Delhi News

IRDAI retains mandatory cession of business in favour of GIC Re at 4% for FY24


The Insurance Regulatory and Development Authority (IRDAI) has maintained the status quo on obligatory cession of business for the financial year 2023-24 at 4 per cent in favour of General Insurance Corporation of India (GIC Re), disappointing the private sector general insurers and foreign reinsurers with operations in India.

The government had notified the move recently saying that the entire Obligatory Cession is to be placed with GIC Re only. Obligatory cession refers to the part of the business that general insurance companies have to mandatorily cede to the national reinsurer GIC Re.

Understandably, private general insurers are against any obligatory cession to GIC Re as it doesn’t give them any freedom to place the reinsurance business the way they like and with the reinsurers they like. The general insurers earn substantial commission out of any reinsurance business they place with the reinsurers apart from the risk cover.

The IRDAI had constituted a panel under Bhargava Dasgupta, MD of ICICI Lombard General Insurance, to suggest measures to phase out obligatory cession and the panel had suggested phase-out the obligatory business along with the right to first refusal by the GIC Re.

Under the right to first refusal, GIC Re has the first right to choose the reinsurance business from the general insurers and then it can be placed with other reinsurers. The obligatory cession was reduced from 5 per cent to 4 per cent in FY23 and the IRDAI, in line with demands of general insurers, had indicated that it will be further be reduced and can even be made zero. “Maybe the government thinks removal of obligatory cession will impact the performance of GIC Re,” said an insurance official.

The IRDAI, after consultation with the Advisory Committee, and with the previous approval of the central government has taken the decision that the percentage cession of the sum insured on each general insurance policy to be reinsured with the Indian re-insurer (GIC Re), will be four percent during the financial year, except the terrorism premium and premium ceded to nuclear pool wherein it would be made ‘NIL’, said the notification.

The approximate size of the Indian reinsurance market is around Rs 70,000 crore in FY2022-23. There are now over 10 foreign reinsurers who are operating in India. However, there are over 200 cross border reinsurers who provide cover offshore and much cheaper premium. The size of the Indian general insurance market is over Rs 2.20 trillion in 2022-23.

It has been growing at over 15 per cent in recent years except for the last two years when it has faced many challenges due to CovID-19 Pandemic and has grown within 10 per cent single digit.

In fact, obligatory cession was 10 per cent which was reduced to five per cent afterwards and the foreign reinsurers which are having branches in India are demanding the total removal of the obligatory cession for GIC Re to create a level playing field in the Indian reinsurance market.

GIC Re reported a net profit of Rs 3,417 crore for the March quarter, an increase of 90 per cent over Rs 1,794 crore reported in the same period of last year. The rise was despite underwriting profits shrinking 61 per cent to Rs 889 crore from Rs 2,313 crore a year ago.

IRDAI had named LIC, GIC Re and New India Assurance as domestic systematically important insurers — which are considered as “too big or too important to fail”


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