Irdai maintains 5% obligatory cession to GIC Re in FY21, fixes commission

Obligatory cession is the part of the business, or premium, that general insurers are required to cede on every policy sold to GIC Re

The insurance regulator has maintained the obligatory cession of each general insurance policy that is to be reinsured with an Indian reinsurer at 5 per cent for the financial year FY21.

“The percentage cession of the sum insured on each general insurance policy to be reinsured with the Indian re-insurer(s) shall be 5 per cent in respect of insurance attaching during the financial year beginning from 1st April, 2021 to 31st March, 2022, except the terrorism premium and premium ceded to Nuclear Pool, wherein it would be made ‘NIL’.

More importantly, the entire obligatory cession has to be reinsured with India’s largest reinsurer, General Insurance Corporation of India (GIC Re).

Obligatory cession refers to the part of the business that general insurance companies have to mandatorily cede to the national reinsurer, GIC Re. Basically, insurers have to cede 5 per cent of their premium on every general insurance policy sold to GIC Re. The insurance regulator decides on the percentage of obligatory cession every year.

 

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 business there will be 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”, the insurance regulator said.

As per Irdai regulations, the reinsurer, in this case GIC Re, has to share the profit commission, on 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, Irdai said.