The Insurance Regulatory and Development Authority of India (IRDAI) is contemplating the introduction of collaterals within the insurance industry as part of its efforts to bolster stability and risk mitigation measures. In a bid to enhance the resilience of the sector, the IRDAI has issued a draft paper on Collateralised Reinsurance Transactions for reinsurance business with cross-border reinsurers (CBRs).
The consultation paper delineates a framework for enabling collateral-backed reinsurance transactions, with the aim of addressing potential counterparty default risks. Under the proposed regulations, insurers engaging in reinsurance business with CBRs will be responsible for procuring the collateral.
As outlined in the draft, the collateral can be in the form of either an Irrevocable Letter of Credit (LC) or Premium/Funds withheld by the insurer. The quantum of collateral required will be contingent upon the credit rating of the CBR. For CBRs rated A- or above by Standard & Poor’s or equivalent, the collateral amount (LC) will be fixed at 80% of outstanding claims plus Incurred But Not Reported (IBNR). Conversely, for CBRs rated below A-, the collateral requirement will escalate to 100% of outstanding claims plus IBNR.
In the case of Premium/Funds Withheld, the proposed regulation mandates that the minimum amount withheld shall be 50% of the premiums ceded by the insurer to the CBR. Crucially, insurers are mandated to release these collaterals upon full settlement of the liabilities of the respective CBR. However, if liabilities are anticipated to persist, insurers may release collaterals after accounting for any outstanding amounts.
It is important to note that insurers are prohibited from factoring collaterals into their solvency margins. This initiative by IRDAI is anticipated to foster greater financial security and risk management within the Indian insurance sector. The draft paper is presently open for public consultation, inviting feedback and insights from stakeholders in the insurance domain.
