Indian insurers may have to tackle pricey reinsurance amidst global crises

Impact of global hardening of rates on India difficult to predict, say analysts

The Indian insurance market in April is likely to feel the heat of higher reinsurance rates that have shot up globally due to adverse weather events, the war in Ukraine and macroeconomic shocks, said experts tracking the trend.

Primary insurers generally transfer a portion of their risk portfolios to reinsurers by paying a premium to reduce the likelihood of having to make a large obligation in the form of a claim.

Globally, primary insurers and reinsurers renew contracts between them in January. Reports say that reinsurance rates this season have touched multi-year highs.

In India, renewals take place in April. Industry insiders believe the country’s insurance market will see an impact of the hardening of reinsurance rates globally. The extent of the cost rise may not be of global levels, as India did not suffer major losses in natural catastrophes in 2022.

“Prices will go up for Indian insurers but the quantum of increase is difficult to ascertain so early,” said a source.

“Yes, rates could harden for Indian insurers. The Indian reinsurers also seek protection globally. So, if the global prices go up, it will also have an impact in India. But the impact should ideally vary on the experience of the company,” said the chief executive officer (CEO) of a private sector general insurance company.

Reinsurers, while insuring primary insurers against risks, are dependent on retrocession capacity. Retrocession is a process where a reinsurance company purchases an insurance scheme from another reinsurance company to cover risks. The process offers additional capacity to the original reinsurer, helping it prepare for crises.

“The retrocession market globally has seen rate hardening in the range of 30-50 per cent on a risk-adjusted basis in different parts of the world at the 1st January renewal,” said Nymphea Batra, managing director and CEO of Guy Carpenter India, a composite broking company and a division of Marsh India Insurance Brokers.

The reinsurance capital supply is composed of traditional reinsurance capital and third-party capital. In 2022, the traditional dedicated reinsurance capital was $435 billion, an 8 per cent decrease from end 2021. A sharp rise in interest rates since then and the risk of recession has caused asset values to deteriorate, creating additional downward pressure on capital levels, said Batra.

 

The key factors for rates hardening in the retro market include heightened catastrophe losses, high inflation coupled with macroeconomic uncertainty and soaring interest rates, which resulted in an increase in margin cost of capital, experts said.

“The impact of all these on the Asian market was also felt on January 1 renewals. The Indian market has not witnessed significant natural catastrophe (Nat Cat) or risk losses in 2022, however the global market conditions would definitely have an impact on the Indian April 1 renewals. Japan, which has also not seen major losses, is expected to see a hardening of rates in the range of 10-15 per cent on a risk-adjusted basis at upcoming April 1 renewals,” Batra said.

According to a senior executive at a private general insurance company, the Indian market expects a hike in reinsurance rates despite the property market doing well. Nevertheless, there could be a 10-15 per cent hike in reinsurance cost, he said on the condition of anonymity.

“How much of the global hardening of rates will impact India is slightly difficult to predict. Because, we did not have any major natural catastrophe events in the last 1-2 years. To that extent, I am not sure if reinsurers will take a view on India based on their global experience. So far, there has been no direct communication from the reinsurers. We will come to know about it in March,” said another executive of a private sector general insurance firm on the condition of anonymity.