Page 48 - India Insurance Report 2023- BIMTECH

36 India Insurance Report - Series II

foreign reinsurance branches have been burdened with compliance to all the local Acts and regulations
besides specific regulations evolved for the foreign reinsurance branches. (e.g., Local solvency rules have
to be complied with despite foreign reinsurers already complying with more advanced and scientific
economic risk-based capital and solvency norms under EU wide Solvency II regime or equivalent of
that). This means additional attendant costs, such as having all key management personnel on the ground,
unconnected reporting requirements, higher taxes and higher regulatory and compliance burdens.
Additionally, there are Investment Regulations and the need for a joint audit which is unique to the
Indian market. When there is already a limit in terms of the number of firms that an auditor can act for,
then prescribing a joint audit needs to be specially understood from a corporate governance perspective.
Similarly, an investment audit and a concurrent audit can be easily performed by the firm’s internal
auditor based on the scope prescribed by the IRDAI. There are investment regulations mandating
investments in the specified securities, which are equally applicable to both insurers and reinsurers,
which impacts the diversification of risks since both are investing in the same market. Therefore, after
the appropriate Act and the Regulatory changes, overseas market investments must be allowed for the
reinsurers, earmarked for the Indian policyholders.

In most other jurisdictions, the local Regulator only insists on a resident CEO/Principal Officer,
who is held accountable and responsible for local operations, provided there is sufficient oversight from
the parent entity. This results in entities choosing the appropriate level of staff required for their local
operations and hiring local talent as necessary.

2.3.Reinsurance Taxation

A consistent, stable and simple tax environment is essential for developing a modern insurance set-
up, and for setting up an internationally competitive insurance marketplace in India. A separate taxation
regime be introduced, keeping in mind the peculiarities of the reinsurance business around competitive
direct tax rates for Indian and non-Indian (global) policies, desirability or otherwise of Minimum
Alternative Tax (MAT), ‘Withholding Tax regime, GST and an inverted tax structure etc.

2.3.1. Rate of Income Tax Applicable to FRB’s and Lloyd’s

FRB’s and Lloyd’s, being branches of foreign reinsures, are registered as non-residents under the
Act. Hence, they are liable to tax at 40% plus surcharge and education cess, whereas the domestic
insurance/reinsurance companies are liable to tax at 22% plus surcharge and education cess. Ultimately,
the impact of all taxes manifests itself in the pricing, and hence, it makes it difficult for the FRBs and
Lloyd’s to compete with the domestic players as a result of something over which they have no control,
irrespective of the efficiencies that they all try to bring in other areas.

For example, in a large risk, the reinsurance support will be required not only from the domestic
reinsurer but also from other FRBs and Lloyd’s. Whilst the domestic reinsurer is able to quote on the back
of a 22% plus surcharge tax rate, FRBs and Lloyd’s would be quoting on the basis of a 40% plus surcharge
tax rate. Therefore, inherently there is an 18% differential in the quote due to the differential tax treatment.