The Insurance Regulatory and Development Authority of India (IRDAI) has recently introduced draft regulations aimed at streamlining reinsurance operations in India. These measures have sparked debate in the insurance industry, with some stakeholders perceiving them as protectionist.

To understand the implications, it’s important to clarify what reinsurance is. Reinsurance is essentially insurance for insurers, where insurance companies purchase protection to safeguard their balance sheets from the financial impact of large-scale losses caused by natural disasters or other catastrophic events.

Critics of the proposed IRDAI regulations argue that they should be revised to allow insurance companies the flexibility to choose between Indian and overseas reinsurers based on their commercial considerations, rather than giving preference to Indian entities.

Here’s some context: After the liberalization of India’s insurance sector in 2000, the General Insurance Corporation of India (GIC) became the sole Indian reinsurer following its demerger. Foreign reinsurers initially operated as servicing offices in India, liaising with the Indian market on behalf of their parent companies. GIC enjoyed preferential treatment, while foreign reinsurers had limited market access.

In 2016, the doors were opened to foreign reinsurers, subject to stringent licensing conditions. Currently, there are eight such branches, including Lloyd’s, with more in the pipeline.

India’s non-life insurance market, which relies heavily on reinsurance, was estimated at ₹1.26 lakh crore in the last fiscal year, with nearly ₹28,900 crore spent on reinsurance premiums. Of this amount, ₹10,000 crore went to overseas reinsurers, known as cross-border reinsurers (CBRs).

GIC, commanding a dominant 60 percent market share, has consistently supported the Indian market, even in the face of low primary market prices. Foreign branches, on the other hand, have been selective in their approach, based on the quality and loss experience of the business referred to them by Indian insurers.

Now, based on the recommendations of The Reinsurance Experts Committee, the IRDAI has released draft regulations, sparking a debate with the following arguments:

1. The regulations will limit competition, leading to high costs, limited coverage, and reduced product innovation.

   Fact: According to the General Insurance Council’s Annual Report, Indian players retained 90 percent of all business generated within the country in FY 2017. Pricing for certain classes, such as auto and health insurance, remains within the prerogative of insurance companies themselves.

2. Concentration of risks in the hands of a few reinsurers will affect market stability.

   Fact: The proposed regulations do not prohibit business placement with CBRs, allowing insurers to diversify their risks effectively.

3. Indian reinsurers will hijack terms offered by overseas reinsurers.

   Fact: The proposed regulations allow for business placement with CBRs with a minimum A-rating, ensuring that cross-border reinsurers are not displaced but rather supported.

4. Risks will not be diversified across geographies.

   Fact: Reinsurers manage accumulations in specific regions through advanced risk transfer methods, ensuring that catastrophic events do not become balance sheet events.

5. Local reinsurers might infringe upon the intellectual property rights of CBRs.

   Fact: Reputed reinsurers set industry standards rather than resorting to imitating the product designs of others.

6. There is no level playing field for CBRs.

   Fact: CBRs can lead business just as effectively as Indian reinsurers if their quotes are deemed the best by insurers, allowing allocation based on merit.

7. Ratings are linked to S&P, and there are no comparable ratings from other agencies.

   Fact: Multiple insurance rating agencies, such as S&P, AM Best, and Moody’s, exist, allowing for calibration of ratings between agencies.

8. India’s preference order is unique.

   Fact: India is not alone in seeking to utilize locally available and secure capacity. Other countries, like the United States, impose similar mandates to support domestic reinsurers, while some impose withholding charges or offer preferential treatment to local reinsurers.

In summary, the proposed regulations aim to balance the interests of Indian and foreign reinsurers while ensuring that locally available capacity is not overlooked. The debate surrounding these regulations underscores the complexities of reinsurance in a dynamic market like India.