Swiss Re says preferential treatment in reinsurance a bad idea

Preferential treatment to domestic reinsurers could be a retrograde move, said global reinsurance major Swiss Re in its sigma report. In its global economic and insurance outlook 2020, the world's second-largest reinsurer said this stifles local competition. India has a policy for giving the first preference to (GIC Re) in contracts.

"In our view, such measures are retrograde in the long run.Many local reinsurers are not sufficiently diversified, have limited skills to manage complex risks, and insufficient capital base. As such, they need to rely heavily on global retrocession capacity, especially for big-ticket risks such as energy, mining and infrastructure," said Swiss Re.

Swiss Re has termed this regulation as 'nationalism in reinsurance'.

Swiss Re is among the nine global reinsurers operate in the Indian reinsurance market through their branches. These include Munich Re, Swiss Re, SCOR SE, Hannover Re, RGA Life Reinsurance Company of Canada, XL Insurance Company SE, Gen Re,Allianz Global Corporate & Specialty SE and AXA France Vie.

Reinsurance refers to risk covers taken by insurance companies against large projects and schemes that they insure. If a reinsurance company is unable to provide coverage for risks, they cede a part of that risk to another reinsurer. This is referred to as retrocession.

Currently, whenever a reinsurance proposal is presented, GIC Re gets the first right to accept or reject it. Only if they reject it, does the business go to other reinsurance companies.

The report mentioned that India has proposed priority cessions to domestic reinsurers. This refers to the fixed percentage of business that has to be ceded to GIC Re by general insurance companies on an annual basis.

It has been more than a year since foreign reinsurers set up branches in India to be closer to the market and also offer better pricing. However, the Insurance Regulatory and Development Authority of India (IRDAI) has asked insurance companies to strictly adhere to the order of preference while giving out reinsurance contracts.This has been a matter of contention between Indian reinsurers and the branch offices of global reinsurers with the latter seeking on par treatment.

Foreign reinsurers have sought the removal of the preferential treatment to the domestic player. Their rationale has been that since they have made heavy investments into the Indian market they should also be part of the list of insurers getting first preference.

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