Chennai, Oct 5 (IANS): Hard decisions have to be taken to protect the primary insurer's interests while implementing the government's decision to allow foreign reinsurance syndicates and foreign reinsurers to operate through branches in the country, insurance experts say.
A cabinet meeting chaired by Prime Minister Manmohan Singh Thursday allowed foreign reinsurers to open branches only for reinsurance business and also allow Lloyd's Corporation to operate in India by amending the definition of foreign company for the purpose of insurance and re-insurance to mean: a company or body established under a law of any country outside India and includes Lloyd's established under the Lloyd's Act, 1871 (United Kingdom).
Simply put, reinsurers are an insurer's insurance company.
"Lloyd's Corporation set up is not easy to understand as it not a risk taker/insurer. The risk is accepted by a multitude of syndicates of wealthy individuals and entities. The syndicates need not be permanent. The task of managing a collection of syndicates is typically done by a managing agent," K.K. Srinivasan, former member of Insurance Regulatory and Development Authority (IRDA) told IANS.
According to him hard decisions have to be taken as to how and how many syndicates to permit and whether managing agents are to be permitted.
"How to make Lloyd's Corporation liable for the commission and omission of syndicates and managing agents are some of the issues that need to be addressed. An enabling amendment merely permitting Lloyd's will not do," Srinivasan said.
In China Lloyd's Corporation is allowed to transact business only as an incorporated entity.
A senior industry official not wanting to be quoted told IANS that Lloyd's syndicates are already participating in the Indian reinsurance business from overseas.
"But if it wants to come here then IRDA has to define how its business is to be conducted and the manner in which the syndicates are regulated. Lloyd's Corporation should offer financial guarantee for its syndicates," he said.
Lloyd's Corporation is not an insurance company, it is a partially mutualised market where its members join together as syndicates to insure risks. The business is transacted by 51 members running 80 syndicates, according to the corporation's website.
Referring to the government's decision on allowing foreign reinsurers to set up branches in India, Srinivasan said that the country is going against the world trend.
"Countries like the UK which allowed branches of foreign insurers earlier, are requiring them to incorporate companies. The major exception is the passporting arrangements allowed among countries within the EU (European Union) which is understandable," he remarked.
He said if the purpose is to attract foreign reinsurer then the reasons for the absence of even single reinsurance joint venture needs to be analysed.
"In the present regulatory set up, foreign reinsurers with a rating of BBB and above can freely transact reinsurance in India. Unless that is changed, there will not be any incentive to set up a reinsurance joint venture or a reinsurance branch in India," Srinivasan added.
"In other countries notably in the Middle East and Canada, laws provide for withholding of 40 percent premium reserves and 90 percent outstanding claim reserves, based on a formula. That provision is lacking in reinsurance regulations and laws in India," an industry expert told IANS without wanting to be named.
He said Indian insurers are exposed to the risk of a default of a reinsurer and opening of a reinsurance branch will become a reality, only when India creates disincentives for the present manner of transacting reinsurance business.
"Otherwise, it will remain just an enabling provision as the entry of foreign joint venture is at present. Secondly the domestic market is loss-making; and is not attractive to others," he added.