Rationale for making India a reinsurance hub
Reinsurance in India:
- Reinsurance in India at the Time of Nationalization and After:- At the time of Nationalization of general insurance business in 1971, there were 63 domestic insurers and 44 foreign insurers operating in the country and each company had its own reinsurance agreements. In 1973, these companies were reconstituted into four companies: National Insurance Company Limited; New India Assurance Company Limited; Oriental Insurance Company Limited; United India Insurance Company Limited. These four companies were thus left to operate in the country as subsidiaries of a holding company known as General Insurance Corporation of India (GIC) as per General Insurance Business Nationalization Act (GIBNA), 1972. After nationalization, in 2000, GIC was notified as India’s sole reinsurer in the domestic market. In 2002, General Insurance Business Nationalization Amendment Act replaced earlier GIBNA, 1972. Subsequently, four subsidiaries got delinked from GIC and in March 2003, GIC officially became “GIC Re”. After that, the outward reinsurance agreements of the Indian insurance companies were rearranged to maximize domestic retention. From 1st April 2003, it was mandated by law that each and every insurer in India has to mandatorily cede every risk’s 5% to GIC Re.
- Reinsurance After Liberalization:- As a part of the process of liberalization of the insurance industry in India, the Indian Regulatory and Development of India (IRDA) was given the authority of regulating and controlling the conduct of insurance business in India. IRDA frames rules and regulations for various aspects of the Insurance business including reinsurance. Each insurer in India is free to structure his annual reinsurance program in compliance with regulation and solvency requirement. The program needs to be approved by the IRDA. Besides having GIC Re as the only reinsurer in India, as Indian government had restricted the direct entry of foreign reinsurers, some of the companies were working by having joint venture like Munich Re, Swiss Re, Insurance group of America, Buffett’s Berkshire Hathaway through an agent with Bajaj Allianz to India (Berkshire stopped broking biz in 2013). GIC Re has diversified its operations and is now emerging as an important Re-Insurer in SAARC countries, Southeast Asia, Middle East and Africa, Europe and America. GIC Re has also expanded its international operations through branches in London, Moscow, Dubai and Kuala Lumpur. GIC Re ranks as the 14th largest Re insurer and 5th largest Aviation Re insurer in the world (Standard & Poor). GIC Re actively participates in “SAARC Insurance Regulator Forum” and offers technical support and advices to its activities.
The rationale for making India a reinsurance hub:
Geographically, India has the ideal location at the heart of South Asia and its close proximity to the Middle East region, South East Asia and Chinese markets, can offer it the role of a reinsurance hub for the region. Economically, India maintains its global position at 3rd in terms of Purchasing Power Parity (PPP), following China and the US (Source: World Bank data). In order to sustain economic reforms and to establish itself on the global platform, India must grow its insurance industry and integrate it with the international counterpart. India’s economic growth will be jeopardized unless the extraordinary risks (mainly the risks from natural catastrophes) are mitigated. Reinsurance is conducted as a B2B (business-to-business) cross-border transaction. Since reinsurance transfers risk from insurers to reinsurers, it reduces volatility by pooling and diversifying risks across diverse markets. Indian government should include financial risk transfer as a part of comprehensive-country-risk-management-strategy to protect society from the financial costs of catastrophic events. This strategy needs a push from the Regulator (IRDA) too for its successful implementation. Major international financial centres such as London, New York, Singapore and Hong Kong have evolved into well-developed international reinsurance hubs. Dubai and Shanghai are also developing fast into regional hubs. India just needs to create a strong financial platform so that it can attract the best of reinsurance companies to come and set up operations in India.