According to a report from Business Standard, the Insurance Regulatory and Development Authority of India (IRDAI) is planning to introduce collaterals for reinsurance transactions with Cross Border Reinsurers (CBR). These changes aim to protect both policyholders and insurers, building confidence in the market and creating a healthier insurance system.
These guidelines will impact all reinsurance agreements with CBRs made by Indian insurance companies, starting from the financial year 2025-2026.
There’s also been a reported increase in CBRs collecting premiums from the Indian reinsurance market. This has raised concerns about protecting the interests of Indian reinsurers.
To address this, IRDAI believes “it is now felt necessary to ring-fence the interests of Indian cedants to maintain their ability to meet obligations towards policyholders in India.”
According to the IRDAI annual report for the financial year 2022-2023, there were 283 companies involved in the Indian CBR reinsurance business, competing with government-owned GIC Re and Foreign Reinsurance Branches (FRBs).
Under the new rules, when an Indian insurance company places reinsurance business with a CBR, they’ll need to collect collateral as a form of security. This could be an irrevocable Letter of Credit (LC) from the CBR, or premium or funds held back by the insurance company.
The LC will be issued through specific banking units and can be accepted in either Indian Rupees or a freely convertible foreign currency. Its amount will be based on the total outstanding claims liabilities and reserves of the insurance company.
For highly rated CBRs (A- and above from S&P), the minimum collateral required will be 80% of the total liabilities and reserves, while for lower-rated ones (below A-), it will be 100%.
The insurance company will release this collateral once all the CBR’s liabilities under the reinsurance contract are settled. If they believe some liabilities might continue, they can release part of the collateral after making adjustments.
Each insurance company will need to confirm that they’re following these rules, based on their approved reinsurance program.
Insurance companies won’t be allowed to use the collateral they’re holding to show financial strength.
Any premiums or funds withheld from CBRs must be managed separately, with any investment income credited back to these separate funds. At least 50% of the premiums given to a CBR must be held back by the insurer.
Overall, IRDAI’s plan to introduce these new regulations shows that they are taking proactive steps to fortify the stability and reliability of the reinsurance sector, ensuring long-term benefits for all parties involved.
