REINSURANCE IN INDIA: ECONOMY
NEWS: LIC, New India Assurance, GIC Re remain D-SIIs
WHAT’S IN THE NEWS?
Valueattics Re has become the first private company to receive IRDAI’s approval to begin reinsurance business in India, breaking the monopoly of the public-sector General Insurance Corporation (GIC Re). Reinsurance helps insurers manage risk by transferring part of their liabilities to other companies, ensuring financial stability in case of large claims.
Valueattics Re Becomes First Private Firm to Receive IRDAI’s Approval for Reinsurance Business in India
• Overview of Reinsurance:
• Reinsurance is the practice where insurance companies transfer a portion of their risks to another insurer, called a reinsurer. This helps the primary insurer manage its risks by reducing exposure to large financial losses.
• Significance: Reinsurance plays a vital role in the financial stability of insurance companies, ensuring that they are equipped to handle large claims arising from catastrophic events like natural disasters or major accidents.
• The Insurance Regulatory and Development Authority of India (IRDAI) is responsible for overseeing the operations of reinsurance companies in India, ensuring that they operate within the legal framework and protect policyholders' interests.
• Process of Reinsurance:
• Ceding Company: The insurance company that seeks to transfer a portion of its risk to a reinsurer.
• Reinsurer: The company that accepts the risk transferred by the ceding company.
• The ceding company pays a premium to the reinsurer, and in return, the reinsurer covers a portion of the losses in case of a claim. This process helps the ceding company reduce its financial exposure and increase its capacity to take on more business.
• Types of Reinsurance Based on Coverage:
• Proportional Reinsurance:
In proportional reinsurance, the reinsurer and the insurer share both the premiums and claims in a fixed ratio. This type of reinsurance is often applied when the risk can be shared in specific, predetermined proportions.
Example: In a 30% quota share arrangement, the reinsurer covers 30% of the claims and receives 30% of the premiums.
• Non-Proportional Reinsurance:
In this arrangement, the reinsurer covers claims beyond a certain threshold or limit. The insurer retains a certain amount of the risk, while the reinsurer covers any losses exceeding that threshold.
Example: In excess-of-loss reinsurance, the reinsurer only pays for claims that exceed a predefined amount, making it particularly useful in the case of catastrophic losses.
• Types of Reinsurance:
• Facultative Reinsurance:
Facultative reinsurance is a specific, case-by-case reinsurance arrangement where a single policy or risk is reinsured. It is typically used for high-risk policies, such as insuring a fleet of aircraft or covering specific large-value assets.
• Treaty Reinsurance:
This type of reinsurance covers a portfolio of policies over a set period of time. It is a more general and automatic reinsurance arrangement where the reinsurer agrees to accept a certain portion of a group of risks.
Example: An insurer reinsuring all its car insurance policies for a given period is a form of treaty reinsurance.
• Laws Governing Reinsurance:
• Regulated under the Insurance Act, 1938 and the IRDAI (Re-Insurance) Regulations, 2018, the legal framework for reinsurance in India is aimed at ensuring financial stability, regulatory oversight, and policyholder protection in the reinsurance sector.
About Insurance Regulatory and Development Authority of India (IRDAI)
• Establishment:
• IRDAI is a statutory body established under the IRDAI Act, 1999, to regulate and oversee the insurance and reinsurance sectors in India.
• Headquarters: Hyderabad, India.
• Ministry: Operates under the Ministry of Finance, Government of India.
• Objectives of IRDAI:
• Protect Policyholder Interests: Ensure that insurance companies operate in a manner that protects the interests of policyholders and promotes the fair treatment of consumers.
• Maintain Financial Stability: Ensure the stability and transparency of the insurance industry by overseeing the financial operations of insurers and reinsurers.
• Regulate and Supervise: Frame and enforce regulations for the smooth operation of the insurance and reinsurance industries, ensuring compliance with industry standards and legal frameworks.
• Functions and Responsibilities:
• Registration and Licensing: IRDAI registers and licenses all insurance companies, reinsurance firms, and intermediaries (like brokers and agents), ensuring they meet eligibility criteria.
• Regulation of Financial Health: Sets eligibility, qualification, and capital requirements for the licensing of insurance businesses, and ensures the companies adhere to financial norms.
• Supervision of Market Conduct: It oversees the functioning of the insurance sector, ensuring ethical practices and consumer protection.
• Composition of IRDAI:
• The IRDAI is a 10-member body, including:
1 Chairman
5 Full-time Members
4 Part-time Members
• Appointments are made by the Government of India.
• Entities Regulated by IRDAI:
• Life Insurance Companies: Covers both public and private sector life insurers in India.
• General Insurance Companies: Regulates public and private sector companies providing non-life insurance (such as health, automobile, and property insurance).
• Reinsurance Companies: Includes both public sector reinsurers like GIC Re and private reinsurers like Valueattics Re, which has recently received IRDAI approval.
• Insurance Intermediaries: Includes corporate agents, brokers, third-party administrators, surveyors, and loss assessors, ensuring they operate in compliance with legal and ethical standards.
Conclusion:
• The development of Valueattics Re as the first private reinsurance company to receive approval from IRDAI marks a significant step in India’s reinsurance market. This move opens up competition and enhances the capacity of the insurance sector to manage large-scale risks effectively.
• The regulatory role of IRDAI ensures that the insurance and reinsurance sectors function in a transparent and financially stable manner, benefiting both the companies and the policyholders.
Source: https://www.thehindu.com/business/lic-new-india-assurance-gic-re-remain-d-siis/article69327277.ece