The Hindu Business Line : Ceding commissions shrink for private non-life insurers

INTENSE competition in the domestic non-life insurance industry has resulted in making ceding commissions negative from reinsurance-driven businesses.

This has resulted in shrinking a lucrative source of non-core earnings for non-life insurers, particularly private sector entities, industry sources said. Estimates were that the negative ceding commission being paid out by some of the non-life insurers was in the region of 0.05 per cent.

Ceding refers to passing on of risk covers to the reinsurer by the primary non-life insurers. This commission implied that the reinsurer picks up the risks from primary insurer at a lower premium, leaving a small margin to the primary insurer. Ceding commissions for the non-life insurance companies, particularly the private sector, were as high as 23 per cent.

However, the sources said that most of the private sector companies in a bid to expand businesses had undercut public sector insurers and driven down risk cover premiums to rock-bottom levels.

Private sector non-life insurers in the country have been ceding their business to international reinsurers.

Most of the ceding to reinsurers is done through the facultative route. Fac Re covers are taken only for large covers in excess of risks over Rs 100 crore.

The sources said that private non-life insurers resorted to facultative reinsurance to protect their solvency margins, as none of them is in a position to absorb covers for Rs 100 crore. They are still capitalised at very low levels, of about Rs 2,000 crore.

Besides, unlike the PSU insurers, competitive pressures have not permitted the private insurers to evolve pooling arrangements, whereby the risks are shared.

Instead, the practice has been to go for coinsurance arrangements, whereby the lead insurer passes on a portion of the premium and the proportionate risks to coinsurance partners. However, coinsurance arrangements had not been very successful, the sources said.

Faced with low retention capacity, private sector insurers relied on reinsurance.

The sources said few reinsurers were prepared to accept the risk pricing.

This was particularly so because the low premium did not reflect the probable maximum loss (PML) ratio.

This ratio reflected the liability of the insurer in the event of policyholders invoking claims.

Consequently, most of the private sector companies were being forced to forego the ceding commission to protect their solvency margins, the sources said. Besides, unlike the older insurers, few private sector companies were able to draw on investment income to offset the costs of reinsurance.

The alternative was to pare business growth targets.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Ceding commissions shrink for private non-life insurers

Securities may see range-bound movement

World Bank report lays emphasis on reforms to revitalise agriculture in TN

Recipe to boost investment climate in TN

Karnataka Bank targets Rs 4,600-crore forex biz

SIB signs pact with Bahrain Financing

Indian Bank to defer IPO

Corporation Bank ED

It's still a toss-up on rate market trends