All you need to know before setting up a Reinsurance Company

Ashish M. Shaji

13 Sep, 2022

Reinsurance Company is a company that provides insurance to the insurance companies. It is a form of a company that receives insurance liabilities from insurance companies. Just like any other business, insurance companies too require protection against risk. An insurance company handles its risk through a re-insurance company. Reinsurers are crucial for insurance companies as they permit the insurance companies to transfer their risks, reduce capital requirements and lessen claimant payouts. They make revenue by determining and accepting policies that are less risky in nature and also by reinvesting the insurance premiums they receive.

Regulatory framework for Reinsurance activities

Reinsurance companies are regulated and supervised by the Insurance Regulatory and Development Authority of India (IRDAI). The IRDAI through the powers provided to it by the Insurance Regulatory and Development Authority Act (IRDA Act), issues regulations and guidelines for governing the IRDA insurance licensing, registration, and functioning of the reinsurers.

What is Reinsurance contract?

Under the Insurance Regulatory and Development Authority of India (Re-insurance) Regulations 2018, the reinsurance contract is a commercial agreement and legally binding on all the parties evidenced by the Reinsurance slip. The reinsurance contract provides a complete record of all terms and conditions of the reinsurance contract. The reinsurance arrangements don’t require to be approved by the IRDAI, however it must be filed with the IRDAI^[1] within the prescribed time period.

Insurers are required to comply with different requirements provided under the regulations that include the following:

• Filing reinsurance programme;
• Filing reinsurance treaty contract wording and excess of loss cover note;
• Filing each new reinsurance arrangement entered by insurers or the revisions thereof and providing details and reasons for arrangements  within 15 days of board’s approval;
• Filing declaration by the CEO providing that the entity, in the reinsurance programme filed with the IRDAI, has not made any changes within 30 days from the beginning of the financial year;
• In terms of the reinsurer details regarding the actual placements during the previous financial year for each insurance segment in 30 days from the start of the financial year.

Regulations governing the Reinsurance Company

Under the regulations governing the Reinsurance or business of reinsurance, it is provided that:

• The branch office regulations that allow the foreign reinsurers to open a branch office in India; A foreign reinsurer is allowed to conduct reinsurance business in India through its registered branch office under the prescribed conditions of the branch office regulations.
• The Lloyd India Regulations governs the setting up of the Lloyd India framework. Syndicates of Lloyd India can manage its reinsurance businesses in India through registered service companies under the prescribed conditions of the Lloyd India Regulations.

How does the Reinsurance Company help Insurance companies?

An insurance company uses the Reinsurance Company for the following purposes:

• Transfer of risk

Insurance companies may issue higher limits policies owing to some of the risks being offset to the reinsurer.

• Less capital at hand

By offsetting the risk of loss in insurance liabilities the insurance companies don’t require keeping more capital on hand to cover losses.

• Underwrite policies

Reinsurance allows the insurance companies to underwrite more policies as a portion of their liabilities is transferred to reinsurers. It helps the insurance company to take more risks.

• Lower Claimant Payout

On some occasions like natural disasters, the claims may be very high and in such situations, an insurance company may go bankrupt as they would have to pay the claims to the claimants.

Statutory limits and restrictions with respect to transfer of risk by Reinsurance Company

• Transfer of business

The Indian regulatory framework prohibits reinsurance arrangements that lead to Indian insurer fronting for reinsurers. Fronting means the process of transferring risks where Indian insurer cedes or retrocedes the majority of or all of the assumed risks to a reinsurer. The Insurance Regulatory and Development Authority of India (IRDAI) can ask an insurer to justify its retention policy so that the regulatory body can ensure that the insurer is not just fronting for a foreign insurer.

• Operating restrictions

In order to obtain authorization, the reinsurer is required to apply for the certificate of registration from the regulatory body (IRDAI) in the manner prescribed. An applicant desiring to run a reinsurance business in India should make a registration application in Form IRDA/R1^[2]. The applicant may make an application for getting a certificate of registration in Form IRDA/R2 on acceptance of requisition. Both forms must be with prescribed documents.

Once the IRDAI is satisfied that the applicant satisfies all the eligibility criteria, it shall grant the certificate to the applicant. The IRDAI has revised the requirements and procedures for grant of registration but the process continues to be staged with specific additional requirements that must be fulfilled for registering.

Conclusion

Reinsurance is an essential prospect for any Insurance company. Although they are in the business of paying insurance claims, the insurance companies need protection from reinsurance company so that they are not left bankrupt in an event of disaster. Reinsurance companies also offer valuable advice to the insurance companies that can help them in times of need.

Also, read: Regulatory Compliances of IRDA for Insurance Companies