The Hindu Business Line : Private non-life cos ceding to global reinsurers

Reinsurance route
Among the businesses ceded to global reinsurers include high value risk covers on assets.
Ceding was being done in view of low capitalisation of private sector companies.
Many private sector companies are finding it difficult to comply with the tight solvency regulations.

Bangalore , July 19

With the increase in the market share of private sector non-life insurance companies, ceding to international reinsurers is on the rise.

The non-life insurance market for the first two months of the current year was close to Rs 4,700 crore, a 22 per cent increase over the previous year. The private sector's share in the market was 35 per cent, up from last year's 27 per cent.

But despite this increase, private sector's retentions remain low. Sources said that most of the increased business was being ceded to international reinsurers.

Among the businesses ceded to global reinsurers include high value risk covers on assets. These assets included power plants, refineries and large manufacturing plants of both the private and public sector companies.

Sources said ceding to global reinsurers was taking place despite the Insurance Regulatory and Development Authority repeatedly directing domestic insurers for greater retentions for conserving foreign exchange, by improved capitalisation.

Ceding refers to passing on of risk covers to the reinsurer by the primary non-life insurers. Ceding was being done in view of the low capitalisation of the private sector companies.

Low capitalisation, in turn, implied low solvency for the private sector companies.

Currently, the solvency margins prescribed by the regulator are 150 per cent.

This implied that the value of the assets and the capital would have to be at least 150 per cent above the insured liabilities.

Solvency regulations

But, with the business expanding, many of the private sector companies are finding it difficult to comply with the tight solvency regulations.

Only the public sector was in a position to meet the solvency regulations prescribed by the regulator and ensure high retentions of premiums. This was also because the public sector currently has a capitalisation of over Rs 10,000 crore. If the provisions are also taken into account the sources said that the public sector would have a solvency margin well in excess of the prescribed 150 per cent.

However, the sources said, this was not the case with private sector insurers. Solvency has actually weakened for some private sector insurers.

This was because investments made by the private sector companies, directed investments, government and public sector securities, have depreciated in value.

Accordingly, the sources said, the option before the private sector insurers was to either bring in more capital or resort to higher ceding.

Barring the large companies bringing in more capital, it was proving to be difficult since the Government has still not raised the ceiling on foreign equity. Besides, the warehousing route, adopted by some of the more savvy insurers, has also been turned off, with the clampdown on external borrowings from Overseas Corporate Bodies.

Consequently, the only option for the private sector was to resort to reinsurance.

But the sources said that even reinsurance was becoming difficult since the external markets were being tightened. Ceding commissions had considerably narrowed, in some cases negative, choking an income source for primary insurers. 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.