IRDAI’s new Reinsurance Committee to explore alternative risk transfer

The Insurance Regulatory and Development Authority of India (IRDAI) has established a Reinsurance Expert Committee to review the region’s reinsurance framework, including the study of alternative risk transfer mechanisms and solutions, suggesting an opportunity for insurance-linked securities (ILS) and the capital markets.

Following the enactment of Insurance Laws (Amendment) Act, 2015 the Indian reinsurance sector has evolved, highlighted by the entry of a number of foreign reinsurers in the country, which includes a Lloyd’s of London branch.

In response to the new market dynamics driven by modernised and amended regulation in the country, the IRDAI has set up a Reinsurance Expert Committee composed of 17 members, Chaired by ex-IRDAI member, M Ramaprasad.

In a statement the IRDAI outlines terms of reference for the new committee, members of which include executives from GIC Re, Gen Re, Lloyd’s India, The New India Assurance Co Ltd., among others.

One of the outlines put in place by the IRDAI calls for the committee to “study international regulatory framework and practices relating to Reinsurance Pools, Alternative Risk Transfer (ART) and other such mechanisms and make appropriate recommendations for India.”

The inclusion of the exploration of alternative risk transfer and other mechanisms, suggests that committee members will look at the ILS space and capital markets, where third-party capital, parametric trigger structures and other features widely used in national and regional reinsurance pools are utilised to support transfering risks to ILS funds and investors.

While ILS is expanding has continued to expand its remit as it looks to grow meaningfully outside of the competitive and pressured U.S. property catastrophe space, regulatory hurdles, modelling inadequacies and a lack of insurance penetration and awareness in many parts of the world has appeared to challenge its growth potential.

As seen in London recently with the launch of an ILS framework and the implementation of regulation that facilitates ILS business in the city, the IRDAI could explore putting in place regulations that support ILS and alternative risk transfer, such as special purpose insurance vehicles, or segregated cell vehicles.

Furthermore, regulation aimed at the facilitation of ILS and alternative risk transfer mechanisms might make it appeal to have an onshore domicile for Indian re/insurers looking for risk transfer to the capital markets.

In developing markets and economies of the world ILS features and mechanisms have been seen to bring valuable capacity and skill sets to the table, enabling regions and individuals to have access to affordable and effective insurance protection against many of the world’s perils.

As India continues to modernise and revolutionise its reinsurance industry it’s possible that alternative risk transfer solutions will have an important role to play, and the sophistication and maturity of the ILS space suggests the capital markets would be willing and able to participate in the Indian insurance and reinsurance market.

As well as the study of alternative risk transfer and reinsurance pools and mechanisms, the IRDAI has tasked the committee with reviewing the current reinsurance framework and to make suitable recommendations.

And; “Study the existing guidelines for SEZ and make necessary recommendations in the context of various reinsurance activities and; Make specific recommendations and devise formats for reports and returns required to be submitted to IRDAI.”

The IRDAI has set a deadline of August 31st, 2017 for the final submission of recommendations from the Reinsurance Expert Committee.

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