If there’s been an overkill on the post-liberalisation insurance sector scenario, the impact on re-insurance has been largely ignored. What it will mean for re-insurance, which is the hiving off of risk by insurers themselves. While the issues of compulsory cession, higher retention by the public sector players will determine equations, there's no doubt that the pie will get larger. Major global re-insurer Swiss Re-insurance Company (Swiss Re), the second largest re-insurer worldwide with a written re-insurance premium volume of US $ 12'000 million in 1997 ( 1996: US $ 10'600 million out of a total global direct insurance premium of US $ 2'105'838 million), has been the first global major to set up a liaison office (although it has been associated in cross-border transactions with India for long), in India to catch a piece of the action. Ettore Rogantini, Swiss Re chief representative in India, in conversation with Jayshree Bose of FE on what he expects the action to be.

What has been your association with India like, and how has it evolved over the years?

As re-insurers, we have been associated with your country for over 70 years and have emerged as what we would like to think as an important player here. Our involvement has seen the vicissitudes of the pre-nationalisation days as well as the days of nationalisation. And now, once again, there is prospective liberalisation. The first re-insurance treaty we concluded in India after nationalisation was with New India Assurance here in Bombay.

Apart from our pure re-insurance activities, which is providing insurance protection, we hope we have also been able to give good service in India, in terms of training and seminars/workshops, know-how transfer regarding risk assessment and rating, sharing of our expertise in risk inspections and risk management, devising new policy covers, etc. Before August 1998 when we set up our representative office in Mumbai, we were operating solely out of our head offices in Zurich and London (life and health division). We have been operating both directly and through re-insurance brokers here. Our portfolio here has quite large exposures to infrastructure such as power plants, petrochemical plants, etc. We are also active in all classes of business, including aviation and satellite re-insurance.

However, the latter segment has cost the industry a lot of money. As far as life business is concerned, we are not only the world's largest re-insurers but also the biggest re-insurers for LIC.

What has been your experience as far as re-insurance is concerned after markets like China, Taiwan, Phillipines and others opened up ?

Re-insurance has historically,been cross border business, allowing insurance companies in a confined domestic market to access the international re-insurance markets.

Although the insurance law in China gives priority to domestic insurance and re-insurance companies, foreign re-insurance companies do have access to business from China. There are, however, considerable restrictions concerning local currency due to the non-convertibility of the Chinese currency. For the time being, no licences have been granted to foreign re-insurers.

Taiwanese companies, on the other hand, have always relied heavily on foreign re-insurers; it can no doubt be said that the Taiwanese insurance industry would not have survived without the strong support of the international re-insurance market. The negative aspect about this is that such a degree of reliance on a very competitive market — as the global market is — has led to its neglecting some of the fundamental priciples of insurance.

How do you find the Indian re-insurance markets as compared to those of more developed countries? Would you say that General Insurance Corporation's (GIC) increased retention shows a distinct slant towards greater market maturity?

I should definitely think so. The bigger players the world over tend to retain more risks (and consequently greater premiums). In India, insurers know what they want — among other things, they want higher retentions, less outflow of foreign exchange. The re-insurance treaties, structures and capacities are consciously and regularly being adjusted to this end.

Greater retention results in a reduction of the proportional premium volume available for re-insurance, but it also means that the companies require more 'excess of loss protection', where risk sharing is not in terms of a percentage of the entire risk cover as in proportional re-insurance, but level-wise. In other words: risk is hived off to re-insurers only if losses exceed a certain pre-determined amount.

The Indian re-insurance sector will see more of these in the years to come. All this reflects confidence in one's underwriting capabilities (and to continue making profits) — and shows that the risk-bearing capacity has gone up.

Where do the impending changes place re-insurers? Apart from the higher retention factor, there is also the mandatory 20 per cent cession to GIC — a trend in keeping with China, South Korea, Philippines, etc. Also, isn't it quite likely that the new joint ventures may prefer to place risk with re-insurers they are already associated with in other countries?

While we do envisage a growth in the direct insurance market, we perceive the re-insurance potential to be smaller next year. However, as I said earlier, there will be plenty of opportunities once again in the medium term — although it is too premature to quantify precisely how much. As far as the new companies are concerned, well, we would certainly like to do business with them also, both in life and non-life.

What other changes do you foresee in the new scenario? Will competition and greater tariff de-regulation drive down rates and result in a shrinking of the re-insurance premium volumes?

As of now, nothing can be said for sure. However, increased competition is very likely to result in rate reductions in certain classes of business, but in those areas which have so far been cross-subsidised, an increase in rates may be possible. Overall, the rate reductions may outweigh the the increases, thus bringing down the re-insurance premium volume available.

Another effect of de-regulation will be that, projects, especially mega projects where one needs the capacities of the international re-insurance market, will get exposed to international trends to an even greater extent than is the case today. This will affect rates too. Areas like the personal lines segment, where we also expect to see substantial growth as also new types of covers, would usually not be affected by international trends in the same way as, there is much less need for global re-insurance support.

In this context, it may be worthwhile to say that international re-insurance markets have been very soft for the past few years now, mainly because the booming finanancial markets themselves have allowed very good returns on investments and attracted considerable" innocent" re-insurance capacity. This phase seems to be over now.

It is therefore expected (is this the wishful thinking of a re-insurer?) that sooner or later this will be reflected in re-insurance/insurance terms and conditions which will be more commensurate with the risk for which protection has been granted.

Would not new covers — especially those for projec insurance — typically generate more re-insurance business (irrespective of global trends), since there, the tendency to hive off risk would be greater?

To some extent, yes. Much would depend on how big the joint venture partner in the new company is — and most of the names we hear about in India are big ones. Global experience shows that the big players do not need the same type or level of re-insurance protection as smaller players do. Smaller companies might be more likely to require the know-how, experience and expertise of an international re-insurer — apart from their need for higher re-insurance capacities/ protection--possibly because of a smaller capital base and less well-balanced portfolio.

Do you feel a capital requirement of Rs 200 crore--which is the figure doing the rounds now in India — for re-insurers is too high? What are your other concerns?

The figure mentioned by you has to be seen against re-insurance capacity a re-insurer can grant (it is not uncommon for new preojects to have a sum insured of US $ 1'000 million). Re-insurance is a global, cross-border business. Swiss Re underwrites (accepts) risks against its group capital which allow us to support insurance companies with substantial amounts. As a purely academic exercise take this into account: should one have to write against a capital of Rs 200 crore, this would restrict business opportunities.

What is at least equally important as the capital requirement are the solvency margins (relation between premiums and exposure). Swiss Re, with its well-balanced portfolio (both geographically and in terms of lines of business),would not require the same solvency margins as a (re)-insurer with a less well-balanced portfolio.

Another issue in this context is the question of repatriation of premiums. It might not be desirable to invest your money in the same industry or country where you are re-insuring. Imagine a calamity hitting a country where you, as re-insurer, have vast exposures and where you have invested your money. In such a scenario, the re-insurer would be hit from two different sides: on one side, he is faced with honouring losses, and, on the other, the financial markets where the investments have been made have depreciated badly ...a certain flexibility is therefore requested.

I feel comfortable about the fact that what we will eventually see from the IRDA's office in terms of regulations will allow us to continue our invlovement with the Indian insurance industry just as professionally into the next millennium, too.