Re Insurance

 INTRODUCTION TO REINSURANCE
The term ‘Reinsurance, also termed as insurance of insurance’. Means that

an insurer who has assumed a large risk may arrange with another insurer
to insure a proportion of the insured risk. In other words, in the event of
loss, if it would be beyond the capacity of the insurer than this reinsurance
process is restored to. In reinsurance, therefore, one insurer insures the
risk which has been undertaken by another insurer. The original insurer
who transfers a part of the insurance contract is called the reinsured and
the second insurer is called the reinsurer. Of course the reinsurance has to
pay reinsurance premium for risk shifted. For example, a man wishing to
insure his premium for 10 lakhs goes to an insurance company, which will
accept the risk if it is satisfied as to the condition of the property. But if it its
own limit is probably Rs 5 lakhs, it will arrange with another company to
reinsure or to take up so much of the risk as exceeds its limits, i.e. Rs 5
lakhs, so that if the house is burnt down the original insurer would pay the
owner Rs 10 lakhs. But they would be recouped 5 lakhs, by the reinsurance
offices. To be effective, the reinsurance policy must be formulated after
carefully considering all aspects of the situation to which it is to be applied.
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 DEFINITION
Reinsurance is a transaction in which one insurer agrees, for a

premium, to indemnify another insurer against all are part of the loss that
insurer may sustain under its policy or policy or policies of insurance. The
company purchasing reinsurance is known as the ceding insurer: the
company selling reinsurance is known as the assuming insurer, or, more
simply, the reinsurer. Reinsurer can also be described as the “insurance of
insurance companies”
Reinsurance provides reimbursement to the ceding insurer for lasses
covered by the reinsurance agreement. It enhances the fundamental
objectives of insurance to spread the risk so that no single entity finds itself
saddled with a final burden beyond its ability to pay. Reinsurance can be
acquired directly from a reinsurance intermediary.
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 OBJECTIVES OF REINSURANCE
Insurer purchases reinsurance for essentially four reasons:

1) To limit liabilities on specific risks
2) To stabilize loss expanses
3) To protect against catastrophes; and
4) To increase capacity.
Different types of reinsurance contract are available in the market
commensurate with the ceding company’s goals.
1. Limiting liability:
By providing a mechanism in which companies limit loss exposure to
levels commensurate with net asset, reinsurance companies allows
insurance companies to offer coverage limits considerably higher then
LALA LAJPATRAI COLLAGE OF COMMERCE & ECONOMICS 2
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they could otherwise provide. This function of reinsurance is crucial
because they allow all companies, large and small, to offer coverage
limits to meet their policyholders’ needs. In this manner, reinsurance
provides an avenue for small-to-medium size companies to compete with
industry giants. In calculating an appropriate level of reinsurance, a
company takes in to account the amount of its available surplus and
determines its retention based on the amt of loss it cam absorb
financially. Surplus, sometime referred to as policyholders surplus, in the
amount by which the asset of an insurance exceeds its liabilities
A company’s retention may range from a few lakhs rupees o thousand
of crores. The reinsurer indemnifies the loss exposure above the
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retention, up to the policy limits of the reinsurance contract. Reinsurance
helps to stabilize loss experience on individual risks, as well as an
accumulated loss under many policies occurring during a specified
period.
2. Stabilization:
Insurance often seeks to reduce the wide swing in profit and loss
margins inherent to the insurance business. These fluctuations result, in
part, from the unique nature of insurance, which involves pricing a
product whose actual cost will not be known until sometime in the future.
Though reinsurance, insurance can reduce these fluctuations in loss
experience, thus stabilizing the company overall operating result.
3. Catastrophe protection:
Reinsurance provides protection against catastrophe loss in much the
same way it helps stabilize an insurer’s loss experience. Insurer uses
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reinsurance to protect against catastrophes in two ways. The first is to
protect against catastrophic loss resulting from a single event, such as the
total fire loss of large manufacturing plant. However, an insurer also
seeks reinsurance to protect against the aggregation of many smaller
claims, which could result from a single event affecting many
policyholders simultaneously, such as an earthquake as a major
hurricane. Financially, the insurer is able to pay losses individually, but
when the losses are aggregated, the total may be more than the insurer
wishes to retain.
Though the careful use of reinsurance, the descriptive effect
catastrophes have on an insurer’s loss experience can be reduced
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dramatically. The decision a company makes when purchasing
catastrophe coverage are unique to each individual company and vary
widely depending on the type and size of the company purchasing the
reinsurance and the risk to be reinsured.
4. Increased capacity:
Capacity measures the rupee amount of risk an insurer can assume
based on its surplus and the nature of the business written. When an
insurance company issues a policy, the expenses associated with issuing
that policy-taxes, agents commissions, administrative expenses-are
changed immediately against the company’s income, resulting in a
decrease in surplus, while the premium collected must be set aside in an
unearned premium reserved to be recognized as income over a period of
time. While this accounting procedure allows for strong solvency
regulation, it ultimately leads to decreased capacity because the more
business an insurance company writes, the more expenses that must be
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paid from surplus, thus reducing the company’s ability to write additional
business.
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 REINSURANCE TERMS
• CEDE : to transfer part of the risk to another insurer

• CEDING COMPANY : the company that transfers or cedes risks to
another company.
• ACQUISITION COSTS : all expenses incurred by an insurance or
reinsurance company that are directly related to acquiring insurance
accounts (insured, or reinsured) for the company.
• ASSUME : to accept all or part of ceding company’s insurance or
reinsurance on a risk or exposure.
• BINDER : A record of reinsurance arrangements pending the
issuance of a formal reinsurance contract (which then replaces the
binder)
• BORDEREAU : A form providing premium or loss data with respect to
identified specific risks which is furnished the reinsurer by the
reinsured
• BURNING COST : The ration of actual past reinsured losses to the
ceding company’s subject matter premium (written or earned) for the
same period; used to analyze past reinsurance experience or to
project future reinsurance experience.
• RETROCESSIONNAIRE : The assuming reinsurer in a retrocession,
where the ceding reinsurer is known as the retrocedent
• CONTINGENCY COVER : Reinsurance protection against the
unusual combination of losses.
• PREMIUM (Written/Unearned/Earned): Written premium is premium
registered on the books of an insurer or reinsurer at the time a policy
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 PURPOSES OF REINSURANCE
"Reinsurance achieves to the utmost extent the technical ideal of
every branch of insurance, which is actually to effect
(1) The atomization,
(2) The distribution and
(3) The homogeneity of risk. Reinsurance is becoming more and
more the essential element of each of the related insurance
branches. It spreads risks so widely and effectively that even
the largest risk can be accommodated without unduly burdening
any individual."
ORIGIN AND DEVELOPMENT OF REINSURANCE

In the years 1871 to 1873, no less than twelve independent
reinsurance institutions were founded in Germany, of which very few
survive today. The pressure of competition led to unwholesome practices,
and soon many of these newly formed companies found themselves in dire
straits. In branches of insurance, other than fire insurance, we find no
definite tendency in the '70's toward the establishment of separate
reinsurance facilities in Germany. Ernst Albert Masius, in his "Rundschau"
in 1846, deplored the lack of reinsurance facilities in hail insurance. Even at
the present time, this branch of the business lacks adequate reinsurance
service.
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Fundamentals
In the most widely accepted sense, reinsurance is understood to be
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that practice where an original insurer, for a definite premium, contracts
with
another insurer (or insurers) to carry a part or the whole of a risk assumed
by
the original insurer. By insurers we mean all persons, partnerships,
corporations, associations, and societies, associations operating as Lloyd's,
inter-insurers or individual underwriters authorized by law to make
contracts
of insurance. We may define insurance as an agreement by which one
party,
for a consideration, promises to pay money or its equivalent, or to do an act
valuable to the insured, upon the happening of a certain event or upon the
destruction, loss or injury of something in which the other party has an
interest. The insurance business is the business of making and
administering
contracts of insurance. Insurance contracts are of two types those which
engage merely to pay a sum of money on the happening of an event, or
merely to begin a series of payments on or after the happening of a certain
event, are contracts of investment. Contracts of insurance which engage to
pay money or its equivalent, or the doing of acts valuable to the insured,
upon destruction, loss or injury involving things, are contracts of indemnity.
And so, reinsurance may be second insurance of
(a) Contracts of investment and/or
(b) Contracts of indemnity.
There may exist, therefore, two types of insurance business,
depending upon which of these two organic contracts the business
engages
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to administer.
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Risks carried by the insurer

The need for reinsurance arises out of the fact that a first or primitive
insurer bears two distinctly different major risks:
(1) The risk that the events insured against will happen among a
number of homogeneous risks;
(2) The risk that certain events insured against will happen among a
heterogeneous group of risk to one or several insured entitled by contract
to
an exceptional payment in money or its equivalent, or entitled to
exceptional, costly service.
Case 1:
An insurer contracts to pay $10,000 to the beneficiary of each of 806
persons insured by him at 21 years of age, in event of the death of the
insured during the contract year. This group is homogeneous in respect to
amount insured and class of risk. He charges a net premium of 1.22 per
cent., or $98,332 to meet the expected claims in that year of age.
Case 2:
Assume, however, that the insurer has accepted, as a second instance,
a heterogeneous group composed of 805 risks at $10,000 each and one
risk
at $100,000. This produces $99,430 in premiums.
If in Case 1, only 8 deaths actually occur with a uniform coverage of
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$I0, 000 each, the premiums are $98,332 and the claims $80,000, leaving
an
underwriting profit of $18,332. If in Case 2, the $100,000 policyholder and
seven $10,000 policyholders die, the premiums are $99,430, and the
claims
$170,000, or an underwriting loss of $70,570. We had in the first case the
carrier of a group of primary, homogeneous risks, with only a slight hazard
to him that the number of actual claims would exceed the expected.
Against
this slight hazard the insurer is supposed to hold paid-in capital and surplus
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(or "guarantee capital" in case he was a mutual underwriter). Slightly
exceptional losses above the expected are to be made up by slightly
favorable underwriting profits in the long run of the business. In the second
case, the insurer is not only carrying a group of primary, homogeneous
risks
but also the secondary risk of selective loss through the death of the
$100,000 policyholder.
(1) External or true coinsurance or
(2) Internal coinsurance or reinsurance.
 HISTORY OF REINSURANCE
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Reinsurance has a rather illustrious history eating back 10 the
fourteenth century. Even though there is no authentic information of the
first reinsurance contract, it is widely recognized that Lombardians beggar
Develop the concept of reinsurance in circa 1200 AD and from whence the
concept of reinsurance took ground.
1200-1600 AD
The emergence of the reinsurance concept and its slow pace of
expansion was one of the remarkable features of this time. Marine
business
was one of the earliest fields that recognized the need of reinsurance to
protect its business from the dangers and rakes of marine transport.
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1600-1850AD
Though marine insurance nourished during this period in Europe, it
suffered a set back in UK, where it went largely unrecognized except when
the insurer became insolvent or went bankrupt or died. This ban lasted till
1864 and as such there was no recorded reinsurance business in England.
After the great fire of London in 1666, an interest to insure against fire suit
faced and regulators soon made modifications to reduce their losses. In the
year 1776 royal concession was granted to the Royal Chartered Fire
insurance Company of Copenhagen to undertake fire insurance one of the
earliest recorded fire reinsurance transactions place in 1813 when the
Eagle
hire Insurance Company of New York assumed all of the outstanding rim
the Union Insurance Company, but it really executed, as the insurer did not
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avail this facility and after this the earliest recorded fire insurance then
which was executed dates back to the year I821 between the National
Assurance Company, Paris, France and the assuming reinsurer the United
Proprietors of Belgium.
Validation of the reinsurance contract by the Supreme Court of New
York boosted a number o\ reinsurance contracts contracted. In l883 the
Supreme Court gave its consent in the case between New York Browery
Insurance Company, the cedent, and the New York Fire Insurance
Company,
the reinsurer. This case acted as a catalyst for the emergence of
reinsurance
companies and thus began a new era in the reinsurance sector and in \S4A
the current system of life reinsurance took seed. The first life treaty as such
dates back to 1858.
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From 1850 onwards
By he mid nineteenth century there was a boom in the European
reinsurance business and Germany became the hotbed for reinsurance
activity. Many German reinsurance companies undertook business of; large
scale and new reinsurance companies flourished. But the after-effects of
the
two world wars spilled over to the reinsurance markets leading to the
emergence of London as a strong player in the reinsurance sector. One of
the pioneers of the insurance industry, Lloyd's of London, began its
operations in the year 1688. It initially ventured into life insurance only and
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because of the ban imposed on marine insurance they could not make
much
headway. Once the ban was lifted it opened its business in all the spheres
of
insurance activity and with the introduction of excess of loss reinsurance it
aggressively jumped into the fray and became one of the strongest players
in the industry.
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 THE FIRST INDEPENDENT REINSURANCE COMPANY
In 1846, the first independent reinsurance company was founded in

Germany, the Cologne Reinsurance Company. This was the idea of
Mevissen. He held that an independent reinsurance company would be no
competitor of the direct-writing companies and that it was certain to be
welcomed by and to receive a good volume of business from those
companies. Mevissen's idea of 1846 did not mature, however. For various
reasons the company did not begin business until 1852, and then only with
the assistance of considerable French capital. This marked the
establishment
of reinsurance as a specific, independent branch of the business. Out of
small beginnings, this company began to prosper and its example began to
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attract other enterprising persons. During the first three years of its
business
life the Cologne Reinsurance Company extended its operations in
Germany,
Austria, Switzerland, Belgium, Holland and France, and then tried to
arrange
treaty contracts with English companies. It seems that domestic English
reinsurance business, at that time, was quite unprofitable to the reinsures
and
the Manager of the Cologne was obliged to keep out Of the English market.
On June 24, 1853, a fire treaty was concluded between the Aachen and
Munchener Fire Insurance Company and its subsidiary, the Aachener
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Reinsurance Company. This was an early example of a true "first surplus"
treaty under which the reinsurer was allotted one-tenth of every surplus
risk,
with certain modifications in respect to various classes of risk enumerated
in
the contract. It is interesting to note that the Aachen - Munchener Company
had an earlier arrangement with L' Urbaine, Paris.
FIRST RECORDED REINSURANCE CONTRACT

The first reinsurance contract on record relates to the year 1370, when
an underwriter named Guilano Grillo contracted with Goffredo Benaira and
Martino Saceo to reinsure a ship on part of the voyage from Genoa to the
harbor of Bruges.
As early as the twelfth century, marine insurance began to be
transacted through the so-called "Chambers or Exchanges of Insurance,"
which had for their object, first, the promotion of the marine insurance
business on a solid basis and, second, the settling of disputes arising
among
merchants and others concerned in bottomry and respondentia contracts.
In
later years, these Chambers or Exchanges of Insurance became corporate
bodiesand instead of remaining confined to the original function of
regulating and registering insurance made by others, actually undertook an
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insurance business themselves. With the establishment and functioning of
Lloyd's in 1710, there was a marked decline in the transaction of insurance
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business through these Chambers or Exchanges. There is a suggestion of
reinsurance practice in the "Antwerp Customs" of 1609. Some mention of
reinsurance practice is to be found also in the "Guidon de la Mer," a code
of
sea laws in use in France from a very early date. These marine regulations
were consolidated and published at Bordeaux in 1647 and at Rouen in
1671.
The author of the consolidations was said to have been Cleirac. With the
shift of centers of commerce from the south, southwest and west of Europe
to the north, England's foreign trade grew. Marine insurance followed in its
wake. Some underwriters found they could affect reinsurance with others.
Underwriters were accustomed to assign parts of risks to others at lower
rates, and these reinsures had hopes of finding other persons who would
take
parts of these risks at still lower rates. This traffic in premium differences
was so greatly abused that in 1746 it was forbidden. (19 Geo. II, c 37,
Section 4). Under this statute, reinsurance was permitted only if the party
whose risk was reinsured was insolvent, bankrupt or in debt and if the
transaction was expressed in the policy to be a reinsurance. The statute
was
more or less of a dead letter and was repealed by 27 and 28 Vict.c 56,
Section I on July 25, 1864
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WHAT IS REINSURANCE?
When you look at the risks that insurers take on, it is not surprising
that they themselves might want to have insurance. When insurers insure a
risk again, it is called reinsurance.
Reinsurance is an extension of the concept of insurance, in that it
passes on part of the risk for which the original insurer is liable.
Reinsurance
contracts are slightly more specialists than insurance contracts but for most
part they work in exactly the same way – it is just that the ‘insured’ is
another insurer, known as the ‘reinsured’ (See the Basics of Insurance for
an
explanation of how insurance contracts work).
A contract of reinsurance is between the insurer and reinsurer only
and legally there is no direct link between the original insured and any
reinsurer. The original insurer is still the one who must pay any claim from
the insured – the insurer must then make its own separate claim against
the
reinsurer.
Reinsurance is important for a number of reasons, including:

1) To protect against large claims. For example, in the case of a fire in a
large oil refinery or a large city hit by an earthquake, insurers will
spread the risk by reinsuring part of what they have agreed to insure
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with other reinsures so that the loss is not so severe for any one
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insurer.
2) To avoid undue fluctuations in underwriting results. Insurers want to
ensure a balanced set of results each year without ‘peaks and troughs’.
They can therefore get reinsurance which will cover them against any
unusually large losses. This keeps a cap on the claims the insurer is
exposed to having to pay it.
3) To obtain an international spread of risk. This is important when a
country is vulnerable to natural disasters and an insurer is heavily
committed in that country. Insurance may be reinsured to spread the
risk outside the country.
4) To increase the capacity of the direct insurer. Sometimes insurers
want to insure a risk but are not able to do so their own. By using
reinsurance, the insurer is able to accept the risk by insuring the whole
risk and then reinsuring the part it cannot keep for itself to other
reinsures.
Like the direct insurance market, reinsurance usually involves
specialist brokers who have expert knowledge of the market and access to
reinsurance underwriters on behalf of their clients.
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 REINSURANCE IN INDIA
Reinsurance in India dated back to the 1960’s. After independence

there was rapid development of the insurance business. With various
sectors
growing in the post independence era the need for reinsuring the
development work was also felt. Since reinsurance industry has negligible
presence in India after independence, the domestic requirement of
reinsurance was netted from mostly was foreign markets mainly British and
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continental. For undertaking reinsurance by Indian entities meant drain of
precious foreign exchanged earned by the country. To prevent the outflow
of
foreign exchange, in year 1956 Indian Reinsurance Corporation, a
professional reinsurance company was formed by some general insurance
companies. This company started receiving the voluntary quote share
cession from member companies.
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The Quality of Service:
The quality of services offered by the reinsurer to their customers

matter a lot in the reinsurance industry. Most customers go for reinsurance
for extra benefits like expertise, experience, and the advisory role of the
insurer. If these services cannot meet customers, expectations, then
reinsurance can accepts a rundown of their businesses which the customer
shifting base to the other players providing better services. It is to be
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remembered that the reinsurance industry is a highly competitive market
and
hence the reinsurance needs to carefully grade its customer.
The Skill Set:

The skill set of the reinsurance is the most important aspect of a
contract to the customer. It matters a lot to a reinsurance too because a
skill set represent the basic amour which it can showcase to its costume.
The skill set generally refers to the underwriting, financial, actuarial, claims
management and last but not the least management skills which it can
serve its clients. Hence the reinsurance gives due consideration to its
available skill set and sees how best it can serve the client with such skills.
Thus reinsurer who takes risk in the hope of gaining the premium volume
ceded to him, as part of a contract, would like to reap the benefits over a
period of time and hope for a long-term relation with its customers.
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 WHY REINSURANCE?
Risk managers and other buyers of insurance rarely think about how
reinsurance affects their company or the insurance they purchase for their
company. Insurance buyers mainly focus on the direct insurers – the
primary, excess, and umbrella carriers that provide the coverage. Smart
insurance buyers look for A--rated or better insurance companies with long
histories. Other buyers rely on their brokers to put together the best quality
insurance program with the best insurance security available. After all, the
insured must rely on the insurance policy issued by the direct insurer.
But what stands behind the A--rated carrier or the high quality
program for a complex risk? The answer is “Reinsurance”. Commercial
insurance cannot exist without reinsurance. The quality of the reinsurance
security purchased by the direct insurer is what helps to insure that loss will
be paid. Quality reinsurer provides special expertise to their direct insurer
client and assists the direct insurer in providing the best possible protection
and risk management for the direct insurer’s own client. Some large
professionals reinsure help small insurance companies expand into new
areas and provide them with technical, actuarial, and claims expertise and
training
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 FUNCTIONS OF REINSURANCE
There are many reasons why an insurance company would choose to

reinsure as part of its responsibility to manage a portfolio of risks for the
benefit of its policyholders and investors :
1. Risk transfer
The main use of any insurer that might practice reinsurance is to allow
the company to assume greater individual risks than its size would
otherwise
allow, and to protect a company against losses. Reinsurance allows an
insurance company to offer higher limits of protection to a policyholder than
its own assets would allow. For example, if the principal insurance
company
can write only $10 million in limits on any given policy, it can reinsure (or
cede) the amount of the limits in excess of $10 million.
Reinsurance’s highly refined uses in recent years include applications
where reinsurance was used as part of a carefully planned hedge strategy.
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Income smoothing
Reinsurance can help to make an insurance company’s results more
predictable by absorbing larger losses and reducing the amount of capital
Surplus relief
An insurance needed to provide coverage.
company's writings are limited by its balance sheet (this
test is known as the solvency margin). When that limit is reached, an
insurer
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can stop writing new business, increase its capital or buy "surplus relief"
reinsurance. The latter is usually done on a quota share basis and is an
efficient way of not having to turn clients away or raise additional capital.
Arbitrage
The insurance company may be motivated by arbitrage in purchasing
reinsurance coverage at a lower rate than what they charge the insured for
the underlying risk.
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 TYPES OF REINSURANCE:
There are two kinds of reinsurances, treaty reinsurance and facultative

reinsurance.
1.Treaty reinsurance:
This kind of reinsurance requires that the reinsurer will assume part or
all of a ceding company’s responsibility for certain sections or classes of
business in accordance with the terms of the policy. It is an obligatory
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contract as the ceding company has to cede the business and the reinsurer
is obliged to assume the business as per the treaty. It is the preferred type
of reinsurance when groups of homogenous risks are considered.
2. Facultative reinsurance:
This kind of reinsurance is used while considering a particular
underlying risk of an individual contract. It is the reinsurance of all or
part of a single policy after the terms and conditions have been
negotiated. It reduces the ceding company’s exposure to risk from an
individual policy. It is non- obligatory.
In another way, reinsurance is classified as proportional and
nonproportional
reinsurances.
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A. PROPORTIONAL REINSURANCES :
The two companies share the premium as well as risk. The
reinsurer usually pays a ceding commission.
B. NON-PROPORTIONAL REINSURANCE:
As the name suggests it is not proportional and the reinsurer
only responds if the loss suffered by the insurer exceeds a certain
amount.
 DOUBLE INSURANCE
The subject matter of the double insurance implies that it is insured
with two or more insurers and the total sum insured exceeds the actual
value
of the subject matter. It is called as Double insurance. In other words, the
subject mater of double insurance must be insured with different insurers. If
the actual value of the subject matter is more than the total sum insured, it
is
not treated as double insurance. In the case of life insurance, double
insurance can be shone profitable because the insured can get full policy
money under all policies. For example if a premises worth of Rs. 2,00,000
is
insured with ‘y’ for Rs. 1,40,000 and Rs. 1,50,000 it is treated as double
insurance because the total value of the subject matter i.e. total of all the
policies exceeds the actual value of the premises. Suppose if it is insured
with X and Y for Rs 70,000 each, there is no double insurance.
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OVER INSURANCE
When the amount for which a subject matter is insured is more than
its actual value it is called as over insurance. For over insurance, the only
criterion is the amount of insurance. It can even be with one insurer alone.
Lords Mansfield, while dealing with these rules of contribution in
case of over-insurance lay down as follows:
In the case of over insurance, the different sets of policies are
considered as making but one insurance, and are good to the extent of the
value of the effects put in risk: the assured can cover an the different
policies, and recover from those, he so sued, to the full extent of his loss,
supposing it to be covered by the policies on which he effects to sue,
leaving
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the underwriter on the policy to recover a ratable sum by way of
contribution
from the underwriters of the other policy.
For Example:
Where a merchant, the value of those whose whole interest is $22001,
first effected a policy on his interest at Liverpool for $ 17001, and hen
without fraud another policy on the same interest at London for $22001, he
is allowed to recover the whole amount on the London Policy, and the
London underwriters are allowed to recover a ratable amount by way of
contribution from the Liverpool underwrite.
EXTERNAL AND INTERNAL INSURANCE
Depending on their nature and scope, the risk insurance may be
broadly classified as External insurance and Internal Insurance.
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1) EXTERNAL INSURANCE
External insurance is referred to any insurance a firm facing in
the commercial market. Captive insurers, risk retention group and risk
sharing pools are the important alternative techniques that have been
developed for commercial insurance. The group captives may be
classified into pure captive and association or group captives. Risk
retentions groups are formed for the purpose of retention or pooling
risk.
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2) INTERNAL INSURANCE
Internal insurance may be described as an alternative to
purchasing insurance in the commercial market. Some public
organisation, enterprise, individual and institutions have established a
fund to meet the insurable losses. As the risk is retained within the
organisation, here is no market transaction of buying insurance cover.
Internal insurance is also termed as self insurance. This mainly
focuses attention and effort on the high frequency and low severity
profile and implies that the losses are predictable. Own damages
motor claims are the best example of self insurance.
NEW ECONOMY & NEW RISKS- ARE REINSURANCE
COMPANIES LISTENING?
The "New Economy" present'; new and significant challenges to
business, government, education; religion, and culture. Geographic borders
are becoming anachronistic symbols of the old economy as the powerful
force of e-commerce tears down artificial obstacles to trans-border trade.
What do all these issues mean for the insurance and reinsurance industry.
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While all industries are affected by this electronic sea change in the
world's economy, no industry is more affected than the insurance industry.
It
is the insurance and reinsurance industry that provides the protection
against
risk that allows businesses to produce their products and expand their
markets
and it is this industry that must meets the challenges of the now economy
and
protect against old and new risks generated by e-commerce.
Reinsures must constantly monitor court decisions, new e-commerce
coverage products, and changes in technology. The new economy already
has claimants seeking coverage for a range of losses from damaged
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hardware and software to claims of defamation. Coverage disputes have
arisen about whether this looses is covered under traditional commercial
liability policies ("CGL") or under newer policies specifically designed for
ecommerce
risk. Reinsures must be prepared to address new risks as they
arise out of e-commerce transaction.
The following are some of the important issues that reinsurance
companies have to tread undertaking new economy risk.
Ecommerce risk insurance and reinsurance companies have to take
new kind of risks that come bundled with the e-commerce are a variety of
risks that present loss both to the business undertaking e-commerce and
the companies which are writing their risks
~ 28 ~
 FACTORS THAT AFFECT REINSURANCE BUSINESS
For underwriting to be effective in the long run, a clear understanding

of the reinsurance contract is absolutely essential for both the parties. The
cedent company needs this understanding to plan its risk-retention, types
of
reinsurance required etc. For the reinsurer, it is necessary to plan for his
REINSURANCE
portfolio, with an eye on the possible accumulations of losses, underwriting
a single large risk etc. After identifying the type of contracts that a
reinsurance company has to underwrite during a period, it has to identify
the
various sources of business that it wanes to get involved in. The different
sources of reinsurance business are:
Domestic direct underwriting companies
Foreign direct underwriting companies
Other reinsurance companies
Reinsurance brokers
Domestic business has various advantages like low acquisition costs,
easy manageability etc and further it is free from ether complications like
adverse fluctuation of foreign exchange, economic instability of the country
etc. It suffers from the drawbacks of low volume and spread of business,
which is essential to build up a stable and profitable portfolio. Further, the
expertise and experience of the reinsures that are spread across the globe
are
~ 29 ~
also denied in case of domestic business. Or the other hand, overseas
business has the advantages of wide geographical spread but the cost of
maintenance may be higher. Further, other complications like difference in
language, legal systems, market practices and exchange control
regulations
may surface hence, a healthy balance of domestic and overseas business
will
enable the reinsurer to develop a strong, stable and profitable portfolio.
Retrocession treaties among various reinsures could be a source of
underwriting international business with a balanced geographical spread.
But the company should closely watch for higher costs of acquisition and
low profitability. One possible solution to overcome these difficulties is to
develop business through intermediaries or brokers, subject to cost of
REINSURANCE
brokerage, delays in remittances and underwriting being in control. Another
aspect which has to be considered in finalizing a reinsurance contract is the
class and spread of risks. The reinsurance company will have to make a
selection of risks depending on the size and intensity. A single aviation
portfolio may consist of a very small number of large risks, whereas there
can
be several small household burglary accounts with limited risk exposure.
Similarly, even within a class, mere can be variation in risk exposure, like
fire policy for residential dwellings as against that of a large industrial
undertaking or industrial complexes. Hence a proper balance will have to
be
struck between various classes; and within a class, between various risks
~ 30 ~
CLASSES OF BUSINESS POLICY
It is of paramount importance for an underwriter to know at the outset
as to what classes of risks are to be covered viz. Property, Casualty, etc. It
must be ensured that the particular class is a genuine insurance risk which
can be defined and quantified properly so that premium considerations do
not lead to avoidable conflicts. Further, within the class, method of
reinsurance whether proportional/non-proportional, facultative/treaty etc.,
lias to be selected, depending on the reinsurer choice as well as suitability.
~ 31 ~
PROCEDURE TO BE FOLLOWED FOR REINSURANCE
ARRANGEMENTS
(1) The Reinsurance Programme shall continue to be guided by the

following objectives to:
a) maximize retention within the country;
b) develop adequate capacity;
c) secure the best possible protection for the reinsurance costs incurred;
d) Simplify the administration of business.
(2) Every insurer shall maintain the maximum possible retention
commensurate with its financial strength and volume of business. The
Authority may require an insurer to justify its retention policy and may
give such directions as considered necessary in order to ensure that the
Indian insurer is not merely fronting for a foreign insurer.
(3) Every insurer shall cede such percentage of the sum assured on each
policy for different classes of insurance written in India to the Indian
reinsurer as may be specified by the Authority in accordance with the
provisions of Part IVA of the Insurance Act, 1938.
(4) The reinsurance Programme of every insurer shall commence from the
beginning of every financial year and every insurer shall submit to the
Authority, his reinsurance programmes for the forthcoming year, 45
days before the commencement of the financial year;
REINSURANCE
(5) Within 30 days of the commencement of the financial year, every
insurer shall file with the Authority a photocopy of every reinsurance
treaty slip and excess of loss cover note in respect of that year together
~ 32 ~
with the list of reinsures and their shares in the reinsurance
arrangement;
(6) The Authority may call for further information or explanations in
respect of the reinsurance Programme of an insurer and may issue such
direction, as it considers necessary;
(7) Insurers shall place their reinsurance business outside India with only
those reinsures who have over a period of the past five years counting
from the year preceding for which the business has to be placed,
enjoyed a rating of at least BBB (with Standard & Poor) or equivalent
rating of any other international rating agency. Placements with other
reinsures shall require the approval of the Authority. Insurers may also
place reinsurances with Lloyd’s syndicates taking care to limit
placements with individual syndicates to such shares as are
commensurate with the capacity of the syndicate.
(8) The Indian Reinsurer shall organize domestic pools for reinsurance
surpluses in fire, marine hull and other classes in consultation with all
insurers on basis, limits and terms which are fair to all insurers and
assist in maintaining the retention of business within India as close to
the level achieved for the year 1999-2000 as possible. The
arrangements so made shall be submitted to the Authority within three
months of these regulations coming into force, for approval.
REINSURANCE
(9) Surplus over and above the domestic reinsurance arrangements class
wise can be placed by the insurer independently with any of the
reinsures complying with sub-regulation (7) subject to a limit of 10% of
the total reinsurance premium ceded outside India being placed with
~ 33 ~
any one reinsurer. Where it is necessary in respect of specialized
insurance to cede a share exceeding such limit to any particular
reinsurer, the insurer may seek the specific approval of the Authority
giving reasons for such cession.
(10) Every insurer shall offer an opportunity to other Indian insurers
including the Indian Reinsurer to participate in its facultative and treaty
surpluses before placement of such cessions outside India.
(11) The Indian Reinsurer shall retrocede at least 50% of the obligatory
cessions received by it to the ceding insurers after protecting the
portfolio by suitable excess of loss covers. Such retrocession shall be
at original terms plus an over-riding commission to the Indian
Reinsurer not exceeding 2.5%. The retrocession to each ceding insurer
shall be in proportion to its cessions to the Indian Reinsurer.
(12) Every insurer shall be required to submit to the Authority statistics
relating to its reinsurance transactions in such forms as the Authority
may specify, together with its annual accounts.
INWARD REINSURANCE BUSINESS

Every insurer wanting to write inward reinsurance business shall have
a well-defined underwriting policy for underwriting inward reinsurance
business. The insurer shall ensure that decisions on acceptance of
REINSURANCE
reinsurance business are made by persons with necessary knowledge and
itsunderwriting policy stating the classes of business, geographical
scope,underwriting limits and profit objective.
~ 34 ~
INDIAN REINSURANCE PROGRAM
The Indian reinsurance industry is characterized by development of a

market reinsurance Programme, which influences the working of Indian
business entities and the way they do reinsurance.
The chief features of the Programme are as follows:
1. To achieve maximization of the retention capacity within the country.
2. Retention of the domestic insurers to be achieved through obligatory
cessions, pools, etc.
REINSURANCE
3. To protect inter-company and individual retentions by providing them
with
excess of loss covers.
4. To make provisions, wherein different classes of business can be ceded
to
treaties based on quota share or surplus basis.
5. To make most of the outward treaties by the companies by providing
automatic covers and restore facultative reinsurance in few case?
As we have noted earlier, general reinsurance business in India is
carried on by four subsidiaries of the General Insurance Lid. These
companies, to meet their own reinsurance needs, made arrange a man is
with
foreign companies. Apart from reciprocal arrangements, G1C and its
subsidiaries accept non-reciprocal inward reinsurance from overseas
markets. Apart from providing the above two facilities, GIC also takes care
~ 35 ~
of inward facultative reinsurance.
Since the business generated by the Indian Markets if not of huge
amount in international markets, they have to merely follow the trend in the
markets and only in some cases, do the Indian players get to dictate the
terms of the agreement in the intentional markets.
~ 36 ~
 STATE REINSURANCE CORPORATION (SRC)
The role and importance of establishment of state reinsurance

corporations was highlighted by world development organizations like
UNCTAD (United Nations Conference on Trade and Development). With
the
encouragement received from multilateral bodies like UNCTAD many
countries have established their own stale reinsurance corporations to take
care of the reinsurance needs arising out of their domestic insurance
REINSURANCE
industry. Many countries in Africa, Asia, including India have opened state
reinsurance corporations.
The main principles behind the encouragement of domestic
reinsurance corporations are as follows:
1. To conserve foreign exchange:
For developing countries like India, foreign exchange is a
precious resource and it needs to be spent very cautiously. The setting
up of these corporations will prevent draining of foreign exchange
resources from the country in the form of premiums to overseas
reinsure.
2. To prevent excessive dependence:
Depending on a foreign country for reinsurance coverage for a
long period of time is not advisable. Because at the times of war,
especially, and political tensions, the reinsurer country may not allow
the reinsurer to discharge its liability and it may drastically affect the
~ 37 ~
insured's business.
3. Creation of market place:
The setting up of state reinsurance corporation will help in
developing the domestic reinsurance market and lay a strong foundation
for development and growth of the domestic reinsurance industry.
4. To avoid competition:
In a domestic market, where the insurance industry has not
advanced on, the presence of a strong state reinsurance corporation will
REINSURANCE
help prevent setting up of new reinsurance companies, betting up - of
more reinsurance companies in less advanced will create wasteful and
destructive forces.
5. Better bargaining capacity:
Presence of a single state reinsurance corporation will
increase bargaining capacity of the country vis-à-vis internal agencies.
6. Develop local market:
The presences of state reinsurance corporations will help
nurture the domestic reinsurance industry and develop the reinsurance
skills.
It is to encourage the growth of SRCs, many rules were
implemented to ensure that SRCs get their due business and grow
strongly in the market.
~ 38 ~
 THE ROLE OF REGIONAL REINSURANCE CORPORATIONS
Similar to the need of setting up SRCs. a need was felt to set up

reinsurance corporations on geographical regional countries wise.
Basically,
a regional reinsurances corporation will look into the reinsurance reduces
arising among a group of neighboring nations. These corporations were
proposed to be set up in different developing nations of the world. \n
example of this method of forming a regional reinsurance corporation is the
Asian Reinsurance Compotation, which was set up at Bangkok. The
participants in this corporation are Afghanistan, China, India, Philippines,
South Korea, Sri Lanka and Thailand.
The basis for setting up regional reinsurance corporations
depends upon some common features which the member countries share
due
REINSURANCE
to their close proximity to each other. Some of the common features, which
make it viable for member countries to be in the RRC are:
1. The member countries have commercial boundaries.
2. Well-developed communication facility exists between the member
countries.
3. The economic and trade ties between the member countries being
welldeveloped,
free flow of trade exists between them.
~ 39 ~
4. The member countries may share some common customs, language
and
identity.
Setting up an RR.C is no easy task, especially with many member
countries participating; each of them can have their own set of preferences
to choose the best market place to locate the headquarters. The
headquarters
may have the following features like well-developed accessibility and good
communication facilities, a well-established commercial background. Added
to that, the presence of a good banking system will provide the smooth
environment for functioning of the RRC.
PROFESSIONALISM IN THE REINSURANCE INDUSTRY
Running a reinsurance company is not similar to running any other
business. It requires in-depth knowledge of the insurance industry apart
from
requiring specialized skills, proper control, and a nack to brood over
statistics
and devise appropriate policies to meet customer needs. Ml these have
necessitated a professional approach towards the industry. With increased
demand for cover and keener competition among insurance companies,
specialized reinsurance companies like marine reinsurance, life
reinsurance etc,
emerged. For a successful growth, the reinsures realized the need to fan
out
REINSURANCE
across the globe and soon started seizing business opportunities wherever
~ 40 ~
they existed.
This thinking process led to the emergence of a professional global
reinsurance industry.
The last hundred years have seen tremendous industrialization the
world over and with it the need and necessity to protect against various
risks
inherent in the business. The emergence of New York as an important
financial hub apart from London and the opening of reinsurance exchanges
in the USA, and setting up of new insurance centers in Bermuda, Panama,
Hong Kong, Singapore and West Asia with tax concessions and easy
regulatory affairs has led droves of insurance companies to set up their
operations in these places. Today, it has become a norm rather than an
exception in this industry to broker deals worth several billions.
The youth and development of reinsurance has brightened many changes
in the practice of the reinsurance industry. Today's professional
reinsurance
companies are they which are financially sound. Technically resourceful
and
who have the expertise in their domain of reinsurance coverage today we
find
all the reinsurance companies extending one or more of the following
services
to their clients.
1. Give valuable suggestions and help the reinsured tide over the crisis:
2. Helping clients in seeing up a suitable reinsurance
program.
~ 41 ~
REINSURANCE
3. Organize training program for the executives of the reinsured
companies.
Thus, over the years the reinsurance industry has matured in terms of
improved development services and policies offered to the clients. But, it is
to he noted here that the development of reinsurance market is restricted
mostly to the developed economies. Developing economics like India, a
few
South East Asian countries, etc, have just recently started their long march
towards the development of more mature Reinsurance market
domestically.
.
REINSURANCE REGULATION
The placement of reinsurance business from the Indian market is now
governed by Reinsurance Regulations formed by the IRDA. The objective
of
the regulation is to maximize the retention of premiums within the country
and to ensure that IRDA has issued the following instructions: Placement of
20% of each policy with National Re subject to a monetary limit for each
risk for some classes. Inter-company cession between four public sector
companies. . Indian Pool for Hull managed by GIC. . The treaty and
balance
risk after automatic capacity are to be first offered to other insurance
companies in the market before offering it to international re-insurers. .
Each
company is free to arrange its own reinsurance program, which has to be
submitted to the IRDA 45 days before commencement. . No re-insurer will
~ 42 ~
REINSURANCE
have a rating of less than .BBB from Standard and Poor’s or an equivalent
rating from AM Best.
GENERAL INSURANCE CORPORATION OF INDIA
GIC as a national re-insurer is providing useful capacity to all
insurance companies.
~ 43 ~
 Reinsurance Loss Reserving: Final Comments
We have seen some examples of how standard actuarial methods and

some not-so-standard actuarial methods apply to reinsurance loss
reserving. We must remember that there is no one right way to estimate
reinsurance loss reserves. But there are many wrong ways. Common
actuarial methods should be used only to the extent they make sense. To
avoid major blunders, the actuary must always understand as well as
possible the types of reinsurance exposure in the reinsurance company’s
portfolio. The differences from primary company loss reserving mainly
involve
much less specificity of information, longer report and settlement timing
delays, and often much smaller claim frequency together with much larger
severity, all inducing a distinctly higher risk situation. But with this goes a
glorious opportunity for actuaries to use fully their theoretical mathematical
and stochastic modeling abilities and their statistical data analytical
abilities.
~ 44 ~

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 INTRODUCTION TO REINSURANCE

The term ‘Reinsurance, also termed as insurance of insurance’. Means that

Reinsurance is a transaction in which one insurer agrees, for a

Insurer purchases reinsurance for essentially four reasons:

• CEDE : to transfer part of the risk to another insurer

ORIGIN AND DEVELOPMENT OF REINSURANCE

Risks carried by the insurer

In 1846, the first independent reinsurance company was founded in

FIRST RECORDED REINSURANCE CONTRACT

Reinsurance is important for a number of reasons, including:

Reinsurance in India dated back to the 1960’s. After independence

The quality of services offered by the reinsurer to their customers

The Skill Set:

There are many reasons why an insurance company would choose to

There are two kinds of reinsurances, treaty reinsurance and facultative

For underwriting to be effective in the long run, a clear understanding

(1) The Reinsurance Programme shall continue to be guided by the

INWARD REINSURANCE BUSINESS

The Indian reinsurance industry is characterized by development of a

The role and importance of establishment of state reinsurance

Similar to the need of setting up SRCs. a need was felt to set up

We have seen some examples of how standard actuarial methods and

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