Non-life insurers not keen on paying obligatory cession to GIC Re

There is growing clamour among non-life insurers that the business they cede to General Insurance Corporation (GIC Re) should be done away with completely as the commission paid by the state-owned reinsurer does not reflect the industry cost structure.

While no formal proposal has been drafted by the industry players through the general insurance council but discussions with the Insurance Regulatory and Development Authority (Irdai) has led to the formation of a task force to look into this aspect.

Under the chairmanship of Bhargav Dasgupta, MD and CEO, ICICI Lombard General Insurance, the task force will look into the issues to find solutions between non-life insurers and reinsurers. The committee is expected to give its report in three weeks' time.

Obligatory cession refers to the part of business that Indian general insurance companies must mandatorily cede to national reinsurer, GIC Re. Ceding refers to the portion of risk that a primary insurer passes onto another insurer.

“There was a discussion on this, and a committee has been formed subsequently by the regulator to look into this aspect. This has been in discussion for a long time now. The obligatory cession was as high as 20 per cent and now it is at 4 per cent. So, stakeholders are saying it should be brought down to zero,” said a CEO of a private sector general insurance company.

“There are a lot of players who want to retain the business as GIC Re gives small commissions. Health companies are very vocal about it because the cost of business is high and they get marginal commission from GIC Re,” he added.

The obligatory cession was reduced from 5 per cent to 4 per cent for FY23. The impact of the reduction on GIC Re would be around Rs 2,000 crore.

“There is no reason why it cannot go down further. There is no reason why insurance companies cannot themselves decide how much they want to cede. Ceding 4 or 5 per cent does anything in terms of risk mitigation for the insurance industry,” said a senior executive at a private sector general insurer.

The insurance regulator has been reducing the obligatory cession over time. Earlier it was 20 per cent, which came down to 15 per cent, followed by 5 per cent and now to 4 per cent. Slowly, Irdai is making sure that the compulsory cession goes down and more re-insurers get into the market to develop India as a re-insurance hub.

Rather than forcing people to do (business) based on obligation, it should be left to individual companies’ appetite, said experts.

In an interview with Business Standard, GIC Re Charmian Devesh Srivastava had said that the reinsurer’s dominance would not be impacted even if the obligatory cession is brought down to zero.

"Of course, in the distant future, it will become zero. But that will not result in GIC Re’s dominance going away. We have diversified and went global. Obligatory cession is a source of huge amounts of data, which we should be trapping and that is on the cards. As the market matures, obligatory cession will come down to zero per cent,” he said.