IRDAI (Reinsurance) Regulations, 2018


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
  1. 25% of sum at risk under pure protection life insurance business portfolio
  2. 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.

Reinsurance Placements

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:

  1. to Indian Re-insurers, transacting re-insurance business (other than emanating from obligatory cession) during the immediate past three continuous financial years;
  2. to other Indian Re-insurers and FRBs;
  3. to the IIO as under regulation 5(1)(B)(a) which provided the best and lead terms with capacity of not less than 10%;
  4. to the CBR as under regulation 5(1)(B)(b) which provided the best and lead terms with capacity of not less than 10%;
  5. to other IIOs;
  6. 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)

  1. Retrocession or reinsurance placements of Indian Re-insurers, FRBs, IIOs and Insurance Pools;
  2. Existing inter-company arrangements of the Indian Insurers transacting direct insurance business;
  3. Obligatory cessions as notified from time to time under Section 101A of the Act;
  4. 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.

IRDAI (Reinsurance) Regulations 2018

Ashish Kumar

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Insurance industry in India


 

Insurance is a part of financial services apart from banking, capital market, money market etc. Insurance is considered as a protection from events which results into financial loss. The insurance industry in India comprises of life insurance, general insurance, stand alone health insurance and reinsurance. The Indian insurance industry is guided by Insurance Act, 1938 which was amended from time to time, the latest amendment happened in 2015.

This post briefly gives an overview of insurance sector in India particularly discussing about the regulator, life insurance, general insurance, stand alone health insurance and reinsurance. The life insurance comprises of around 79% of the market, the rest 21% is occupied by general insurance. Of the general insurance, motor insurance has the highest market share of 44% followed by health insurance having market share of 29%, as per IRDAI Annual Report 2015-16. It is worth to mention that the insurance industry in India has showed a significant growth after it got opened for private sector in the year 2000. Since then, the industry is growing rapidly. In 2015, the reinsurance sector was allowed for foreign players which were solely dominated by General Insurance Corporation of India (GIC Re).  A small discussion about regulator, life insurance, stand alone health insurance and reinsurance is mentioned below.

Regulator:  Indian insurance industry is regulated by Insurance Regulatory and Development Authority of India (IRDAI) which was formed by an Act of Parliament in 1999. The Insurance Regulatory and Development Authority (IRDA) Act was passed in 1999 leading to the formation of IRDAI. IRDAI is headquartered in Hyderabad and has offices in New Delhi and Mumbai. The regulator is responsible for carrying various activities like granting license to insurance companies, framing regulations which the insurers need to follow, protecting policyholder’s interest etc. Breach of IRDAI regulations can have serious implications resulting from penalty to cancellation of license of the insurance company.

Life Insurance: At present, there are 24 life insurers in India, of which, Life Insurance Corporation of India (LIC) is wholly owned by the Government of India. LIC was formed in September 1956 by an Act of Parliament known as LIC Act, 1956.  Some of the private life insurers include ICICI Prudential Life Insurance, HDFC Standard Life Insurance, SBI Life Insurance etc.

General Insurance: Non-life or general insurance comprises of all kinds of insurance except life. It has various segments comprising of motor insurance, health insurance, fire insurance, marine insurance, engineering insurance, aviation insurance, satellite insurance etc. There are 33 non-life insurers operating in India consisting of public and private insurers. The public insurers include the following:

  • The New India Assurance Co Ltd. (NIACL), headquartered at Mumbai.
  • National Insurance Co Ltd. (NICL), headquartered at Kolkata.
  • Oriental Insurance Co Ltd (OIICL), headquartered at New Delhi.
  • United India Insurance Co Ltd (UIICL), headquartered at Chennai.
  • Export Credit Guarantee Corporation of India (ECGC)
  • Agriculture Insurance Company of India (AIC)

ECGC and AIC are known as specialized insurers. Apart from above mentioned public sector companies, some of the private non-life insurers include ICICI Lombard, HDFC Ergo General Insurance, SBI General Insurance, IFFCO Tokio General Insurance, Tata AIG General Insurance etc.

Standalone Health Insurance: These are those companies which are solely carrying their business on health insurance. There are six stand alone health insurers like Apollo Munich Health Insurance, Star and Allied Health Insurance, Max Bupa Health Insurance, Cigna TTK Health Insurance, Religare Health Insurance and Aditya Birla Health Insurance. One of the ways to recognize the stand alone health insurers is that the stand alone health insurers will have the word “health insurance” in the name of the company as in the above mentioned six stand alone health insurers.

Reinsurance: General Insurance Corporation of India (GIC Re) is owned by the Government of India and is the national reinsurer which is headquartered at Mumbai. The reinsurance industry in India is now opened for foreign players to open their branch offices in after the Insurance Act, 1938 was amended in 2015. At present there are 9 foreign reinsurers who have opened their branch offices in India. They are mentioned below:

  • Swiss Re
  • Munich Re
  • Llyod’s India
  • Reinsurance Group f America (RGA)
  • Hannover Re
  • SCOR
  • XL Insurance Company
  • Axa France Vie
  • General Reinsurance AG

It is important to note that apart from GIC Re and the above mentioned foreign reinsurers, ITI Re is the first private Indian reinsurance company which got licensed by IRDAI. Hence the Indian reinsurers include GIC Re and ITI Re.

 

Apart from the above players, the insurance industry also comprises of various intermediaries and distribution channels like agents, brokers, Insurance Marketing Firms (IMF), Web Aggregators etc. which I will discuss in separate post.

One thing to be noted is that the insurers in India can take part in either life insurance or general insurance business and not both. This means that a life insurer cannot start their business of motor insurance, fire insurance etc and vice versa. Health insurance is the only insurance product which can be offered by both non-life and life insurers. Non-life insurers can sell separate health insurance policy while life insurers offer health insurance in the form of riders. Riders are the extra benefits which are covered by paying some extra premium. Example of riders include Accidental Death Benefit (ADB) rider, critical illness rider etc. Life  insurers cannot offer separate health insurance products.

– Ashish Kumar