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Home / IRDA Update 

IRDA to grant first order of acceptance to GIC

The Insurance Development and Regulatory Authority (IRDA) has said that the national resinsurer (GIC) will be given the first order of acceptance and only on its decline will the insurer be allowed to reinsure abroad. At present, the General Insurance Corporation (GIC) of India performs the role of a national resinsurer.

Prospective private insurers are not overly happy with the requirement that the first offer goes to the domestic reinsurer since it goes against the spirit of competition in the market. This is probably because the domestic reinsurance firm may not offer the best rates. This might also lead to bureaucratic delays while arranging for insurance cover for large clients.

At the same time, the draft reinsurance guidelines say that IRDA's clearance is a must for companies planning to obtain a facultative insurance cover abroad. A facultative reinsurance pact is a one-off agreement. 

Basically, the reinsurance terms are designed to exclusively support one contract. The other form of reinsurance is a treaty-based contract where an insurance company enters into an agreement with a reinsurer for automatic coverage of a fixed percentage of his business or risks beyond a certain limit. The approvals are required to be obtained for both treaty as well as facultative covers. This condition gains even more significance considering the fact that the IRDA has fixed the maximum retention per risk of an insurer has been fixed at 5 percent of the premium income or 3 percent of the company's capital and free reserves. 

Considering that a company will be starting with an equity base of Rs.100 crores, the maximum limit per risk will be Rs.3 crores. Even if the financial limits were ignored, reinsurance is an important support system for domestic companies. Even now cover for large risks such as refineries and specialised covers such as comprehensive cover for stock exchanges are entirely driven by the national reinsurance market with more than 95 percent of the risk reinsured abroad. This is probably owing to two reasons.

Firstly, the domestic insurer is not comfortable with the high concentration of risks in his books and more importantly in case of specialised risks, the insurers do not have the experience to price such insurance covers. In larger risks, the the insured themselves push for facultative reinsurance as the national reinsurers may at times agree to reinsure the whole risk at a lower rate than what is charged in the local markets.

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