 "IRDAI")
The Insurance Regulatory and Development Authority (Irdai) is planning to introduce collaterals for reinsurance transactions with Cross Border Reinsurers (CBR).
The proposed guidelines given in an exposure draft will be applicable for all the reinsurance placements with CBRs by cedants or insurers from India, for reinsurance programmes from FY25-26 onwards.
Reinsurers are considered key capital management tools that play a crucial role in risk management for insurance companies and against this backdrop, the practice of maintaining collaterals will not only aid in protecting the interest of the policyholders and insurers but also in fostering confidence in the market, attracting reinsurers for promoting a healthy and robust insurance ecosystem.
The regulator has also observed an increase in premiums collected by CBRs from the Indian reinsurance market and the need to protect the interest of the Indian reinsurer.
"In addition, the Cross Border Reinsurers (CBRs) have also been getting a significant amount of premiums from India and their share in the Indian reinsurance market is increasing. It is now felt necessary to ring-fence the interests of Indian cedants to maintain their ability to meet obligations towards policyholders in India,” said IRDAI.
According to the IRDAI annual report for FY23, 283 companies were participating in the Indian CBR reinsurance business competing with state-owned GIC Re and Foreign Reinsurance Branches (FRBs).
The cedant placing re-insurance business with CBRs shall be responsible for collecting the collateral. The collateral offered will be either in the form of an irrevocable Letter of Credit (LC) from the CBR or premium or funds withheld by the ceding insurer.
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The LC shall be issued through any IFSC Banking Unit (IBU) in GIFT IFSC or a scheduled commercial bank regulated by the Reserve Bank of India, which the cedant can choose to accept this LC either in Indian Rupees or in any freely convertible foreign currency.
The amount of LC shall be with reference to the aggregate of outstanding claims liabilities and IBNR reserves of the ceding insurer for re-insurance contract or arrangement with the concerned CBR.
A CBR with A- or above from Standard or Poor’s or equivalent, the minimum amount of collateral (aggregate of outstanding claims liabilities and IBNR reserves) will be 80 per cent while for below A- rating it will be 100 per cent.
The insurer will release such collaterals as specified in the new regulations if all the liabilities of the concerned CBR under re-insurance contract(s) are fully extinguished.
If the cedant is satisfied that part of the liabilities of a CBR under the re-insurance contract is likely to continue, it may release the collateral as given by the CBR after making adjustments for any amount that it determines should be kept available for meeting claims in respect of re-insurance contracts entered into by the CBR.
Every ceding insurer shall furnish a confirmation regarding compliance with the collateral requirements as indicated in these guidelines, based on the reinsurance programme as approved by its board of directors or the executive committee.
The ceding insurer will not be permitted to take credit of the collaterals held by it, to determine the available solvency margin.
In case of the premiums or funds withheld from each CBR shall be identified, accounted for, kept, and invested separately from the funds of the insurer, the investment income, if any, on such withheld funds shall be credited to such fund(s), the minimum amount of premium/ fund withheld shall be 50 per cent of the premiums ceded by the insurer to a CBR.
The exposure draft of the proposed guidelines has sought comments from the stakeholders in the next 15 days.
