India: Report Of The Reinsurance Expert Committee 2017: An Overview Of The Recommendations

Last Updated: 1 December 2017

Article by Celia Jenkins and Priya Misra

The Indian insurance sector has witnessed significant developments over the past couple of years. By way of the Insurance Laws (Amendment) Act 2015, establishment up of branch offices of foreign reinsurers was permitted. In this regard, the Insurance Regulatory and Development Authority of India (IRDAI) subsequently issued the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd's) Regulations 2015 (Branch Office Regulations) and the IRDAI (Lloyd's India) Regulations 2016 (Lloyd's India Regulations), prescribing the procedure for setting up and operation of foreign reinsurers' branches (FRBs) and Lloyd's in India.

Through the Branch Office Regulations (and subsequent amendments to the same), the IRDAI prescribed the order for preference for cessions to prescribe the hierarchy between various entities with which an Indian Insurer reinsures the business written. However, it was clarified that the provision stipulating the order of preference for cessions would be re-evaluated by the IRDAI after a period of one year.

By way of an Order of 5th May 2017 (Order), the IRDAI set up a reinsurance expert committee (Committee) to make recommendations, inter alia, for the efficient implementation and operation of the order of preference for cessions specified under the Branch Office Regulations. The Committee released its report on 14th November 2017 (Report), providing its analysis and recommendations on the terms of reference prescribed under the Order.

Significant Recommendations of the Committee

The extant provision prescribing the order of preference stipulated under the Branch Office Regulations requires Indian Insurers to obtain the best terms for their facultative and treaty surpluses from Indian Reinsurers having the minimum prescribed credit rating for the previous three years and at least three FRBs registered under Category I prescribed under the Branch Office Regulations. Subsequently, the Indian Insurer is required to offer the best terms for participation to the qualifying Indian reinsurers, and thereafter to Category I FRBs, followed by other Indian Reinsurers or Category II FRBs, then to FRBs set up in special economic zones and the balance, if any, to Indian Insurers and overseas reinsurers/ cross border reinsurers.

The Committee has, by way of its Report, now recommended that Indian Insurers be permitted to obtain best terms simultaneously from Indian Reinsurers, at least three FRBs, Lloyd's India and from any cross border reinsurer satisfying the eligibility criteria prescribed (minimum security rating of A minus). It has been recommended that Indian Insurers and their offices in the Special Economic Zones (SEZs) not be permitted to offer competitive terms for domestic reinsurance risks/treaties/contracts.

After obtaining best terms, the Committee has recommended that reinsurers be classified into two categories for offer of participation in the following order of preference:

  1. General Insurance Corporation of India and then simultaneously to other Indian Reinsurers, Cross-Border Reinsurers if any, who provided lead terms with a meaningful capacity, FRBs registered under Category I, Lloyd's India and Indian Insurers;
  2. Reinsurers in SEZs, Joint Venture Partners of the Indian Insurers, Reinsurers and other CBRs satisfying the eligibility criteria (including overseas reinsurance entities of FRBs' parent group).

The Committee has, therefore, recommended a mechanism for cross border reinsurers to, effectively, be brought at par with FRBs in India. However, the Committee has also recommended that a limit be prescribed vis-à-vis the total cessions made to all cross border reinsurers by any Indian Insurer, and appropriate safeguards (including collaterals) be put in place by Indian Insurers with respect to reinsurance placements with cross border reinsurers.

The Committee has further recommended that stipulations of order of preference for reinsurance cessions be waived for life insurance, aviation, marine hull, large infrastructure projects, petrochemical and refinery plants, large power plants, oil and energy, specialised/emerging/volatile risks with high loss potential, retrocessions, and any other line of business as prescribed by the IRDAI.

With respect to life insurance, the Committee has also recommended that life reinsurance business be placed only with reinsurers (incorporated, FRBs and Lloyd's India) registered in India.

Other Key Changes

The Committee has recommended the following:

  1. Cession limits to be prescribed to check single reinsurer risk concentration. However, the cap on cessions shall not be applicable to Indian Reinsurers/FRBs/ Lloyd's India.
  2. Application of cession limits to be waived for FRBs, Lloyd's India and SEZ reinsurers, provided the retrocession premium being paid only to the parent entity and not to any other entity.
  3. Structured reinsurance proposals to be permitted in certain instances, where risk transfer tests are satisfied. The Committee has also recommended for financial reinsurance to be permitted for Life Insurers on a case by case basis.
  4. Simplified reporting requirements for all reinsurers and the formats for filing such reports/returns;
  5. Waiver of applicability of IRDAI (Maintenance of Insurance Records) Regulations 2015; IRDA (Insurance Advertisements and Disclosure) Regulations 2000 and IRDAI (Protection of Policyholders Interest) Regulations 2017 for reinsurers;
  6. Domestic insurance or reinsurance pools be administered by an Indian Reinsurer or any other Insurer or an FRB or Lloyd's India as per directions of the IRDAI;
  7. Indian Insurers not be permitted to accept domestic reinsurance treaties from other Indian Insurers and retrocession of facultative risks, to avoid market spirals from domestic risks.

Comment

The IRDAI will now consider the recommendations made by the Committee. While at this stage it is unclear whether the recommendations of the Committee will be accepted and if so to what extent they will be incorporated into the applicable regulations, it is certain that the IRDAI will have to balance the need for transparency and healthy competition in the reinsurance market with providing encouragement to foreign reinsurers to open branch offices in India.

For further information on this topic please contact Tuli & Co 

Tel T +91 11 4593 4000, fax F +91 11 4593 4001 or email lawyers@tuli.co.in

www.tuli.co.in

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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