended the insurance Act, which has given a substantial role to the regulator to form the rules to translate this policy into practice by the industry and the stakeholders. The regulator's office has done a commendable job in putting up the exposure drafts in several areas within a short period. One such reform is the introduction of global reinsurance players of a certain size and rating to the Indian market directly by their branch presence. In several ways, the draft exposure meets with the policy stance in promoting a robust reinsurance sector in India. The exposure draft has invited comments from the stakeholders before the regulator finalises the guidelines.

There are two significant areas which will demand comments from three stake-holders. One is the aspect of providing hierarchal right of refusal to different players. The second one is the aspect of limiting the retrocession for the players.

The first stakeholder who should offer his comments to the exposure draft is the government. The Prime Minister's Office, the ministry of finance and perhaps the law ministry could offer their comment on both these aspects. On one side the government is promoting India Inc and inviting investors and know-how and several road shows are being organised to this effect. The concept of creating a non-level playing field may be difficult for the government to digest. And from the aspect of promoting competition and avoiding restrictive practices, the law ministry could also comment on its tenability. A quota system would result in promoting inefficiency for which the insurance industry will pay a price. Then again the concept of retrocession is an extreme swing from the policy stance articulated both in the preamble to the amendment and also the report offered by a select committee to Parliament. The policy formation is the prerogative of the government and Parliament and hence the need for a comment to the exposure draft from this stakeholder.

The second stakeholder who could offer his comments to the exposure draft are the customers of reinsurance, namely the insurers. The quota system as proposed in the exposure draft would be a restrictive practice and promote inefficiency. The larger question is whether the insurers were better off in the prevailing regulatory conditions where they could cede their premium and risks to global reinsurers, after complying with ceding it to the national reinsurer, in offshore locations or go through the rigour of different quotas for different players.

The third stakeholder is the global reinsurance industry itself. Both the players and the regulators and reinsurance associations from various global markets should share with the regulator their views on the subject. If they have past experience of working in markets with differential rights to write business or where retrocession is limited then they could provide it to the regulator. It should avoid responding to the reform by creating such barriers for Indian reinsurers in their jurisdictions.

The regulations are in their state of drafting. One would conclude that comments from these stakeholders and others would assist the regulator in making the guidelines congruent with the reforms proposed by the new government.

The author is Managing Partner, Ashvin Parekh Advisory Services LLP. Views are personal