Local risk players still coy of reinsurance

Reinsurance has failed to play a major role in the domestic insurance industry in complete contrast to the international scene.

Against US insurers transferring as much as 60 per cent of their risks to reinsurers, domestic private life players have transferred just about 3 to 5 per cent of their total premium.

In the case of the Life Insurance Corporation of India (LIC), 0.1 per cent has been reinsured, said Edward B Reiche, head of life reinsurance Asia, Munich Re.

Commenting on how reinsurance companies can help insurance players meet capital requirement, Reiche said the Indian regulatory environment needs to be further developed.

"One cannot have one size fits all model, without any differentiating factor between companies," he said, citing that imposition of 150 per cent required solvency margin on a conservative company would end up punishing it.

Reiche was speaking at a one-day seminar on risk management organised by Munich Re earlier this week. Today, Indian regulations try to maximise retention of risk, but this said Reiche was not good for the industry in the long run in terms of risk management.

Reinsurance companies can help Indian insurers manage risks by transfering it onto their books especially at a time when some Indian partners are running out of money.

The Indian insurance industry like any other in the developed world is today facing three critical risks: technical, investment and operational.

While globally reinsurance companies offer various mechanisms whereby these risks can be transferred through alternative risk mechanism, the Insurance Regulatory and Development Authority (Irda) is not too comfortable with the risk tranfer mechanisms practiced overseas.

Said C S Rao, IRDA chief in his inaugural address: "The regulator is not confident that proper risk transfer has taken place, since adequacy of capital is crucial."

Meanwhile, Jan Willing, senior financial consultant, Munich Re, highlighted in his presentation the ways insurers overseas have replaced the traditional approach of formula based solvency requirement by sophisticated approaches such as internal and enterprise risk models based on stochastic modelling.

These modern approaches consider and aggregate all risks of insurance operation including asset, liability and operating risks (and not just the traditional insurance risk consisting of mortality, morbidity and lapses).