Legal Framework, Contract Terms and Indian Market Practice
IC-81 tests the legal skeleton of reinsurance: contract formation, good faith, claims conduct clauses and the Indian regulatory order of preference. Reinsurance is a contract of indemnity between sophisticated parties, but it depends on the original policy terms.
Core rules
- Reinsurance is uberrimae fidei: the cedant must disclose all material facts, including unusual policy terms and poor loss experience.
- Follow-the-settlements binds the reinsurer to a cedant's good-faith settlement within the reinsurance terms; it does not extend cover to ex gratia payments or risks outside the treaty.
- Claims cooperation and access-to-records clauses let the reinsurer investigate and associate in defence.
- Offset allows mutual debts between cedant and reinsurer to be set off, subject to contract and insolvency law.
- Cut-through clauses may give the original insured direct access to the reinsurer in defined insolvency situations.
- In India, the IRDAI (Reinsurance) Regulations, 2018 set registration, order of preference, retention and cession requirements; GIC Re has a statutory role as the Indian reinsurer, and foreign reinsurance branches operate under IRDAI approval.
Worked example
A cedant pays INR 2 crore ex gratia on a INR 5 crore claim although the policy clearly excludes flood. The reinsurer's follow-the-settlements clause does not make it liable for the ex gratia portion. If the same settlement were within the policy terms and made in good faith, the reinsurer would normally be bound to its treaty share.
Traps
Do not treat the reinsurer as a party to the original policy. Do not assume follow-the-settlements covers ex gratia or ambiguous coverage. Do not ignore arbitration, governing law or regulatory approval requirements.