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State-Run GIC Re May Lose First Preference In Certain Businesses

India’s largest reinsurer General Insurance Corporation of India may lose its first preference in several areas of business if the insurance regulator accepts recommendations of an expert committee.

The Reinsurance Expert Committee, constituted by the Insurance Regulatory Authority of India, recommended waiving preferential treatment to GIC Re in areas including aviation, life and marine hull in a Nov. 28 report. The first right of refusal currently lies with GIC Re.

The state-run reinsurer may also lose its first preference for large infrastructure projects, petrochemical and refinery plants, large power plants, oil and energy, and specialised risks such as cyber and climate change risks, according to the committee’s report.

GIC Re gets nearly ten percent of its revenue from these business.

The move will ensure healthy competition and right pricing in the Indian market and ensure fair treatment of domestic reinsurers and cross border reinsurers, a long standing demand of the Global Reinsurance Forum, a reinsurers’ body that represents more than 67 percent of the world’s reinsurance business, the report said.

The report, therefore, has recommended that domestic insurance companies – both public and privately owned – should be permitted to obtain the best terms simultaneously from the Indian reinsurers, cross-border reinsurers and foreign reinsurance branches established in India.

The India branches of foreign reinsurance majors such as Swiss Re and Munich Re as well as Lloyds India are currently required to retain half of their premium income as well as their assigned capital funds within India. The committee has suggested that FRBs be allowed to outsource their investment activities till they reach a threshold of Rs 2,500 crore. Once the fund of the foreign reinsurers’ branch and Lloyds in India crosses this limit, they will be required to open a front and back office in the country.

Cross border reinsurers will have to attain a minimum security rating of A-, based on the credit risk undertaken in the country. The ratings may be assigned by international agencies such as S&P or equivalent until the insurance regulator introduces risk-based capital norms or a similar methodology to measure the same. The committee also recommended a cap on the reinsurance business provided to these entities, which could be revised annually.

GIC Re, however, will continue to get the first right of refusal for all the other lines of reinsurance business. The order of preference will then be followed simultaneously by cross border reinsuers, foreign reinsurer branches, Lloyds India and any other Indian reinsurer.

“This is just the beginning and the recommendations are at the discussion stage. Right now, we are looking at a three-month period to release an exposure draft,” PJ Joseph, member-non life at IRDAI told BloombergQuint over the phone. Final guidelines may even take up to three years subject to other approvals at the regulatory and the ministry level, he said.

Implementation of the committee’s recommendations may reassure foreign investors but they will “still have to compete with GIC Re and the other local reinsurers,” said Joydeep K Roy, partner and leader for insurance and allied businesses at PwC India. “The stipulation against which the recommendations were made is part of the Insurance Act. There could be many steps before it finally gets implemented,” he added.

The report recommended enforcing unified reinsurance regulations for both life and non-life sectors from April 1, 2018.