On November 7, the Ministry of Finance, through an administrative order under Section 101(A)(8)(ii) of the Insurance Act, 1938, effected the conversion of General Insurance Corporation (GIC) into the Indian Re-Insurer.

Setting up the Indian Re-Insurer for the domestic insurance sector was a regulatory requirement under the Insurance Regulatory and Development Authority Act. Though the existing GIC can operate as an Indian reinsurer with immediate effect, the final conversion can only happen only after the amendment of the General Insurance Nationalisation Business Act, 1972.

The current GIC chairman D Sengupta will continue as the chairman of the Indian Re-Insurer along with one managing director - unlike in GIC, where there are two managing directors. After Mr Sengupta's term, the Indian Re-Insurer would be headed by a managing director.

The basic estimate of the Indian Re-Insurer for such a high amount of premium is linked to the fact that the Insurance Regulatory Development Authority Act provides that all non-life companies will have to transfer 20 per cent of their risks and premiums income to the Indian Re-insurer.

Apart from this segment, ministry sources point out that the Indian Re-Insurer will also transact a certain percentage of reinsurance business of the domestic life insurance industry.

IRDA, which is working on the reinsurance guidelines of the life insurance business, will soon decide on the the exact percentage of business the life company has to underwrite with the Indian Re-Insurer.

The IRDA, which is scheduled to meet on November 20 is expected to take a decision on the issue.

Ministry sources point out that the Life Insurance Corporation (LIC) has strongly pleaded with the IRDA that only around 10 per cent of the risk-related component of its business - which is pegged at over 30 per cent of the total life business - should be required to be reinsured with the Indian Re-Insurer. The other 70 per cent of LIC's business has a savings component in it.

If IRDA accepts the LIC plea, Indian Re-Insurer will earn a premium of over Rs 700 crore out of LIC's Rs 7000 crore savings business. However, sources point out that IRDA may peg the minimum percentage of the reinsurance business from the LIC between 10-20 per cent. Earlier, though GIC was handling the reinsurance business of the four non-life subsidiaries, LIC did not have any such exercise and used to underwrite a small reinsurance business with the Swiss Re-Insurer.

Also, for the first time, the board of the Indian Re-Insurer will be meeting during the third week of the month to finalise the new norms of the company. It is unlikely that the Indian Re-Insurer, with its existing Rs 215 crore kitty, will require more capital, as the IRDA regulation stipulates Rs 200 crore capital for any reinsurance company.

At present, the retention capacity of the GIC, which was transacting the reinsurance business of the non-life industry is estimated at around 90 per cent. The aviation and crop insurance businesses of GIC will be transferred to New India and Oriental Insurance. Though the retention can be further expanded beyond 90 per cent, it may not prudent to do so, as in case of losses, it may put pressure on the Indian Re-Insurer's finances. The, Indian Re-Insurer has to play a crucial role for the country's insurance industry, as IRDA reinsurance guidelines stipulates a maximum retention of the reinsurance business within the country.