New Delhi: The government plans to relax limits on the extent of compulsory reinsurance by general-insurance companies. The move will give them more leeway to reduce expenses and, eventually, insurance premiums.
The aim is to bring down slowly the compulsory reinsurance that companies have to carry out with national reinsurer General Insurance Corporation of India (GIC) to 10% from 15% at present, a senior finance ministry official told Mint.
When the industry earlier asked the government to bring down the extent of compulsory reinsurance from the original level of 20% to 10%, it decided to do so in phases to lessen the impact on GIC, he added.
GIC was identified as the national reinsurer in November 2000, and there was a statutory need for companies to cede 20% business to it.
The size of the Indian general-insurance industry in terms of premium today is about Rs25,000 crore a year.
Reinsurers are second-line insurers in the industry who underwrite the risks that companies such as New India Assurance, which deal with end customers, take on.
Consequently, a company such as New India shares its premium with the reinsurer.
The more leeway general-insurance companies have in choosing the reinsurer, the more control they have over their business, said a senior executive in a state-owned company, who did not want to be identified.
Generally, the more business a company retains, the better off it is.
The retention ratio in India can be categorized loosely between state-owned companies and private companies.
The four state-owned companies—The New India Assurance Company Ltd, The Oriental Insurance Company Ltd, National Insurance Company Ltd and United India Insurance Company Ltd—tend to retain more business as they have the financial muscle to do so.
Private companies, which began to enter the market in 2000, after the sector was once again opened, tend to retain a smaller amount and depend more on reinsurers to underwrite risks.
State-owned Oriental, for example, retains about 70% of the business it underwrites every year. Private-company Iffco-Tokio General Insurance Company retained 52% of its business last financial year.