The Hindu Business Line : Re-insurers insisting on stiffer terms

Munich Re and Swiss Re had warned insurers against any steep discounting in a free-pricing regime. Yet, several domestic insurers have chosen to ignore the warning and ushered in a regime of cut-throat competition.

Our Bureau

Bangalore , Jan. 17

Worried about the steep drop in tariffs in the domestic primary non-life insurance markets after migration to the free pricing regime, global re-insurers have begun insisting on tighter terms for treaty renewals for the next financial year.

The guidelines of the Insurance Regulatory and Development Authority (IRDA) prescribe that all agreements for re-insurance support would have to be concluded at the latest by February 15 this year.

Sources said the negotiations had begun and insurers were insisting on stiffer terms.

The Managing Director of Tata AIG General Insurance Company Ltd, Mr Dalip Verma, admitted, "re-insurance negotiations will be difficult this year."

In fact global re-insurers, Munich Re and Swiss Re, had warned insurers against any steep discounting in a free-pricing regime. Most of the external treaty supports to domestic non-life insurers, both in the public and private sectors, is provided by these two giants.

Overriding caution

Yet, several domestic insurers have chosen to ignore re-insurer cautions and ushered in a regime of cut-throat competition.

Fire insurance tariffs, as a result, hasdropped by over 40 per cent as insurers have pulled out all stops to boost market share. Insurers are attempting to prevent any reduction in revenues by boosting volumes, industry sources said. But re-insurers are now beginning to insist on far harsher terms for concluding the treaties before the IRDA deadline.

This was because few re-insurers are comfortable with the current free fall regime in premiums. Till last year-end when tariff floors were fixed by the regulator, re-insurers were comfortable.

Sources said that the options before the re-insurers included cutting back on capacity allocations for India, insisting on higher retentions by the primary insurers or compressing the ceding commissions paid out to the domestic insurers.

There is also the fourth alternative: Raising the proportion of Facultative Reinsurance and the Treaty Reinsurance. Under the treaty reinsurance arrangement, normally re-insurers are comfortable with the tariffs quoted by the primary insurers. In Fac Re, the re-insurer has the right to accept or reject any risk offered.

Fac Re, sources said, also provided the re-insurer with levers on the primary insurer, where the reinsurance rate itself would act as a floor. However, the Swiss Re representative in the country and Managing Director of Swiss Re Services India, Mr Dhananjay N. Date, said, "We are still watching the market."

Undercutting scale

But the reality was that the ability of domestic insurers, particularly the private sector, to undercut tariffs on the same scale as the public sector was very limited, the sources said. This was because the four public sector companies have far stronger balance sheets than the private sector.

Consequently it would be the private sector that would take recourse to re-insurer capacities, the sources said, to comply with the solvency requirements prescribed by the regulator. The prescribed solvency margin (the excess of capital plus value of assets over the insured liabilities) is 150 per cent.

Increased reliance on re-insurer capacity would, however, mean that they would have to forego the liberal ceding commissions paid out in the past. Mr Date said, "If the insurers want capacity they will have to settle for lower commissions." Insurers are now prepared to accept reduced commissions for the next year as the competition becomes even fiercer, the sources said.

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