The Hindu Business Line : Non-life insurers shift to lower-rated East Asian cos

Reinsurance arrangements are allowed with firms having global ratings of up to “BBB” . Top-rated reinsurers have indicated that the support remained a completely commercial decision.

Bangalore, Feb. 14 Non-life insurance companies are increasingly turning to lower-rated East Asian reinsurers for support.

Sources said the shift was largely driven by mounting resistance from traditional global reinsurance companies to increase support after sharp declines in rates post-deregulation. The deregulation has resulted in premia falling by at least 70 per cent during the last few months in low loss businesses -- fire and engineering.

Under the current guidelines of the Insurance Regulatory and Development Authority (IRDA), reinsurance arrangements are expected to be finalised by February 15. This essentially implied that primary insurers would have to submit their insurance programmes for the next financial year and the quantum of reinsurance.

Biz opportunities

The sources said the shift to east Asian companies were mostly in the case of private sector companies. In fact, some of the East Asian companies were already exploring business opportunities in India. The companies included Malaysian Reinsurance Berhad. Traditionally domestic insurers, both public and private have preferred only AAA rated European reinsurers. But companies such as MRB are “A” rated by A M Best, global insurance rating agency. IRDA guidelines allow insurers to enter into reinsurance arrangements with global ratings of up to “BBB” or investment grade.

With tariffs moving down, western reinsurers have indicated that the reinsurance support remained completely commercial decision. Munich Re, among the world’s largest Reinsurers, India Representative, Mr Sandeep Choudhry, said, “Reinsurance support will be a purely commercial decision.”

But this implied that ceding commissions that comprised a large portion of the domestic non-life insurers’ incomes was likely to come under pressure. For private sector insurers, soft reinsurance markets globally allowed them to pursue aggressive topline growth and earn large ceding commissions. Ceding commission for PSU insurers for the last financial year was a little over Rs 500 crore. This comprised barely 3 per cent of the gross income. In the case of the private sector, the commissions were slightly larger, or closer to about 17 per cent of their gross income.

However, United India Insurance Company Ltd’s General Manager, Mr Harshavardhan, said, “The days of 40-42 per cent ceding commissions are over. Only those with strong underwriting practices and good balance sheets can expect to command terms.”

retention

The clear implication was that the public sector, despite the price drop, was still largely unaffected. PSU insurers’ retention to reinsurance ratio is high. At least 70 per cent of the premiums collected are retained in the country itself. In the case of the private sector, the ratio was about 50 per cent.

But even this level of retention was largely on account of small ticket retail business. The advantage with small ticket business is that the losses/claims are easily absorbed into the balance sheet. As a result, India Insure’s Vice-President, Mr Radhakrishan, said, “Private sector insurers are likely to increase focus on retail business, once they overcome the distribution challenges.”

The advantage with the retail focus was not just low losses. The high retentions allowed for building the capital. Above all, small business reduced reliance on reinsurance.

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