The Hindu Business Line : Reinsurance treaty terms likely to stiffen

Bangalore, Nov. 11 The global financial turmoil has cast its shadow on treaty renewal negotiations between domestic insurance companies and international reinsurers.

Preliminary negotiations for renewal of reinsurance treaties are expected to begin next month.

Under the guidelines of the Insurance Regulatory and Development Authority, reinsurance arrangements are expected to be finalised at least 45 days before the beginning of the next financial year. However, internationally, the calendar year is also the accounting year. Consequently, negotiations would have to begin next month.

Top-level insurance officials said that with the asset write-downs and losses by global reinsurers, treaty terms were likely to stiffen.

Q3 losses

At least two of the large global reinsurers have reported third quarter losses. Swiss Re reported a loss of Swiss Francs 304 million ($271 million). Hannover Re reported a loss of €142 million ($198 million) for the third quarter of this year. Only Munich Re reported a small net profit of €7 million ($9 million).

The Chief Executive of Optima Risk Management Ltd, Mr Rahul Agarwal, said, “The additional capacities in South Asia have dried up, with tightening global liquidity. Conditions, therefore, point to rates hardening.”

The stiffening of terms was largely because reinsurers were expected to recover their investment losses through hikes in reinsurance premiums, both treaty and off-treaty terms. Off-treaty terms included both facultative and excess of loss reinsurance.

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 offer 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.

Falling tariffs

Domestic insurers’ treaty arrangements are mostly with these three large international insurers. In addition, the domestic insurance market has also hit by rock-bottom tariffs. Insurance premiums have dropped by as much as 70 per cent on a year on year basis, shrinking the ability to negotiate favourable terms.

Insurers said that the treaty limits were likely to be reduced for the next year. Primary insurers, therefore, were likely to be pushed more into the Fac Re markets, where the premiums are far more volatile unlike treaty reinsurance. This implied that some of the large mega insurance deals done on soft terms this year were unlikely to continue next year. This despite the fact that there have been few claims events this year. Among the sectors likely to take a knock are power, refinery and transport.

The last time reinsurance premiums hardened was after 9/11 in the US. Reinsurance premiums are currently about 0.5 per cent to 0.7 per cent of the sum assured. The rates had crossed 1 per cent of the sum assured after the attack on World Trade Centre. Insurers, however, said premiums were unlikely to reach those levels in the absence of major catastrophes.

Insurers, though, would have to take more risks into their own balance sheets, putting pressure on their respective solvency margins.

Private sector insurers are already capital hungry under the current conditions and were finding it difficult to find additional capitalisation. Consequently, the sources said, the shift to small ticket, low loss business was likely to accelerate.

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