The Central Insurance company of Iran (CII), the regulatory body of the insurance industry, says it plans to launch a national reinsurance company.
“Issuing license for specialized reinsurance companies and setting up a national reinsurance company are among the CII’s agenda,” Majid Behzadpour, the CII chief, was quoted as saying by the company’s website.
"Development of the reinsurance market is in line with government policy and plans announced by the economy minister. Given the issue of the economic sanctions we need to proceed with extra care," he said without elaboration.
Behzadpour expressed the hope that with the expansion of the insurance industry worldwide and the relative stability in international financial markets, cooperation with other countries would improve.
Reinsurance has attracted investors in Iran in recent years. Amin Re and Iranian Re were the two main reinsurance companies for years. The CII recently issued operation license for Saman Reinsurance Company.
The regulator gave a permit to Iran Moein Insurance Company to move from general insurance to reinsurance. Tehran Ruck Reinsurance Company (Tehran Re) received operating permit from the CII last week as the fifth reinsurance company. Ava Pars Reinsurance Company (Ava Pars Re) was the other that made debut in October.
A limited number of firms have permits from the regulator to enter the gradually growing reinsurance industry. Market observers say loopholes and poor regulations are depriving the reinsurance industry from playing its deserved role.
Last year, the CII said it had reduced the share of mandatory reinsurance both in life and non-life segments for the current fiscal year to help empower reinsurance firms.
Insurance companies are required to pay 17% of their premium income from life insurance and 9% of the premium from selling non-life insurance to the CII.
This share was 20% for life insurance and 10% for non-life insurance policies in the last calendar year that ended in March.
Call for Smaller Footprint
Elaborating on the new policy Behzadpour said that the Sixth Five-Year Economic Development Plan (March 2016-2021) required the CII to lower its footprint in the reinsurance sector to expand the role and presence of non-government players.
Per regulations, insurers are obliged to cede a portion of all their non-life and life insurance premium to the CII for reinsurance needs. CII’s reinsurance business was created to handle risks that could not be covered by insurers.
CII’s reinsurance arm is also set to support the sector against potential losses due to the US sanctions and the absence of foreign peers.
A review of the share of mandatory reinsurance in the past ten years shows that the CII has steadily reduced this share from 25% and 45% for life and non-life categories in 2011.
Economy Minister Ehsan Khandouzi recently instructed the CII to terminate its reinsurance operations. "CII's involvement in the reinsurance sector can be understandable in the current economic conditions and international sanctions. However, the CII should discontinue reinsurance work to help the sector grow," he said in a meeting with CEOs of insurance companies in March.
Reinsurance Securities
Behzadpour pointed to the use of alternative tools for the development of the reinsurance market as one of the defined priorities in the past year saying that the issuance of reinsurance securities is one of the manifestations of this approach.
It was announced in January that two local insurance companies, namely Amin Re and Mellat Insurance, have received regulatory permission to issue reinsurance bonds for the first time.
The decision was approved by the CII executive board and Security and Exchange Organization (SEO) to transfer risks to the capital market.
Mellat will offer 1 trillion rials ($2.46 million) in reinsurance bonds and Amin Re 12 trillion rials ($29.5m).
The move is in the framework of CII agenda to employ innovative instruments to strengthen the industry and augment its efficiency.
ILS in the Pipeline
Reports earlier said the SEO is working on plans to introduce insurance-linked securities (ILS) so that domestic insurers can offload some portfolio risk in the capital market.
ILS are typically tied to natural disasters such as earthquakes and offer high yields; investors can lose the principal if a catastrophe unleashes a major loss.
They can serve as an alternative to reinsurance cover, which is scarce because the US sanctions have shut out Iran from global reinsurance markets such as Lloyd’s of London.
An Insurance bond or catastrophe bond (CAT) is a high-yield debt instrument that is designed to raise money for companies in the insurance industry in the event of a natural disaster.
A CAT bond allows the issuer to receive funding from the bond only if specific conditions, such as an earthquake or tornado, occur. If an event protected by the bond activates a payout to the insurance company, the obligation to pay interest and repay the principal is either deferred or completely forgiven.
Reinsurance is the practice whereby insurers transfer a part of their risk portfolios to other parties in some form of agreement to reduce the likelihood of paying large amounts in claims. It allows insurers to function by recovering some or all the monies paid to claimants.
