The Hindu Business Line : 2008-09 reinsurance terms seen to favour insurers here

Cover drive
Reinsurers satisfied with high technical reserves with domestic firms.
Renewals likely to see 50% drop in the risk pricing of fire, engg covers.
Drop in policy premia may shrink ceding commissions.

C. Shivkumar

Bangalore, March 14 General insurers have tied up their reinsurance treaty arrangements for financial year 2008-09 in line with regulatory requirements.

A public sector insurance company official said the terms were expected to favour domestic insurers.

This was in view of the intense competition from global reinsurers. East Asian Reinsurers, enjoying a ‘BBB’ rating, have pitched for a slice of the domestic market.

Domestic insurers are permitted by the Insurance Regulatory and Development Authority (IRDA) to enter into reinsurance arrangements with entities that have a minimum ‘BBB’ rating over the last five years.

As a result, the initial sabre rattling notwithstanding, most global reinsurers have not only accepted the current risk pricing, but were also braced for another steep drop in the next financial year, when renewals start in the next financial year.

In for renewal

The covers coming up for renewal include those of NTPC, all the refinery majors and the domestic defence aviation company HAL. Premia, post-deregulation, has dropped by close to 70 per cent this year. Renewals were likely to see another 50 per cent drop in the risk pricing of fire and engineering covers, the sources said.

The drop in policy premia was expected to slim the ceding commissions. Ceding commissions are now likely to be only about 5 per cent, as against nearly 40 per cent about three years ago.

Besides, the reinsurers were satisfied with the high level of technical reserves with the domestic companies. Technical reserves include provisions for unexpired losses and reserves for incurred but not reported risks. The changes in solvency reporting have also inspired greater confidence among traditional reinsurers Swiss Re and Munich Re.

Currently, solvency is reported on a quarterly basis. The sources said that most insurers, both public and private, were in line with Required Solvency Margin requirements (RSM). IRDA’s mandated RSM is 150 per cent. Solvency margin implied the excess of capital and the value of assets over the insured liabilities.

Low losses

But global reinsurers’ interest in India was also on account of low losses over the last three years. India Inc’s outflows on reinsurance, in both the public and private sector, are currently around Rs 6,000 crore per annum. Claims are referred to as losses in insurance jargon.

In fact, during the last three years, recourse to reinsurance has been minimal on property or liability risks, the officials said. “Reinsurers are therefore passing on the profits back to the primary insurers, in line with international practice,” the officials said.

The low losses in the country allowed improved retentions in the country. High retentions imply the capacity of domestic companies to take more risks on their books.

As a result, recourse to reinsurance was on the descent for the last two years. Private sector recourse to reinsurance was only about 45 per cent. Public sector recourse currently ranged between 25 and 30 per cent.

The high retentions are good news for the financial markets.

Insurers have greater investible surpluses to park in the markets, both debt and equity.

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