Western Firms Seek Indian Branches; GIC Exploring Asia Block To Counter Threat

This demand to form branches by foreign reinsurers is entirely different from the stand taken by some of them in the past, when they had lobbied for more than a 26 percent share in a joint venture.

"I am sure the regulators will see the merit in our arguments. Reinsurance demands a large capital base and risk-taking ability. It is very difficult to find an Indian company committed to injecting fresh capital in a new joint venture for the first few years," the Mumbai-based representative of a European reinsurance company told National Underwriter.

It has been three years since these investment rules were enacted by Indias regulator, the Insurance Regulatory and Development Authority. However, no foreign player has come forward to set up a domestic reinsurance company, although most of the top 50 global reinsurers indirectly operate from their overseas offices by sharing the reinsurance risks picked up by the domestic monopoly, the General Insurance Corporation of India.

Though they do not wish to set up local companies, several foreign reinsurers are keen to have a formal presence in India in the form of branch offices because they would like to have their ears to the ground to track political and other risks, rather than depend on their local allies, while operating from overseas locations.

GIC is lobbying in the opposite direction, as it fears that allowing foreign reinsurers to set up branch offices would result in much tougher competition, compared to what it faces today.

Under the present rules, the scope of business of a joint-venture reinsurance company is based on its capital base. If branch operations are followed, foreign reinsurers would be able to utilize the vast capital strengths of their parent companies, and thus do a lot more business, market sources explain.

Foreign players have explained to the IRDA that a branch office is a better option in terms of customer protection because a parent company is legally liable to discharge all claims. As the rules currently stand for a joint venture, the liability of the foreign reinsurer is limited to just 26 percent, the maximum foreign investment allowed.

To counter the competitive threats from Western reinsurers, GIC is also trying to rope in Asian players like China Re and Korean Re to create an "Asian trade block" to share each others major industrial risks from fields like energy, aviation and satellite reinsurance, and thus reduce their dependence on Western reinsurance giants, according to market reports.

P.B. Ramanujam, managing director of GIC, has gone on record saying that possibilities of coordination between Asian reinsurers are being explored.

Talking to journalists in Chennai, India, in August, Mr. Ramanujam announced that GIC will set up a major office in London by March 2004.

He pointed out that the purpose is to face up to growing competitiondemonstrated by an announcement by Munich Re that it was setting up full-fledged operations in India. (Foreign companies usually start out in India with a token presence of one officer or use their local contacts to do the initial groundwork before setting up full-fledged operations, with sufficient staff to look at areas like sales, government relations, research and building corporate relationships with other companies.)

"If they are coming to India directly, this business may go away from us in time. Hence, it is imperative that we expand to geographies beyond India," Mr. Ramanujam said.

Though it tries to retain as much risk as possible, GIC passes on a portion of the reinsurance to Lloyds and players such as General Re, American Re, Swiss Re, Munich Re, AXA, SCOR and Allianz, industry sources said, noting that GIC does not want to take a huge amount of risk from a single company.

The most recent example is Bharat Petroleum, which bought terrorism cover worth Rs 5 billion ($109 million) in the international market, as the GIC was not willing to absorb terrorism risk beyond Rs 2 billion ($43.5 million) from a single client company.

Western brokers are also moving into the Indian market, anticipating its potential for growth. In April 2003, IRDA handed out licenses to four reinsurance brokers and 20 composite brokers, which are allowed to operate both in direct non-life insurance and reinsurance business.

The move also saw the formal entry of two major U.S. brokers, under the locally registered names of Aon Global Insurance Services Private Ltd. and Marsh India Private Ltd. Both have set up offices in Mumbai.

Major local brokers that work with international reinsurers include J.B. Boda and Interlink Reinsurance, both based in Mumbai.

Soon after obtaining the license, William D. Jones, managing director for Marsh, made no bones about the fact that the company would deal with both domestic and foreign reinsurers as part of its effort to provide a seamless service to Indian customers who fail to obtain sufficient cover from the GIC. The laws permit Indian companies to buy insurance from foreign insurers if, and to the extent, the GIC is not able to provide them with adequate cover.

"We can create products and also arrange the reinsurance of the same in the London market. Indias insurance market will become a strategic component of Marshs global operations," he said during a news conference in Mumbai.

"The license will help us create and deliver risk solutions and services that are increasingly critical given the dramatic changes taking place in the global and Indian insurance markets," Mr. Jones said. He also pointed out that Marsh catered to 80 percent of the Fortune 500 companies, many of which have investments in India.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.