News and developments
Collateralized Reinsurance in India: Draft Guidelines
The Indian insurance sector has also witnessed a steady growth in recent years, with Indian Insurance Companies underwriting more risks every year[[1]]. To manage these underwritten risks, Insurance Companies typically cede a portion of the risk to reinsurers, which include the Indian Reinsurer (ie, GIC Re), branches of foreign reinsurers (“FRBs”), International Financial Service Centre Insurance Offices (“IIOs”) as well as overseas reinsurers registered with the IRDAI as Cross Border Reinsurers (“CBRs”).
It is relevant to note that the IRDAI’s “Report of the Reinsurance Expert Committee 2017” of 14 November 2017 (“Report”) observed that cross border reinsurance (ie, placing reinsurance business with CBRs) is the most common category of reinsurance in India and the IRDAI’s regulatory oversight over CBRs is limited. The Report discussed that similar to any other mechanism for risk transfer and management, reinsurance is not without its own risks, namely, counterparty credit risk ie, the risk of reinsurers defaulting on their obligations under a reinsurance transaction. With regard to this potential counterparty credit risk in relation to CBRs, the Report recommended that while the IRDAI should continue to prescribe minimum eligibility criteria and security rating for reinsurance placements with CBRs, the IRDAI may require Insurance Companies to have appropriate safeguards such as collaterals in respect of any reinsurance with CBRs. However, draft guidance on the requirement of obtaining collaterals for reinsurance placements with CBRs did not follow immediately after the issuance of the Report.
Subsequently, the IRDAI notified the IRDAI (Reinsurance) Regulations 2018 (“Reinsurance Regulations”) on 30 November 2018, which expressly empowered the IRDAI to issue guidelines, inter alia, on collaterals. Further, the IRDAI recently amended the Reinsurance Regulations on 28 August 2023, specifying norms related to reinsurance placement with the CBRs. The amended Reinsurance Regulations stipulate that IRDAI’s prior approval is required for any reinsurance placements with any international pool/risk sharing arrangement involving CBRs (as members, participants, or administrators), and the IRDAI may review the business underwritten, claims experience and lines of support given by a CBR and impose additional conditions on placing reinsurance with them.
In addition, the IRDAI issued an exposure draft on “Guidelines on Collateralized reinsurance transactions for placement of reinsurance business with CBR” on 20 February 2024 (“Draft Guidelines”)[[2]] and invited comments from all concerned stakeholders. The Draft Guidelines propose that all Insurers placing reinsurance business with CBRs would be required to collect collateral for such reinsurance placement. These guidelines are proposed to be made applicable to all reinsurance programs in India from the financial year 2025-26 onwards[[3]].
Key Points
The salient points under the Draft Guidelines are as follows:
Footnotes [1] The Indian life insurance sector has been growing at a compound annual growth rate (CAGR) of more than 11% over the past few years, ET Times, 10 April 2024, https://bfsi.economictimes.indiatimes.com/news/insurance/indian-life-insurance-industry-may-grow-11-13-over-five-years/109178102 (last accessed on 16 April 2024). [2] ¶1(c) of the Draft Guidelines. [3] �� ¶6 of the Draft Guidelines. [4] ¶4(a) of the Draft Guidelines. [5] ¶4(b) of the Draft Guidelines. [6] ¶4(b)(iii) of the Draft Guidelines. [7] ¶4(c)(iii) of the Draft Guidelines. [8] ¶4(c) of the Draft Guidelines. [9] ¶4(c) of the Draft Guidelines. [10] ¶5 of the Draft Guidelines. [11] ¶5(d) of the Draft Guidelines. [12] The Insurance Europe Reinsurance Advisory Board (RAB) has provided comments on the Draft Guidelines, 5 March 2024, https://www.insuranceeurope.eu/publications/3077/rab-response-to-irdai-exposure-draft-guidelines-on-collateralized-reinsurance-transactions-for-placement-of-reinsurance-business-with-cross-border-reinsurers/ (last accessed on 16 April 2024).
- The Draft Guidelines propose that all Cedants placing reinsurance business with CBRs should collect collaterals for such reinsurance placement. These collaterals can be either an irrevocable Letter of Credit (“LoC”) from the respective CBR or a withholding of the premium or funds by the Cedant from the respective CBR[[4]].
- In the case of an LoC, the Draft Guidelines stipulate the following norms:
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- The LoC should be obtained either through an International Financial Services Centre Banking Unit in GIFT City (SEZ in India) or a scheduled commercial bank regulated by the Reserve Bank of India.
- The LoC can be in any currency as chosen/preferred by the Cedant (ie, either in Indian Rupees or any freely convertible foreign currency)[[5]].
- The Draft Guidelines specify the minimum amount of LoC. This amount should cover 80% to 100% of sum total of Cedant’s outstanding claims, liabilities and the IBNR (incurred but not reported) reserves, depending upon the rating of the concerned CBR[[6]].
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- The Cedant should withhold a minimum of 50% of the premiums ceded by the Cedant to the CBR[[7]].
- The premium/funds withheld by a Cedant from each CBR should be identified, accounted for, kept, and invested separately from the Cedant’s funds[[8]].
- Any investment income on the same should be credited to the withheld funds of the concerned CBR[[9]].
Footnotes [1] The Indian life insurance sector has been growing at a compound annual growth rate (CAGR) of more than 11% over the past few years, ET Times, 10 April 2024, https://bfsi.economictimes.indiatimes.com/news/insurance/indian-life-insurance-industry-may-grow-11-13-over-five-years/109178102 (last accessed on 16 April 2024). [2] ¶1(c) of the Draft Guidelines. [3] �� ¶6 of the Draft Guidelines. [4] ¶4(a) of the Draft Guidelines. [5] ¶4(b) of the Draft Guidelines. [6] ¶4(b)(iii) of the Draft Guidelines. [7] ¶4(c)(iii) of the Draft Guidelines. [8] ¶4(c) of the Draft Guidelines. [9] ¶4(c) of the Draft Guidelines. [10] ¶5 of the Draft Guidelines. [11] ¶5(d) of the Draft Guidelines. [12] The Insurance Europe Reinsurance Advisory Board (RAB) has provided comments on the Draft Guidelines, 5 March 2024, https://www.insuranceeurope.eu/publications/3077/rab-response-to-irdai-exposure-draft-guidelines-on-collateralized-reinsurance-transactions-for-placement-of-reinsurance-business-with-cross-border-reinsurers/ (last accessed on 16 April 2024).