On 12th December 2018 the IRDAI (Re-insurance) Regulations 2018 (the "2018 Regulations") were notified. The 2018 Regulations came into force on 1st January 2019 and consolidate the provisions governing reinsurance business in India into one set of applicable regulations along with introducing new requirements for both life and general reinsurance business.
The 2018 Regulations repeal the IRDAI (General Insurance – Reinsurance) Regulations 2016 (the "2016 Regulations") and IRDAI (Life Insurance – Reinsurance) Regulations 2013 (the "2013 Regulations"). They also amend to relevant extent the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers Other than Lloyd's) Regulations 2015 (the "Branch Office Regulations") and the IRDAI (Lloyd's India) Regulations 2016 (the "Lloyd's India Regulations").
The key changes introduced by the 2018 Regulations are summarised below.
The 2018 Regulations are applicable to an "Indian Insurer", which means an "Insurer" defined under §2(9) of the Insurance Act 1938 (the "Act"), International Financial Services Centre ("IFSC") Insurance Offices ("IIOs"), and "Exempted Insurers" as defined under Section 118(c) of the Act. Per §2(9) of the Act, "Insurer" includes Indian Insurance Companies, insurance co-operative societies, statutory bodies carrying on insurance business, and Foreign Reinsurer's Branches in India ("FRBs").
Further, in addition to the insurance segments expressly covered by the 2016 Regulations and 2013 Regulations, the 2018 Regulations are stated to also cover Engineering, Aviation, Crop, Trade Credit, Liability, Oil and Energy. The life insurance segment also expressly includes health insurance policies issued by Life Insurers.
The 2018 Regulations retain the objectives of the Reinsurance Programme under the erstwhile regulations but the guidance towards maximising retention within India is now subject to "proper and adequate diversification of risks".
In relation to the retention policy that Indian Insurers are required to have in place, the 2018 Regulations introduce the following changes:
- Indian Insurers are required to formulate a suitable retention policy per insurance segment. In this regard, the 2013 Regulations were more specific and required formulation of a retention policy for each type of product/risk, and the 2016 Regulations contained the same requirement if the insurance segment consisted of more than one product.
- Every Indian Insurer transacting life insurance business is required to maintain a minimum retention of 25% of sum at risk for the pure protection life insurance business portfolio, and 50% for the other than pure protection life insurance business portfolio. This appears to be a more uniform limit as compared to the 2013 Regulations, which imposed various monetary limits on retention on the basis of (i) either the age of the Insurer or of the product, and (ii) the type of product, such as ULIPs. The restrictions on quota share for health insurance and group term insurance business under the 2013 Regulations no longer apply.
- Separately, both Indian Reinsurers and FRBs are required to maintain a minimum retention of 50% of their Indian business.
This part of the 2018 Regulations appears to align fairly closely with the provisions of the 2016 Regulations. Therefore, it would be a change for Life Insurers who earlier followed the procedure under the 2013 Regulations. In addition, these provisions modify the existing guidance under the 2016 Regulations, and introduce a number of new requirements for entering into reinsurance arrangements.
The significant new filing provisions are as follows:
- Indian Insurers are required to file:
- A declaration by their CEO that the entity has not made any change in the Reinsurance Programme filed with the IRDAI within 30 days of the commencement of the financial year.
- Reinsurer wise details of actual placements during the previous financial year for each insurance segment within 30 days of the commencement of the financial year.
- Any new reinsurance arrangements or revisions thereof, after the submission of a final Reinsurance Programme giving full details and reasons for the arrangement within 15 days of the Board's approval.
- The Reinsurance Programme is now generally required to include insurance segment-wise information, a change from the previous product-wise requirement. In addition to the details stipulated in the 2016 Regulations, the Reinsurance Programme is also required to include:
- Reasons for variation in retention limits for the proposed financial year from the current financial year.
- Segment-wise statement of the net retention ratio and the actual Gross Written Premium Income for the current financial year (estimated).
- Segment-wise statement showing actual reinsurance cost for the previous three financial years (changed from two), including the estimated cost for the current financial year.
- Details of inward reinsurance business, if any, separately for domestic and foreign business.
- Details of inter-company reinsurance arrangements, if any, with other Indian Insurers transacting direct insurance business.
- Every Indian Reinsurer, FRB and IIO writing reinsurance business is required to file a Board approved underwriting policy, and any subsequent change to it.
Maintenance of Records
Indian Insurers are required to submit each and every reinsurance contract, list of Reinsurers with their credit rating, and their shares in the proportional and non-proportional Reinsurance arrangement, expressly in soft copy format. The hard copies are required to be maintained as per the previous regulations and may be inspected by the IRDAI.
Cross Border Reinsurer (CBR)
The definition of Cross Border Reinsurer ("CBR") has been modified to mean a foreign "Reinsurer" only, including Lloyd's Syndicates. It also includes parent or group companies of FRBs and IIOs. The definition therefore now excludes foreign Insurers. While the eligibility criteria to be satisfied by CBRs in order for an Indian Insurer to place business with them remains broadly the same, CBRs are now expressly required to be entities authorised in their home country to conduct reinsurance business for the past three (3) continuous years.
Procedures for Reinsurance Placements
These provisions replace the earlier provisions regarding order of preference set out in the Branch Office Regulations, and apply only to "Cedants", where Cedant is defined under the 2018 Regulations as an Indian Insurer writing direct insurance business, who contractually cedes a portion of the risk. These provisions do not apply to (a) reinsurance placements of Indian Insurers transacting life insurance business; (b) retrocession or reinsurance placements of Indian Reinsurers, FRBs, IIOs and Insurance Pools; and (c) existing inter-company arrangements of the Indian Insurers transacting direct insurance business.
Obtaining Best Terms
Every Cedant shall be free to obtain best terms for its reinsurance coverage requirements, subject to the following:
- Every Cedant is required to seek terms from (i) all Indian Reinsurers, who have been transacting reinsurance business (other than emanating from obligatory cession) during the immediate past three (3) continuous years, and (ii) at least from four FRBs.
- No Cedant can seek terms from IIOs and CBRs having a credit rating below A- from Standard and Poor's, or an equivalent rating from any other International Rating Agency.
- Further, the Cedant is responsible for complying with the 2018 Regulations, irrespective of the involvement of a Reinsurance Broker.
Offer for Participation
- Every Cedant is required to comply with the following order of preference for its reinsurance placements:
- Indian Reinsurers transacting reinsurance business (other than emanating from obligatory cession) during the immediate past three (3) continuous financial years;
- Other Indian Reinsurers and FRBs (FRBs have been moved up with other Indian Reinsurers);
- IIO meeting the required credit rating, which provided the best and lead terms with capacity of not less than 10%;
- CBR meeting the required credit rating, which provided the best and lead terms with capacity of not less than 10%;
- Other IIOs;
- Indian Insurers (only Facultative) and CBRs.
- There are also specific requirements as to the total sum insured required in order for a Cedant to be eligible to make an offer to CBRs which are "applicant companies" of any FRBs (for property insurance, material damage and business interruption combined, and for liability cover).
Cession limits for reinsurance placements with CBRs by Cedants transacting other than life insurance business remain the same. However, the percentages of the cession limits are now to be calculated on the total reinsurance premium ceded outside India. Previously the limits were calculated on the total reinsurance premium ceded in India and outside India, for each insurance segment.
It will be noted from the definition of "Cedant" set out above, that the term no longer includes Reinsurers ceding risk to a retrocessionaire.
Alternative Risk Transfer (ART)
The 2018 Regulations define "Alternative Risk Transfer" as non-traditional structured reinsurance solutions that are tailored to specific needs and profile of an Insurer or Reinsurer (also called "Financial Reinsurance" in life reinsurance business). Indian Insurers are required to submit ART proposals to the IRDAI, which may allow the ART solution on a case by case basis.
Specific Reforms for Life Insurance Business
Although the order of preference does not apply to Indian Insurers transacting life insurance business, the 2018 Regulations require them to endeavour to utilise the Indian domestic capacity before offering reinsurance placements to the CBRs. Life Insurers are also required to obtain the prior approval of the IRDAI before entering into reinsurance arrangements with their promoter company, or associate or group companies, except where the arrangements are on commercially competitive terms and an arm's length basis.
Amendments to Branch Office Regulations and Lloyd's India Regulations
The Branch Office Regulations and the Lloyd's India Regulations categorised applicants, for the purpose of opening a FRB, into two categories: Category – I where the minimum retention is 50% of the applicant's Indian reinsurance business, and Category – II where the minimum retention is 30% of the applicant's Indian reinsurance business. The 2018 Regulations have done away with Category - II, and now all applicants are required to maintain a minimum retention of 50% of the Indian reinsurance business.
The 2018 Regulations consolidate the existing regulations for life and general reinsurance business into a uniform set of provisions for reinsurance business in India. There has also been a streamlining of filing requirements and processes. While the 2018 Regulations retain the objective of maximising retention within the country, there has been significant reform to the order of preference in allowing FRBs to compete with other Indian Reinsurers for reinsurance of general insurance risks. This change appears to have been welcomed by foreign players writing reinsurance business in India.
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.