CHAPTER I – THEORY OF REINSURANCE LAW
An insurance policy is taken to guard or protect oneself from certain financial risks that might occur due to certain losses. This risk of loss is transferred to a certain person (another party) and to carry out that the other party is paid an insurance premium as an incentive and to ensure that the parties honor their agreement they sign an insurance agreement for the same and that is called an insurance policy. This is the concept of insurance in a nutshell. An example of an insurance policy is as follows, A takes a fire insurance policy from an insurance company X and the policy is worth Rs 1 lakh. Now, in this case A is the “insured” and X is the “insurer” and if A has passed on his risk on to X and for that he pays X a premium. If the house of A which has been insured burns down then the insurance company X would have to cover the loss of A.
In the case of La. Safety Association of Timbermen-Self Insurers Fund v. La. Ins. Guar. Association, re-insurance was defined as “ a contract whereby one insurer transfers or cedes to another insurer all or part of the risk it has assumed under a separate or distinct policy or group of policies in exchange for a portion of the premium.”
The concept of re-insurance runs along the similar lines as that of insurance that is they are similar in their concept. In the case of re-insurance the company which has issued the insurance policy (the insurer) purchases a re-insurance policy from another company (the reinsurer) and this is a means of risk management. The insurer pays the reinsurer a re-insurance premium and this contract of re-insurance is an independent contract which is between the insurer and the reinsurer and the insured is not a part of this contract. An example of re-insurance is as follows, let’s take the above example for instance in that the company X which is the insurer takes a re-insurance policy from a re-insurance company Y and this is done to protect itself from the risk of paying the insured and so to protect itself from that financial risk of loss the insurance takes a re-insurance policy and that determines the conditions upon which the reinsurer would pay the insurer's losses (in terms of excess of loss or proportional to loss). This is the concept of re-insurance in a nutshell.
One may wonder as to why an insurance company needs to take a re-insurance policy and there are many reasons as to why the insurance companies take a re-insurance policy and they are as follows:
1. They can protect themselves from bankruptcy, &
2. Through the mechanism of re-insurance the insurance company can create a pool of the insurance policies and using that the risk can be divided amongst the various providers of insurance and that will save the insurance company from huge loss as that pool of money can be divided in case a huge loss occurs.
Re-insurance as a concept primarily deals with risks that are of such nature that they cannot be foreseen and predicted and due that volatile nature of the risk the insurance companies tend to suffer huge losses and that causes the greatest risk exposure to the insurance companies and as a single insurance company would not be able to bear monetary impact of such a huge loss hence this loss which cannot be borne by the insurance company is divided into smaller units of smaller and bearable losses by the transfer of risks. The value of risks that the insurance companies would take depends a lot upon the terms that are offered by the re-insurers and it also depends upon the other factors like the worth of its assets, trend of inflation in the economy, price of the insurance products and the type of risk.
DIFFERENCE BETWEEN INSURANCE AND REINSURANCE
Though theoretically insurance and re-insurance may seem the same they vary on a few points which are as follows:
POINTS OF DIFFERENCE INSURANCE REINSURANCE
1. The Insured Individual Insurance Company
2. Premium The company that provides the insurance will receive the premium which would be paid by the insured.
All the companies in the pool that would bear the risk of loss would be the beneficiaries of the insurance premium that is paid for re-insurance.
CHAPTER II – TYPES OF REINSURANCE
Reinsurance can be classified into two types and they are as follows:
1. Facultative Reinsurance, &
2. Treaty Reinsurance.
The above mentioned types of re-insurance are discussed below:
1. Facultative Re-insurance : In this type of re-insurance a re-insurance contract between the re-insurer and the primary insurer is negotiated for separately or individually for each risk. In this case of re-insurance contract the reinsurer is at liberty to re-insure only such insurance policies they want to re-insure so they are under no compulsion or obligation to re-insure the insurance policies that they wish to. The re-insurer is also under no compulsion or obligation to re-insure the proposals that are submitted to it. The choice to decline or accept the proposal to re-insure is totally in the hands of the re-insurer. This kind of re-insurance can be either proportional in nature or non-proportional in nature.
2. Treaty Re-insurance : In this kind of re-insurance the kind of business that the re-insurer would re-insure is already decided in the agreement between the re-insurer and the insurance company and the insurance companies agree to accept it and the business is given in the terms and conditions of the agreement that is between the re-insurer and the insurance company. So, it can be observed that there is an obligation on the part of the insurance company to re-insure those insurance policies that fall under the business agreed or stipulated in the agreement. Also, the re-insurer is under an obligation to re-insure those insurance policies that fall under the business stipulated in the agreement and hence the re-insurer cannot decline to re-insure such a policy.
CHAPTER III – REINSURANCE AND LEGAL ISSUES
The legal issues that are related to the concept of reinsurance are as follows:
1. Insurable Interest: In case of reinsurance the doctrine of insurable interest is applicable and according to this the reinsurer cannot reinsure or give a risk coverage that is more than the scope of the coverage provided for in the policy and the insurer company cannot reinsure the policy for more than the coverage provided for in the policy.
2. Insurer Company becomes insolvent: In such a case the reinsurer company is bound to pay the amount if the insurer company becomes insolvent and that is applicable only if there is a clause to that effect.
3. The rights of the insured versus the right of the reinsurer: When the Insurance Company enters into a reinsurance contract with the reinsurance company the contract only extends between the two of them and does not extend to the insured, that means that the reinsurance company does not have any liability towards the insured, this means that there is no privity of contract that exists between the insured and the reinsurer. They are a contract of indemnity that exists between the cedent and the reinsurer.
CHAPTER IV – DEVELOPMENT OF RE-INSURANCE LAW IN INDIA
It was observed by the Malhotra Committee that when the re-insurance in the life insurance business was compared to the re-insurance in the general insurance business it was lesser than in the general insurance business. It is also observed that Life Insurance Corporation of India didn’t take get into the business of re-insurance when it took over two-hundred and forty-five insurers in 1956, and the reason behind this decision of Life Insurance Corporation of India was that it had the financial standing to bear all its risks fully.
Now, as there was a rapid increase in the need of general insurance business due to large scale industrialization and other factors, after independence as the business in India grew there were bigger and complex risks which were involved and this led to the increase in the business of reinsurance. This rapid growth led to the Indian insurers going to the foreign markets for reinsurance. Indian Re-insurance Corporation was formed by the central government in 1956 in order to reduce the flow of foreign capital from India and also to reduce the foreign intervention and that led to the retention of the domestic business. In order to reduce the drainage of the foreign currency from India certain measures were taken, which are as follows:
1. Obligatory non-reciprocal cessions of by the subsidiaries of General Insurance Corporation (GIC),
2. Market pools for fire and marine business relating to hulls, and
3. Inter-company cessions were adopted.
In the year 1961 an amendment was made to the Section 101-A of the Insurance Act, 1938 which mandated that the Indian Insurers who were involved in the general insurance business should reinsure with an Indian reinsurer who is approved by the Central Government and also the insurer should re-insure at least a specified percentage of the sum that is assured on each policy but that should not exceed thirty percent and that should be done with the same re-insurer. The reason behind making this amendment was that the there was huge drainage of foreign exchange from India and this was because the all the Indian insurance companies were approaching the foreign re-insurers for re-insuring the Indian insurance policies and hence this amendment was brought about. In order to see that the main aim or purpose of the amendment was successful, the central government in the year 1957 established the Re-insurance Corporation of India and it commenced its business from 1st January 1957 and it also established the General Insurance Company Limited, who was to affect the re-insurance.
The government started regulation in the re-insurance market by introducing Sections 101A, 101B and 101C in the Insurance Act, 1938, which was further, streamlined the Insurance Regulatory and Development Authority by issuing two regulations, one for general insurance and another for life insurance. These regulations are intended to regulate and maximize retention of re-insurance within the domestic market. The re-insurance in Life Insurance is regulated by the Insurance Regulatory and Development Authority (Life Insurance-Reinsurance) Regulations, 2013 and the re-insurance in General Insurance is regulated by the Insurance Regulatory and Development Authority (General Insurance-Reinsurance) Regulations, 2013.
CHAPTER V – CURRENT POSITION OF REINSURANCE LAW IN INDIA
In March 2015 the Indian Parliament passed the Insurance Law (Amendment) Act, 2015 and there were many highlights in that amendment but the one that is really important from the perspective of the reinsurers in India is that as per the amended law the foreign reinsurers are allowed to open or establish their branches in India or they can also act as investors by investing in some Indian Insurance Company but that is to be within the 49% cap and it also defines “re-insurance” as “"re-insurance" means the insurance of part of one insurer's risk by another insurer who accepts the risk for a mutually acceptable premium” and therefore it ensures that there is no possibility that the risk that is re-insured is not ceded, which could lead to companies acting as front companies for other insurers.
The Insurance Regulatory and Development Authority of India (hereinafter IRDAI) on the 7th of April 2015 in order to get comments of the industry stakeholders released an exposure draft on "Branch Offices of Foreign Reinsurers (excluding Lloyd's) Regulations" (First Exposure Draft) also called the IRDA [Branch Offices of Foreign Reinsurers (excluding Lloyd’s)] Regulations, 2015 (Regulations) (hereinafter regulations). After getting the comments from the industry stakeholder IRDAI released a second exposure draft in the month of May 2015 (Second Exposure Draft). After IRDAI had received the comments on the Second Exposure Draft it constituted a committee in July 2015 which was to review the proposed regulations in detail once more. On October 19th 2015 the IRDA released the final regulations which is called “Insurance Regulatory and Development Authority of India (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015.”
APPLICABILITY OF THE REGULATIONS
The regulations will be effective from the 19th of October 2015 and all foreign non-admitted reinsurers who are planning of establishing a branch office in India have to follow the guidelines as it applies to them too. But the regulations do not recognize the setting up and the operation of a branch of the Lloyd’s in India and Lloyd’s has been recognized as an “insurer” as per the above mentioned amendment to the Insurance Act, 1938.
BRIEF OVERVIEW OF THE REGULATIONS
The eligibility criteria as per the regulation are as follows:
1. The re-insurers need to obtain prior approval or in-principle clearance from their home regulator,
2. The re-insurer has to have a minimum net own funds of INR 50 billion,
3. The re-insurer must have a minimum credit rating which is having at least good financial security characteristics for the last three years from any international credit rating agency, and
4. There must be infusion of a minimum assigned capital of INR 1 billion into the branch and proven experience in the re-insurance market for at least 10 years.
As per the regulations the re-insurers must opt for any of the two categories that are provided in the regulations for the purpose of branch registration. The categories are as follows:
1. Category I: These are branches whose order of preference is at par with that of the Indian re-insurers and they are needed to retain a minimum of 50% of their Indian insurance business,
2. Category II: These are branches which have a lower order of preference and the minimum retention for Category II branches is pegged at 30%.
There has been an order of preference which has been laid down by the regulations and this is regarding the placing of their faculty and treaty surpluses and this has to be followed by the Indian Insurers. The requirements that need to be fulfilled by the Indian Insurers are as follows:
(a) First offer the Indian Reinsurer (i.e., GIC Re), Category I branches or to other Indian insurers the opportunity to participate in their faculty and treaty surpluses;
(b) Approach Category II branches after having offered to at least three entities in (a) above;
(c) Approach the offices of insurers set-up in Special Economic Zones, only after having offered to at least three entities in each of (a) and (b) above.
(d) Offer the balance to overseas non-admitted reinsurers, only after having offered to at least three entities in each of (a), (b) and (c) above.
To set up branch in India the re-insurers will have to go through the process of application which is a two stage process and the steps are as follows:
1. First Stage: A requisition for the registration application will have to be made in the prescribed form, by providing the requisite details,
2. Second Stage: Once the requisition sent to IRDA is accepted then it is required by the applicant to send an application to the chairperson of IRDA in the prescribed form with other requirements for the purpose of grant of registration. They also have to submit the nature of their re-insurance agreements and also any projection or the outcome of any market analysis that they a have carried out with regards to their branch which they intend to set up.
BRANCHES IN SPECIAL ECONOMIC ZONES
In the month of March 2015 the "IRDA (Regulation of Insurance Business in Special Economic Zone) Rules, 2015" were notified by the central government, these rules give IRDA permission to allow the foreign re-insurers to establish their branches in Special Economic Zones (hereinafter SEZs) and they can underwrite re-insurance in these SEZs and in other places in the country but there is a condition attached to that and that is they would be considered as cross border re-insurers. After that IRDA issued the "IRDA (International Financial Service Centre) Guidelines, 2015" (Guidelines) in April, 2015, but the IRDA committee which was appointed to examine the regulations are directed to make recommendations on these guidelines too.
Conclusion
From the above discussion it can be seen that the concept or the idea of reinsurance came up because the insurers could not handle such huge risks all by themselves even after having sufficient risk taking capabilities and so to protect themselves from such huge unforeseen losses which would bankrupt them they reinsured the insurance policy that they had initially issued and that was their insurance. Now, in India the concept of reinsurance came about because as the number of insurance companies increased and were looking at foreign reinsurance companies to reinsure their policies and to avoid that the Indian regulators and the government created the reinsurance company in India and this was the first reinsurance company in India and after that as the demand for setting up reinsurance branches of the foreign reinsurance companies increased the government passed the Insurance Amendment Act 2015 which set the track for newer foreign reinsurance companies to venture into the Indian re-insurance market and this change would be a game changer for the industry and only time would tell as whether if the change would be a positive one or a negative, but till then we can only speculate on the probable outcomes. But we can definitely see that reinsurance is an important to the insurance industry or the insurance sector.