Checkmate for Chinese firms in India's growing reinsurance market

A clutch of regulatory changes announced earlier this year throws a spanner in the works for Chinese reinsurance firms pitching to do business in India, a coveted marketplace of the sector.

The insurance business, by its nature, collects enormous data about Indians and is regarded as an economically sensitive sector. This concern could have played a role in the risk assessment the Insurance Regulatory and Development Authority of India (Irdai) made about domestic firms' exposure to Chinese re-insurance, said a sector leader in India on the condition of anonymity.

It is like this. Irdai issues every year a file reference number (FRN) for all reinsurance companies planning to pick up business from Indian insurers. FRN makes it obligatory for reinsurance companies to formally identify themselves with Indian insurance companies to solicit business. While the bulk of the reinsurance business is placed from January to March, often the FRN arrives for many reinsurers after the financial year is over.

Irdai, to fix that problem, relaxed from this January the FRN rule for leading global reinsurance companies. For doing business with them, domestic insurance companies can consider the FRN as auto-renewed. The regulator held that this is necessary since global companies “play a significant role in the reinsurance market in providing reinsurance support/capacity to the Insurers”. Chinese reinsurance companies do not qualify for the relaxation and their FRN will continue being approved by the regulator and Indian government departments. As global companies are auto-renewed, it was expected that the FRN for all reinsurers will be issued within Financial Year 2022-23 (FY23) that ended on March 31.

The delay in issuing FRN has now stretched to May: unprecedented in the industry.

Reinsurance leaders—Swiss Re, Munich Re and India’s state-run GIC Re—have expanded sharply in the country. When GIC Re filed its initial public offering (IPO) in October 2017, it estimated the reinsurance market will be worth $11 billion by March 2022. A Swiss Re report from earlier this year noted: “India is one of the fastest growing insurance markets in the world, and we forecast that it will be the sixth largest by 2032. We estimate that total insurance premiums will grow on average by 14 percent annually in nominal local currency terms over the next decade”.

Data shows that against the name of Chinese reinsurers, Irdai has put up a cryptic notice saying “under consideration”. Indian insurance companies that have placed business with them are in a fix. The Chinese share in India’s reinsurance market is less than 4 per cent. The apparent denial is significant since India is pitching itself to become the hub of the South Asian reinsurance market.

No Indian insurance company commented on this story and questions sent to Irdai were not answered.

Over the past few years, Indian insurance companies placing reinsurance have got stability. Calm came after a decade of murderous discounted premium in property insurance rates that raged till renewal year 2018. It stopped after GIC Re nudged companies to adopt better standards. GIC Re —a sort of monopoly since all insurers have to first buy reinsurance from it and then approach others for additional cover—asked all companies that their own premium rates must be in line with their claims experience. GIC Re asked insurance companies to adopt rates for their clients, as suggested by the Insurance Information Bureau of India (IIBI), a business advisory body set up by Irdai. The companies began to quote the benchmark rates for the industry offered by IIBI in their information package to GIC Re.

Insurance reforms

Irdai in January instructed insurance companies to discontinue this practice, seeking dynamism in the sector. While companies may cite IIBI’s benchmark rates, they cannot use them as “embedded rates” in their negotiations with GIC Re or other reinsurers. They have to do their in house underwriting and quote the same in their deals with the reinsurers.

A joint study conducted by RIMS, a global network of risk management professionals, and the National Insurance Academy this year said, “all countries are allowed to exercise freedom in pricing whereas pricing in some lines of business, like fire, remains fixed in India due to conditions imposed in reinsurance treaties”.

“The time is ripe for introducing changes in the insurance industry that will provide choice and option to the policyholder and lead to growth in the industry,” said Roop Kumar, N K V chairman at RIMS India Chapter.

Irdai’s reforms like easing the rule for IIBI’s benchmark to attract global reinsurance companies appear succeeding. In its results for Q4 FY23, Munich Re noted: “In the reinsurance renewals as at 1 April 2023, Munich Re was able to increase the volume of business written to €2.9bn (+11.1 percent). It was possible to leverage growth opportunities, especially in Asia – particularly in Japan and India – as well as in Latin America. Non-proportional natural catastrophe business was expanded, in particular, in view of attractive rate levels. By contrast, Munich Re once again selectively discontinued business that no longer met risk/return expectations”. 

The regulator has targeted that reforms that make insurance companies take risks and be rewarded with larger profits will improve insurance penetration in the country from less than 4 per cent (including government-run insurance schemes makes it 4.2 percent) to over 5 percent within this decade.