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Developing India as a Global Reinsurance Hub at the IFSC, GIFT City

BusinessDeveloping India as a Global Reinsurance Hub at the IFSC, GIFT City

India wants a Global Reinsurance Hub (the earliest mention is in 41st Report of Standing Committee on Finance, 2011-12). The International Financial Services Centers Authority (IFSCA), a unified authority for the development and regulation of financial products, financial services and financial institutions in the International Financial Services Centre (IFSC) has been working on development of strategic framework for making India’s first IFSC, Gujarat International Finance-tec city (GIFT City) a Reinsurance Hub.

Chairman, Insurance Regulatory and Development Authority of India (IRDAI) has recently stated, “Efforts are being directed towards building IFSC – GIFT City as a Global Reinsurance Hub, which will lead to improved technical and financial capacities to undertake specialized lines of business”. Though, the Indian insurance regulations had earlier mandated that the Foreign Reinsurance Branches (FRBs), licensed from 2016 onward and who all opted to be in Mumbai – because of it being the financial capital – will create a “Hub”. Moving forward, with the location settled now, a precise focus will be required on the nature of businesses to be underwritten: whether “specialized” or bringing the reinsurers’ book from offshore to onshore or creating ‘competitive conditions in India’ for attracting global risks and underwriting such global polices / risks, and competing with the existing/emerging ‘Global Hubs’ on equal or better footing.

Reinsurance (insurance of insurance)is a global industry. Reinsurers are able to assume some of the world’s largest and most complex risks because they spread risk on a global basis, instead of maximizing risk retention within a country.

Diversification of risks is fundamental to reinsurers creating value, and providing efficient and effective protection to the ceding insurers. In the United States, up to 60% of the costs of catastrophic losses are transferred/exported to the international reinsurance industry, significantly alleviating local costs and allowing for a swift influx of capital following large events: 67% of the losses of 9/11 in the United States, still world’s largest economy, were picked up by the international reinsurance industry. Due to the large sums of money that they invest in financial markets, reinsurers also contribute significantly to the real economy besides, setting incentives for risk-adequate behavior.

Reinsurance Hubs around the world work most effectively in a commercial environment underpinned by robust and transparently-applied international law and practice, supported by a network of qualified service providers, such as claims assessors, loss modelers, risk managers and specialist legal practitioners, complemented by speed of access to courts and transparent dispute resolution process. In the global centers such as London, Singapore, and Dubai etc., a cluster effect has developed as expertise in underwriting, professional intermediation and related support services have been attracted by commercially-viable trading and regulatory regimes and high-quality and politically stable institutional environments.Reinsurance Hubs around the world are sometimes associated with a liberal tax regime. Bermuda, built on collaboration between business, government and the regulators, continues to evolve to meet the needs of the global reinsurance market, attracting innovators – such as investors in the Insurance Linked Securities (ILS) asset space and increasingly fintech players – to the island and helping to create new business models.

Established global centers of reinsurance have in common a flexible and robust regulatory approach such as those established by the International Association of Insurance Supervisors (IAIS). The Indian regulations, however, take a different approach.The Indian regulations have ‘premium retentions’ mandated to measure them at the ‘country level’ / GIC Re (a government reinsurance company) is treated as the preferred entity, favoring it with ‘Obligatory Cession’ and ‘Order of Preference’ regulations despite, IAIS having a model risk management framework and the “ceding insurer responsibility model” in place.From a competition perspective, the Order of preference regime must be premised on equal footing for GIC Re and the FRBs in India.

IFSC has been conferred with several taxation benefits with the intent to promote financial activities. Under the extant framework, there is 100% income tax exemption for 10 consecutive years out of the first 15 years, and the IFSC unit has the flexibility to select any 10 years out of the total block of 15 years. However, this is still limited, when compared to some of the other leading IFSCs such as Dubai International Financial Centre (DIFC), etc. Units are also exempted from GST and subject to lower minimum alternate tax (9%), which is still an anachronism. Subject to certain conditions, IFSC are further entitled to exemption from commodity transaction tax, securities transaction tax, tax on long term capital gains and dividend distribution tax. However, the taxation benefits will not be the sole reason for an entity to decide the place of business; firms also look for a fair and rational tax system with sufficient ease of doing business. This is where some of the legacies of the Domestic Tariff Area (DTA) continue to operate though IFSCA regulations.There must be attempts to provide flexibility to reinsurers setting up branches in the IFSC to adhere to standards as available in their home country.
Since as compared to Mumbai, the IFSC – GIFT City lacks the market ecosystem, the regulatory framework for the Reinsurance Hub at the IFSC, GIFT City must proceed with thecentral government (under the powers vested with it per Insurance Act) entrusting the IFSCA to lay the ground work as a ‘greenfield’ projecton par or better than the leading reinsurers’ framework in their own home jurisdictions rather than improving on IRDAI framework.A predictable, friendly and participative regulatory architecture are key attributes in established financial centers, which is what Ease of doing insurance business is all about.Therefore, India needs an integrated and globally benchmarked regulatory/legal/alternative dispute resolution/tax policies.IFSCA may also explore the possibility to invite more international arbitral institutions to set up their offices in the GIFT City. Establishing multiple institutions in the IFSC will not only provide competitive choices to the businesses, it would also promote the culture of institutional arbitration in India, where mostly ad-hoc arbitration is popular.It is also crucial that IFSCA leads India to become a Reinsurance Hub by creating complementary linkages with Mumbai. It must allow the existing FRBs, already operational at Mumbai under IRDAI licensing regime, to start their operations from IFSC – GIFT City since the due diligence has already been done, and use their Mumbai offices to source, underwrite and service this global businesses under the minimal licensing requirements at the IFSC – GIFT City.

In India,only a very small percentage of economic losses are insured leading to high protection gaps. These “risk icebergs” must be cleared through sound reinsurance infrastructure to help build resilience all across especially involving natural catastrophes (NATCAT), mortality and healthcare etc. A natural commercial consequence of insurance is to improve resilience.An inclusive and fully penetrated insurance, and developing its export potential, whilst tapping Indian talent, are the two fundamental obligations for IRDAI and IFSCA. The key to creating international centers is to have progressive and proportionateregulations and tax mechanisms, ease of doing insurance business, grooming of talent etc. leading to Mumbai becoming a Global Insurance Centre, and IFSC – GIFT City a Reinsurance Hub that are attractive choices for investors.The final key, though, would requirea global insurance professional helmsmanship at these centers that has global understanding, a global mind set and which is ready to provide a steady hand on the tiller.

A former CEO, and recipient of Lifetime Achievement Award at the 24th AsiaInsurance Industry Awards, 2020 Singapore, Arun has been publishing researchpapers, and has recently edited and authored (along with others) a book, “Time forBharat”, which raises educated conversations on public governance, in an encompassing way.

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