IRDAI has clarified that premium retroceded by the branches of foreign reinsurers and Indian reinsurers to CBRs, premiums ceded to CBRs for the government schemes such as PMFBY, PMJAY, PMJJBY, PMSBY and If total premium ceded by an insurer to CBRs is up to Rs 75 crore during a financial year, provided that the CBRs are rated ‘A-’ or above from S&P or equivalent. they cannot be subjected to collateral requirements
Hyderabad: With minor changes in its earlier proposed draft, the Indian insurance regulator Irdai has finally notified the new regulations for the Cross Boarder Reinsurers(CBR) mandating them to keep collaterals with Indian insurers while providing reinsurance cover to them.
These new guidelines will be applicable for all the reinsurance placements with CBRs by cedants (insurers which are getting reinsurance covers from CBRs ) from India, for reinsurance programs for FY 2025-26 onwards, said the IRDAI in its master circular issued on Monday.
However the IRDAI has clarified that the following reinsurance transactions cannot be subject to collateral requirements:
– premium retroceded by the branches of foreign reinsurers and Indian reinsurers to CBRs;
-. premiums ceded to CBRs in respect of schemes of the government, such as PMFBY, PMJAY, PMJJBY, PMSBY
-If total premium ceded by an insurer to CBRs is up to Rs 75 crore during a financial year, provided that the CBRs are rated ‘A-’ or above from S&P or equivalent.
For a CBR with A- or above from an international rating agency Standard or Poor’s or equivalent, minimum amount of collateral (aggregate of outstanding claims liabilities and IBNR reserves) will be 75% per cent while for CBRs below A- rating it will be 100 %.
The collateral has to be either in the form of irrevocable Letter of Credit (LC) from the CBR or premium / funds withheld by the ceding insurer.
In case of LC:
-the LC will be issued through any IFSC Banking Unit (IBU) in GIFT-IFSC or a scheduled commercial bank regulated by the Reserve Bank of India(RBI),
– the cedant may choose to accept such LC either in Indian Rupees or in any freely convertible foreign currency,
– the amount of LC shall be with reference to the aggregate of outstanding claims liabilities and Incurred but not reported (IBNR) reserves of the ceding insurer for re-insurance contract or arrangement with the concerned CBR.
In case of Premiums/ Funds withheld;
-the premiums/ funds withheld from each CBR has to be identified, accounted for, kept and invested separately from the funds of the insurer,
– the investment income, if any, on such withheld funds shall be credited to such fund(s),
– the minimum amount of premium/ fund withheld shall be 50% of the premiums ceded by the insurer to a CBR.
If the cedant is satisfied that the liabilities of the concerned CBR under re-insurance contract(s) are extinguished, the cedant can release such collaterals to that extent.
-The ceding insurer will not be permitted to take credit of the collaterals held by it, for the purpose of determining the available solvency margin.
All insurers has to ensure that CBRs meet, among other things rating requirements as per IRDAI (Reinsurance) Regulations, 2018 and need to have a valid File Reference Number (FRN), before placing any business with them. Such FRNs are issued for each financial year by the IRDAI.
The CBRs which meet the eligibility criteria will be issued FRN in the automatic mode on the portal, after application made by the ceding insurer. The CBRs, which do not qualify for Auto-renewal, will be issued FRN in normal mode every financial year.
A specific IRDAI portal would be available for Auto-renewal for the current financial year and would also be available three months in advance for the next financial year.
The eligibility criteria for auto-renewal of a CBR, are
– Credit rating of the CBR will not be less than ‘Standard & Poor’s A- or equivalent. The latest credit rating of the CBR will not be older than 12 months from the date of application for autorenewal;
-The auto-renewal facility is available for three consecutive financial years for a CBR. After three financial years, normal renewal application has to be submitted by the insurer through the CBR portal.
The validity of FRN issued to CBRs shall be for one financial year. No insurer shall place re-insurance business with any CBR without valid FRN. Once FRN is issued for a particular CBR, the same shall be valid for three years .
India is now poised for high growth in the coming years. It is therefore, felt necessary to ring-fence the interests of Indian cedants to maintain their ability to meet obligations towards policyholders in India, while continuing their growth trajectory, said the IRDAI.
At present, around 300 registered CBRs with the IRDAI, who are based in overseas markets, compete with state owned GIC Re, Foreign Reinsurance Branches(FRBs), set up by global reinsurance giants, to provide reinsurance covers to Rs 2.80 trillion general insurance market, through brokers, at a much cheaper cost as they do business from their local offices.
If the CBRs, that want to do business in India, donot want keep collaterals, then they will have to explore options for onshore presence i.e. either as foreign reinsurance branches (FRBs) or IFSC Insurance Office(IIOs), said analysts.
IIOs have to get a separate licenses from International Financial Services Centres Authority(IFSC) based in Gujrat’s Gift City while FRBs are licensed by the IRDAI.
The size of the Indian reinsurance market currently is around Rs 80,000 crore, out of which CBRs transact business of around Rs 15,000 crore.