Systemic Risk - Unplaced Reinsurance

One of the most fascinating aspects of the Indian Insurance market is the way Reinsurance operates. It is fascinating because of the change in process between the way Direct Insurance works. Most of the people in Reinsurance in India have spent a significant portion of their time in Direct Insurance and thus set the general culture which is carried into Facultative Reinsurance.


The Direct Insurance market is characterized by a lack of credit risk. Sec 64 VB of the Insurance Act broadly says that no risk will incept unless premium is paid IN ADVANCE. This means if you have a renewal or potential inception of risk on 1st January you have to ensure your cheque is released by 31st December and accounted for. Most buyers therefore delay release of the premium cheque in the mistaken belief that they are saving (interest?) cost. larger the risk and premium , greater the delay. What they are creating is uncertainty - especially when the risk requires facultative reinsurance support.


Problem is the Reinsuarance market works on Credit. You get between 30-90 days to pay your reinsurance premium. In the olden days most reinsurers were unaware of 64VB. So Insurers could take their time to remit monies. However in recent times reinsurers increasingly question the need for 90 days when Insurers have ALREADY got the premium!

But the more serious downside is when reinsurance is sought AFTER inception of risk, the cedant/broker is always playing a weak hand. More so , where the market conditions encourage Insurers to pick up risks on less than reinsurance quoted terms on the assumption that the reinsurers will support anyway - after all ; of what use a soft market if not to accomodate our sins?

But! Every once in a while for a variety of reasons but not uncommonly due to the fact that the terms sought by Cedants and the terms offered by Reinsurers are not exactly apple to apple various "structures" are tried before an equitable solution obtains.(Usually this means Reinsurers write a high excess some times charging more premium than Primary!)

And, God forbid, there is a major claim - then starts the usual rounds of trying to play the blame game and identifying scape goats till the proper sacrifice is made. Usually that sacrifice is the broker - a species barely tolerated in the Indian market by most stakeholders; though not always without reason.

Regulators have sought to curb the systemic risk by trying to limit DIC/DIL situations.But a simpler solution obtains....

When the NSE first started trading, settlement cycles allowed smart brokers to arbitrage their positions in various exchanges due to the longer cycle. Trade (T) + 7 meant a whole week to play the market. As cycles narrowed outright arbitrage opportunities reduced.

Borrowing from that principle but in reverse, how about a T - 7 directive for Facultative Reinsurance? Why not mandate that 7 days prior to inception/renewal of risk, certificates of reinsurance must be provided to the Cedant or the Cedant must insist on these. Unless a Cedant receives such documents or chooses to retain the risk to its own net account(per regulations) severe penalties will be imposed on the Cedants.Similarly all reinsurance accounts must be settled T + 15.

This will eliminate a huge Systemic Risk inherent in the Indian Facultative Reinsurance market. Better than trying to increase Capital norms in order to "elimiinate/prevent" non serious players. But of course this means a change in mindset; about treating all players equally. That needs a separate column!