Insurance Article, The Insurance Times 2020, The Insurance Times March 2020

HOW REINSURANCE IS PROGRESSING IN INDIAN INSURANCE INDUSTRY?

In November 2000, GIC was renotified as the Indian Reinsurer and through administrative instruction, its supervisory role over subsidiaries was ended. With the General Insurance Business (Nationalization) Amendment Act 2002 (40 of 2002) coming into force from March 21, 2003 GIC ceased to be a holding company of its subsidiaries. Their ownership were vested with Government of India. General Insurance Corporation of India (GIC Re) is the only reinsurance company in India in the domestic reinsurance market. Insurance and reinsurance companies, foreign reinsurer branches and intermediaries in India are governed by the IRDAI. India presently has 24 life insurers, 27 general insurers and seven stand-alone health insurers. There are 11 foreign reinsurer branches in India, including the branch office of Lloyd’s of London set up under the IRDAI (Lloyd’s India) Regulations 2016 (the Lloyd’s India Regulations). In addition, at present, there are two reinsurance companies in India: the government-owned General Insurance Corporation; and ITI Reinsurance Limited, which has surrendered its license to the IRDAI in 2019. India is a happening ground for insurance at the moment. There are many new plans afoot with great expectations including a regulatory sandbox, InsurTechs, government-sponsored insurance schemes (health/agri/PA), telematics and new insurance companies. Then there is the onslaught of natural disasters buffeting the country, which has a low penetration rate. India is indeed a melting pot for lots of things in insurance. It is expected to herald a brave new business model for the entire industry.

The insurance industry may soon see an influx of foreign capital as the government has increased the foreign investment limit on insurance intermediaries to 100% from 49% earlier. Additionally, the government is also mulling over reducing the net owned fund requirement for reinsurers to Rs.1000 crore from Rs.5000 crore earlier to attract international insurers find better risk pricing for the premiums offered. To facilitate on-shoring of international insurance transactions and to enable opening of branches by foreign reinsurers in the International Financial Services Centre, it is proposed to reduce Net Owned Fund requirement from Rs.5000 crore to Rs.1000 crore. Reinsurers are those companies which handle financial risks for insurance companies that would be too large for them to pay. Currently most reinsurance in the country is done by state owned General Insurance Company of India. It is a progressive move as currently the burden of crop insurance is largely on GIC. With this move, niche players with good understanding of market and international players looking to purchase diversified global pools may enter the market which will lead to better risk-based price discoveries. The Insurance Act 1938, the Insurance Regulatory and Development Authority Act 1999, the Marine Insurance Act 1963 and the regulations, guidelines, circulars and notifications issued by the IRDAI, govern insurance and reinsurance business. The courts may refer to common law if there are no judicial precedents available under Indian law. Common law is, however, not binding on Indian courts.

KEY HIGHLIGHTS:

It was only after the Insurance Laws (Amendment) Act 2015 (Insurance Act hereafter), which bought pervasive changes to the Insurance Act, 1938, that the reinsurance sector got an impetus. Pursuant to the Insurance Act, 2015, foreign reinsurers and Lloyd’s have been allowed to open their branches in India to transact reinsurance business in the country. Additionally, IRDAI has also allowed insurers to open their offices in International Financial Services Centre, Gujarat-SEZ, and transact reinsurance business. The loss environment and shifting views of risk were crucial factors in changing market sentiment. The impact of risk reassessments has been particularly pronounced in the primary insurance market to date, where derisking exercises at some players have led to the scaling back or withdrawal of capacity from several underperforming lines of business. Shifting market dynamics prompted reinsurers to weigh the alternatives of accepting enhanced volatility potential or considering alternative vehicles, such as catastrophe bonds. These capacity conditions culminated in significant retrocession rate increases across several types of coverage at renewal, albeit with marked distinctions depending on products, structures, relationships, risk tolerances, loss experiences and performance. The (re)insurance sector is undergoing a period of transition as risk quantification strategies incorporate new information and risk appetites are adjusting accordingly. Key factors are:

  • The reinsurance segment in India comprises one domestic reinsurer: the government-owned General Insurance Corporation of India.
  • The total reinsurance ceded increased at a review-period CAGR of 8.7%.
  • Growth in the reinsurance segment was driven by robust growth in all primary insurance segments.
  • Insurance products in India are mainly modeled around earthquakes and terrorism, with very few products covering floods.
  • In March 2015, the FDI limit for insurance was increased from 26% to 49%.

The reinsurance market enters 2020 in a solid position with initial analysis of dedicated reinsurance capital up slightly as compared to a year ago, bolstered by mid-single digit growth in rated capital in 2019.

MAIN IMPEDIMENTS TO GROWTH:

 The future of the sector in India is surely very promising before looking at some of the challenges facing the industry. There is a $27bn insurance gap in India. Three main impediments to growth are confidence, relevance and cost. The insurance industry should be using data and data analytics to design products that are more closely related to customers’ needs and more relevant for them—while the issue of confidence could be easily addressed.  Products are also too expensive and this is because acquisition costs and administration costs are too high; the industry needs to modernise its systems and use technology like drones and blockchain to improve performance. It is imperative to have an innovative culture within the organization. Third party capital now makes up 16% of reinsurance capital, but the gravest threat to this growth is protectionist government initiatives— which is why Lloyd’s has taken it upon itself to work closely with governments around the world—including in India. The emerging risks of climate change, data and data analytics, and looked at what part the industry should play in the transition to a low-carbon world. Insurers who embrace innovation are best placed to thrive. Risk will continue to be commoditised and the best way to predict the future is to create it. Some of the same themes were also evident in other high-octane speeches at the conference.

BUILDING RESILIENCE:

It may be fast-growing, but presumably the past 12 months have thrown a few surprises at reinsurers in Asia? The biggest surprise was probably around typhoon Jebi.  In 2018, the market predicted $6bn in terms of claims. The figure went from US$6bn to US$13bn when the Japanese clients had to finalize the figures. That was not a positive surprise. For many reinsurers, the climate catastrophe is the gift that keeps on giving. It’s easy to say that this is a climate change thing, but that’s a simplistic perspective. When we look at the history of weather events in the region, we see a 30-year pattern. There were big claims in the 1930s, ’60s, ’90s, now into the 2020s. So based on history, the frequency doesn’t seem to have changed particularly. But what has changed is the severity impact. And each new catastrophe is a learning experience. Over time, what is expected  is a migration of people and assets to more coastal regions – higher-value assets, potentially more vulnerable assets. Learning, updating and charging the prices that are commensurate with the risk is part of what reinsurers do. One of the themes to emerge strongly from the recent SIRC was the call for all businesses to acknowledge the part they play in the fight against climate change.  One is the liability risk that reinsurers put onto their books, and the other is how they conducted as an organization.  On the second one, Swiss Re has talked about climate risk for years. It first became a risk topic for them the late 1970s and they are one of the founding members of ClimateWise. Sometimes it’s not the grand initiatives but the little things that give an indication of how serious an organization is in its commitment to climate action. While thinking about the stages of resilience, the first stage is improving understanding and awareness of the topic. Reinsurers are trying to build more resilient communities and societies, which means building in the most appropriate locations, having the right building standards, building the right protections against floods and so on. That minimizes and mitigates the impact of any climate event that might come your way. And then in turn, insurance risk transfer comes in because you can mitigate and minimize, but you can’t always get rid of that risk completely.

 

LEVEL PLAYING FIELD:

At present there are close to ten foreign reinsurers, including another service company of Llyod’s, namely Markel Services India Private Limited that have set up branch offices in India. All of them had set up the offices around 2017 IRDAI allowed foreign reinsurers to set up branches in India. Earlier, foreign reinsurers operated only servicing outlets in India, liaising with Indian market for their parent offices. As a rule, GIC Re is given the first right of refusal in reinsurance contracts and only if it declines the risk, do foreign reinsurers come into play. IRDAI tweaked this law, and insurance companies will now simultaneously seek terms from at least four foreign reinsurance branches. If the Indian reinsurers cannot match the rates quoted by their foreign counterparts, then they stand to lose business. Hence, technically, the first right of refusal is still with GIC Re. Most foreign reinsurers that have set up offices in India expects a more level-playing field with the local reinsurer GIC Re. It would be great if all the local reinsurers, FRBs (foreign reinsurance branches) are bought on parity, as setting up a branch means significant infusion of capital (both financial and human) and bringing some of the best global practices/solutions to India. Having a level playing field would certainly be beneficial and help expedite the development of reinsurance solutions for the market. This would also support the overall objective of developing India as a potential reinsurance hub. GIC remains the dominant player in India’s reinsurance market, though its share terms of premiums have come down from 99.8 per cent in FY17 to about 83 per cent in FY18, after foreign reinsurers were allowed to open offices in India. Initially, when foreign reinsurers contemplated opening branches in India, they expected a level playing field with GIC. Although there has been a change in the regulations, there is little change in the actual order of preference for cessions, effectively giving the GIC a first right of refusal. The exit of M S Amlin would surely not set a right precedent as it is quite unusual in the insurance sector so far for a company to exit the market in such a short span of time.

FINANCIAL REINSURANCE TO RAISE CAPITAL:

Life insurance companies are working on a new avenue to raise capital. At least eight life insurers are looking to raise fund through financial reinsurance model. One life insurance company has sent a proposal to IRDAI for raising funds through reinsurance. A study by Actuarial firm Milliman showed that 35 per cent of the 17 companies in survey are looking to raise capital from reinsurers. A reinsurance company gives capital to life insurance companies in the form of reinsurance commission and the insurance company service it in the form of premium over a period of time. This capital is by way of debt and repayment is contingent on profitability. There is a sunset clause and reinsurers generally write off these investments if they don’t get paid within 15-20 years. Four reinsurers — Munich Re, RGA, Swiss Re and Hannover Re — are looking to take exposure in Indian life insurance. The life insurance industry has deployed Rs 37,116 crore capital up to March 31, 2019. The industry needs capital to grow business. Higher foreign direct investment of 49 per cent has only helped in the exchange of shares, with Indian shareholders making money in the process.

PINCH OF A SLOWING ECONOMY:

Foreign reinsurers are drawn to the Indian market due to its business and geographical diversity and mix, and its sheer size and potential. India shares close ties with SAARC (South Asian Association for Regional Cooperation) countries and extensively supports reinsurance programmes in many of the markets. With rates hardening, an increasing number of Nat CAT events across the world, and the rise in protectionism, international reinsurers are finding the going tough. India is today the fifth largest economy in the world. With an insurance penetration of 0.93% in the non life segment, the potential is limitless. Changes to reinsurance laws in 2017 allow foreign reinsurers to establish branches in the country, and this has injected dynamism and greater professionalism in the market place. The Rendezvous this year will also look at the new drivers of growth in the vibrant market, as India still shines as a major destination for companies around the world.

India’s slowing economy will weigh on insurance premium growth over the next 2-3 years, although supportive measures put in place by the IRDAI will help counterbalance the deteriorating economic environment. India’s GDP growth weakened to its slowest rate in five years in the fiscal year ended March 2019, and the resultant financial pressure on rural households amid weaker job creation is in turn also weighing on premium growth. Nevertheless, the country’s low insurance penetration rate suggests ample room for further growth, while supportive government and regulatory initiatives are also helping mitigate the currently challenging environment for Indian insurance and reinsurance companies. Health premiums in particular are likely to increase as a result of the Ayushman Bharat, or National Health Protection Mission, a government-funded initiative that aims to provide 100m families with up to INR500,000 ($7,000) of health insurance coverage each year. Additionally, the IRDAI has put in place a series of measures, including the removal of the limit on foreign ownership stakes in Indian insurance intermediaries, which will strengthen distribution capabilities. The regulator also plans to introduce a new risk-based capital (RBC) system with similar principles as the Europe’s Solvency II regime, which should help improve insurers’ risk management, while measures to safeguard customers and encourage innovation should help raise the insurance penetration rate.

The total losses and the uninsured losses from the major disasters that occurred in India between 1999 and 2017 were approximately 1.5 and 1.4 percent of the average Indian GDP between 2014 and 2017 (Calculation done using World Bank current GDP data). Additionally, it has been estimated that more than $2 billion of major Indian cities’ GDP is at risk each year from floods, tropical winds and earthquakes. Therefore, not only have disasters wreaked havoc in the past but remain an imminent danger in the present and near future. Cyber is one of the fastest growing lines of business with 25% growth last year. There’s about $4.5bn of cyber premium in the market. When it started to emerge a few years ago, Reinsurers were relatively cautious. If a reinsurer want to write risk, the first thing they have got to do is understand the risk. A few years down the line, companies have invested a lot in R&D on cyber, and also in working with partners. So they have a much better understanding of the risk. Every time a cyber event happens, there are things to be learned. So, when it comes to looking for a risk-transfer mechanism, they need to understand the risk better so that they can understand their risk better, enabling their ability to mitigate and reduce it.

An amendment in the Insurance Act 1938, the notification of Finance (No.2) Act, 2019 by the Indian government, has significantly lowered the required volume of Net Owned Funds (NOF) for foreign insurers and reinsurers looking to establish a branch in the Gandhinagar International Financial Services Center (IFSC). India Flag Specifically, the NOF requirement has been reduced to Rs 1,000 crore (roughly USD 141.8 million) from the previous Rs 5,000 crore (roughly USD 709.2 million). The move is expected to attract foreign insurance and reinsurance companies that operate in global financial centers to open a branch in the IFSC in India. Currently, government-backed reinsurer GIC Re is the only reinsurer with an office at the IFSC Gandhinagar in Gujarat. The Indian government has made efforts to attract global insurers and reinsurer to the Indian marketplace, with relaxed measures introduced over the last few years resulting in a number of players launching Indian branches. However, GIC Re has first right of refusal on business in the country, a move which frustrated some global players and some have said it has been a hindrance to the development and expansion of the country’s re/insurance industry. It’s hoped that the latest amendment will result in an influx of global re/insurers setting up shop at the IFSC, and in turn result in on-shoring of global insurance transactions. The way around the aforementioned order of preference regulatory hurdle is to increase the size of the insurance and reinsurance market to such a magnitude that GIC Re is stretched in its operations and there is a considerable spillover of reinsurance business to the private players. Following are the ways to do so.

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