A new service tax for reinsurers could hit non-life premiums.

Non-life insurance in India is expected to become more expensive on account of a new 12% service tax being imposed on reinsurance in the recently announced budget proposals for fiscal 2006-2007. The national reinsurer General Insurance Corporation of India (GIC) is likely to pass on the incidence of service tax to direct insurance companies, as it does not have the margins to absorb the tax.

Insurance companies will also have to pay service tax on risks placed with international reinsurers. At the same time, GIC will have to pay service tax on the reinsurance premium that it receives from foreign companies, failing which they would risk losing the business in this highly competitive market. The news comes hard on the heels of a sharp rise in the rates offered to Indian non-life insurers for reinsurance treaty renewals for 2006-2007.

Indian primary non-life insurers have concluded their reinsurance arrangements for the next financial year within the deadline of 45 days before the end of the ongoing financial year, as stipulated by the Insurance Regulatory and Development Authority. The terms, however, have considerably stiffened. Reinsurance rates are now estimated to be in the region of 0.09% for industrial risks, substantially up from 0.05% last year. Most insurers have also had to forego the “no claim discounts” for the forthcoming year.

“The new terms were partly driven by a catastrophic 2005-2006 in terms of natural disasters in India, combined with hardening international markets and changes in the probable maximum loss ratios,” said Soma Sekharan, CEO of Reliance General Insurance. “They were also driven by the IRDA's stipulation that reinsurance contracts be tied only with those international reinsurers who boast a rating of at least “BBB”, although there were no limits on placements with the national reinsurer GIC.”

The higher cost of reinsurance will force insurers to increase rates as they are already incurring claims in excess of premium. No restriction has been placed on companies raising rates to pass on service tax on reinsurance. Industry providers say that the reinsurance service provider will not accept the service tax burden and general insurers say that a rate hike is inevitable if service tax is implemented as companies are already running underwriting losses.