The Hindu Business Line : Reinsurance ceding commissions shrink

Advertisement

Bangalore March 7 Domestic general insurance companies have finalised their reinsurance arrangements for the next financial year, but the hefty ceding commissions have become history.

According to the current regulations of the Insurance Regulatory and Development Authority (IRDA), reinsurance arrangements are expected to be finalised at least 45 days before the beginning of the next financial year. Sources said that there were little changes in the renewed treaty terms, since global reinsurers have incurred little losses in the country during the current financial year. As a result, the probable maximum loss ratio, an estimate used by the industry to forecast claims, has remained unchanged for the next financial year.

But sources said, despite the stable terms, global reinsurers have reduced the ceding commissions to domestic general insurers by nearly 75 per cent. Ceding commissions are earned, when primary insurers pass on their insurance liabilities to the reinsurers. Till last year, the reinsurance commissions earned by domestic general insurers ranged between 40 and 45 per cent of the domestic premiums collected. For the next year, the sources said, the commission earnings were unlikely to exceed 10 per cent.

New pricing regime

The reduction in commissions comes at a time when the domestic industry has completely migrated to a deregulated pricing regime. Reinsurers had cautioned primary insurers against any sharp reduction in tariffs in the free pricing regime. Yet the industry has cut down tariffs across some of the profitable segments such as fire and engineering. The high profitability from these segments was largely on account of the traditionally low claims ratios. Tariffs are down by about 40 per cent across the industry.

The reduced commission earnings and the lower premiums were now likely to impact the revenues of the primary insurers. The impact of this likely to be more on the private sector, for whom, ceding commissions were a substantial revenue source. Damage control measures

Primary insurers have now put in place damage control measures to defend their respective top lines and bottom lines of their core business. Some of the steps that have been taken include removal of the cross subsidy mechanisms for corporate and bulk customers. For instance, some of the insurers had in the past, offered group medical and marine insurance covers free of cost or at subsidised tariffs to their customers for placement of fire and engineering businesses. The pricing of both medical and marine are now being increasingly linked to the claims history.

Solvency requirements

Besides, some of the companies are also moving to raise capital to comply with the IRDA's solvency requirements of 1.5 times. The solvency margin implied that the capital and value of the assets would have to be at least 150 per cent more than the insured liabilities. The public sector insurers are preparing the ground for tapping the capital markets for raising equity funds. So are the private sector companies. ICICI's insurance companies have already begun the groundwork for the purpose.