Irdai's protection to a few reinsurers riles industry

Implements the controversial guideline allowing first right of refusal to select players

In a move that favours few players in the reinsurance market, the Insurance Regulatory and Development Authority of India (Irdai), on Tuesday, implemented the reinsurance guidelines that allows GIC Re and some foreign players with Indian branches the first right of refusal with immediate effect.

Irdai’s decision has shocked both general insurers and brokers, who feel this would mean protection for one set of players. “Giving preference to some players would be against the principle of the ease of doing business, something the Indian government wants to improve upon,” said a general insurance executive.

The reinsurance regulations on order of preference in regulation 28(9) of Irdai’s foreign reinsurers regulations has been under contention since the time it was proposed a year back, as both general insurance players and brokers feel the few reinsurance players would have an edge over other players. This could lead to a rise in premia and will be against policyholders’ interest.

The controversy started when Irdai proposed four categories of reinsurers who would get preference in the following order: GIC Re, foreign reinsurers with branches in India, offices of reinsurers in special economic zones and cross-border players. The five foreign players who have been granted the R3 licence (permission to open branches) thus far include Switzerland-based Swiss Re, France-based Scor, two Germany-based reinsurers Hannover Re and Munich Re, and RGA Life Reinsurance Company of Canada.

A chief executive officer of a general insurance company said: “Earlier general insurers, after insuring a particular project, would go around the world seeking the best rates for reinsurance. This gave rise to competition and allowed cost-saving for both the insurer and the policyholder.” With this move, the market will move from free competition to prescriptive right of first refusal to a handful of players.

There are fears of cartelisation as well. “It will be quite easy for a few players, a common practice since three-four players often reinsure a single project, to come together to form a cartel and keep prices high,” said an industry executive.    

The Insurance Brokers Association of India, the industry body of insurance companies, had written to the General Insurance Council, expressing its issues with the order of preference guidelines. In this letter, the association had said creating four layers of preferred reinsurers and requirement to approach each layer and exhaust members within that layer to provide in writing their preferred interest on each and every placement would be an administrative ordeal and practically impossible to comply.

An industry player said that earlier foreign reinsurance companies only had subsidiaries in India. When they were allowed to open branches, they had asked the government to give them preference over companies that did not have branches in India. “The government was also told by these players that the premia, which get transferred abroad, would largely (50 per cent) be retained in India. “It is a fallacy that any regulatory condition such as retaining 50 per cent of the premium in the country will succeed in a transparent manner. The risks and premium would still move out, either through treaty or facultative reinsurance structures behind these branches,” said the letter.  

According to industry players, Brazil and Malaysia are the two countries with similar guidelines.