Irdai reduces obligatory cession of premiums to GIC Re to 4% from FY23

Firm stands to lose about Rs 1,500 cr of premium, say experts

The insurance regulator has lowered the obligatory cession of sum insured on each general insurance policy that is to be reinsured with state-owned reinsurer GIC Re to 4 per cent, beginning financial year 2022-23 (FY23), from 5 per cent earlier. The move could result in GIC Re losing about Rs 1,500-2,000 crore of premiums, said industry experts.

In a gazette notification, the Insurance Regulatory and Development Authority of India (Irdai) said: “The percentage cession of the sum insured on each general insurance policy to be reinsured with the Indian re-insurer(s) shall be 4 per cent in respect of insurance attaching during the financial year beginning from 1st April, 2022 to 31st March, 2023, except the terrorism premium and premium ceded to nuclear pool, wherein it would be made nil”.

Obligatory cession refers to the part of business that general insurance firms have to mandatorily cede to the national reinsurer, GIC Re.

“It’s a very positive thing because rather than forcing people to do (business) based on obligation, it should be left to individual companies’ appetite. So, for us as a large company and the fact that our obligatory cession was profitable, we will stand to benefit, though it’s a marginal benefit because 5 per cent obligation has been reduced to 4 per cent,” said Bhargav Dasgupta, managing director and chief executive officer, ICICI Lombard General Insurance.

“This decision may hit GIC Re marginally, but for the primary insurers the impact of this will depend on whether they are able to get more reinsurance capacity for the extra risk. Insurers started looking for reinsurance capacity at 95 per cent because 5 per cent was automatic cession to GIC Re. Now, it will start at 96 per cent. On an average around 5-70 per cent of the risk is re-insured, depending on the various lines of business,” a private sector insurer said.

Irdai has been reducing the obligatory cession over time — from as much as 20 per cent, to 15 per cent, and then to 5 per cent, and 4 per cent now. Slowly the regulator is making sure that more re-insurers get into the market to develop India as a hub, he added.

Furthermore, the regulator has also fixed the percentage of commission on obligatory cession for each class of business. In the motor third party, oil and energy businesses, there will be a minimum 5 per cent of commission, while it is 10 per cent in group health business, and 7.5 per cent in the crop insurance business. All other classes of insurance business will attract a minimum 15 per cent commission.

“Commission over and above, can be as mutually agreed between Indian re-insurer(s) and the ceding insurer,” Irdai said.

According to regulations, the reinsurer, in this case GIC Re, has to share the profit commission on a 50:50 basis with the ceding insurer based on the performance and surplus of the total obligatory portfolio of the ceding insurer. However, no profit commission is payable if the loss ratio exceeds 78 per cent and profit commission shall not exceed 14 per cent, the regulator said.