Indian cedents likely to face new collateral requirements for cross-border reinsurance transactions

IRDAI issues draft guidelines mandating new collateral requirements from FY 2025-26.

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Indian cedents likely to face new collateral requirements for cross border reinsurance transactions
Indian cedents likely to face new collateral requirements for cross border reinsurance transactions
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Indian cedents likely to face new collateral requirements for cross border reinsurance transactions

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(Re)in Summary

• The IRDAI issued draft guidelines requiring cedents to collect collateral for reinsurance transactions with Cross Border Reinsurers (CBR).
• New guidelines set to be implemented from fiscal year 2025-26.
• Guidelines issued in the context of IRDAI proactively trying to encourage international reinsurers to establish onshore operations.
• Cedents will need to secure collateral for reinsurance transactions with CBRs, either through an irrevocable Letter of Credit (LC) or withheld premiums/funds.
• The LC amount depends on the CBR’s credit rating: at least 80% for A- or above, and 100% for below A-.
• IRDAI seeks stakeholder feedback within 15 days before moving on to the finalisation of the rules.

The Insurance Regulatory and Development Authority of India (IRDAI) has issued new draft guidelines requiring cedents to meet new collateral requirements for reinsurance transactions involving cross-border reinsurers (CBR).

The proposed guidelines mandate that cedents placing cross-border reinsurance businesses will be responsible for collecting collateral from the fiscal year 2025-26.

According to the IRDAI’s annual report for FY23, 283 companies participated in the Indian CBR reinsurance business. The share of premiums for CBRs, which competes with state-owned GIC Re and Foreign Reinsurance Branches (FRBs), is also growing.

In this context, the IRDAI said in the guidelines that it “now felt necessary to ring-fence the interests of Indian cedents to maintain their ability to meet obligations towards policyholders in India.”

The guidelines arrive in the context of the IRDAI actively engaging with international reinsurers, including trips to Tokyo and Singapore, to encourage them to establish onshore operations in India.

Industry experts told (Re)in Asia that the regulator is also considering imposing caps on the amount of cross-border business cedents can place with a single reinsurance group, which would encourage more onshore operations.

New requirements

The new guidelines stipulate that cedents placing reinsurance transactions with CBRs will be responsible for collecting collateral, which can be an irrevocable Letter of Credit (LC) or premiums or funds withheld by the ceding insurer.

The amount of the LC required will depend on the CBR’s credit rating.

For CBRs rated A- or above by Standard & Poor’s or equivalent, the collateral must cover at least 80% of the aggregate of outstanding claims liabilities and Incurred But Not Reported (IBNR) reserves. For those rated below A-, the coverage increases to 100%.

LCs must be issued through an IFSC Banking Unit in GIFTIFSC or a scheduled commercial bank regulated by the Reserve Bank of India, and can be accepted in Indian Rupees or any freely convertible foreign currency.

Alternatively, premiums or funds withheld must amount to at least 50% of the premiums ceded to a CBR. These funds must be kept separate from the insurer’s other funds, and any investment income generated must be credited back to the fund, the IRDAI said.

The guidelines also stipulate that cedents must release the collateral once all liabilities under the reinsurance contract with the CBR are fully extinguished. However, if some liabilities are expected to continue, the cedent may release part of the collateral, adjusting for amounts deemed necessary to cover future claims, the IRDAI said.

Importantly, cedents cannot count the collaterals towards their available solvency margin.

Every ceding insurer will also be required to confirm compliance with these collateral requirements based on their reinsurance program as approved by its Board of Directors or the Executive Committee.

The regulator has called for comments from stakeholders on the exposure draft of the proposed guidelines within the next 15 days before it moves to finalise the regulations.

A push for onshore reinsurance

The IRDAI has been actively engaging with international reinsurers, including trips to Tokyo and Singapore, to encourage them to establish onshore operations in India.

Industry experts spoke to (Re)in Asia earlier this month to provide insight into some of the changes regulators are adopting to promote India as a reinsurance hub, including new licences, caps on cross-border business, and reduced capital requirements

The efforts aim to support India’s growing primary insurance market, which is expected to expand significantly by 2030 due to an increase in middle-income households.

Currently, India hosts 11 foreign reinsurance branches and is looking to attract more, especially for innovative product areas like cyber and renewable energy.

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