Global reinsurers miffed at pro-GIC bias, seek level-playing field in India

Many are reluctant to invest financial and human capital in a scenario in which GIC Re enjoys the advantage of right of first refusal in reinsurance contracts

In less than a week after Union finance minister Nirmala Sitharaman announced in her Budget speech concessions for on-shoring of international transactions by foreign reinsurers in India, MS Amlin, a syndicate of Lloyd's India, announced its exit from the Indian reinsurance market.

MS Amlin, a service company of Lloyd's that entered India in June 2018, had only underwritten the business of Agriculture Insurance Company in the country.

While MS Amlin refused to comment on the exact reason for its exit in such a short span after setting up shop in India, most other foreign reinsurers that have set up offices in India were expecting a more level-playing field with the local reinsurer GIC Re in the Budget. 

“It would be great if all the local reinsurers, FRBs (foreign reinsurance branches) are bought on parity, as setting up a branch means significant infusion of capital (both financial and human) and bringing some of the best global practices/solutions to India. Having a level playing field would certainly be beneficial and help expedite the development of reinsurance solutions for the market. This would also support the overall objective of developing India as a potential reinsurance hub,” said Hitesh Kotak, Chief Executive Officer, Munich Re India Branch.

"Swiss Re for now is focused on serving our clients and market requirements out of our branch in Mumbai, which was established a little over two years ago. We continue to evaluate opportunities to grow our business and support the growth of the market in India," said G Satish Raju, CEO, Swiss Reinsurance Company Ltd, India branch, Mumbai.

At present there are close to ten foreign reinsurers, including another service company of Llyod’s, namely Markel Services India Private Limited, that have set up branch offices in India. All of them had set up the offices around 2017 after Insurance Regulatory and Development Authority of India (Irdai) allowed foreign reinsurers to set up branches in India. Earlier, foreign reinsurers operated only servicing outlets in India, liaising with Indian market for their parent offices. 

As a rule, GIC Re is given the first right of refusal in reinsurance contracts and only if it declines the risk, do foreign reinsurers come into play. Recently, Irdai tweaked this law, and insurance companies will now simultaneously seek terms from at least four foreign reinsurance branches. If the Indian reinsurers cannot match the rates quoted by their foreign counterparts, then they stand to lose business. Hence, technically, the first right of refusal is still with GIC Re.

GIC remains the dominant player in India's reinsurance market, though its share terms of premiums have come down from 99.8 per cent in FY17 to about 83 per cent in FY18, after foreign reinsurers were allowed to open offices in India.

According to experts, opening of branches has been of little use to foreign reinsurers as they could garner same business even without a branch office in India. 

“Foreign reinsurers have been underwriting risks for Indian insurers for ages, both onshore through liaison offices and offshore through brokers or directly. However, having now invested capital in India as branch offices, it is a small disadvantage for foreign reinsurers to come second in the pecking order. However the business and innovation potential is enormous. Finally, reinsurance is about capacity and capability and I am sure everybody will find their space,” said Joydeep K Roy, Partner and Leader, Insurance and Allied Business, PwC. 

According to a senior executive of a foreign reinsurance firm in India, ahead of Budget, the FRBs had asked permission to set up satellite office in GIFT City, through which it could handle both local as well as on shoring business. 

In the Budget, the government reduced the net-owned-fund requirement from Rs 5,000 crore to Rs 1,000 crore to facilitate on-shoring of international insurance transactions in the International Financial Services Centre, GIFT city — a move foreign reinsurers feel will be of little utility towards making the government’s vision of making India a reinsurance hub.

“More than a reduction in the net-owned-fund requirement, we were expecting a relaxation in setting up satellite offices, as the process of taking a fresh license is cumbersome and time consuming,” said the executive. 

“Initially, when foreign reinsurers contemplated opening branches in India, they expected a level playing field with GIC. Although there has been a change in the regulations, there is little change in the actual order of preference for cessions, effectively giving the GIC a first right of refusal. The exit of M S Amlin would surely not set a right precedent as it is quite unusual in the insurance sector so far for a company to exit the market in such a short span of time,” said Celia Jenkins, Partner, Tuli & Co.