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The limits set by the regulator to maximise retention of reinsurance business within the country will constrain insurers’ freedom, says Global Federation of Insurance Associations (GFIA).
GFIA has 32 member-associations which represent insurers that account for around 88 per cent of total insurance premiums worldwide.
IRDA sets limits
The Insurance Regulatory and Development Authority (IRDA) has prescribed retention limits for risks ceded to reinsurers ranging from Rs 1 lakh to Rs 30 lakh.
This depends on the age of the insurer or the year in which the risk is introduced and the categories of products such as pure protection , savings, group protection and personal accident.
In the reinsurance regulations issued by the IRDA in February, life insurers were asked to maximise retention of reinsurance within the country, develop adequate capacity to carry the insurance risk on their books, and secure the best possible protection for the reinsurance cost incurred.
IRDA has mandated that insurers will have to report their reinsurance programme if their total reinsurance premium to the total premium received exceeds 2 per cent for all savings products and 30 per cent for all term insurance/health products.
“Limiting access to reinsurance constrains insurers’ ability to reduce their risk exposure, whilst simultaneously necessitating an increase in their capital requirements.
“Higher retention limits also result in the aggregation of risks within insurers, compromising their underwriting performance.
“These factors individually, and more so in conjunction, hinder the development of capacity of existing Indian insurers, and deter new investors from entering the insurance sector,” said GFIA in a letter to IRDA and the Finance Ministry.
G. V. Nageswara Rao, Managing Director and CEO, IDBI Federal Life Insurance, said: “The idea of these regulations is to ensure that Indian insurance companies develop risk capacity within the country rather than completely pass it on to reinsurers.”
Intermediary role
Insurance industry experts say some life insurance companies were acting only as intermediaries, whereby instead of keeping any risk on their book they were passing on the maximum or the entire risk to a reinsurer. This practice is called ‘fronting’.
Companies, generally, pass on or cede a part of their risk to reinsurance companies against a ceding commission.
According to GFIA, while IRDA has highlighted the need for new capital inflows into the Indian insurance sector, having supported an increase in the foreign direct investment (FDI) ceiling in insurance to 49 per cent, the retention limits by the IRDA will reduce capital flexibility of insurers and will act as a disincentive to investment in the Indian insurance sector.
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