‘Order of preference’ and the growth of reinsurance

By Shailaja Lall and Ashish Teni, Shardul Amarchand Mangaldas & Co
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Since January 2017, Indian insurers have been required to follow the “order of preference” prescribed by the Insurance Regulatory and Development Authority of India (IRDAI) when approaching the reinsurance market. Prior to this, Indian insurers could approach any cross-border reinsurer registered with IRDAI to meet their reinsurance needs, subject to mandatory cessions to General Insurance Corporation of India (GIC). Introduction of the requirement has unleashed a spate of debates within the industry, given the huge ramifications for reinsurance programmes of Indian insurers and the reinsurance sector as a whole. The order of preference is also a key factor when multinational reinsurance groups consider expanding their business in India.

Shailaja LallPartnerShardul Amarchand Mangaldas & Co
Shailaja Lall
Partner
Shardul Amarchand Mangaldas & Co

Under the order of preference, Indian insurers are required to seek best terms for their facultative and treaty surpluses from Indian reinsurers holding minimum prescribed credit ratings for the past three years (now only GIC) and three category I branches of foreign reinsurers. Subsequently, the insurer has to offer best terms for participation to the various reinsurance providers in the following order: (i) GIC and then category I branches; (ii) ITI Re (and other Indian reinsurance companies) or category II branches; (iii) foreign reinsurers’ branches in special economic zones; (iv) other Indian insurers and cross-border reinsurers.

Given the pervasive implications of this requirement, IRDAI constituted two committees to analyse the order of preference, in November 2016 and May 2017. In November 2017, the Reinsurance Expert Committee – comprising senior officials from IRDAI, Indian insurers, foreign reinsurers and Lloyd’s – released a report which recommended a revised order of preference and unified reinsurance regulations for life as well as non-life insurance business.

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Shailaja Lall is a partner and Ashish Teni is a principal associate at Shardul Amarchand Mangaldas & Co. The views and opinions expressed are solely those of the author and do not necessarily reflect the official view or position of the firm.

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