Reinsurance Regulations in India: Phases, Types and Growth

source: insurancechat

The term 'Reinsurance', also called "insurance for insurance companies," is a financial contract formed between two different insurance companies. In this contract, a reinsurer bestows coverage to another insurance organisation if they fail to give financial coverage to their consumers.

In India, reinsurance policies diminish the risk factors of a covered insurer and aid it during financial distress. By doing so, it safeguards an insurance agency from financial shambles. If you wish to learn more about reinsurance in India, keep reading.

The government of India is the governing body that administers the insurance business in India. This is why the legal provisions regarding insurance are identical throughout the nation. 

The growth and development of the reinsurance business in India should be explained in three phases: 

• The Pre-nationalisation period
• The Post-nationalisation period 
• The Post-liberalisation Period

1. Pre-Nationalisation Period of Reinsurance Industry in India

After 1951, India experienced significant economic growth, leading to a boom in the insurance industry, including life insurance. As the insurance business expanded, companies realized they needed reinsurance to manage their risks. At that time, they mostly relied on foreign reinsurance markets, especially those in Britain and its colonies.

In 1961, the Indian government required all insurance companies to give a portion of their premiums to support the creation of local reinsurance companies. Two such companies were established: the Indian Reinsurance Corporation and the Indian Guarantee and General Company. The premiums were split equally between these two reinsurers.

2. Post-Nationalisation Phase of Reinsurance Business in India

In the post-nationalisation scenario, 63 domestic insurers and 44 foreign insurance companies were operating in India, and each had to enter into reinsurance agreements. Subsequently, in 1973, under the General Insurance Company (GIC), four subsidiary companies were formed: 

• National Insurance Company Limited 
• Oriental Insurance Company Limited 
• United India Insurance Company Limited
• New India Assurance Company Limited. 

After nationalisation, GIC took the leading role as an Indian reinsurer.

3. Post-Liberation Phase of Reinsurance Business in India

With the emergence of the liberalisation process of the insurance business in India, a regulatory body became necessary. The Insurance Regulatory and Development Authority of India (IRDAI) got the authority to regulate and administer the legal ways of conducting all insurance business in India. The IRDAI formulated different rules and regulations on all insurance and reinsurance business aspects.

After passing the General Insurance Business (Nationalisation) Amendment Act 2002, the GIC's supervisory role on its subsidiaries ceased. Their ownership as well as management were assigned to the Government of India.

Furthermore, the General Insurance Corporation of India (GIC RE) become the sole reinsurance company in India to manage the domestic reinsurance market.

An entity planning to perform insurance business needs to apply for a registration certificate from the IRDAI by following a three-step process under the IRDAI (Registration of Indian Insurance Companies) Regulations 2000. Besides, the Registration Regulations pre-set the essential parameters that an applicant must fulfil such as:

• Permissible Foreign Limits of Investment
• Minimum Needs of Capitalisation
• Minimum Qualifications of Directors and Officers
• Planned Infrastructure

1. Reinsurance Treaty

The type of reinsurance agreement wherein an insurance business acquires an insurance policy from another insurance provider is called treaty reinsurance. These reinsurance contracts are formed based on premium sharing that bestows better security for the ceding agency's equity alongside more stability in various financial or monetary events. 

However, this kind of treaty is riskier for any reinsurance company in case they do not go through every policy with diligence.

2. Facultative Coverage

The second type of reinsurance in India is facultative coverage, a form of agreement that facilitates reviewing individual risks. Here, a reinsurer can distribute the coverage among various insurance companies.

In addition, this policy unveils a better opportunity for a reinsurer to analyse their risks and divide the premiums with other organisations. By doing so, they can decide if coverage is required for a section of the policy or the entire policy.

Mentioned below are the essential laws related to reinsurance regulations in India:

• As per the IRDAI (Outsourcing of Activities by Indian Insurers) Regulations 2017, insurers or insurance mediators with IRDAI registration must not take part in any activity of insurers.
• Following Section 101A of the Insurance Act 1938, an insurance organisation must re-insure a maximum of 30% of the assured sum with another reinsurer from India. 
• Section 2(16B) of the Insurance Act, 1938 states the 'modus operandi' of reinsurance as an agreement between an insurer and a reinsurer in which a reinsurer agrees to take a part of the risk of the insurer instead of a mutually consented premium. 
• Insurance and reinsurance agencies can only take on insurance businesses in India if they register with IRDAI.
• Buying an overseas insurance policy by an insurance company in India has been strictly banned unless it gets authorisation from the Reserve Bank of India (RBI).
• Both insurance brokers and corporate agents are not permitted to conduct their operations in the same group.
• According to Accounting Standard 18 and the Companies Act 2013, telemarketers and aggregators are not allowed to be the parties of an insurer.
• Once IRDAI accepts Form IRDA/R1, an individual can avail a registration certificate with the help of Form IRDA/R2.
• The paperwork, documentation, and structure of fees vary from one organisation to another.
• Neither insurance providers nor third-party administrators (TPAs) have any direct restrictions in the same group. 
• Both Form IRDA/R1 and IRDA/R2 must be submitted along with authentic documents and details about the applicant.

The Insurance Act 1938, the Marine Insurance Act 1963, and the Insurance Regulatory Development Authority Act 1999 are the three major acts related to reinsurance in India. Apart from those, the reinsurance regulations, guidelines, circulars, strategies, and notifications, as provided by the IRDAI, also come under the reinsurance act.

In a nutshell, the approach of reinsurance in India has gained a high level of fame owing to their support and assistance to the insurance companies. Reinsurance is also a kind of insurance plan that insurance companies avail to avoid risk and uncertainty.

In other words, reinsurance saves numerous insurance providers from financial problems and thus protects their clients from anonymous risks.