GIC plans to tighten re-insurance norms

In order to restrict the undisclosed exposure of non-life insurers, General Insurance Corporation of India (GIC), the national reinsurer, is planning to control the risk reinsured through facultative reinsurance arrangements.

The move was proposed to be implemented from the next financial year, a senior GIC executive told Business Standard.

“GIC is getting very little share of the facultative reinsurance (fac re) pie. It is mostly done by insurers among themselves and (they) rate the risks inappropriately. In order to avoid low pricing and deductibles, we are going to discourage fac re by insurers,” said a senior GIC executive.

Under facultative agreements, which are done on a case-to-case basis, the rates are fixed depending on the risk to be reinsured, under treaties which have participation from insurers, the national reinsurer and international players. The risks are pooled and commissions fixed at the beginning of the year.

Similarly, in facultative reinsurance, the reinsurer can take a call based on the risks involved and the cost of underwriting a project. In contrast, under treaty arrangements, rates cannot be changed and do not depend on individual risks.

GIC’s move will deter companies from opting to price risks cheap through facultative arrangements as they will have to disclose the parameters of the treaty signed to the national reinsurer. Accepting or rejecting the treaty based on the underwriting scope will be at the discretion of GIC. At present, they are offering high discounts to grab the market share.

“This is a mild threat from GIC to insurance companies. GIC is trying to send a message that it may not accept all kinds of arrangements,” said an insurance broker.

Industry players said recent claims prompted GIC to tighten the arrangement. GIC had to pay around Rs 70 crore to Bhel and another Rs 130 crore to Indian Oil Corporation.

Last year, GIC had introduced profit-sharing at the time of treaty renewals. Industry players said GIC had been taking new steps so that companies underwrote risks properly.

Post detarification, insurance companies have been offering discounts as high as 85 per cent. Though rates in some segments such as group medical insurance have hardened during the last few months, insurers said there was a long way to go before prices stabilised.

During the last financial year, the non-life insurance industry had reported cumulative underwriting losses of around Rs 5,000 crore.