Page 52 - India Insurance Report 2023- BIMTECH

40 India Insurance Report - Series II

3.2.Required Regulatory Changes on Reinsurance

3.2.1. Premium Retentions

India must follow the IAIS model of risk management framework and the “ceding insurer responsibility
model”. Under this Core Principle, instead of imposing retention limits on insurance, the regulator focuses its
attention on ensuring that the ceding insurer has adopted a prudent approach to the purchase of reinsurance
and to the management of risk associated with purchasing reinsurance. According to this model, the choice of
reinsurance cover should be a commercial decision made by management within the overall reinsurance strategy
of the ceding insurer. In other words, the ceding insurer should be left to judge whether the risk profile –
including the experience, expertise and solvency position – of all the reinsurers to which it cedes is acceptable
and in line with its operating strategy. As long as the regulatory minimum standards are met, in terms of the
adequacy and quality of the reinsurance program, it should be of little concern to the Indian regulator.

3.2.2. Obligatory Cession

The obligatory cessions have outlived their utility, and their continuation is without any technical and
commercial logic. The majority of the market wants to do away with obligatory cessions, and there is no
commercial rationale on either side: GIC Re wants reduced commissions as they are making losses, while the
majority market wants to reduce/discontinue obligatory and/or increased commissions. The GIC Re wants
continuation with Obligatory Cessions despite losses since it reinforces itself as the ‘Indian Reinsurer’ (a
perception with no rationale), provides GIC Re with regular cashflows and helps them make investment
profits. But the obligatory cession to GIC Re is a losing proposition for all. The better performing overseas
markets do not have obligatory. The market’s discomfort with obligatory cession is increasing with the passing
of each year: GIC Re is giving out an 11% commission against the management expenses of 27%. The PSU
General Insurers, however, want obligatory cessions continued. Since all are making losses, obligatory cessions
help them share losses with GIC Re, which further impacts the rest of the market as GIC Re finds it difficult
to reward the better performing players. Thus, protecting GIC Re has a cost for the rest; Sharing losses is not
good for the overall health of the market, And PSU Companies’ losses are being distributed via GIC Re.

3.2.3. Order of Preference / Right of First Refusal Regime

The Order of preference regime must be premised on equal footing for GIC Re and the foreign
reinsurance branches in India, either:

A) Remodelled

Terms may be sought from any number of onshore and offshore reinsurers simultaneously. The
ceding insurer will choose the best terms and allocate a share to the successful quoting market. The
remaining share must then be offered to all onshore reinsurers, who have a right of first refusal. For any