As debate over obligatory cession rages, GIC Re could hold the solution

Whether obligatory cession should be cut to zero or retained could be resolved by allowing GIC Re to independently set commissions instead of Irdai mandating a fixed rate

The ongoing debate over whether obligatory cession should be abolished entirely — as many players in the non-life insurance industry have demanded — or retained in some form, could potentially be resolved by allowing state-owned GIC Re to set commissions for insurance companies independently, instead of the insurance regulator mandating a fixed rate. In this arrangement, the Insurance Regulatory and Development Authority of India’s (Irdai’s) role would be limited to determining the percentage of obligatory cession, industry experts suggested.

 

Obligatory cession refers to the portion of business that Indian general insurance companies must mandatorily cede to GIC Re, the national reinsurer. Ceding refers to the part of the risk that a primary insurer passes on to another insurer.

 

Irdai has retained the obligatory cession to be placed with GIC Re at 4 per cent for FY26 — the third consecutive financial year at that level.

 

Irdai has also specified that the commission on obligatory cession will be a minimum of 5 per cent for motor third-party and oil & energy insurance, 10 per cent for group health insurance, 7.5 per cent for crop insurance, and a minimum of 15 per cent for all other classes of insurance. Additionally, commission above the specified thresholds may be mutually agreed between the Indian reinsurer and the ceding insurer.

 

The obligatory cession was reduced from 5 per cent to 4 per cent in FY23. Irdai has gradually lowered it over the years — from 20 per cent to 15 per cent, then to 5 per cent, and subsequently to 4 per cent.

 

Meanwhile, there has been a long-standing demand from non-life insurers to bring down obligatory cession to zero, as the commission paid by the reinsurer does not reflect the industry’s cost structure, industry players said.

 

According to Ramaswamy Narayanan, chairman and managing director of GIC Re, the demand to reduce obligatory cession to zero comes from specific quarters, while other players are comfortable with the current structure. The difference of opinion, he said, lies in how commissions are disbursed. Private insurers that are profitable often feel they are subsidising others, particularly unprofitable state-owned insurers.

 

“Today, in obligatory, Irdai decides what is the minimum commission to be paid and it varies. We have suggested to Irdai that we understand how to price a contract, how to provide commissions. So if you only say what is the obligatory, we will handle the rest. On a company basis, depending on their performance, we know how to fix the commissions. Irdai has even allowed that, but I think it has been pending at the DFS level. Once that is given, I think everybody will be on board,” Narayanan said.

 

According to him, if the obligatory cession is brought down to zero, it could lead to a cash flow problem.

 

Industry players noted that standalone health insurers are particularly unhappy with the current arrangement with GIC Re, citing low commissions received.

 

“Removing obligatory cessions will be beneficial for insurers who don’t have a high claims ratio. Whereas, having obligatory cession supports insurers who have a very high claims ratio,” said a private sector insurance executive, on condition of anonymity.

 

“Obligatory cession is an important risk mitigation strategy that should continue to exist for general insurance companies. With composite licences in play, it might be useful for Irdai to revisit the same, given the diversification benefits that the revised product portfolio structure under a composite licence will offer. In case it is being brought down, it should be done in a staggered manner after a careful understanding of how each organisation is managing their business and portfolio risk,” said Vivek Iyer, partner and financial services risk leader at Grant Thornton Bharat.