Draft IRDA regulations 2018 suggest protectionism in reinsurance

Protectionism seems to be the flavour of the season, and the Indian insurance industry is also getting a taste of it, courtesy what is known as the “order of preference”. The origin of this dissonance is the Draft IRDA (reinsurance) Regulations, 2018, which has created a first right of refusal for Indian reinsurers and Foreign Reinsurer Branch (FBR). This, a large section of the industry says, amounts to limiting competition on reinsurance, thereby impacting policyholders adversely in terms of higher cost and limited coverage, and product innovation. 

This will also create significant risk for the policyholder and insurers in terms of concentration of risk in the hands of a few reinsurers that can potentially threaten the stability of insurance market. 

The Insurance Brokers Association of India says the prescriptive measures under the regulations require the consumer to approach reinsurance providers in preferred order without any choice to them. The regulations allow Indian reinsurers and FRBs to match and take away business of international reinsurers even if the latter quote the lowest in price. 

The regulations prescribe that the risk can be placed with the Indian reinsurer (GIC) and FRBs within the Indian market without cession limits. This, it is feared, will greatly increase the risk of concentration within the Indian market and the purpose of reinsurance will get lost. 

In addition, the right of first refusal disregards intellectual property rights, as all confidential product offerings and innovation will have to be shared with only a few preferred reinsurers. For example, cyber risk and insurance is the largest growing class of insurance in the world, requiring deep expertise and constant innovation. If forced to follow compulsory sharing of intellectual property, most international reinsurers will have to exit their engagement with India. Precluding Indian markets from global expertise will not be in the interest of Indian customers. 

This is how it works. In individual reinsurance for large and specialised risk, the rates, terms and coverage are decided by the lead reinsurers. Depending on the nature of risk, there could be several global reinsurers or a few specialised reinsurers offering a unique product. Since a handful of reinsurers would only be entering India as Branch operations and the entire business will be offered to them on Order of Preference, a majority of the international players will be denied a level playing field. This could affect all industries that purchase reinsurance. 

For example, take the oil & gas industry, which pays one of the highest premiums as the coverage requirements are highly specialised. Limited competition could directly impact the insurance cost and coverage of companies in the sector. Other large Indian companies with asset exposure above ~25 billion will also be affected. The regulator has been allowing “Mega Risk” for such corporates so that they can get global quality coverage and terms. With reinsurance restricted to only a select few, these companies will be denied best-in-class risk management and competitive insurance programmes.

There is more. In case of natural disaster, concentration of risk in only a handful of reinsurers can create market collapse and coverage restriction for end policyholders. Example: the Thailand flood in 2011, where a basic cover like flood risk was excluded on renewal of policies.

It will affect the pharmaceutical industry, too. India is now one of the largest generic drug manufacturing country in the world and the industry needs specialised product liability insurance covers. But very few specialised reinsurance markets provide such coverage and most commercial reinsurance markets do not provide competitive reinsurance in this area. Clinical trial research affects a large number of companies, which require coverage and service to provide certificate of insurance in a timely manner in multiple jurisdictions. These arrangements have taken years to build and may be threatened if the regulator goes ahead with its restrictive reinsurance regulations. 

The regulations require that the ratings of cross-border insurers should be A- (by S&P) or equivalent. There is no certified equivalency scale that can equate the S&P rating with the AM Best rating. For example, GIC has only AM Best rating, but no S&P Rating, making it difficult to understand if any equivalency scale is available. This needs clarity. 

Let’s look at the global best practices. A total of 12 markets, including India, contribute nearly 80 per cent of worldwide insurance premium. Though 11 of these countries encourage domestic cession of the reinsurance premium, none of them has priority cession order like in India. The focus is more on credit risk management rather than providing preference to a select few reinsurers within the country.

The Indian insurance market has been procuring reinsurance on competitive basis from across the globe including GIC. The government and regulator recently allowed foreign reinsurers to set up branches in India, which is a welcome step, provided it generates even more competition and benefits the policyholder. However, there are serious concerns on the manner in which competition is being severely restricted on the reinsurance procurement.