Insurance regulator Irdai has asked non-life insurance companies and reinsurers to ensure that broad-occupancy market average burning costs rates for fire and engineering risks, published by the Insurance Information Bureau of India (IIB), are not embedded as “minimum rates” within reinsurance treaty agreements applying to the Indian market for the risks commencing from the next financial year.
“The authority has observed that reinsurance treaty agreements in many instances include, as a precondition or prescription, the requirement to apply the IIB published broad-occupancy market average burning costs, as minimum risk rates,” the Insurance Regulatory and Development Authority of India (Irdai) said in a circular.
Such prescription by any reinsurer that effectively creates or reinstates a market (price) tariff is not in line with the de-tariffed pricing regime currently in vogue and would distort the level playing field intended to be provided by the insurance regulator, according to the circular issued on Monday. Burning cost refers to the cost of insuring a property/unit and what is the nature of the risk it is for an insurer.
“The said treaty agreement provisions do not acknowledge individual risk quality or accident / loss history and effectively discourage risk management along with the loss prevention/ mitigation investments of insurance buyers,” Irdai said, adding that it acknowledges that every reinsurer should have the freedom to price its reinsurance product and freely negotiate terms of trade with its counterparties i.e. ‘Cedants’ (insurers).
However, terms of trade shall not be an impediment on the freedom of the insurer to freely compete, negotiate, price and assume risks via its own contracts of insurance with its clients i.e. ‘insurance buyers’, the regulator pointed out.
In a background of reports and market feedback, Irdai, vide its circular dated May 12, 2022 clarified that the IIB published only broad-occupancy market average burning costs (commonly now referred to as IIB rates) for fire and allied perils, and these were not to be interpreted and operated as a minimum mandated rate.
The insurance regulator has been working on reforms in the non-life insurance sector to enable ease of business from the viewpoint of insurers as also to enable choice for insurance buyers and create a free-market regime that fosters prudent risk management and loss control.
Towards this, the regulator had progressively denotified various tariffs, including the fire and engineering tariffs prices set up by the erstwhile Tariff Advisory Committee.