The Hindu Business Line : Reinsurers concerned over free pricing fall-out

Worried over the fallout of deregulation of the non-life insurance sector, global reinsurers have begun mounting pressure and indicated that treaty terms would change adversely when they come up for renewal next year.

The Insurance Regulatory and Development Authority (IRDA) has set the roadmap for deregulation of tariffs to begin from the next year.

While the contours of the free pricing regime are yet to be defined, the initial round is expected to begin with the fire and engineering sectors. This detariffing or free pricing regime for risks is likely to trigger a drop in premiums by at least 40 per cent during the next financial year, on account of intense competition.

Large global reinsurers, both Swiss Reinsurance and Munich Reinsurance, with whom treaties are signed by the Indian primary insurers, have expressed concern over the possible impact on tariffs.

`Unacceptable'

Swiss Re Services India Private Ltd's Managing Director, Mr Dhananjay N Date, cautioned, "Any steep fall in tariffs will not be an acceptable to any of us."

The concerns stem mainly from fears that the tariff reduction will result in revenues of primary insurers shrinking, leading to deterioration in underwriting losses and consequent weakening of domestic retention capacities.

Underwriting losses for the domestic insurers are already high. "If loss expectations are high, it is logical for reinsurers to react," Hyperion Insurance Group's Chief Executive, Mr David P Howden, said. The reinsurers' reaction is through a likely tightening of treaties coming up for renewal in March 2007, PSU insurance officials said.

Till now the treaty reinsurers were comfortable with the tariffs, since the IRDA's Tariff Advisory Committee fixed floor rates. Violations of the floor rates were unacceptable to the regulator. However, with the deregulation, no floor rates are expected to be prescribed by the regulator.

The tightening, the sources said, would be through higher Excess of loss (XL) or Facultative Reinsurance (Fac Re) components in treaties. (XL is a contract between insurer and reinsurer, whereby the claims above certain threshholds are settled by the latter. In Fac Re, the reinsurer has the right to accept or reject any insurance claim lodged by the primary insurer). Both these components give reinsurers substantial flexibility to accept or reject rates.

However, increasing these components in treaties would allow reinsurers to determine tariffs. "If tariffs fall sharply, reinsurance programmes could be dictated by global reinsurers," Mr Howden warned.

Besides, substantial revenues earned in the form of ceding commissions by primary insurers would also vanish. Primary insurers, particularly private sector, presently earn up to 30 per cent by way of commissions by ceding liabilities to global reinsurers.

Lower tariffs, insurers said, would translate into negative commissions, where cession would be forced only for complying with solvency guidelines.

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