Financial Daily from THE HINDU group of publications
Thursday, Feb 23, 2006
Financial Daily from THE HINDU group of publications Thursday, Feb 23, 2006 |
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Money & Banking
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General Insurance Reinsurance treaties on stiff terms — Spike in primary insurance rates on cards C. Shivkumar
Bangalore , Feb. 22 GENERAL insurance companies have concluded their reinsurance arrangements for the next financial year, though the terms have considerably stiffened. Sources said here that the primary non-life insurers, both public and private sector, completed their arrangements within the stipulated deadline by the Insurance Regulatory and Development Authority (IRDA). The terms would now have to be approved by the regulator. Most of the treaties negotiated were done on much harder terms than last year. Reinsurance rates are now estimated to be in the region of 0.09 per cent for industrial risks. Most of them have also had to forego the `no claim discounts' for the next year. This was in view of the large claims some of them had made during the current year on account of losses incurred during the Mumbai, Bangalore floods and the ONGC rig fire. The new terms were partly driven by the hardening international markets and the changes in the probable maximum loss ratios, the sources said. The stiff terms were also driven by the IRDA's stipulation that reinsurance contracts be tied only with those international reinsurers with a rating of at least `BBB'. There are, howeve,r no limits on primary insurers on placements with the national reinsurer, General Insurance Corporation of India. Besides, the regulator also specified that the reinsurance contract was exclusive between the primary insurer and the reinsurer. During the last two years, some of the large corporates had specified reinsurance companies in East Asia and Europe. This was done specifically to drive down premiums, especially by refinery and power entities. The Chief Executive Officer of ASL Insurance Brokers Ltd, Mr Jitendra Kumar Bhagat, said, "The contract of insurance is independent of the contract of reinsurance. The client is not a party to it." This implied that only insurers could negotiate reinsurance contracts. The insured does not have a role in such negotiations. Accordingly, it would also give greater flexibility to insurers to choose reinsurers on the best possible terms without being pressured by clients or brokers. This was especially in the case of Facultative Reinsurance contracts. Fac Re is an arrangement where the ceding insurer offers individual risks to a reinsurer, who has the right to accept or reject each risk. But, industry sources said that IRDA's stipulation was also driven by solvency concerns of the domestic insurance companies. This was especially after some of the reinsurers, particularly in Asia and Europe, defaulted in meeting their obligations. In the event of such defaults, the primary insurer is obliged to meet the claims. In the case of reinsurers' default, the solvency is directly under pressure. Moreover, the sources said that the new stipulations and harsh reinsurance terms were also likely to act as catalysts for greater retention of business within the country. This was partly because most of the insurers were likely to face negative ceding commissions in the harsh reinsurance environment. This was also likely to translate into a spike in primary insurance market in the country as well, the sources added.
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