The second round of insurance reforms is likely to bring about a major change in the equity structure of reinsurance companies.

Pressure from the industry and the spate of small reinsurance companies overseas having become insolvent following September 11 terrorist attacks have given rise to rethinking on the part of the authorities.

It is likely that the insurance regulator will relook at the existing equity structure and permit reinsurance companies to operate on a branch licence basis.

"We are pursuing the issue with the authorities that it makes better sense for reinsurance companies to function on a branch licence basis," said Swiss Re Services India managing director Dhananjay Date.

This will bring about greater capacity and financial security to the domestic industry.

Currently following the opening up of the insurance sector, the government has capped foreign investment at 26 per cent in the case of insurance companies, brokerage firms, third-party administrators and reinsurers.

Not one global reinsurance company has set up shop in the country despite the entry of over 20 global insurers' domestic joint ventures.

According to the Insurance Regulatory and Development Authority Act, a reinsurance company must have a minimum capital base of Rs 200 crore (Rs 2 billion), but the equity holding pattern remains at 74:26 in favour of Indian promoters.

Speaking to Business Standard, Date said that the regulator seemed to accept the logic of allowing reinsurance companies to operate on a branch licence basis as in the case of foreign banks.

"As a branch operating in the country, the parent company is legally liable to discharge all claims," he stated.

Otherwise, in a joint venture company with a stake of just 26 per cent, the liability would be restricted to the extent of the share capital base, he added.

Should a reinsurance company go bust in the country, it will indirectly affect the regulator since it would seem it has failed in its duty to monitor the company.

Further, the IRDA in the interest of policyholders, would need to pay up 90 per cent of the claims amount, said Date.

As to how the government would address the apprehension of funds leaving the country, Date said that the IRDA could insist that assets match liabilities of a branch operating in the country.

"This will ensure that funds do not leave the country and at the same time, offer financial security and capacity," he added.