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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.
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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.
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:
Under the regulations governing the Reinsurance or business of reinsurance, it is provided that:
An insurance company uses the Reinsurance Company for the following purposes:
Insurance companies may issue higher limits policies owing to some of the risks being offset to the reinsurer.
By offsetting the risk of loss in insurance liabilities the insurance companies don’t require keeping more capital on hand to cover losses.
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.
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.
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.
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.
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
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