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29 January 2019
Procedures for reinsurance placements
Alternative risk transfers
Specific reforms for life insurance business
Amendments to Branch Office Regulations and Lloyd's India Regulations
The Insurance Regulatory and Development Authority of India (IRDAI) (Re-insurance) Regulations 2018 (2018 regulations) were notified on 12 December 2018 and came into force on 1 January 2019. These regulations have:
The 2018 regulations repeal the IRDAI (General Insurance – Reinsurance) Regulations 2016 and the IRDAI (Life Insurance – Reinsurance) Regulations 2013. They also amend (where relevant) the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers Other than Lloyd's) Regulations 2015 (the Branch Office Regulations) and the IRDAI (Lloyd's India) Regulations 2016 (the Lloyd's India Regulations).
The key changes introduced by the 2018 regulations are summarised below.
The 2018 regulations apply to 'Indian insurers', which means:
Per Section 2(9) of the act, 'insurers' include Indian insurance companies, insurance cooperative societies, statutory bodies carrying on insurance business and foreign reinsurance branches in India.
Further, in addition to the insurance segments expressly covered by the 2016 regulations and 2013 regulations, the 2018 regulations also cover engineering, aviation, crops, trade credits, liability, oil and energy. The life insurance segment also expressly includes health insurance policies issued by life insurers.
The 2018 regulations retain the objectives of the reinsurance programme set out under the erstwhile regulations. However, the guidance regarding maximising retention within India is now subject to "proper and adequate diversification of risks".
In relation to the retention policy that Indian insurers must have in place, the 2018 regulations introduce the following changes:
The restrictions on quota shares for health insurance and group term insurance business under the 2013 regulations no longer apply.
This part of the 2018 regulations appears to align fairly closely with the 2016 regulations. Therefore, it will be a change for life insurers that previously followed the 2013 regulations. In addition, the provisions on reinsurance arrangements modify the existing guidance under the 2016 regulations and introduce a number of new requirements for entering into reinsurance arrangements.
The significant new filing provisions are as follows:
Maintenance of records
Indian insurers must submit in soft copy:
The hard copies must be maintained as per the previous regulations and may be inspected by the IRDAI.
The definition of 'cross-border reinsurer' has been modified to mean a foreign reinsurer only, including Lloyd's syndicates. It also includes parent or group companies of foreign reinsurance branches and IFSC insurance offices. The definition therefore now excludes foreign insurers. While the eligibility criteria for Indian insurers to place business with a cross-border reinsurer remain broadly the same, cross-border reinsurers are now expressly required to be entities authorised in their home country to conduct reinsurance business for the past three continuous years.
These provisions replace the earlier provisions regarding order of preference set out in the Branch Office Regulations and apply only to 'cedants', which are defined under the 2018 regulations as Indian insurers writing direct insurance business that contractually cede a portion of the risk. These provisions do not apply to:
Obtaining best terms
Every cedant is free to obtain the best terms for its reinsurance coverage requirements, subject to the following conditions:
Offer for participation
Cedants must comply with the following order of preference for their reinsurance placements:
There are also specific requirements as to the total sum insured required in order for a cedant to make an offer to cross-border reinsurers that are applicant companies of any foreign reinsurance branch (for property insurance, material damage and business interruption combined, as well as for liability cover).
The cession limits for reinsurance placements with cross-border reinsurers by cedants transacting anything other than life insurance business remain the same. However, the cession limit percentages will now be calculated based on the total reinsurance premium ceded outside India. Previously, the limits were calculated based on the total reinsurance premium ceded in India and outside India for each insurance segment.
As per the definition set out above, 'cedants' no longer includes reinsurers ceding risk to a retrocessionaire.
The 2018 regulations define 'alternative risk transfers' as non-traditional structured reinsurance solutions that are tailored to specific needs and the insurer or reinsurer's profile (also called 'financial reinsurance' in life reinsurance business). Indian insurers must submit alternative risk transfer proposals to the IRDAI, which will grant transfers on a case-by-case basis.
Although the order of preference does not apply to Indian insurers transacting life insurance business, the 2018 regulations require them to use the Indian domestic capacity before offering reinsurance placements to cross-border reinsurers. Life insurers must also obtain prior approval from the IRDAI before entering into reinsurance arrangements with their promoter company or associate or group companies, except where the arrangements are on commercially competitive terms and an arm's-length basis.
For the purpose of opening a foreign reinsurance branch, the Branch Office Regulations and the Lloyd's India Regulations categorised applicants into two categories:
The 2018 regulations have done away with Category II. All applicants must maintain at least 50% of their Indian reinsurance business.
The 2018 regulations consolidate the existing regulations for life and general reinsurance business into a uniform set of provisions for reinsurance business in India. There has also been a streamlining of filing requirements and processes. While the 2018 regulations retain the objective of maximising retention within the country, there has been significant reform to the order of preference in allowing foreign reinsurance branches to compete with other Indian reinsurers for reinsurance of general insurance risks. This change appears to have been welcomed by foreign players writing reinsurance business in India.
For further information on this topic please contact Celia Jenkins or Anuj Bahukhandi at Tuli & Co by telephone (+91 11 2464 0906) or email (email@example.com or firstname.lastname@example.org). The Tuli & Co website can be accessed at www.tuli.biz.
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