On 16 January 2017, the IRDAI announced that with immediate effect the placement of all Indian reinsurance business is subject to an “Order of Preference” for cessions by Indian insurers as stated in regulation 28(9) of IRDAI (Registration and Operations of Branch Offices of Foreign Re Insurers other than Lloyds Regulations (“the Regulations”). The Regulations create a tiered system whereby Indian insurers are required to cede business to reinsurers according to a prescribed order of preference.
With effect from 1 January 2019, the Insurance Regulatory and Development Authority of India (Reinsurance) Regulations 2018 (IRDAI Reinsurance Regulations) confirms the enforcement of the order of preference and the procedure to follow for reinsurance placements. Please note that the explanation of the procedure for reinsurance placements detailed below follows the precise text of the IRDAI Reinsurance Regulations.
Procedure for Reinsurance Placements
Step 1 – Obtaining best terms for cessions
Every cedant, shall be free to obtain best terms for its reinsurance protection of domestic risks, subject to the following:
A. Cedants shall seek terms at least from all Indian reinsurers, who have been transacting reinsurance business (other than emanating from obligatory cession) during the immediate past three continuous years and at least from four FRBs (Foreign Reinsurer Branch).
B. No cedant shall seek terms from:
a. IIOs (International Financial Service Centre Insurance Offices) having credit rating below A- from Standard & Poor’s or equivalent rating from any other International Rating Agency, or
b. CBRs (Cross Border Reinsurer) having credit rating below A- from Standard & Poor’s or equivalent rating from any other International Rating Agency.
C. No cedant shall seek terms from any Indian Insurer, not registered with the Authority to transact reinsurance business.
D. The cedant shall be responsible and accountable to comply with these regulations, irrespective of whether the terms are obtained directly or through reinsurance Broker.
Step 2 – Offer for Participation
A. Every cedant shall offer best terms obtained, for participation in the following order of preference:
a. to Indian reinsurers, transacting reinsurance business (other than emanating from obligatory cession) during the immediate past three continuous financial years;
b. to other Indian reinsurers and FRBs;
c. to the IIO as under regulation 5(1)(B)(a) which provided the best and lead terms with capacity of not less than 10%;
d. to the CBR as under regulation 5(1)(B)(b) which provided the best and lead terms with capacity of not less than 10%;
e. to other IIOs;
f. to other Indian Insurers (only Facultative) and CBRs.
The following sets out the circumstances in which Indian cedants can make an offer for participation to CBRs which are applicant companies of the FRBs (subject to meeting the requirements of ‘Step 2’ above):
a. The total sum-insured is rupees two thousand five hundred crore or more for property insurance, material damage and business interruption combined at one location; or
b. The total sum-insured is rupees one hundred crore or more for liability cover, per event; or
c. The offer for participation is for Aviation, Oil & up-stream energy, Marine Hull risk; or
d. Prior approval of the Authority is obtained for exceptions to the above.
Exclusions to the order of preference include:
A. Retrocession or reinsurance placements of Indian Re-insurers, FRBs, IIOs and Insurance Pools;
B. Existing inter-company arrangements of the Indian Insurers transacting direct insurance business;
C. Obligatory cessions as notified from time to time under Section 101A of the Act;
D. Re-insurance placements of Indian insurers transacting life insurance business. However, Indian insurers, transacting life insurance business, shall endeavor to utilize the Indian domestic capacity before offering to the CBRs.
Reinsurance placements with CBRs by cedants transacting other than life business shall be subject to the following overall cession limits during the financial year:
A. Where the rating of the CBR as per the Standard & Poor or equivalent is greater than A+, the maximum overall cession limit allowed per CBR is 20%.
B. Where the rating of the CBR as per the Standard & Poor or equivalent is greater than BBB+ and up to and including A+, the maximum overall cession limit allowed per CBR is 15%.
C. Where the rating of the CBR as per the Standard & Poor or equivalent is BBB or BBB+, the maximum overall cession limit allowed per CBR is 10%.
Lloyd's is currently rated A+ (Strong) by Standard and Poor’s and A (Excellent) by A.M Best. If an insurer wants to cede a larger proportion of the risk to a cross border reinsurer, it requires the IRDAI's specific approval.
Alternative Risk Transfer
Alternative Risk Transfer (ART) has been given regulatory recognition in the IRDAI Reinsurance Regulations. It states that an Indian insurer intending to adopt ART solutions is required to submit its proposals to the Insurance Regulatory and Development Authority of India for approval before entering into any arrangements.
Certificate of Registration
Foreign reinsurers seeking to establish a branch office in India are able to apply for a certificate of registration from IRDAI under two possible categories:
- A certificate of registration obtained under the Regulation 4 (a) category will require the branch office of the foreign reinsurer to maintain a minimum retention of 50% of the Indian reinsurance business it writes. Please note that Lloyd's India service companies fall under 8(a) of the IRDAI (Lloyd's India) Regulations, 2016 which is equivalent to Regulation 4 (a) and places Lloyd’s in this same category.
- A certificate of registration obtained under the Regulation 4 (b) category will require the branch office of the foreign reinsurer to maintain a minimum retention of 30% of the Indian reinsurance business it writes.
While primary responsibility to act in accordance with the regulations lies with the Indian cedant(s), managing agents should engage with their brokers to determine how best to adhere to the regulations.
Lloyd’s will continue to monitor and alert the market of any developments .
Further information can be found in Market Bulletin Y5059.