Reinsurers discipline primary insurers in India

Chennai, Jan 3 Reinsurers operating in India are forcing disciplined risk underwriting practices in primary insurers in the life and non-life sectors, rather than the latter's promoters.

Recently, life insurers decided to hike their premium rates for term insurance policies following pressure from their reinsurers.

While the life insurers attributed the increased claims to Covid-19 related deaths, industry officials told IANS that the term insurance portfolio has been suffering losses and reinsurers have been insisting on rate hike since 2018 onwards.

"The term insurance portfolio of life insurers showed higher claims than what was initially projected. The life insurers designed their term insurance product targeting a certain segment with a certain risk profile and signed up reinsurance agreements with reinsurers," an industry official told IANS preferring anonymity.

Later, the term insurance policies were sold to all kinds of people and life insurers started settling the claims on the comfort that they will get reimbursed from their reinsurers, ringing alarm bells in the latter.

"The reinsurers decided not to accept term insurance risks as they felt the life insurers are topline focused and do not underwrite the risks in a prudent manner," a senior official of a private life insurer told IANS on condition of anonymity.

"It was a conundrum. Though life insurance is a volume game, an increased number of policies resulted in higher claims outgo," he added.

The conundrum would vanish if the insurers underwrote the risks as per the assumptions they made while designing the policy and went to the reinsurers, another senior official said.

In 2020, the General Insurance Corporation of India (GIC), a reinsurer, decided to accept reinsurance placement only if their clients belonging to certain industries are charged a premium rate on 'burning cost' basis as arrived by the Insurance Information Bureau (IIB).

Simply put, the burning cost rate is arrived at by dividing claims paid by the sum insured.

The insurance regulator too advised the insurers a) either adopt 'burning cost rate' published by IIB or b) adopt their own internal burning costs, if any or c) in case of deviations from both, report to their board of such exceptions and periodically inform board reactions to the regulator.

The GIC's move in effect has forced the primary insurers to increase their rates several folds, in some cases by nine times.

Fire insurance premium rate crashed soon after the insurance regulator abolished the administered pricing mechanism.

In September 2021, the Insurance Regulatory and Development Authority of India (IRDAI) issued a draft Insurance Regulatory and Development Authority of India (Insurance Information Bureau of India) Regulations 2021.

As per the draft regulations, one of the objectives of IIB is to generate benchmark rates for different lines of insurance business, including life, motor, health, marine, fire and others on a periodic basis for promoting reasonableness and sustainability of premiums in the insurance business.

The draft regulation mandates life/non-life/reinsurers and other entities regulated by IRDAI to share the data in required format with IIB so that it can come out with the benchmark rates.

According to IRDAI, the draft regulations were made in consultation with the Insurance Advisory Committee (IAC), whose members are majorly from the insurance industry.

The IIB is a society registered in Andhra Pradesh.