With today’s alarming recurrence of accidents, disasters and catastrophes, individuals and businesses seek insurance cover to receive financial protection from insurance companies which are constantly fishing for new insurance strategies to safeguard their financial interests. With the increased burden, insurance companies look for ways to mitigate the risks involved, and rescuing them from the crisis are reinsurance companies.
Reinsurance business is expected to gain momentum in India with the passing of the Insurance Laws (Amendment) Bill, 2008, which is still being reviewed in the parliament. India, which now has only one reinsurance company, the state-owned General Insurance Corporation of India (GIC Re), will widen its arena to foreign reinsurance companies opening branches in India with the bill being implemented.
GIC Re experienced a huge loss of ₹24.69 billion (US$405 million) in 2011-12 due to natural catastrophes, which may serve as a warning to foreign investors and reinsurers looking forward to investing in India’s capital market. The insurance industry worldwide experienced a heavy loss of US$108 billion resulting from natural and man-made disasters in 2011, up from US$48 billion in 2010.
Asia being designated as a high-risk zone has seen a rise in rates when companies renewed their insurance policies. However, reinsurance business in India attracts many outside reinsurance companies, which are waiting for the opening up of the Indian reinsurance market. GIC Re and Hannover Re have had a cooperation agreement for development of life reinsurance business in India since 2008 and have been awaiting the implementation of the bill, while Swiss Re has established a commercial relations office since Indian laws do not allow foreign reinsurance companies to open branches in India. Lloyd’s, intending to open a franchise in India, is proposed to be covered under the definition of a “foreign company” in the amendment bill.
The much awaited bill provides for foreign reinsurance companies to open branches in India to carry on business and allows foreign investment up to 49% of the capital in an Indian insurance company as against the prevailing 26% cap, in line with India’s growing capital requirement. The bill redefines certain types of insurances, such as health insurance, and provides for general insurance companies to raise funds from capital markets with the approval of the central government.
The bill also proposes that appeals against decisions by the Insurance Regulatory and Development Authority (IRDA) be referred to the Securities Appellate Tribunal. Further, the requirement of licensing of agents by the IRDA has not been retained in the bill.
The passage of this bill would lead to an immediate rise in insurance joint ventures and inflow of fresh capital. The bill having been stuck in the parliament for so long now has led policy makers to call for a separate reinsurance bill. With global reinsurers waiting to enter India, proposals to make Mumbai a reinsurance hub have come forward.
The IRDA, which was set up to autonomously regulate the insurance sector, has specified that risks advanced to reinsurers be within a range of ₹100,000 to ₹3 million. It has further limited life insurance companies to maximize the retention of reinsurance within the country and ensure that they can carry the risk on their books.
As per the IRDA’s mandate, GIC Re has reinsured 60% of the terrorism liability. Reinsurance companies have also limited the maximum liability imposed by non-life insurers claiming for a natural disaster. Reinsurance rates in India have gone up by 5-15% after the Indonesian earthquake of 2012.
In the current scenario, with the IRDA having little control over reinsurance, the risk in most cases is ceded to international reinsurers. European Union sanctions have prevented European reinsurers from covering shipments of Iranian oil, thereby propelling India to set up an emergency cover. India has planned to provide financial protection to domestic insurers by setting up a fund of up to ₹20 billion to cover refiners that process Iranian crude. The fund will be run by GIC Re with annual contributions from Indian insurers and the Ministry of Petroleum and Natural Gas.
The insurance sector requires attention to generate a higher level of awareness among consumers and also to maintain the penetration levels of the sector. This sector has evolved in the Indian market in the past 13 years and is set to move ahead by extending its ambit in the international market. The amendment bill has attracted both the Indian insurance sector and reinsurance companies and its implementation would be a win-win situation for both.
Priyanka Khimani is an associate at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.
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