Life insurers retain higher risks as global reinsurers shy away from India post-Covid

Despite the post-Covid-19 recovery, global reinsurers have remained concerned about higher risk exposure in India. Several reinsurers have made the decision to discontinue writing group term business due to the higher mortality experienced during Covid-19. Consequently, insurance companies are now compelled to retain group term insurance business entirely in their books. The challenges posed by reinsurers have prompted insurers to reassess their risk management strategies, and as a result retention limit for life insurers has increased up to 30 per cent compared to the previous pre-Covid limit of 10 per cent.

“In recent times, the insurance industry has experienced a significant surge in claims, with almost all insurers receiving approximately three times more claims compared to previous years. To mitigate the burden of mortality risk, insurance companies had reinsured their term insurance business with low retention cover, placing a considerable portion of the risk on reinsurance companies. As a consequence, nearly all life insurers have incurred cumulative losses to reinsurers. This situation has prompted an increase in reinsurance premium rates by 30 per cent to 40 per cent in India,” explained Rushabh Gandhi, Deputy Chief Executive Officer at IndiaFirst Life Insurance.

Retention limit is the maximum amount of risk retained by an insurer. Beyond that, the insurer passes on the risk to a reinsurer, which provides insurance cover to large insurance companies to safeguard them against substantial losses. In India, foreign players underwrite a large share of life insurance business. 

"Indians have operated with relatively low retention compared to their peers globally. Only 10-15% of the risk was retained by insurers until COVID. Reinsurers have been working towards increasing the insurer’s retention. COVID provided the market an opportunity to correct this and we see the change come about radically.  Retentions have increased from 10-15% to up to 40%," said Nymphea Batra, CEO, Guy Carpenter India, a division of Marsh India Insurance Brokers.

Post the pandemic, reinsurance companies in India are tightening underwriting practices, revisiting non-medical limits, and increasing term insurance rates. Some companies increased their retention to ease out the increase of mortality premiums demanded by most of the reinsurance companies to remain competitive.

“The Covid-19 pandemic has presented several challenges for both insurers and reinsurers, especially for the term category. While there has been added pressure on reinsurers due to an unexpected surge in claims, the demand for term insurance has increased as more people understood why financial protection is important. There has been some correction in term premium rates, and the exact increase in premiums may vary from company to company, depending on their individual circumstances and the extent of business conducted with their reinsurers. To address this challenge, insurers and reinsurers are engaging in discussions to find a balanced approach to future risk management,” said Anup Seth, Chief Distribution Officer, Edelweiss Tokio Life Insurance.

At present, the mortality experience seems to be improving across Indian insurance firms, but there is still an element of the unknown in terms of long-term mortality trends in the post-Covid era. “Due to this ambiguity, reinsurers are evaluating their pricing approach and retention strategy to remain competitive and recover part of the losses made in the past. Reinsurance companies are also reserving for the possibility of a similar long-term unforeseen calamity of mass impact as a risk mitigation strategy,” said Gandhi.

Any hike in premium rates imposed by reinsurers eventually impacts policyholders. Instead of raising term insurance rates in tune with the reinsurance rates, some life insurers have adopted the strategy of a higher retention limit to keep term insurance rates stable for a while.

“We may witness a slight relaxation in underwriting controls, which will be gradual in nature. However, at present, the negotiation opportunity of the insurers in terms of pricing has reduced significantly. They have resorted to adapting to a higher retention limit agreement with the reinsurers to have a better risk-sharing arrangement,” said Gandhi.

“As a risk management strategy, most life insurers enter into reinsurance agreements. These contracts are of a long-term nature, and the pricing is based on the mortality experience. Short-term volatility has relatively less impact on reinsurance rates for such contracts. However, we believe that for short-term insurance contracts, there is a case for normalization of reinsurance rates to pre-Covid-19 levels. Reinsurers are actively monitoring the short and long-term mortality trends compared to the pricing,”  Souvik Jash, Appointed Actuary, ICICI Prudential Life Insurance had told Business Today.