IRDA examining options to change entry rules.
MUMBAI: The lobbying by global reinsurance giants to go it alone in India seems to be bearing fruits. According to sources, the government has sounded out the Insurance Regulatory and Development Authority (IRDA) to look out for ways and means to change the entry rules through an executive order rather than through an amendment in Parliament.
Though Indian rules do not allow reinsurance companies to start operations in the country without domestic equity participation, as a first step to break the rule, they have been allowed to set up service branches in India. Under this route, foreign reinsurers can mobilise business and retrocede, or repatriate, the entire money back to their country, after a 10% ceding (compulsory money) to the national reinsurer, General Insurance Corporation of India (GIC).
Also, another recommendation by an IRDA panel is seen as a move to ensure more business for overseas reinsurers. Under existing rules, all domestic insurers will have to give a 20% ceding, or compulsory business, to GIC. An IRDA panel has recommended its reduction to 15%, and according to sources, this is likely to be brought down further.
Even if the ceding rate is brought down to 15%, GIC will, in effect, get only 5%, as 10% will go as inward reinsurance. In other words, if a domestic insurance company gives GIC a 15% ceding, GIC will, in turn, insure some business of that company another insurer. This process of allowing insurance companies to act as each others’ reinsurer is called inward reinsurance. All this, a source said, will together place GIC on a weak ground.
In India, insurance companies are allowed to act as each others’ reinsurers, but a reinsurance company cannot do direct insurance business as done abroad.
When asked why reinsurance companies are so keen to keep domestic partners out, an industry source said that reinsurance was a highly capital-intensive business and risk-unpredictable, unlike life insurance, and many foreign giants believe that Indian companies are not so deep-pocketed.
A complaint within the industry that the IRDA-prescribed Rs 200 crore minimum capital requirement for reinsurance companies is too low an amount and that no Indian company has set up this business so far lend credence to this belief.
Reliance is the only Indian company to have shown some interest and there are reports of it holding talks with Warren Buffett Hathaway Investments.
If the Rs 25,000 crore India reinsurance market is fully opened up, the major beneficiaries will be Swiss Re, Munich Re and America Re. All the three already have service branches in India, and sources said that America Re’s monthly salary bill alone comes to Rs 2 crore.
Though potentially, reinsurers can repatriate 90% of the business generated here to their home countries, in normal practice they keep 40% of the money with them.
Internationally, to avoid regulatory wrath, many companies, instead or retroceding money directly, do it through brokers.
