The Hindu Business Line : Reinsurance treaty terms likely to be tougher

Check points
Stiffening stance despite no major claim events in country in last 2 yrs.
PSU insurers in a position to assume more risks than private units.
Sub-prime meltdown also hardened standpoint of global reinsurers.

C. Shivkumar

Bangalore, Jan. 10 With general insurance tariffs dropping by over 80 per cent, treaty negotiations with the reinsurers has come under a cloud.

Highly placed sources said that global reinsurers have indicated that with the steep fall in tariffs in fire and engineering since the beginning of this month, treaty terms would be restricted. This implied that primary insurers would have to take more liabilities on their books.

Alternatively, primary insurers would have to enter into treaties with more reinsurers. The stiffening stance comes despite the absence of major claim events in the country during the last two years.

The sources said that public sector insurers were in a position to assume more risks into their books. This was on account of the higher capitalisation and removal of motor third party liabilities from their books. However, private sector insurers were not in a similar position, since their capitalisation was far lower.

PSU reinsurance outflows last year were about 27 per cent of the gross premiums and in the private sector reinsurance outflows were closer to 50 per cent. The combined reinsurance outflows in 2006-07 was about Rs 8,500 crore, both through treaty and spot arrangements.

Treaty arrangement

Under current regulations of the Insurance Regulatory and Development Authority, domestic insurers are expected to finalise their treaty arrangements at least 45 days before the beginning of the next financial year. But there is fear among insurers that tariffs could move further south in the coming months. This is particularly because most big ticket insurance renewals are usually done in March.

This also translated into hefty commissions by ceding liabilities by the first quarter of the next year. Ceding is a process where the primary insurer passes on the premium and liabilities to the reinsurer. In the process, the primary insurer earns a commission

But commission have steadily dropped during the last few years. Last year, ceding commissions were barely 10 per cent. “Next financial year, if this situation continues, we are not expecting any large commission income,” the sources said.

Sub-prime stem

The hardening stance of global reinsurers also stemmed from losses incurred in the sub-prime meltdown. Both Munich Re and Swiss Re have incurred large losses in the American sub-prime crisis. Swiss Re losses are estimated at $1.1 million and Munich Re about €600 million.

Accordingly, the option was to have treaties with reinsurers with lower ratings. However, IRDA’s guidelines permit only reinsurance arrangements with reinsurers with credit ratings of not less than AA. The tightening was largely on account of defaults some primary insurers had suffered last year.

As a result, the sources said there was little option other than taking reinsurance support through the Facultative route — a reinsurance contract under which the primary insurer has the option to cede and the reinsurer has the option to accept or decline individual risks.

Fac Re route

Moreover, the General Insurer Corporation, the national reinsurer, has also reduced its statutory obligation to 15 per cent in 2007 and was expected to reduce it further to 10 per cent in the next financial year. As a result, the sources said that the even with GIC, many would have to opt for the Fac Re route for insurance cover. Fac Re is significantly more expensive than treaties. But there are few options, they added.