IRDAI Introduces Collateral Requirements for Reinsurance Transactions with Cross Border Reinsurers

The Insurance Regulatory and Development Authority of India (IRDAI) has announced plans to introduce collateral requirements for reinsurance transactions involving Cross Border Reinsurers (CBRs). This move is aimed at enhancing the protection of policyholders and insurers, as well as fostering confidence and stability in the Indian insurance market.

According to the draft guidelines released by IRDAI, all reinsurance placements with CBRs by Indian insurers will require collaterals starting from the financial year 2025-26. This decision comes in the wake of increasing premiums collected by CBRs from the Indian reinsurance market, highlighting the need to safeguard the interests of Indian reinsurers.

Types of Collateral

The collaterals can be in the form of an irrevocable Letter of Credit (LC) from the CBR or premiums/funds withheld by the ceding insurer. The LC must be issued through an IFSC Banking Unit (IBU) in GIFT IFSC or a scheduled commercial bank regulated by the Reserve Bank of India, and it can be accepted in either Indian Rupees or any freely convertible foreign currency.

For highly rated CBRs (A- or above from Standard & Poors or equivalent), the minimum collateral required will be 80% of the aggregate of outstanding claims liabilities and IBNR reserves. For lower-rated CBRs (below A-), the minimum collateral will be 100% of these liabilities and reserves.

Management and Release of Collateral

The ceding insurer will be responsible for collecting and managing the collateral. The collateral will be released once all liabilities of the CBR under the reinsurance contract are fully extinguished. If part of the liabilities is likely to continue, the cedant may release the collateral after adjusting for any amounts necessary to cover potential claims.

Additionally, the premiums or funds withheld from each CBR must be identified, accounted for, kept, and invested separately from the insurers funds. The investment income from these withheld funds will be credited back to these separate funds, with a minimum of 50% of the premiums ceded to the CBR being withheld.

Compliance and Solvency Margin

Every ceding insurer must furnish a confirmation regarding compliance with the collateral requirements based on the reinsurance program approved by its board of directors or executive committee. However, insurers are not permitted to take credit of the collaterals held by them for determining the available solvency margin.

This regulatory move is part of IRDAIs broader efforts to enhance the stability and reliability of the reinsurance sector, addressing potential counterparty credit risk associated with reinsurance transactions involving CBRs.

The introduction of these guidelines reflects IRDAIs commitment to protecting the interests of policyholders and insurers, ensuring a robust and healthy insurance ecosystem in India.

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