To encourage insurers to be diligent in their underwriting, India’s sole homegrown reinsurer has offered to share a portion of its profits from reinsured risk.
General Insurance Corporation (GIC), the country’s sole homegrown reinsurer, has had enough. After having dealt with the fallout of shoddy underwriting practices for years, the state-owned reinsurer has decided to force insurance companies to get their act in order.
Enter the concept of profit-sharing. To encourage insurers to be diligent in their underwriting, GIC has offered to share a portion of the profits from reinsured risk, when contracts come up for renewal. This profit commission is over and above the commission that reinsurers pay insurance companies when insurers pass on the liability to them. Since insurance pricing was freed, premium rates have gone down by almost 70-80 per cent.
In addition, GIC is going to restrict inward facultative reinsurance for non-life insurance companies from the next financial year. Insurers will be faced with a cap on how much risk they can reinsure with each other.
The Insurance Regulatory & Development Authority (Irda) has also imposed sectoral caps on how much risk insurance companies can place with GIC. The cap has been introduced on various lines of general insurance, including fire, industrial and marine risks, aviation, liability and machinery breakdown risks, among others, from the next financial year.
While insurance companies are currently required to place at least 10 per cent of their risk with the national reinsurer, public sector insurers place as much as 70 per cent of their risk. Private players place around 60 per cent of their risk with GIC. Among the international reinsurers, Munich Re, Lloyd’s, Asia Capital Re, Swiss Re and AIG are the prominent players in India.
Irda has asked general insurers to separate risks under the new rules and write accordingly.
This would bring down the underwriting capacity of the insurance companies. These measures come in the wake of the huge claims that GIC has had to contend with in the past few years.
The devastating fire at Indian Oil Corporation’s depot in Jaipur last year set GIC back by approximately Rs 100 crore. While the entire plant was insured for a sum of Rs 230 crore, the sole homegrown reinsurer had reinsured 30 per cent of the risk.
International thrust
With opportunities in domestic operations remaining sluggish, GIC is looking overseas for growth. International reinsurance giants such as Munich Re and Swiss Re had to book huge investment losses during the financial crisis and, as a result, reduce their underwriting capacity. GIC is looking to exploit the pull-back of these reinsurers and eventually aims to bring the size of its international book on par with its domestic business.
Recently, GIC chairman Yogesh Lohiya said the reinsurer would achieve the 50:50 target for the ratio of domestic to international operations by 2012. In order to tap the international opportunity following the financial crisis, GIC is looking to upgrade its London branch into a subsidiary with an investment of Rs 1,200 crore. Besides the London arm, the corporation is also opening offices in Malaysia, South Africa and Brazil.
While GIC has a high rating on account of its public ownership status, other reinsurers have seen their rating change during the downturn. Irda has prescribed ‘BBB’ ratings of the reinsurance company for any reinsurance treaty arrangement. For instance, after AIG posted losses and sought government intervention in 2008, rating agencies had downgraded the firm.
Investment gains
In 2008-09 the corporation reported a net profit of Rs 1,407 crore, which was an increase of 41 per cent over the Rs 997 crore posted in 2007-08.
While most reinsurers recorded investment losses, GIC has posted an investment income of Rs 1800 crore. Also, unlike its global counterparts, GIC did not have any exposure to derivatives or sub-prime mortgages. This enabled the corporation to make up for underwriting losses of around Rs 200 crore in the last financial year.
Terror pool
The reinsurer has settled claims under the terror pool, which was formed in 2001 by all non-life insurance companies. The terrorism pool saw its fund corpus grow to Rs 1,518 crore by the end of 2007-08. The total payout for the terror claims on the Taj and the Trident, including loss-on-profits, was expected to be within Rs 500 crore, of which GIC has paid around Rs 200 crore from the pool to the two heritage hotels in Mumbai.
