Move to scrap reinsurance commission draws insurers ire

Written by Sitanshu Swain | Mumbai | Updated: Nov 24 2011, 07:24am hrs
The ministry of finance (MoF) has asked the General Insurance Company of India (GIC Re)the country's official reinsurer not to pay commission on obligatory business to general insurers.

The move is being vehemently opposed by general insurersincluding the public sector unitswho are set to lose around R450 crore. Insurance Regulatory and Development Authority (Irda) chairman J Hari Narayan has already written to the MoF on the issue.

The existing norms, as laid down by the Irda, make it mandatory for domestic general insurers to reinsure a minimum of 10% of their business with GIC Re and it is a normal global practice for reinsurers to offer some commission to the primary insurers.

The MoF has justified its decision on the grounds that the obligatory insurance business is bound to come to the reinsurer irrespective of the rate of commission. Therefore, its inappropriate for GIC Re to pay commission on it.

Though the rate of commission was negotiable between the insurer and GIC Re, industry sources point out that the minimum commission paid by GIC Re was above 10 %.

Consequent to the communication received from the department of financial services, MoF, we are withdrawing all commissions payable for the financial year 2011-12,'' GIC Re told insurers in an email.

Commission from the obligatory reinsurance business placed with GIC Re accounted for 10% of the R44,000-crore revenue mobilised by the general insurance industry in 2010-11. Therefore, the insurers stand to lose around R450 crore under the new regime.

General insurers are already under pressure as they may have to provide a much higher capital for the loss-making third-party business during the year. The industry had suffered a loss of R10,000 crore in 2010-11.

The rationale behind the payment of commission is that primary insurers incur expenses to get business. Reinsurers just compensate a part of these expenses while getting the reinsurance business from them, said a CEO of a private sector company. The general insurance council, the official representative of the general insurers, has taken up matter with Irda. There is some kind of communication gap between MoF and Irda on the issue. The matter ought to be sorted out soon, said an official of New India Insurance, the largest general insurance company in the country.