Easier norms for foreign players to up competition in reinsurance market
- Business Standard
- January 30, 2019
New Delhi: The sector has seen the entry of nine foreign players as well as a domestic private sector company
While Irdai retained the right of first refusal for the state-owned General Insurance Corporation of India (GIC Re), insurance companies will now have to simultaneously seek terms from at least four foreign reinsurance branches. If the Indian reinsurers cannot match the rates quoted by their foreign counterparts, then they stand to lose business.
This, experts believe, will drive up competition in the market which is currently dominated by GIC Re, and will thus provide the Indian insurance companies with more options to choose from.
According to Kapil Mehta, CEO of Secure Now, an insurance broking firm, “A lot of reinsurers are coming in as the market is growing at a rapid pace. Also, there is much more clarity on the mechanism through which they can enter the market. In fact, many more reinsurers are expected to come into the market in the next year or so.”
The order of preference does make it difficult for new entrants to build their business. But the market is so huge that new players will come anyway, he added.
Rating agency Moody’s believes that the new rules will give local insurers access to a broader range of reinsurers. They will nudge domestic insurers to actively use reinsurance for risk management and reduce balance sheet volatility.
So, will global reinsurers make life difficult for their domestic counterparts? Experts say that while competition will certainly grow, keeping GIC Re on its toes to enhance capacity and services, it is unlikely that there will be any significant erosion in its market share any time soon.
Says Alice Vaidyan, Chairman of GIC Re, “When faced with free competition, GIC Re has gone from strength to strength and has now emerged as the 10th largest global reinsurer. We do not think the new rules will have any material impact on the market or GIC Re’s competitive position.”
Industry experts feel that the idea behind retaining the right of first refusal is to encourage more domestic companies to set up their reinsurance business in India. This will also help retain the business within the country instead of letting it go to insurance hubs like Singapore and London.
“The aim of the insurance regulator is to have maximum business reinsured within the Indian territory with domestic capacity and only the rest being passed on to foreign reinsurers,” Irdai said in its annual report for the year 2017-18.
Says T S Vijayan, former IRDAI Chairman, “Reinsurance is a specialised business and follows global practices. Until now a large part of India’s business was going abroad. After the entry of new players, the business will be retained in India.”
As for what the competition will do to pricing and product variety, there is no consensus on whether the new rules will impact the pricing of premiums. But they would certainly lead to the development of new products, particularly for non-life insurers, say experts.
Vijayan points out, “The competition will improve only if these new reinsurers bring India-specific products. It’s too early to say if the premiums will come down as the risks taken over by companies will be different.”
Secure Now’s Mehta adds that the impact will be greater on product innovation as the reinsurers who come in could have interesting products that are absent here.
At present 11 reinsurers operate out of India. Of these, nine are foreign reinsurers who have branches here and the other two are Indian reinsurers, namely,
GIC Re and ITI Re.
GIC Re remains the most dominant player in the market. However, its share in the total Indian reinsurance market premiums has come down from 99.8 per cent in FY 17 to 83 per cent in FY18, thus reflecting the growing presence of foreign reinsurers.
The net premium underwritten by GIC Re grew from ~30,175 crore in FY17 to ~37,634 crore in FY18 — an uptick of 25 per cent. The total premium on reinsurance accepted by foreign reinsurance branches in FY18 was ~6,216 crore, out of which Swiss Re had the largest share of ~2,047 crore, while Munich Re and SCOR SE reported ~1,307 crore and ~1,186 crore respectively.
According to Irdai, out of the nine foreign reinsurance branches in India, in FY18, three have reported net profit while the rest have reported losses.
With new players establishing branches in India and the rules for effective competition in place, the regulator has now set its sight on making India a reinsurance hub. The low insurance penetration levels and high vulnerability to natural catastrophes provide the Indian insurance industry ample scope to expand in an aggressive way, Irdai said in its annual report of 2017-18.
The regulator also points to the development of Gujarat International Financial Tec-City (GIFT City) in Ahmedabad as a step in the right direction.
Many insurance and reinsurance firms have shown their interest in setting up shop there, indicating India’s potential to compete with global financial centres like Singapore, London and Tokyo.
However, experts feel that the regulator should first create a level-playing field for reinsurers in the country and then look at making India a reinsurance hub. “We would like to be on a level-playing field with the other reinsurers,” says C B Murali,
CEO of Allianz SE in India.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.
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