India's national reinsurer, General Insurance Corporation, has enjoyed a virtual monopoly. But with the opening up of the market, and the phasing out of compulsory cessions, the reinsurer is leaving its comfort zone, explains Shirish Nadkarni.

"If you exclude JAPANESE companies, there is no reinsurance company in the Afro-Asian region that has the financial strength of General Insurance Corporation (GIC)," says the company's chairman and managing director RK Joshi, confidently. Indeed, there have been several sterling achievements for GIC in its role as India's national reinsurer during Joshi's two-year tenure at the helm, which will come to an end with his retirement at the end of April this year.

The corporation has been able to maintain a balance between domestic premium income and foreign income, and has targeted premium income contracts worth $500m in 2006-2007, compared to $350m in 2005-2006. Some of the business will come from its Dubai office, which was upgraded to a fully-fledged branch office in December 2006. The company has also expanded into Africa and the Confederation of Independent States (CIS), with representative offices in Nairobi and Moscow.

GIC, which is positioning itself as the lead reinsurer in the Afro-Asian region and in emerging economies, had around 25% of its premium income come from overseas operations in the financial year 2005-2006. With the Dubai office now operational, this figure, according to Joshi, is likely to rise to 35% in the current fiscal, and go up to 40% by 2007-2008.

Goodbye to cessions

But the corporation has its work cut out for the next couple of years, both at home and abroad. The first phase of insurance reforms has already been implemented by the Insurance Regulatory and Development Authority (IRDA), with the de-tariffing of general insurance from 1 January this year. In the second phase will come a steady diminution of obligatory cessions. All general insurers in India have to compulsorily surrender 20% of their premium income to GIC for reinsurance cover, but this is now being phased out. The cession is being reduced to 15% with effect from 1 April 2007 and is expected to be further reduced to 10% the following year.

From 1 April 2010, obligatory cessions could be totally abolished. And this could hit GIC's turnover and profits hard. "Perhaps the top-line volume will go down in the short term," says R Chandrasekaran, GIC's general manager, who has spent 29 years at the company and is one of the two frontrunners to replace Joshi in the top job on 1 May. "But we have been in India for many years and know the insurance companies so well that we are able to offer the capacity back to them. So I don't think it will affect our bottom-line - or really, for that matter, even our top-line."

GIC's objective has always been to retain as much of the capacity within India as possible; and it has been the corporation's boast that until now, insurance companies have been ceding more than the mandatory 20%. Industry observers have felt that this retention level would be adversely affected, but Chandrasekaran begs to differ. "Unlike in international markets, where capacity is related to premiums, our capacity is a direct derivative of net worth," he maintains. "The ratio of our total premium to net worth is 1:1. Therefore there is enough capital available to write more business. The premium reduction due to the abolition of obligatory cessions is not going to affect our capacity to write business."

The further opening up of the insurance arena, following the first step taken in August 2001 of allowing private players into the sector, has come at a difficult time. GIC's balance sheet was hit quite badly by heavy property losses in India over the past two years. The unprecedented floods in Mumbai in July 2005 and in Gujarat in August 2006 have resulted in massive claims, while the de-tariffing has caused premium rates to nosedive and cut throat competition to set in.

These factors have led GIC to moot basic changes in the terms of reinsurance treaty renewals, scheduled for 1 April. "We have written to non-life insurers, asking them to employ healthy underwriting practices," admits Chandrasekaran. "We have placed certain riders on reinsurance agreements that place limits on reduction in the cost of premiums in the free-price regime. We will renew our treaties based on the performance of each company and their underwriting philosophy."

The corporation is offering capacity for market surplus as long as pricing does not dip too low. "For the future, we will work on commercial principles, but our responsibility as the Indian national reinsurer is much larger than commercial considerations; and we will hence have to play a balancing role between commercial considerations and retaining business in India," says Chandrasekaran. Ultimately, GIC would have to support the market in one way or another, since it cannot refuse compulsory cessions. However, renewal terms can be changed. "When we conclude a treaty, we have to continue it," adds Chandrasekaran. "But when it comes to facultative and other requirements, we can always say 'no' to the insurance company if the price is not adequate or appropriate."

Broadening its horizons

On the overseas front, GIC took a big step towards garnering more business in the Middle East when it elevated its Dubai representative office to a fully-fledged branch in December last year. "We have been writing international business from India for several years," says Chandrasekaran. "When we started operating overseas, our strategy was to be near the market in which we were already writing business. The Middle East was one such area. There is a large concentration of non-resident Indians who trust GIC more than other reinsurers, and a lot of people working there who are familiar with Indian reinsurance. We found an immediate synergistic level there."

The same strategy has been employed in the UK, where GIC has been present for five years, and has received first-stage approval. It has now applied to the Financial Services Authority for second-stage approval for operations there. This office is expected to be fully operational by May this year, and will service all business from Europe that was earlier being handled in Mumbai. "Between London, Dubai and Mumbai, we see a clear synergy and a method of collecting and communicating information, cross-checking of business transactions, rates, terms and conditions, so that we get the best rates and terms," says Chandrasekaran. "In all three places, we will still be concentrating on Asian, Afro-Asian, Middle Eastern and East European business."

Considering the fact that London and Dubai are highly price-sensitive, the GIC official admits the company will have to follow suit if it is to become an international reinsurer. "We have to cut operational costs and try to compete," he says. "That's the way the business is. I have never heard anyone say that prices are going up continuously. They may go up one year because of specific losses; but they will come down the following year."

In Nairobi, GIC has received permission to open a representative office, which will be up and running soon, and then possibly upgraded later on down the line. The reinsurer also looks to have strategic investments in local companies in Kenya. "The strategy for Africa is different from that in the Middle East and Europe," explains Chandrasekaran. "In Africa, they look forward to our capacity and expertise."

In Moscow, an office is being opened mainly to study how the markets in the CIS have been growing and evolving. "On the international scene, the threat is the cycle of insurance and reinsurance," says Chandrasekaran. "GIC and its people need to be sensitive to the cycles - to know when to get in and get out, ensuring that appropriate lines are taken in a soft and hard market. That expertise and knowledge is an area where the other majors are scoring, and we need to improve."

Taking on the competition

On the technology side, the national reinsurer has invested in systems, which have been embraced the world over by reinsurance giants such as like Munich Re and Hannover Re. "We have chosen the appropriate technology platforms, and therefore don't need technological tie-ups with any company on the IT front," says Chandrasekaran. "But in the field of specific reinsurance technology, like simulation models, tools and techniques, we are going to buy the same standard international products. Product-wise, we want to be just as competent as international majors in the field."

Chandrasekaran does admit that trained and skilled manpower is an area of weakness; and that the corporation has limited manpower. "Our weakness stems from the process side - the technology as well as the human resources and skills needed to handle the new demand," he says. "That is mainly because GIC was a holding company till 2001, and did not feel the need to prioritise the building of in-house expertise for managing the whole industry ... This will have to be overcome within a year or so before we gear ourselves to take on the world's top reinsurance players in our own market."

Indeed, while several top global reinsurance outfits have already set up representative offices in India, they are not yet fully operative. Most of them are awaiting expected changes in the Indian policy on foreign direct investment; when it takes place, it will be the cue for them to set up in full strength. "We need to be ready for them when they finally come in," says Chandrasekaran.

Shirish Nadkarni is a freelance journalist.


RK Joshi took over as chairman and managing director of General Insurance Corporation (GIC) in February 2005. He joined GIC in 1998 as assistant general manager and then as general manager, in charge of reinsurance, publicity, information technology and finance. Before 1998, Joshi spent over 20 years at National Insurance Company, one of the state-owned non-life insurance companies in India. During that time he was posted at various divisional offices of the company. He was in charge of the Singapore branch of the company for three years and was also instrumental in the formation of India International Insurance, a joint initiative of GIC and Indian state-owned non-life insurance companies in Singapore.