General Insurers Vote Against Change of Rule in Favour of Foreign Players

On the morning of January 5, all general insurers in the country mustered the courage to meet at The Cricket Club of India in Mumbai to vote against a new rule which the government is pushing through and the regulator is reluctant to change. The insurers fear that the new regulation which gives foreign reinsurers the first right of refusal in obtaining business in India — would push up insurance premium, throttle competition and concentrate risks. In a nutshell, it would pinch policyholders as well hurt the bottom line of local insurance companies.

"The participants overwhelmingly voted in opposing the regulation. We have now taken it up with the IRDA," said the CEO of a large insurance firm. IRDA, or The Insurance Regulatory & Development Authority of India is the industry watchdog. The rule in question relates to the special right given to foreign reinsurers who open shop in India. In order to minimise risk, insurance companies buy covers (or insurance) from reinsurers with larger capital base. While general insurance companies welcome the government's decision to open the doors to international reinsurers and make India a reinsurance hub, they are challenging the first right of refusal that these global firms would enjoy.

While buying a cover domestic insurance companies, according to the new rule, will have to first approach global reinsurers who set up shop in India, unlike the current practice where they fish around the globe for the best rate from hundreds of reinsurers. Also, if they refuse to accept the rate offered by a global reinsurer branch in India and find a better one from an offshore reinsurer, then the former has to be given the chance to match it.

"This could be time-consuming. It's certainly anti-competitive... Less than 10% of the participants voted in favour of the rule, and even those who did were largely representatives of insurance JVs having an international reinsurer as a foreign partner," said another person who attended the meeting. "Brazil is the only market where foreign insurers have such a right. Internationally it's considered to be a flawed structure. Singapore offers some tax incentive but no special right," said a senior official.

"Reinsurance is a complex subject. The ministry may not have fully grasped the implications. The assurance that premium paid to reinsurers would remain within the country may have appealed to the ministry. But the downsides are far too many. Today, insurers shop around the world from 300 reinsurers to spread the cover, mitigate risk, and minimise cost. But a special right could tie them down with less than 10 companies which open branches here.