Legal Briefing

India’s Insurance Regulatory and Development Authority takes a giant leap to rein in cross-border reinsurers

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India | 01 April 2012

For a professional who has been advising primarily on insurance law for more than a decade, some things never change. For example, the foreign direct investment (FDI) policy on insurance, which continues to prescribe a cap of 26%, despite almost every other sector having higher FDI limits. In the wake of this seemingly nonchalant and laid-back attitude affecting the insurance sector, the sudden and somewhat unexpected change in reinsurance reporting requirements comes as a surprise to an industry fighting many battles at the 
same time.

The Insurance Regulatory and Development Authority (IRDA) has issued the ‘Guidelines 
on submission of information on 
cross-border reinsurers not having any presence in India’ (the Cross-Border Guidelines) through its circulars dated 
6 January 2012 and 31 January 2012 (which came into effect on 1 April 2012) and subsequently clarified the methodology to be followed by unregistered reinsurers to comply with the Cross-Border Guidelines. While most cross-border reinsurers are coming to terms with the new requests for registration/information, there is a lot of skepticism in the market as to the probable outcome following compliance with the registration process.

The Indian reinsurance market, which is primarily regulated by the IRDA, previously permitted Indian cedants to reinsure their risks with:

  1. an Indian reinsurance company registered with the IRDA and approved by the central government (currently, General Insurance Corporation (GIC Re), the national re-insurer of India, is the only registered Indian reinsurance company); and
  2. unregistered foreign reinsurers, provided they comply with the requirements stated in the IRDA (General Insurance – Reinsurance) Regulations 2000 and the IRDA (Life Insurance – Reinsurance) Regulations 2000 (collectively referred to as ‘the Regulations’).

It is interesting to note that the reinsurance market in India has not been subject to much regulatory intervention, which is clear from the fact the Regulations, which were notified in 2000, have remained substantially in the same form as they were when they were originally notified. Reinsurance in India has therefore remained largely market driven, though the guiding principle of the Regulations has always been to retain and maximise the retention of risk within India. The IRDA also required that insurers placing reinsurance with overseas reinsurers can only cede to companies that satisfy necessary requirements as stipulated in the Regulations. As per the Regulations, each insurer in India is free 
to structure its annual reinsurance program in compliance with the Regulations, although the same must be submitted 
to the IRDA.

Although several international reinsurers are active in the Indian market, they are not permitted to open branches in the country, though this could change if the Insurance Laws (Amendment) Bill 2008, which is currently pending before the parliament of India, is passed in its current form.

Recent change in the regulatory regime: the cross-border 
reinsurance guidelines

Under the Cross-Border Guidelines, a 
non-domestic reinsurance company not having a physical presence in India can carry out reinsurance business in India only if it is domiciled in a country that has signed a double taxation avoidance agreement or countries/jurisdictions that have entered into tax information exchange agreements with India, as per the list maintained by the Income Tax Department.

Upon fulfilling the domicile test, the foreign reinsurer must register itself with the IRDA. All registration applications must be routed through the concerned direct insurer or GIC Re. The reinsurer must also file an information sheet, along with necessary documents and enclosures with any one direct insurer, who must in turn submit the same to the IRDA with its forwarding letter.

It is interesting to note that the onus of placing reinsurance business with registered cross-border reinsurers has been placed on the Indian insurers or Indian reinsurers. All insurers and reinsurance intermediaries are required to ensure that the cross-border reinsurers who accept reinsurance business from India are a legal entity in their home country and are regulated and supervised by their home supervisors. The home supervisory authority for the cross-border reinsurer should monitor the financial strength, quality of the management and adequacy of the technical reserving methodologies 
of the reinsurer.

To add icing on the cake, the IRDA prescribes a requirement for solvency of the cross-border reinsurer and their parent company, where applicable, to be at least equivalent to the standards prescribed for Indian insurers by the IRDA. In other words, even if a reinsurer satisfies the solvency requirements in its home country, it may not be able to write reinsurance business in India if it cannot prove to the IRDA that its solvency requirements satisfy the Regulations. The concern voiced by several leading reinsurers is that the requirements for maintenance of a solvency margin (similar to that applicable to Indian insurers) may not be practically possible for foreign reinsurers to maintain, who shall be subject to their own solvency requirements in 
their jurisdiction. In addition, even if the Indian solvency margin is to be applied, it should be applied to the reinsurer actually writing Indian business, rather than its parent company.

Any cross-border reinsurer who is not registered with the IRDA by 31 March of that year can accept reinsurance business in India only on the condition that it is participating in a facultative placement. All cross-border reinsurers (whether they have a representative/liaison office or services company in India or not) must file an information sheet along with a copy of audited annual report with the IRDA by 31 March of every year, before accepting insurance/reinsurance/retrocession business in India.

Given that these Cross-Border Guidelines were only notified in January 2012, wide coverage has not yet been given to the new guidelines in the local media. However, industry sources have reported that there appears to be discontent among the insurance community and local brokers. As per the earlier framework, Indian insurers were required to only file information about their reinsurance programme with the IRDA on a periodic basis, though cross-border reinsurers now have much stricter filing requirements to adhere to, within a limited time frame. More than the actual filing, reinsurance companies are grappling with issues surrounding disclosure of sensitive business information and the degree of confidentiality with which local cedants and the IRDA would treat such information.

Foreign reinsurers also have no direct control on whether such information is being submitted by the local cedant in a timely manner. Some of the information sought by the IRDA such as ‘details of existing relationships with Indian insurance companies’ definitely seem to tread the thin line between disclosure of confidential contractual obligations and adherence 
to law.

Concerns have also been expressed by various international organisations such as the American Council of Life Insurers, the Association of Bermuda Insurers and Reinsurers, Insurance Europe (formerly the CEA) and the Reinsurance Association of America, who, in their joint written representation dated 12 March 2012 to the IRDA, have urged the IRDA to reconsider the registration requirements given the sophisticated nature of reinsurance transactions and the need for greater supervisory recognition of home jurisdiction supervision. These organisations have requested the IRDA to allow cross-border reinsurers from well-regulated jurisdictions to carry our reinsurance freely and be exempt from the registration requirements1.

The current situation is also made more complicated by the fact that the IRDA has not explained its intent or provided a background to the Cross-Border Guidelines. For example, some of the requests for information, such as details of persons holding more than 1% of the issued capital of cross-border reinsurers seem to be onerous and need to be rationalised and explained.

At this early stage, we can only speculate about the IRDA’s intent, though it appears that these provisions were introduced to ensure that the IRDA can have greater control and information about the foreign reinsures operating in India, especially given the global financial market instability.

It is clear that the reinsurance industry faces tremendous challenges in the years ahead. Increasing transparency, financial stability, monitoring and supervision are the call of the day and it is arguable that it is necessary for a financial regulator to have complete and detailed information about all the companies operating in its sector. However, it may be necessary for the IRDA and the reinsurance companies to have a healthy dialogue about the manner in which the Cross-Border Guidelines may be restructured to ensure that the objectives of each of the stakeholders are met

Ultimately, the presence of foreign reinsurers is critical in the Indian market as they make additional capacity available, relieve Indian insurers of partial and/or entire risks that are too large for their own capital base, provide Indian insurers with proven international expertise in assessing complex risks and handling large, complex claims and transfer international insurance and reinsurance-specific know-how to the local market. Given the same, it is imperative that the IRDA and the reinsurance industry debate these guidelines to ensure that the Cross-Border Guidelines do not result in or create a trade barrier in the free provision of reinsurance services in India. In fact, the Cross-Border Guidelines may well be considered as a good starting point or basis for more regulated and streamlined regulations in the reinsurance sector in India.