The Hindu Business Line : Global reinsurers fail in meeting Fac Re contracts

Bangalore June 25 Faced with reinsurers defaulting in meeting claims, non-life insurers are confronted with the first major challenge since the deregulation of the industry.

Highly placed sources said that some global reinsurers had failed to entertain claims made by the primary insurers. This was especially in the case of non-treaty Facultative Reinsurance arrangements. The amount involved is estimated at around Rs 750 crore among all the non-life insurers.

Non-life insurers have entered into Facultative/Excess of loss reinsurance arrangements with some of the East Asian reinsurers. This was over and above their treaty arrangements with national reinsurers and global reinsurers.

Treaty arrangements

In treaty arrangements, the primary insurer cedes a certain percentage of the liabilities of business and the reinsurer is obliged to make good the claims as and when they arise. Facultative Reinsurance (Fac Re) is entered for specific risks that are not covered by treaties. Fac Re is an arrangement where ceding insurers offers individual risks to a reinsurer, who has the right to accept or reject each risk. Excess of loss reinsurance is done for only the portion that is not covered by the treaty reinsurance.

The sources said that most of the Fac Re contracts were placed through international reinsurance brokers. However, the sources added that the brokers had failed to respond for meeting the claims settlements. In fact, some of the primary insurers have approached the Insurance Regulatory and Development Authority (IRDA) for intervention.

But the IRDA Chairman, Mr C.S. Rao, said: "There is no question of our intervention at this juncture. This is an issue to be settled by the insurers and their customers."

However, Mr Rao made it clear, that irrespective of the reinsurers failing to settle claims, primary insurers would be expected to meet their obligations to policyholders.

Consequently insurers would have to take a hit on their own respective balance sheets for claims settlements.

Non-receipt of reinsurance claims would have to be provisioned and treated as bad assets in the balance sheets of the private sector insurers. This would though substantially damage solvency margins. Insurers are currently expected to maintain a solvency margin (the excess of value of assets and capital in excess of the insured liabilities) of 150 per cent.

The sources said that such a situation was taking place when reforms in the sector were entering the second phase. Private sector insurers have focused on building business, and ceding the same to overseas reinsurers in a bid to take advantage of high commissions and build high toplines. The commission till last year were as high as 40 per cent, though this has now declined to less than half.

Besides the major global reinsurers are unwilling to accept all the post deregulation tariffs and accordingly have opted to cherry pick. This has prompted private sector insurers to increasingly shift to second rung companies in East Asia, through intermediaries for complying with solvency.

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