Cession phaseout will prop GIC bottomline

The Indian insurance industry may no longer be able to fall back on the General Insurance Corporation of India (GIC) to pick up a portion of their bad portfolios especially the loss-making motor business.

This follows the Insurance Regulatory and Development Authority (Irda) considering the progressive removal of the current practice of insisting that insurance companies reinsure at least 20 per cent of their business with the national reinsurer GIC.

While GIC welcomes the move for progressive removal of what it claims has been a safety valve for the Indian insurance players as it would give a boost to its bottomline, GIC managing director P B Ramanujam also pointed out this move can lead to some adverse selection.

Insurers, which today used to accept poor risks and then reinsure them partly with GIC, would now think twice of taking bad risks on its books.

GIC sees the phasing out of compulsory cessions as a positive move. It will help since GIC is forced to accept the 20 per cent cession, said Ramanujam, adding that often the loss in some businesses is greater than the profit made elsewhere.

Today the loss-making motor portfolio accounts 40 per cent of the total industry, which finds no takers in the global reinsurance market. However, on account of the compulsory 20 per cent cession, GIC is forced to reinsure 20 per cent of this business in its books. "The loss-making motor portfolio is high and 20 per cent of this is transferred to us," said Ramanujam.

"In a liberalised market there should not by any stipulation regarding the statutory cessions to the GIC," stated the three-member expert committee constituted by the insurance regulator. The committee thus proposed a progressive reduction in the levels of statutory cessions, which is currently being considered by the regulator.

Moreover, many new insurance companies have questioned the motive behind the 20 per cent compulsory cession to GIC in the wake of healthy foreign exchange flows and as reserves have crossed the $ 100 billion mark.

While the committee stated that GIC ought to offer the required reinsurance capacity on a voluntary basis, "placements abroad should be allowed by IRDA only after an insurer has satisfactorily demonstrated that it has exhausted the domestic capacity." Ramanujam said about 24 to 25 per cent of the reinsurance premium is going abroad.

"Cession is today a safety valve for the Indian insurance industry, which otherwise would result in fronting business. As a long-term measure, I agree statutory cessions are not needed, but let the environment stabilise," he added.