Downgrading May Hamper Gic & #39;S Reinsurance Business

Private insurance companies are raising doubts over General Insurance Corporation of India (GIC), the designated National Reinsurer, to meet its commitments following its downgrading to BBB- (triple B minus) from BBB by Standard & Poor's (S&P).

The downgrading of GIC is expected to hamper its reinsurance programme and affect its ability to offer competitive premium rates. Underwriters would price the risks accordingly higher and this would not augur well for the local market, stated reinsurance brokers.

Insurance companies pointed to the dichotomy in the reinsurance regulations following the downgrading of the National Re. The notified regulations of Insurance Regulatory and Development Authority (IRDA) dictate that non-life insurance companies in placing their reinsurance business outside the country, can do so only with those insurers who enjoy a BBB rating from S&P. Insurers, however, are forced to maximise the retention capacity within the country through the National Re, despite GIC having been downgraded to BBB- by S&P.

"We are dealing with promises to pay here," said a leading foreign insurer. Even as GIC's downgrading follows on the heels of S&P revising its outlook for India, insurers opine that it could reflect on the claims payment ability of the National Reinsurer.

Insurers feel the need for the regulations to reflect the downward rating of GIC as the dichotomy has become obvious, especially when leading global insurers prefer to undertake business only with A- rated insurance companies. There is no immediate breach of regulations which state: "Insurers shall place their reinsurance business outside India with only those reinsurers who have over a period of the past five years (counting from the year preceding for which the business has to be placed) enjoyed a rating of at least BBB (with Standard & Poor) or equivalent rating of any other international rating agency."

In its defense, GIC officials stated that the downgrading is simply because one cannot have a higher rating than the sovereign. However, some officials stated that GIC continues to enjoy a rating of A+ by AM Best, "which rates insurance companies in particular". He added that GIC was expecting domestic rating agencies to give the National Re a rating of AAA.

However, insurance companies are concerned about "the fragile state of the government" and that GIC's rating is just one step away from being rated as BB+. GIC's downgrading and that of its four subsidiaries comes in the wake of S&P's outlook on India turning negative from stable.

One insurance official questioned S&P's ability to rate insurance companies in the light of what happened in the case of Independence. This insurer enjoyed a rating of AA before the organisation went bust.