The Insurance Regulatory and Development Authority of India (IRDAI) came up with the reinsurance regulations recently in December 2018. This is a first kind of regulation of its type, specific to reinsurance repealing IRDAI (General Insurance – Reinsurance) Regulations and IRDAI (Life Insurance – Reinsurance) Regulations which were released in 2016. This regulation will be called as IRDAI (Reinsurance) Regulations, 2018 which will be effective from 1st January 2019. This article will provide some of the insights of this newly released regulation covering some of the basic terminologies, areas like Cross Border Reinsurer (CBR), cession limit, amendment to previous regulations etc.
There are total 12 regulations contained in IRDAI (Reinsurance) Regulations, 2018. Some of the important points which need to be known from these regulations are as follows:
- Reinsurance Program: Every insurer need to have a reinsurance program with the objective of having maximum retention within the country. The Board approved reinsurance program need to be submitted to the IRDAI before 45 days of the commencement of the financial year. For any changes made to the reinsurance program, insurer need to submit the final board approved reinsurance program within 30 days of the commencement of the financial year. The reinsurance program along with the retention policy (discussed below) need to be submitted to the Authority i.e IRDAI. (Regulation 3)
- Retention Policy: The first objective of reinsurance as stated in these regulations, is to maximize retention within the country. Keeping this objective in mind insurers need to formulate a retention policy. Every Indian insurer shall maintain the maximum possible retention in commensuration with its financial strength, quality of risks and volume of business ensuring that the reinsurance arrangement is not fronting. (Regulation 3). Life Insurer should maintain a minimum retention of
- 25% of sum at risk under pure protection life insurance business portfolio
- 50% of sum at risk under other than pure protection life insurance business portfolio
The retention policy also states that “Every Indian Reinsurer shall maintain a minimum retention of 50% of its Indian business”, as mentioned in Regulation 3(2)(C) .
- Fronting: This is one of the confusing jargons used in reinsurance. Let us try to understand this with an example. An insurer is having motor portfolio and what it does is instead of keeping some portion of risks within itself, the insurer transfers most or all part of the risks to a reinsurer, thus relieving itself from the financial burden. This is an example of fronting. Insurer transferring most or all portion of risks to reinsurers. Generally, new insurers use fronting as a risk transfer tool in order to reduce their financial burden at the time of claims. Fronting is defined as a process of transferring risk in which an Indian Insurer cedes or retro-cedes most of or all of the assumed risk to a Re-insurer or retrocessionaire. (Regulation 2(13))
- IIOs: IIOs is an acronym of International Financial Service Center (IFSC) Insurance Office. This means a branch office of an insurer or reinsurer domiciled in India or outside, which has been granted a certificate of registration by the Authority to set up its office in IFSC-SEZ, to transact insurance business or reinsurance business or both. IIO has been defined in Regulation 2(17) of these Regulations. This is a new concept which specifies setting up of offices in IFSC Special Economic Zone (SEZ).
- Foreign Reinsurer Branch (FRB): This means a branch of a Foreign Reinsurer who has been granted certificate of registration by the Authority under the Insurance Regulatory and Development Authority of India (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015 or Insurance Regulatory and Development Authority of India (Lloyd’s India) Regulations, 2016, as amended from time to time.
Cross Border Reinsurer (CBR)
CBR, as the name suggests, means a foreign reinsurers including Lloyd’s Syndicates, whose place of business is established outside India and which is supervised by its home country regulator. CBR includes:
- Parent or Group companies of FRBs (Foreign Reinsurer Branch)
- Parent or Group companies of IIOs.
CBR can be understood by an example. Consider an Indian insurer wants to transfer its risk to a reinsurer which is not in India but in United Kingdom (UK). Indian insurer can transfer its risk to UK based reinsurer whose place of business is in UK and not in India. Then the UK based reinsurer is a CBR. In order to transact business through CBRs, there are eligibility criteria which a CBR (like the UK based reinsurer) should have. Indian insurer can place their business through CBRs if CBRs meet the following eligibility criteria as defined in Regulation 4:
- The CBR is an insurance or Re-insurance entity in its home country, duly authorized by its home country regulator to transact re-insurance business during the immediate past three continuous years;
- The CBR has a credit rating of at least BBB from Standard & Poor or equivalent rating from an international rating agency during the immediate past three continuous years;
- The home country of the CBR has signed Double Taxation Avoidance Agreement with India;
- The CBR has minimum solvency margin or capital adequacy, as specified by the home country regulator, during the immediate past three continuous years;
- The past claims settlement experience of the CBR is found to be satisfactory;
- Any other requirements as stipulated by the Authority from time to time.
One of the most important aspects related to CBR is what is known as Cession Limits. Cession means transfer of risks and the insurance company which transfers the risks to a reinsurer is known as Cedant. Cession Limits restricts Indian insurer to transfer risks to CBRs based on the rating of CBRs. The rule is simple; better the rating of CBR, more risk can be transferred and vice-versa. The below table provides the maximum cession limit that can be allowed per CBR as defined in Regulation 6.
|Rating of the CBR as per Standard & Poor or equivalent||Maximum overall cession limits
allowed per CBR
|Greater than A+||20%|
|Greater than BBB+ and up to and including A+||15%|
|BBB and BBB+||10%|
|Note: The above percentages are to be calculated on the total reinsurance premium ceded out-side India.|
Regulation 5 describes the way of placing reinsurance placements. According to Regulation 5(1), every insurer (Cedant) shall be free to obtain best terms for its reinsurance protection of domestic risks, subject to the following:
- Cedants shall seek terms at least from all Indian Re-insurers, who have been transacting Re-insurance business (other than emanating from obligatory cession) during the immediate past three continuous years and at least from four FRBs. (Regulation 5(1)(A) )
- No Cedant shall seek terms from IIOs and FRBs having credit rating below A- from Standard & Poor’s or equivalent rating from any other International Rating Agency. (Regulation 5(1)(B)(a) and Regulation 5(1)(B)(b) )
Order of Preference
One of the most important aspects of reinsurance placement in Indian context is Order of Preference which has been revised in IRDAI (Reinsurance) Regulations, 2018. Order of preference means in which order, the insurance company in India should place their reinsurance business. In simple terms, which reinsurers should be given preference while placing reinsurance business? As per Regulation 5(2)(A), every cedant shall offer best terms, for participation in the following order of preference:
- to Indian Re-insurers, transacting re-insurance business (other than emanating from obligatory cession) during the immediate past three continuous financial years;
- to other Indian Re-insurers and FRBs;
- to the IIO as under regulation 5(1)(B)(a) which provided the best and lead terms with capacity of not less than 10%;
- to the CBR as under regulation 5(1)(B)(b) which provided the best and lead terms with capacity of not less than 10%;
- to other IIOs;
- To other Indian Insurers (only Facultative) and CBRs.
A thorough look on the above order of preference interprets that the Indian insurers should give first preference to General Insurance Corporation of India, popularly known as GIC Re as it is the only Indian reinsurer transacting reinsurance business for the past consecutive three financial years. Other Indian reinsurers and FRBs come at second preference followed by IIOs and CBRs.
Reinsurance placements and order of preference as defined in Regulation 5(1) and Regulation 5(2) are not applicable to the following as defined in Regulation 5(3)
- Retrocession or reinsurance placements of Indian Re-insurers, FRBs, IIOs and Insurance Pools;
- Existing inter-company arrangements of the Indian Insurers transacting direct insurance business;
- Obligatory cessions as notified from time to time under Section 101A of the Act;
- Re-insurance placements of Indian insurers transacting life insurance business. However, Indian insurers,transacting life insurance business, shall endeavor to utilize the Indian domestic capacity before offering to the CBRs.
Alternative Risk Transfer (ART) and Domestic Insurance Pool
Insurer can initiate the proposal for an insurance pool which needs to be approved by the IRDAI as defined in Regulation 7. IRDAI approval is required for the formation of domestic insurance pool.
As far as Alternative Risk Transfer (ART) is concerned, there is a provision for ART solutions for Indian insurers as per Regulation 8. Insurers intending to adopt ART solutions need to submit their proposal to the IRDAI and after examining various aspects, IRDAI may grant permission to adopt ART solutions. IRDAI approval is required for adopting ART solutions.
What’s new in IRDAI (Reinsurance) Regulations, 2018
After having a walk through on IRDAI (Reinsurance) Regulations, 2018, let us see what is new in these regulations which are mentioned below:
- Order of preference revised.
- Order of preference not applicable for life insurers.
- Every Indian Reinsurer shall maintain a minimum retention of 50% of its Indian business.
- Amendment to Regulation 4 of IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurance Other than Llyod’s) Regulations, 2015 which has been changed to, “An applicant shall make a requisition for registration application under for Re-insurance business wherein the branch office of foreign Re-insurer shall maintain a minimum retention of 50% of the Indian Re-insurance business.”
- For FRBs, there is no category as such now. The minimum retention is 50%. An applicant shall make a requisition for registration application for Re-insurance business wherein the branch office of foreign Re-insurer shall maintain a minimum retention of 50% of the Indian Re-insurance business. This removes Category B (minimum retention of 30%) of IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurance Other than Llyod’s) Regulations, 2015.
- Amendment to Regulation 8 of IRDAI (Llyod’s India) Regulations, 2016 which has been changed as, “An applicant shall make a requisition for registration application for Re-insurance business wherein the Lloyd’s India Syndicate shall maintain a minimum retention of 50% of the Indian Re-insurance business.”
- Provision for Alternate Risk Transfer (ART).
I have attached the IRDAI (Reinsurance) Regulations, 2018 below. One can download the regulation for their reference.
– Ashish Kumar