Parijat Dutta brings close to 36 years of unparalleled experience in the non-life insurance sector, with a specialization in Reinsurance. Currently, he is engaged in training and mentoring on Reinsurance while serving as a Member of the Reinsurance Advisory Committee at IRDAI. Also, he had earlier served as an Independent Director on the Board of the United India Insurance Co.
His professional journey began in July 1980, and his career spans both the government-controlled tariff regime and the privatized, de-tariffed era. During the tariff regime, four PSU companies, supervised by GIC, competed under rates set by the Tariff Advisory Committee (TAC), with risk management overseen by engineers from various fields. At that time, property lines of business, particularly Fire and Engineering, were dominant and governed by the comprehensive All India Fire Tariff. Risk management focused on construction class, level of housekeeping, fire prevention and fire control installations, and discounts were authorized on overall good features.
Now let’s look at it from his lens:
Parijat reflects on the evolution of the insurance sector, highlighting the transformation from a tariff-regulated environment to a highly competitive, privatized market, which included tie ups of several large foreign insurers with new domestic players, including Banks.
Initially, successful Risk Managers in the PSU companies excelled in navigating the complex tariff structures, in tandem with the TAC, and guiding clients on securing the best discounts. However, with the abolition of tariffs and the advent of privatization in the late 1990s, the industry focus shifted to long-term relationships, past loss experience, history of claims, and detailed inspection reports by in-house engineers or market experts.
During this transition, private insurers introduced innovative products, attractive discounts, and assurances of reduced turnaround times for policy issuance and claim settlements. Customers welcomed these changes, leading to heightened expectations from the new market players. PSU companies, facing the threat of losing their customer base and market dominance, had to adapt swiftly. The market's response was varied. While some customers felt they were being overcharged previously, many decided to remain loyal to their long-term relationships, valuing reliable coverage and assured support during claims, over the attractively discounted policies.
Corporate clients, particularly in the Fire & Engineering sectors, faced a dilemma. They were accustomed to tariff driven policies, crafted by the PSU companies, with reinsurance arranged by GIC, the then holding company. The sudden influx of competition, in the form of new insurance companies and Broking houses, and GIC transforming to GIC Re, a pure Reinsurance company, threatened these established relationships; the ones who remained, expected rate matching from the PSUs without compromising on coverage or reinsurance terms.
This competitive landscape led to a decline in the market share of Fire business from 23 percent then, to 7 percent over a decade. Furthermore, this was accompanied by rising claim ratios due to aggressive pricing strategies by the direct players supported by reinsurers who also wanted skin in the game. However, recurring adverse treaty results prompted many reinsurers to introduce stringent conditions or to exit the market. GIC Re, significantly impacted, also introduced conditions over time, keeping in mind their role as the government owned Indian reinsurer, and responsibility to the market as a whole.
Today, customers are more informed about the crucial role of reinsurance treaties in providing capacity and maintaining market stability. Improved floor rates mandated by GIC Re for certain industries, have contributed to a gradual recovery, with the share of the fire line of business rising to 9 percent of the GDPI as of March 31, 2024. Major insurance buyers now seek partnership roles in the insurance process, recognizing the importance of data and information to ensure quick claim settlements and resilience in the face of losses, particularly when policies include Business Interruption coverage. This collaborative approach helps businesses recover swiftly and maintain their market presence.
Transformation of Reinsurance Over the Years
In the early days of reinsurance, agreements were often sealed with simple contracts, even if some details remained incomplete. The agreements were often signed with 'TBA' remarks due to the lower volume of business and infrequent natural catastrophes. This meant relatively simple and straightforward reinsurance arrangements, notwithstanding the risk of a loss occurring before the blanks in the contract were filled.
Over the past two decades, the landscape has drastically changed with the onset of privatization, and the increasing impact of climate change. The dependence on reinsurance has surged, necessitating more detailed and restrictive treaties. As exposures for insurance companies multiplied, the frequency and severity of natural catastrophes also increased, prompting more elaborate contract wordings and a greater role for brokers. Insurance companies became acutely aware of the risks of inadequate reinsurance protection, and the Regulator too mandated accountability from the Boards of the Insurance companies, regarding their annual Reinsurance Programs.
Despite the increased complexity, reinsurance remains abundantly available, with ample capital in both traditional and nontraditional markets like Insurance Linked Securities. Today, reinsurance continues to be structured through treaties for entire portfolio protection and facultative reinsurance for specific, large, and complex risks. Today’s insurance companies are more informed, navigating changes in regulations and legislation, with enhanced board accountability. There is a greater reliance on experienced brokers, and buyers realize they must cultivate strong, knowledgeable partnerships while honing their own skills. Long-term relationships with reinsurers have become vital, as negotiating from a position of knowledge and ‘utmost good faith’ is now far more crucial.
GIC Re, the Indian reinsurer since November 2000, has consistently supported the market, notably in the formation of the Indian Market Terrorism Risk Insurance Pool in April 2002 (following 9/11 and the overnight withdrawal of Terrorism insurance support by reinsurers worldwide) and aiding the market to recover from major catastrophes like the 2005 Bombay floods, the 2008 Mumbai terror attacks, and recurring floods. However, with adverse market dynamics, and competition becoming more intense, GIC Re introduced more conditions in its support to the market, particularly in the Fire line of business to reverse negative treaty trends and indirectly correct the direct insurance market. Companies with better underwriting discipline, risk management and claims control measures were supported with more favorable reinsurance terms.
Challenges in the Realm of Reinsurance
The foremost challenges in reinsurance today are the NAT CATS or natural catastrophes, which occur worldwide, with increasing ferocity and frequency. The events range from hurricanes and cyclones to wildfires, landslides, floods and now, pandemics (resulting in business interruption losses). Contract wordings, no matter how carefully drafted, do not always stand scrutiny in a court of law, with judgements, even from Supreme Courts of the world, increasingly favoring the policyholders.
The Liability lines of business, like the Directors and Officers Liability, and Product liability insurance policies are witnessing staggering awards from Courts, worldwide, running into billions of dollars. Unless criminal intent or fraud is admitted or proved, the reinsurance payouts are huge. Another challenge faced by Reinsurers is policies issued by insurance companies, with Terms and Conditions at variance with those provided by reinsurers – Difference In Conditions or DIC as they are called.
Reinsurers rely on data, in its accuracy and adequacy and “disclosure of material facts” assumes great significance when claims are processed, often leading to disputes. In the fiercely competitive environment, insurers may withhold selective information from reinsurers hoping for better terms. Information, which the reinsurer considers to be ‘material facts’ if found missing from the submissions made by insurance companies, often lead to reinsurers not admitting liability in the event of a loss.
EOD, reinsurers insist that data and information in their quality, reliability and adequacy are captured and shared fully by the buyer, before deciding on designing a suitable cover. Alternatively, releasing terms assuming a worst case scenario, does not benefit the market
Reinsurance interest depends on business volumes and diversity. Despite good growth in the overall GDPI, Parijat emphasizes, “It’s important to understand where this growth originates. For the financial year ending March 2024, e.g., 70 percent came from Health and Motor insurance, with shares of 38 percent and 32 percent respectively, while Fire insurance accounted for just 9 percent. An emerging economy like India needs balanced growth across all insurance segments, which includes Marine, Liability, Aviation, Engineering…, to truly reflect insurance and reinsurance participation in the development of the economy. There is enough reinsurance supply out there for these lines of business, but not enough demand.”
Health and Motor insurance, with high claims ratios, drive up reinsurance costs. Companies focusing on these lines must monitor their Combined Ratios and Solvency Margins closely. Both insurers and reinsurers now face new challenges, including pandemics, cybercrime, new diseases, and rising litigation, eventually favoring policyholders, Parijat highlights the urgent need for reforms in vehicle insurance due to high road fatalities, surge in new vehicle registrations, and uninsured owners.
The Future Prospects
Going forward, the insurance sector, particularly the private insurers, is delighting customers with a plethora of innovative, largely digital products aimed at a large percentage of the tech-savvy, young, earning population. These digital offerings are expected to gain popularity, providing convenience and accessibility. Additionally, the claims settlement process is set for transformation, focusing on quick admission of liability, seamless loss evaluation, and immediate electronic remittance of claims - AI enabled.
Parijat emphasizes the need for robust systems to enhance the claims experience, especially in the wake of significant global events and digital advancements. Efficient claims processing is crucial, as delays can severely damage customer confidence and impede market growth. Health insurance, e.g. with many customers often claiming for hospitalization for the first time in decades, must ensure hassle-free discharge processes to maintain trust. As the government aims for a "cashless for all" objective, customers demand transparency and easy claims processing.
Reinsurance-driven policies for large risks are increasing but face challenges in data adequacy and accuracy. Discrepancies between direct insurance and reinsurance contracts can lead to prolonged disputes, impacting insurers' balance sheets. There is a growing need for developing expertise in reinsurance underwriting within the insurance companies. This would facilitate meaningful dialogue with broking houses bringing experience and skill, and assuming a more responsible role as the market evolves.
Furthermore Parijat stresses on the critical importance of ongoing training and mentoring in reinsurance for the next generation of insurance professionals. He advocates for structured technical programs that keep employees updated on the latest developments across all lines of business, particularly in navigating global impacts on reinsurance pricing and risk management. The increasing frequency of cross-border phenomena such as supply chain disruption, contingent business interruption, new perils and natural catastrophes underscores the need for informed decision-making in reinsurance coverage and pricing.
With experience on the Board of United India Insurance Co. and the Reinsurance Advisory Committee of IRDAI, Parijat recognizes the impact of regulatory changes focused on policyholder protection. The responsibility of the Regulator is immense, given the volume of business and number of entities involved. While committees of domain experts assist the Regulator on market-relevant issues, all entities in the value chain need to have a clear understanding of their respective roles. He highlights the immediate need for reforms in the Health insurance segment to address rising hospitalization costs and disease incidence. Agreements between insurers and hospitals and TPAs must be clear and comprehensive, ensuring policyholders are not disadvantaged by loopholes or inefficiencies.
Reinsurance professionals and intermediaries play a pivotal role in guiding clients through complex contract wordings, pricing strategies and risk assessments. One should also emphasize on Regulatory compliance regarding exposure data modeling and risk mitigation measures, including preparedness for loss accumulation following a CAT event The emphasis should be on proactive risk management approaches over reactive ones. Lastly, one should advocate for reintroducing insurance education in school curricula to foster a knowledgeable and insurance aware populace, and ensure a resilient insurance industry in the future,” concludes Parijat.
