The IRDAI is considering the introduction of collaterals in the Indian insurance industry, specifically for reinsurance transactions with Cross Border Reinsurers (CBRs).
In a statement, the insurance regulator said, “ In various jurisdictions around the world, many reinsurance transactions are backed by collaterals to mitigate counterparty default risk in respect of the reinsurers. The amount of collateral required to back reinsurance transactions depends on the type of reinsurance and the reinsurer’s creditworthiness
“It is important to note that the practice of collaterals requirements not only protects the interests of policyholders and insurers but also fosters confidence in the market, attracting reinsurers for promoting a healthy and robust insurance ecosystem.“
The IRDAI has released an exposure draft on guidelines on collaterals for cross-border reinsurance deals. The aim is for the proposed guidelines to apply to all the reinsurance placements with CBRs by cedants or insurers from India, for reinsurance programmes from the financial year beginning 1 April 2025 (FY25-26).
The proposed guidelines include:
1 The cedant placing re-insurance business with CBRs shall be responsible for collecting the collateral for such placement as indicated below –
i. the LC shall be issued through any IFSC Banking Unit (IBU) in GIFT-IFSC or a scheduled commercial bank regulated by the Reserve Bank of India,
ii. the cedant may choose to accept such LC either in Indian rupees or in any freely convertible foreign currency,
iii. the amount of the LC shall be with reference to the aggregate of outstanding liabilities and IBNR reserves of the ceding insurer for a reinsurance contract or arrangement with the concerned CBR. The amount of collateral shall be as below:
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Rating Position of CBR
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Minimum Amount of collateral (aggregate of outstanding claims liabilities and IBNR reserves)
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A- or above from Standard or Poor’s or equivalent
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80%
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Below A-
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100%
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2 The cedant shall release such collaterals as mentioned herein above if all the liabilities of the concerned CBR under re-insurance contract(s) are fully extinguished.
3 If the cedant is satisfied that part of the liabilities of a CBR under the re-insurance contract is likely to continue, it may release the collateral as given by the CBR after making adjustments for any amount that it determines should be kept available for meeting claims in respect of reinsurance contracts entered into by the CBR.
