The Insurance Regulatory and Development Authority of India (IRDAI) is considering the introduction of collaterals within the insurance industry. In a move aimed at enhancing the stability and risk mitigation measures within the sector, the IRDAI has released a draft paper on Collateralised Reinsurance Transactions for reinsurance business with cross-border reinsurers (CBRs).
The consultation paper outlines the framework for facilitating collateral-backed reinsurance transactions, intending to address the potential counterparty default risks.
According to the proposed regulations, insurers placing reinsurance business with CBRs will be entrusted with the responsibility of collecting the collateral.
The collateral, as per the draft, can take the form of either an Irrevocable Letter of Credit (LC) or Premium/Funds withheld by the insurer.
The amount of collateral required will depend on the credit rating of the CBR.
For CBRs rated A- or above from Standard & Poor's or equivalent, the collateral amount (LC) will be set at 80% of outstanding claims plus Incurred But Not Reported (IBNR).
Meanwhile, for CBRs rated below A-, the collateral requirement will increase to 100% of outstanding claims plus IBNR.
In the case of Premium/Funds Withheld, the proposed regulation stipulates that the minimum amount of premium or fund withheld shall be 50% of the premiums ceded by the insurer to the CBR.
Importantly, insurers are mandated to release these collaterals when the liabilities of the concerned CBR are fully extinguished.
However, if liabilities are expected to persist, insurers can release collaterals after making necessary adjustments for any outstanding amounts.
It is noteworthy that insurers cannot account for collaterals in their solvency margins.
This move by IRDAI is expected to bring about increased financial security and risk mitigation within the Indian insurance landscape.
The draft paper is currently open for public consultation, inviting feedback and insights from stakeholders in the insurance sector.
(Edited by : Amrita)
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