The Hindu Business Line : Reinsurance terms softening

AFTER remaining firm for almost two years, reinsurance markets have eased. Many primary general insurers expect the treaty terms to be less rigid than last year.

Sources said that unlike last year, this year few companies faced difficulties in finalising their reinsurance plans for 2004-05. Under the Insurance Regulatory and Development Authority norms, primary insurers are expected to submit their reinsurance plans 45 days before the beginning of next financial year. The sources said that with intense competition in the international reinsurance market, indications were that most domestic companies have been able to comply with the IRDA guidelines. The sources said a major reason for the Indian insurers' ability to finalise their arrangements, was due to the presence of the national reinsurer - General Insurance Corporation (GIC). The national reinsurer has been able to drive down rates in the domestic markets. As a result, the sources said, several of the insurers, including the private sector, preferred GIC for reinsurance arrangements over and above the statutory limit of 20 per cent.

Indian general insurers are allowed to enter into treaty arrangements only with reinsurers who come within the top categories of the rating category. Many East Asian reinsurers were in the markets offering more competitive rates than European counterparts; but they fall in the `BBB' categories.

This rating indicated the risk of insolvency of the reinsurer and his consequent ability to meet claims when invoked.

However, the sources said, that despite the higher risk profile, Asian reinsurers had managed to bring down rates in the Facultative Reinsurance markets, especially in the case of aviation hull. Mr Sandip Bakshi, Managing Director and Chief Executive Officer said, "Fac Re rates are soft now. But we are a tariff-driven market."

This year reinsurers have so far been comfortable, especially from the South Asian regional risk. There were fewer catastrophes in South Asia and therefore lower claims. Low claim ratios in turn implied that the reinsurers were now willing to review the probably maximum loss (PML) ratios and even scale it down. A scaling down of the PML ratio would naturally allow for more flexible terms in the treaties. Some of the caps that had been put in place two years ago on certain liabilities have now been relaxed upwards.

The flexible terms by reinsurers would be largely restricted to the public sector insurance companies and well-capitalised private sector companies, sources said.