GIC Re links ceding fees to performance

Huge losses during 2011-12 have prompted GIC Re to go for a first: Start performance-based commissions to non-life insurers. The designated reinsurer in the country is offering commissions as low as five per cent if the underwriting practices and rates offered by the insurers are not satisfactory.

For the first time in its history, the 2000-founded GIC has developed a floating commission system based on the underwriting practices, claim history and pricing history of the insurance companies. The terms and conditions of each companies are different and, hence, the commissions offered, too. The commissions offered varies between five and 35 per cent, linked with the performance.

GIC has also prepared to do away with the business if the insurers decline to follow the new norms. Its chairman and managing director, A K Roy, said this was the first time the company had linked the commissions to performance. “A couple of non-life insurers are not doing business any more with us, as they were not willing to accept the conditions,” he told Business Standard. Of the two insurers, one was a state-owned general insurance company, he added.

According to the Insurance Regulatory and Development Authority (Irda), GIC, being the designated reinsurer in the country, is required to at least reinsure 10 per cent of the total business written by general insurance companies.

There are also sectorial caps on how much risk general insurance companies can place with GIC for various lines of their business like fire, industrial and marine risks, aviation, liability and machinery breakdown risks. The commissions offered varies between five and 35 per cent, linked with performance.

“For some companies, we have offered as low as five per cent, which will improve next year if they increase their profitability,” Roy said. “On the other hand, for good companies and in some lines of business like engineering, the commission can go up to 35 per cent.”

During 2011-12, GIC declared a net loss of Rs 2,490 crore, largely on the account of record claims from natural catastrophes from Japan, New Zealand and Thailand. The reinsurer also took a hit of around Rs 810 crore in the same period, on account of losses from the third-party motor pool. The total losses in the third-party motor pool is estimated to be around Rs 8,100 crore in the last financial year. GIC, by an Irda directive, has to bear 10 per cent the loss in the pool.

Typically, four state-owned insurers place as much as 65-70 per cent of their risk with GIC. On the other hand, the private general insurance companies place around 60 per cent of their risk. The decision also comes after the finance ministry issued a letter to GIC, asking it to avoid underwriting business which has high claims ratios like third-party motor and group health business.

Motor and health constitute 65 per cent of the total premiums in the general insurance industry.

However, these two lines of business are loss-making, with the average loss ratio being not less than 120 per cent.

During 2011-12, the general insurance industry collected Rs 58,344 crore by writing new polices — higher by 23 per cent from the previous year.

An official from a public sector general insurance companies, when contacted, said GIC had been trying to put in some restrictive conditions while renewing the contracts.

An official at a state-owned general insurance company said GIC was now looking at earlier claims history, pricing and risk management systems besides the technology adopted before deciding on the extent of reinsurance support to be given. “However, we have been able to get reasonable rates,” he added.