General insurance companies not to be paid ceding commission

General insurance companies not to be paid ceding commission

New Delhi: Indian general insurance companies will no longer be paid a commission on the portion of business they are required by the law to reinsure with the state-owned reinsurer.

The decision, on a directive from the finance ministry, risks increasing the already hefty underwriting losses of non-life insurance firms, which have to mandatorily reinsure 10% of their business with the General Insurance Corp. of India (GIC Re). In a letter to GIC Re last month, the ministry argued that general insurers didn’t need to be paid a commission, given that reinsuring a portion of their business with the state-owned firm was mandatory, said three people familiar with the development.

The decision is effective 1 April, which means the insurers have to pay back any commissions they have already received this fiscal year.

GIC Re pays the ceding commission to the primary insurer as compensation for placing the business with it. The commission covers the insurance companies’ cost of underwriting and administering the business.

“Insurance companies used to get ceding commissions of around 20% of the total business ceded, depending on their underwriting track record. But with this, we will have to even refund the commissions that we have received so far this fiscal," said the reinsurance head with a private general insurance company who did not want to be identified. “This will increase our underwriting losses."

India has 24 non-life insurance companies, including four in the public sector, with combined gross underwritten premiums of Rs44,126 crore in fiscal 2010-11. According to industry estimates, the domestic general insurance industry incurred underwriting losses of around Rs10,000 crore in the fiscal year ended 31 March.

Insurance firms further insure their business with reinsurance companies to spread their risk. Reinsurers, in return for being paid a premium, accept a portion of the liability assumed by the insurance firms while selling a cover. “The whole idea behind setting up of GIC Re was the creation of domestic reinsurance capacity," said Rahul Aggarwal, CEO, Optima Insurance Brokers. “But it is not fair to deprive insurance companies of the commissions for the obligatory cession. On a macro level, since GIC Re and the four largest general insurance companies (combined market share of 60%) are government-owned, it will only mean a transfer of funds from one state-owned entity to the other." Most Indian insurance companies cede more than the compulsory 10% to GIC Re.

“Insurance companies incur underwriting costs such as agent commissions, policy formulation and paperwork and other administrative expenses," the general insurance company official cited above said. “Commissions are paid to compensate the insurers for this." A GIC Re official confirmed the development. “It will benefit us. Since it is applicable from this fiscal, the commissions that have been already paid out will be refunded back to us by the companies."

The official, who spoke on condition that he not be named, didn’t divulge a figure for the refunds it expects to recive.

Non-life insurers have taken up the issue with the General Insurance Council, the industry lobby group, said Amarnath Ananthanarayanan, chief executive officer of Bharti Axa General Insurance Company.

“The General Insurance Council will approach Irda (Insurance Regulatory and Development Authority) and seek recourse," he said. “In absolute terms, companies with a larger book size will be hit more."