India: IRDAI Unveils New Reinsurance Regulations In India

Last Updated: 2 January 2019
Article by Shailaja Lall and Ashish Teni

The IRDAI has notified the IRDAI (Re-insurance) Regulations, 2018 ("Regulations"), which will come into force on January 1, 2019 and repeal the previous regulations applicable to reinsurance (i.e. the IRDAI (General Insurance - Reinsurance) Regulations, 2016 ("GIR Regulations") and the IRDAI (Life Insurance - Reinsurance) Regulations, 2013).

The Regulations were keenly awaited by the Indian insurance sector and aim to keep at pace with the changing market dynamics. In this article, we discuss the major changes that have been introduced by the Regulations:

  • Order of Preference: GIC Re continues to enjoy first preference in reinsurance placements of Indian cedants over Indian branch offices of foreign reinsurers ("FRBs"), International Financial Service Centre Insurance Offices ("IIOs") and cross border reinsurers ("CBRs").

Indian cedants are now required to comply with the following procedure and conditions for their reinsurance placements:

Step 1 - Obtaining best terms for Cessions:

Whilst obtaining best terms for reinsurance protection of domestic risks, cedants shall adhere to the following:

i) They shall seek terms from all Indian reinsurers which have undertaken reinsurance business continuously during the immediately preceding 3 years and at least from 4 FRBs;

ii) No terms shall be sought from:

a) IIOs or CBRs having a credit rating below A- from Standard & Poor's or equivalent rating from any other international rating agency; or

b) an Indian insurer not registered as a reinsurance company with the IRDAI.

Step 2 - Offer for Participation

Once the best terms are obtained as above, every cedant shall seek participation in the following order of preference:

i) to Indian reinsurers which have undertaken reinsurance business continuously during the immediately preceding 3 years;

ii) to other Indian reinsurers and FRBs;

iii) to the IIO, satisfying the prescribed rating, which provided the best and lead terms with capacity of at least 10%;

iv) to the CBR, satisfying the prescribed rating, which provided the best and lead terms with capacity of at least 10%;

v) to other IIOs;

vi) to other Indian insurers (provided only facultative risks can be placed with them and they cannot lead on any placement) and CBRs.

  • Indian cedants cannot make an offer for participation to CBRs, which are applicant companies of the FRBs, unless:
  • the total sum-insured is INR 2,500 crores or more for property insurance, material damage and business interruption combined at one location; or
  • the total sum-insured is INR 100 crores or more for liability cover, per event; or
  • the offer for participation is for aviation, oil & up-stream energy, marine hull risk; or
  • prior approval of the IRDAI has been obtained for exceptions to the above.
  • Exclusions to the Order of Preference: The Order of Preference shall not apply to:
  • reinsurance placements of life insurers. However, life insurers must endeavor to utilize the Indian domestic capacity before offering participation to the CBRs.
  • retrocession or reinsurance placements of Indian reinsurers, FRBs, IIOs and insurance pools;
  • existing inter-company arrangements of Indian insurers transacting direct insurance business;
  • obligatory cessions as notified, from time to time, by the IRDAI under Section 101A of the Insurance Act, 1938.
  • Common Minimum Retention: Every Indian reinsurer/ FRB/ IIO is now required to maintain a minimum retention of "50% of its Indian business". The IRDAI has done away with different categories of FRBs (i.e. Category I and Category II).
  • Filing of Board Approved Underwriting Policy: All Indian reinsurers/ FRBs/ IIOs are now required to file their board approved underwriting policy with the IRDAI. Any subsequent change in such policy should be duly approved by their board/executive committee and filed with the IRDAI within 15 days.
  • Cession Limits with any One CBR (Non-Life): Cession limits on placements with any one CBR in respect of non-life insurance business are now prescribed on an overall cession basis instead of being applicable insurance segment wise. The percentage limits set out under the GIR Regulations based on the CBR's rating continue to remain unchanged.
  • Minimum Retention for Life Insurers: The IRDAI has done away with minimum retention limits for various product lines of life insurers as well as the requirement to report breaches of those limits to the IRDAI.

Life insurers are now required to ensure that they maintain a minimum retention of:

i) 25% of sum at risk under pure protection life insurance business portfolio; and

ii) 50% of sum at risk under other business portfolios.

  • Alternative Risk Transfer: An Indian insurer intending to adopt alternative risk transfer solutions is required to submit its proposal and obtain prior IRDAI approval before entering into the arrangement.
  • Insurance Pools: Any Indian (re)insurer/ FRB/ IIO can now submit a proposal to the IRDAI for the creation of an 'insurance pool'. The IRDAI may permit formation of domestic insurance pool(s) after examining the proposal. The IRDAI, wherever necessary, may also suo-moto direct Indian insurers to create and participate in domestic insurance pools. The constitution of the insurance pools and selection of administrators will be as per the IRDAI's directions.
  • Existing Arrangements: Unless otherwise provided, the Regulations do not invalidate arrangements entered prior to January 1, 2019, which will continue to be governed by the earlier regulations.

The IRDAI has notified the IRDAI (Re-insurance) Regulations, 2018 ("Regulations"), which will come into force on January 1, 2019 and repeal the previous regulations applicable to reinsurance (i.e. the IRDAI (General Insurance - Reinsurance) Regulations, 2016 ("GIR Regulations") and the IRDAI (Life Insurance - Reinsurance) Regulations, 2013).

The Regulations were keenly awaited by the Indian insurance sector and aim to keep at pace with the changing market dynamics. In this article, we discuss the major changes that have been introduced by the Regulations:

  • Order of Preference: GIC Re continues to enjoy first preference in reinsurance placements of Indian cedants over Indian branch offices of foreign reinsurers ("FRBs"), International Financial Service Centre Insurance Offices ("IIOs") and cross border reinsurers ("CBRs").

Indian cedants are now required to comply with the following procedure and conditions for their reinsurance placements:

Step 1 - Obtaining best terms for Cessions:

Whilst obtaining best terms for reinsurance protection of domestic risks, cedants shall adhere to the following:

i) They shall seek terms from all Indian reinsurers which have undertaken reinsurance business continuously during the immediately preceding 3 years and at least from 4 FRBs;

ii) No terms shall be sought from:

a) IIOs or CBRs having a credit rating below A- from Standard & Poor's or equivalent rating from any other international rating agency; or

b) an Indian insurer not registered as a reinsurance company with the IRDAI.

Step 2 - Offer for Participation

Once the best terms are obtained as above, every cedant shall seek participation in the following order of preference:

i) to Indian reinsurers which have undertaken reinsurance business continuously during the immediately preceding 3 years;

ii) to other Indian reinsurers and FRBs;

iii) to the IIO, satisfying the prescribed rating, which provided the best and lead terms with capacity of at least 10%;

iv) to the CBR, satisfying the prescribed rating, which provided the best and lead terms with capacity of at least 10%;

v) to other IIOs;

vi) to other Indian insurers (provided only facultative risks can be placed with them and they cannot lead on any placement) and CBRs.

  • Indian cedants cannot make an offer for participation to CBRs, which are applicant companies of the FRBs, unless:
  • the total sum-insured is INR 2,500 crores or more for property insurance, material damage and business interruption combined at one location; or
  • the total sum-insured is INR 100 crores or more for liability cover, per event; or
  • the offer for participation is for aviation, oil & up-stream energy, marine hull risk; or
  • prior approval of the IRDAI has been obtained for exceptions to the above.
  • Exclusions to the Order of Preference: The Order of Preference shall not apply to:
  • reinsurance placements of life insurers. However, life insurers must endeavor to utilize the Indian domestic capacity before offering participation to the CBRs.
  • retrocession or reinsurance placements of Indian reinsurers, FRBs, IIOs and insurance pools;
  • existing inter-company arrangements of Indian insurers transacting direct insurance business;
  • obligatory cessions as notified, from time to time, by the IRDAI under Section 101A of the Insurance Act, 1938.
  • Common Minimum Retention: Every Indian reinsurer/ FRB/ IIO is now required to maintain a minimum retention of "50% of its Indian business". The IRDAI has done away with different categories of FRBs (i.e. Category I and Category II).
  • Filing of Board Approved Underwriting Policy: All Indian reinsurers/ FRBs/ IIOs are now required to file their board approved underwriting policy with the IRDAI. Any subsequent change in such policy should be duly approved by their board/executive committee and filed with the IRDAI within 15 days.
  • Cession Limits with any One CBR (Non-Life): Cession limits on placements with any one CBR in respect of non-life insurance business are now prescribed on an overall cession basis instead of being applicable insurance segment wise. The percentage limits set out under the GIR Regulations based on the CBR's rating continue to remain unchanged.
  • Minimum Retention for Life Insurers: The IRDAI has done away with minimum retention limits for various product lines of life insurers as well as the requirement to report breaches of those limits to the IRDAI.

Life insurers are now required to ensure that they maintain a minimum retention of:

i) 25% of sum at risk under pure protection life insurance business portfolio; and

ii) 50% of sum at risk under other business portfolios.

  • Alternative Risk Transfer: An Indian insurer intending to adopt alternative risk transfer solutions is required to submit its proposal and obtain prior IRDAI approval before entering into the arrangement.
  • Insurance Pools: Any Indian (re)insurer/ FRB/ IIO can now submit a proposal to the IRDAI for the creation of an 'insurance pool'. The IRDAI may permit formation of domestic insurance pool(s) after examining the proposal. The IRDAI, wherever necessary, may also suo-moto direct Indian insurers to create and participate in domestic insurance pools. The constitution of the insurance pools and selection of administrators will be as per the IRDAI's directions.
  • Existing Arrangements: Unless otherwise provided, the Regulations do not invalidate arrangements entered prior to January 1, 2019, which will continue to be governed by the earlier regulations.

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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