In what may reduce the underwriting capacity of the general insurance industry, General Insurance Corporation has withdrawn the market surplus treaty with effect from April 1.

As a result, local insurers would be forced to seek more support from global players to underwrite large risks.

Market surplus treaties have been providing capacity treaties to general insurers over the last ten years. A surplus treaty is an arrangement where only the excess amount of the normal capacity of a particular risk is ceded to the reinsurers and not a fixed proportion of every risk. Here, capacity is the maximum amount of business or premium volume, which a company or the total market can write, based on financial strength.

Industry experts said that this would lead to an increase in relevance on facultative reinsurance arrangement. Companies enter facultative reinsurance to cover specific risks, which are otherwise not covered by the treaty.

"With the market surplus treaty withdrawn, companies will have to rely more on the facultative reinsurance, which is decided on case to case basis. It will have marginal effect on our business, especially our marine and hull business," said ICICI [Get Quote] Lombard head reinsurance Rajiv Kumaraswamy.

"This will reduce the capacity of the non-life insurance companies to write large risks," said Tata AIG CEO and managing director Guarav Garg.

Insurers take facultative reinsurance from GIC or other international reinsurers.

GIC provides automatic capacity to the non-life insurance companies and the treaty is renewed, based on the performance of each company and its underwriting practices.

GIC, hit by the large claims this year and a steep decline in the premium income since detariffing, is changing the terms of the reinsurance treaties. The renewal terms depend on various factors such as result of the arrangements, premium income, and underwriting pattern.

A senior executive at GIC had earlier said that the national reinsurer would lower the commission rates from 30-35 per cent to 25-30 per cent during 2009 renewals.  It has decided to give profit commission to the non-life insurers. Insurers get commission at the time when they pass on the liability to the reinsurer.