IRDAI vide Circular dated February 20, 2024 issued an Exposure Draft on Guidelines on collateralized re-insurance transactions for placement of reinsurance business with Cross Broder Re-insurers (CBRs) (“Proposed Draft”) with an intent to fosters confidence in the market and protect the interest of the policyholders as well as insurers.
The major highlights of the Proposed Draft are as follows:
1. Collateral Management for Cross Border Reinsurers (CBRs): The Proposed Draft specify the responsibility of cedants in collecting collateral for reinsurance placements with CBRs. Two forms of collateral are identified: an irrevocable Letter of Credit (LC) or premium/funds withheld by the ceding insurer.
2. Irrevocable Letter of Credit (LC): The following norms have been provided concerning Irrevocable Letter of Credit:
a. The LC must be issued through an IFSC Banking Unit (IBU) in GIFT-IFSC or a scheduled commercial bank regulated by the Reserve Bank of India.
b. The cedant has the flexibility to accept the LC in Indian Rupees or any freely convertible foreign currency.
c. The collateral amount is determined based on the rating position of the CBR, with a minimum of 80% for those rated A- or above and 100% for those below A- by Standard and Poor’s or equivalent.
3. Premiums/Funds Withheld: The following norms have been provided concerning Premiums/Funds Withheld:
a. premiums/funds withheld must be identified, accounted for, and invested separately from the cedant’s funds.
b. Investment income on withheld funds is credited to the respective fund(s).
c. The minimum amount of premium/fund withheld is set at 50% of the premiums ceded by the insurer to a CBR.
4. General Provisions: Cedants are required to release collaterals when all liabilities of the concerned CBR under reinsurance contracts are fully extinguished. In cases where part of the CBR’s liabilities is anticipated to continue, the cedant may release collateral after making adjustments for future claim settlements. Further, confirmation of compliance with collateral requirements, based on the approved reinsurance program, is mandatory and must be furnished by every ceding insurer. Lastly, Cedants are prohibited from taking credit for collaterals in determining the available solvency margin.
The Proposed Draft applies to all reinsurance placements with CBRs by Indian cedants, covering reinsurance programs for the fiscal year 2025-26 and onwards.
A copy of the Exposure Draft is attached herewith for your ready reference.
Source category: IRDAI
Attachments
- /2024/356_20_Feb_2024_Feedback_format_Collaterals_CBR_Annexure_B.pdf
- /2024/356_Guidelines_on_collateralized_re-insurance_transactions_for_placement_of_re-insurance_business_with_C
- /2024/356_Exposure_Draft_Guidelines_on_Collateralized_reinsurance_transactions_for_placement_of_reinsurance_bu
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