Page 45 - India Insurance Report 2023- BIMTECH

India Insurance Report - Series II 33

2.1. Reinsurance Regulations

Reinsurance is primarily used to spread risks around the world instead of maximizing risk retention
within a country. Diversification of risk is the fundamental function through which reinsurers create
value, ultimately providing efficient and effective protection to the ceding insurers. A wise reinsurance
program can increase an insurer’s financial standing, whereas counterproductive regulatory restrictions
on the reinsurance program can produce financial instability. In the United States, up to 60% of the
costs of catastrophic losses are transferred/exported to the international reinsurance industry, significantly
alleviating local costs and allowing for a swift influx of capital following large events: 67% of the losses
of 9/11 in the United States, still world’s largest economy, were picked up by the international reinsurance
industry. Hurricane Katrina, which hit the US Coast in 2005, is one of the worst natural disasters in the
world, with economic losses of over USD 150 billion and the insurance industry paying for over USD
70 billion of this loss, according to one global reinsurer.

Established centers of reinsurance around the globe have in common a flexible, robust and responsive
regulatory approach. Their regulators adopt international standards such as those established by the
International Association of Insurance Supervisors (IAIS), implementing transparent policies for the
authorization and regulation of international insurers, reinsurers and brokers.

The Indian regulations, however, take a different approach as compared to the International
Association of Insurance Supervisors (IAIS). The Indian regulations have ‘premium retentions’ mandated
to measure them at the ‘country level’ / GIC Re (a government reinsurance company) is treated as the
preferred entity, favouring it with ‘Obligatory Cession’ and ‘Order of Preference’ regulations despite,
IAIS having a model risk management framework and the “ceding insurer responsibility model” in place.

Whilst many countries have adopted similar measures as part of their evolution to ensure that the
local entities are given preferential treatment, it is important for the genuine growth of the market to
bring in more insurers and reinsurers, who will all play their role in contributing towards the growth of
the Indian insurance market, by catering to the needs of the policyholder and introducing products that
would differentiate them from their competition. It is important for policy makers to understand that,
ultimately, the policyholder will determine the best insurance policy and security that meets their
requirements. By creating a more favourable environment for attracting business into a jurisdiction,
there would be a natural flow of business as well as market participants to cater to this business. For
example, the Singapore Government and Regulator realized that they would need to develop and
implement appropriate policies and Regulations to attract the various insurance, reinsurance,
intermediaries, and ancillary companies into Singapore, which would naturally attract global business
into Singapore. As a result of the various measures that have been implemented, Singapore has now
emerged as a significant global (re)insurance hubs in the World and is continuing to evolve, despite the
lack of any substantial local business.

2.1.1. The Definition of ‘Reinsurance’ Per The Insurance Act

The Insurance Act duly amended in 2015 defines ‘reinsurance’ - “re-insurance” means the insurance of
part of one insurer’s risk by another insurer who accepts the risk for a mutually acceptable premium”. The Act