I NDIA F ELLOWSHIP S EMINAR J UNE 14 2013 J UNE 14, 2013 R R EINSURANCE REGULATIONS : I MPACT ON I RISKS IN THE I NDIAN L IFE I NSURANCE MARKET Guide: Rajesh S L Lead Presenter: Balaji Ravi d P B l ji R i Support Presenter: Devadeep Gupta
Agenda g Need for reinsurance Prevailing regulatory scenario 2013 regulations 2013 regulations Implications Summary
Agenda g Need for reinsurance Prevailing regulatory scenario 2013 regulations Implications Summary
Need for reinsurance HEDGE AGAINST ACCESS TO EXPERTISE Claims volatility Product development Parameter risk Data Exposure to large risks Contract design C Concentration of risk i f i k U d Underwriting policy i i li Capital efficiency Smooth annual returns
Agenda g Need for reinsurance Prevailing regulatory scenario 2013 regulations Implications Summary
Agenda g Need for reinsurance Prevailing regulatory scenario 2013 2013 regulations l Implications Summary
Prevailing regulatory scenario g g y Insurance Act 1938: Insurance Act, 1938: Section 101 (Reinsurance) • Insurers to reinsure specified minimum • Insurers to reinsure specified minimum proportion of Sum Assured on each policy with Indian reinsurers • Indian reinsurer – Company granted a certificate of registration under sub section (2A) of section 3 (2A) of section 3 • No upper limit on reinsurance cession specified
Prevailing regulatory scenario g g y Life Insurance IRDA Life Insurance Life Insurance – IRDA Life Insurance (Reinsurance) Regulations, 2000 • Programme of reinsurance to be certified • “Programme of reinsurance” to be certified by Appointed Actuary • IRDA to scrutinise this programme, p g , • Request further information, • Suggest changes, if necessary • Principle based approach to reinsurance
Prevailing regulatory scenario g g y Other considerations for an actuary Other considerations for an actuary to consider • IRDA Appointed Actuary Regulations 2000 • IRDA Appointed Actuary Regulations, 2000 • IRDA Assets, Liabilities and Solvency Margins of Insurers Regulations, 2000 g , • Actuarial Practice Standard 1, IAI
Agenda g Need for reinsurance Prevailing regulatory scenario 2013 2013 regulations l Implications Summary
Agenda g Need for reinsurance P Prevailing regulatory scenario ili l i 2013 regulations 2013 regulations Implications Summary
Areas covered Maximize Maximize retention in India Develop Simplify capacity p y administration Objectives Best Eliminate Eliminate protection for i f “fronting” costs incurred
Areas covered • Section 4: Programme of reinsurance Section 4: Programme of reinsurance • Documentation of reinsurance arrangements as prescribed • Mitigation of catastrophe risks, including disaster scenario testing Preparation • Credit and concentration risks, their mitigation Preparation • C dit d t ti i k th i iti ti • Sign-off by Appointed Actuary g y pp y • Approval by Board of Directors Sign-off • Scrutiny by Authority S b A h • Modifications suggested Review • Lesser credit in demonstration of solvency
Areas covered • Section 5: Retention policy Section 5: Retention policy Aims Formulation Justification Build retention Suitable Emerging claims Emerging claims capacity within i i hi retention policy experience company for each product/risk Financial Financial Maximise standing premium Restrictions on Underwriting retained in India quota share q capacity capacity
Areas covered Section 6: Regulatory reporting Section 10: Inward reinsurance requirements business Product category-wise retention limits increasing with age of ith f insurer/product Board of Directors made responsible in addition to Appointed Actuary A i d A Retentions below prescribed limits to be justified by providing further information
Areas covered Underwriting process g p Claims experience Current retentions Financial Strength Financial Strength Retention levels Volume of business Capital Requirements Past payment history Past payment history Capacity building measures
Agenda g Need for reinsurance P Prevailing regulatory scenario ili l i 2013 regulations 2013 regulations Implications Summary
Agenda g Need for reinsurance P Prevailing regulatory scenario l l 2013 regulations Implications Summary
Implications- Insurers p Review of reinsurance Review of reinsurance arrangements by the Board • Management and shareholders to share • Management and shareholders to share responsibility • Management information and reporting g p g systems need to be put in place • Board needs to understand the risks and their mitigation measures iti ti • Need to build understanding among non- executive directors executive directors
Implications- Insurers p Focus of regulations – “building Focus of regulations building capacity” • Building capacity in isolation will not mitigate • Building capacity in isolation will not mitigate all risks • Reinsurance not needed solely against y g parameter risk and claims volatility • Regulations silent on commercial considerations for reinsurance id ti f i • May lead to sub optimal use of capital
Implications- Insurers p S Supply of reinsurance l f • Definition of “Indian reinsurer” Definition of Indian reinsurer • Eligibility of multinational reinsurers • Monopoly power? p y p • Increase in concentration risk • Reduction in benefits of geographical di diversification ifi i
Implications- Insurers p � Price of reinsurance Factors driving Factors driving increase in price decrease in price Diseconomies of Competitive scale – higher g market for overheads reinsurance High retention – High retention - small, small significant volumes significant volumes undiversified of “select“ risks ceded portfolio reinsured
Implications- Insurers p � Reinsurer as an enabler of product innovation Online Term Long term health Setting/Review of Insurance insurance rating factors g Access to Competitive Credibility of reinsurer data reinsurer data reinsurance population rates Sharing of data parameter risk Contract Access to Reliance on design and reinsurer’s reinsurers’ underwriting underwriting expertise experience policy
Implications- Insurers p Impact on product design I t d t d i • Hardening of premium rates g p • More stringent underwriting • Risk aversion in contract design • Risk aversion in claims control • Investment in capacity building – increase in costs costs • Will insurers start sharing experience?
Implications - Reinsurers p � Definition of “Indian reinsurer” � Indian reinsurers will have to build and demonstrate capability in all lines of business. � May promote development of indigenous reinsurance sector � Need to understand risks � Capital intensive nature of business � Gestation period � Gestation period � Acquisition of expertise
Implications - Policyholder p y � Impact on current products priced assuming � Impact on current products priced assuming prevailing treaties � Cover may become expensive � Cover may become expensive � Exclusions in policy terms and conditions may increase increase � Proposal underwriting may become stringent � Protection against some risks may no longer be � Protection against some risks may no longer be available
Implications - Macroeconomic p � Consistency with government/regulator’s objective y g / g j of increasing insurance penetration � Impact on India’s image as an investment friendly destination? � Implications for other economic reforms – (FDI in i insurance) ) � Higher retention within India to flow back into the economy having an effect on GDP growth? economy, having an effect on GDP growth?
Agenda g Need for reinsurance P Prevailing regulatory scenario l l 2013 regulations Implications Summary
Agenda g Need for reinsurance Prevailing regulatory scenario l l 2013 regulations Implications Summary
Impact on risks p Parameter Large Contract risk risks design Claims Claims Operations Operations volatility risk risk Catastrophe risk Impact Type of risk
Impact on product types p p yp Long term Group Term health health Individual d d l term Savings Impact Retained Sum at Risk Type of product
Impact on company strategy p p y gy Business plan Supporting initiatives Systems and control Change in product strategy processes Governance structure for Change in channel strategy Board reporting Data warehousing and Change in risk rates analytics infrastructure Impact on capital Impact on capital Sharing of data? adequacy
Agenda g Discussion
IAIS ICP 13 Prudent Choice of Principles approach to reinsurance Cedant to assess A commercial the risk profile - Purchase of decision made by decision made by experience experience, reinsurance management expertise and solvency position Management of Within the overall Reinsurance risk associated reinsurance decision in line with purchasing p g strategy of the gy with its operating p g reinsurance insurer. strategy.
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