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Introduction 5
History of Reinsurance 8
Literature Review 10
Types of Reinsurance 12
Reinsurance Markets 28
Market Share of Reinsurers 37
Reinsurance in India 40
Terrorism- A Setback to the industry 45
News on Reinsurance Industry 48
Some Case Studies 55

Bibliography 84


Insurance, in law and economics, is a form of risk

management primarily used to hedge against the risk of a
contingent loss. Insurance is defined as the equitable transfer
of the risk of a potential loss, from one entity to another, in
exchange for a premium and duty of care. Insurer, in
economics, is the company that sells the insurance.
Insurance rate is a factor used to determine the amount,
called the premium, to be charged for a certain amount of
insurance coverage.


The insurance tradition was performed each year in

Norouz (beginning of the Iranian New Year); the heads of
different ethnic groups as well as others willing to take part,
presented gifts to the monarch. The most important gift was
presented during a special ceremony. When a gift was worth
more than 10,000 derrik (Achaemenian gold coin weighing
8.35-8.42) the issue was registered in a special office. This
was advantageous to those who presented such special gifts.
For others, the presents were fairly assessed by the
confidants of the court. Then the assessment was registered.
Achaemenian monarchs were the first to insure their people
and made it official by in special offices.The purpose of
registering was that whenever the person who presented the
gift registered by the court was in trouble, the monarch and
the court would help him. Jahez, a historian and writer,
writes in one of his books on ancient Iran: "Whenever the
owner of the present is in trouble or wants to construct a
building, set up a feast, have his children married, etc. the
one in charge of this in the court would check the
registration. If the registered amount exceeded 10,000
derrik, he or she would receive an amount of twice as

A thousand years later, the inhabitants of Rhodes invented

the concept of the 'general average'. Merchants whose goods
were being shipped together would pay a proportionally
divided premium which would be used to reimburse any
merchant whose goods were jettisoned during storm or
sinkage.The Greeks and Romans introduced the origins of
health and life insurance c. 600 AD when they organized
guilds called "benevolent societies" which cared for the
families and paid funeral expenses of members upon death.
Guilds in the middle ages served a similar purpose.
Separate insurance contracts were invented in Genoa in the
14th century, as were insurance pools backed by pledges of
landed estates. These new insurance contracts allowed
insurance to be separated from investment, a separation of
roles that first proved useful in marine insurance. Insurance
became far more sophisticated in post-renaissance Europe,
and specialized varieties developed.

The first insurance company in the United States underwrote

fire insurance and was formed in Charles town (modern-day
Charleston), South Carolina, in 1732.

Benjamin Franklin helped to popularize and make standard
the practice of insurance, particularly against fire in the form
of perpetual insurance. In 1752, he founded the Philadelphia
contribution ship for the insurance of houses from loss by
fire. Franklin's company was the first to make contributions
toward fire prevention. Not only did his company warn
against certain fire hazards.


The development of a reinsurance market took a

rockier road. Reinsurance of marine risks is thought to be is
old as commercial insurance, but it was not until 1864 that
the practice in the UK was legalised and the ban on marine
reinsurance was removed. Previously, reinsurance had been
considered as a form of gambling.

As reinsurance of fire business appeared unattractive

to UK insurers, co-insurance remained a more common way
of spreading the risk. Insurers wishing to spread their risks
then had to turn to the continental merchant banks for their
reinsurance protection.

It was in continental Europe, in the early 1 SOPs, that

automatic treaty reinsurance was first developed and there
are numerous examples on record of facultative and treaty
reinsurance arrangements at that time.

However, it took until 1852 for the first independent

reinsurance company to be established, and that company
was the Ruchversicherrungs Gesellschaft of Cologne.
Several German companies, including the Aachener Ruck,
followed suit, proving themselves to he as productive as
their forerunner. Unfortunately, British reinsurers who

decided to enter the field found that their initial experiences
were not so fortuitous.

In the 1 870s, quite soon after setting up, a number of

UK reinsurance companies went into liquidation. Ike
reasons for heir lack of success are not altogether clear, but
the UK retained its role as a modest reinsurance market for
some time, with its European counterparts continuing to
hold the stronger market position.

It is in 1880 that we find the earliest trace of excess of

loss reinsurance, as established by Mr Cuthbert Heath of
Lloyds, and nor until 1907 do we find the establishment of
Britains oldest and longest operating reinsurance company,
the Mercantile and General.

Then came the First World War, which brought with it

a curtailment in trading relationships between the UK and its
primary reinsurance markets. This forced companies to look
within their own national boundary for cover and Lloyds, a
late entrant to the reinsurance market, began to take a more
active role, attracting a large volume of business from the
United States of America.



Reinsurance is a means by which an insurance company

can protect itself against the risk of losses with other
insurance companies. Individuals and corporations obtain
insurance policies to provide protection for various risks
(hurricanes, earthquakes, lawsuits, collisions, sickness and
death, etc.). Reinsurers, in turn, provide insurance to
insurance companies

Reinsurance helps primary insurers to reduce their capital

costs and raise their underwriting capacity since major risks
are transferred to reinsurers; the primary insurer no longer
needs to retain capital on its balance sheet to cover them.
Reinsurance thus serves the primary insurer as an equity
substitute and provides additional underwriting capacity.
This indirect capital is cheaper for the primary insurer than
borrowing equity, since reinsurers can offer to assume risks
at more favorable rates thanks to their superior risk
diversification. The additional underwriting capacity permits
the primary insurers to assume additional risks which
without reinsurance they would either have to refuse or
which would compel them to provide a lot more of their own
capital. In a globalized world, in which potential financial
claims are steadily rising and in which the limits of
insurability are being constantly extended, reinsurance thus
assumes a major significance for the whole economy.

Types of reinsurance

Treaty and Facultative Reinsurance

The two basic types of reinsurance arrangements are treaty

and facultative reinsurance.

In treaty reinsurance, the ceding company is

contractually bound to cede and the reinsurer is bound to
assume a specified portion of a type or category of risks
insured by the ceding company. Treaty reinsurers, including
the SCOR Group, do not separately evaluate each of the
individual risks assumed under their treaties and,
consequently, after a review of the ceding company's
underwriting practices, are dependent on the original risk
underwriting decisions made by the ceding primary policy
Such dependence subjects reinsurers in general, including
SCOR, to the possibility that the ceding companies have not
adequately evaluated the risks to be reinsured and, therefore,
that the premiums ceded in connection therewith may not
adequately compensate the reinsurer for the risk assumed.

The reinsurer's evaluation of the ceding company's risk

management and underwriting practices as well as claims
settlement practices and procedures, therefore, will usually
impact the pricing of the treaty.

In facultative reinsurance, the ceding company cedes
and the reinsurer assumes all or part of the risk assumed by a
particular specified insurance policy. Facultative reinsurance
is negotiated separately for each insurance contract that is
reinsured. Facultative reinsurance normally is purchased by
ceding companies for individual risks not covered by their
reinsurance treaties, for amounts in excess of the monetary
limits of their reinsurance treaties and for unusual risks.
Underwriting expenses and, in particular, personnel costs,
are higher relative to premiums written on facultative
business because each risk is individually underwritten and
administered. The ability to separately evaluate each risk
reinsured, however, increases the probability that the
underwriter can price the contract to more accurately reflect
the risks involved.

o Individual o No individual

risk review risk scrutiny
by the
o Right to
accept or
reject each o Obligatory
risk on its acceptance
own merit by the
reinsurer of
o A profit is
expected by
the reinsurer
in the short o A long-term
and long relationship
term, and in which the
depends reinsurers
primarily on profitability
the is expected,
reinsurers but measured
risk selection and adjusted
process over an
o Adapts to
period of
philosophy o Less costly
of the insurer than per
o A contract or reinsurance
certificate is
o One contract
written to
confirm each
all subject
o Can reinsure
a risk that is
from a treaty

o Can protect a
treaty from

Proprotional And Non-Propoertional Reinsurance

Both treaty and facultative reinsurance can be written on a
proportional, or pro rata, basis or a non-proportional, or
excess of loss or stop loss, basis.

Proportional reinsurance (the types of which are quota share
& surplus reinsurance) involves one or more reinsurers
taking a stated percent share of each policy that an insurer
produces ("writes"). This means that the reinsurer will
receive that stated percentage of each dollar of premiums
and will pay that percentage of each dollar of losses. In
addition, the reinsurer will allow a "ceding commission" to
the insurer to compensate the insurer for the costs of writing
and administering the business (agents' commissions,
modeling, paperwork, etc.).

The insurer may seek such coverage for several reasons.

First, the insurer may not have sufficient capital to prudently
retain all of the exposure that it is capable of producing. For
example, it may only be able to offer $1 million in coverage,
but by purchasing proportional reinsurance it might double
or triple that limit. Premiums and losses are then shared on a
pro rata basis. For example, an insurance company might
purchase a 50% quota share treaty; in this case they would
share half of all premium and losses with the reinsurer. In a
75% quota share, they would share (cede) 3/4 of all
premiums and losses.

The other form of proportional reinsurance is surplus share

or surplus of line treaty. In this case, a retained line is
defined as the ceding company's retention - say $100,000. In
a 9 line surplus treaty the reinsurer would then accept up to
$900,000 (9 lines). So if the insurance company issues a
policy for $100,000, they would keep all of the premiums

and losses from that policy. If they issue a $200,000 policy,
they would give (cede) half of the premiums and losses to
the reinsurer (1 line each). The maximum underwriting
capacity of the cedant would be $ 1,000,000 in this example.
Surplus treaties are also known as variable quota shares.

Non-proportional reinsurance only responds if the loss
suffered by the insurer exceeds a certain amount, called the
retention or priority. An example of this form of reinsurance
is where the insurer is prepared to accept a loss of $1 million
for any loss which may occur and purchases a layer of
reinsurance of $4m in excess of $1 million - if a loss of $3
million occurs the insurer pays the $3 million to the
insured(s), and then recovers $2 million from its
reinsurer(s). In this example, the reinsured will retain any
loss exceeding $5 million unless they have purchased a
further excess layer (second layer) of say $10 million excess
of $5 million. The main forms of non-proportional
reinsurance are excess of loss and stop loss. Excess of loss
reinsurance can have three forms - "Per Risk XL" (Working
XL), "Per Occurrence or Per Event XL" (Catastrophe or Cat
XL), and "Aggregate XL". In per risk, the cedants insurance
policy limits are greater than the reinsurance retention. For
example, an insurance company might insure commercial
property risks with policy limits up to $10 million and then
buy per risk reinsurance of $5 million in excess of $5
million. In this case a loss of $6 million on that policy will
result in the recovery of $1 million from the reinsurer. In
catastrophe excess of loss, the cedants per risk retention is
usually less than the cat reinsurance retention (this is not
important as these contracts usually contain a 2 risk
warranty i.e. they are designed to protect the reinsured
against catastrophic events that involve more than 1 policy).
For example, an insurance company issues homeowner's
policies with limits of up to $500,000 and then buys
catastrophe reinsurance of $22,000,000 in excess of
$3,000,000. In that case, the insurance company would only
recover from reinsurers in the event of multiple policy losses
in one event (i.e., hurricane, earthquake, flood, etc.).
Aggregate XL afford a frequency protection to the reinsured.
For instance if the company retains $1m net any one vessel,
the cover $10m in the aggregate excess $5m in the aggregate
would equate to 10 total losses in excess of 5 total losses (or
more partial losses). Aggregate covers can also be linked to
the cedant's gross premium income during a 12 month
period, with limit and deductible expressed as percentages
and amounts. Such covers are then known as "Stop Loss" or
annual aggregate XL


Reinsurance companies themselves also purchase
reinsurance and this is known as a retrocession. They
purchase this reinsurance from other reinsurance companies.
The reinsurance company who sells the reinsurance in this
scenario are known as retrocessionaires. The reinsurance
company that purchases the reinsurance is known as the

It is not unusual for a reinsurer to buy reinsurance protection

from other reinsurers. For example, a reinsurer that provides
proportional, or pro rata, reinsurance capacity to insurance
companies may wish to protect its own exposure to
catastrophes by buying excess of loss protection. Another
situation would be that a reinsurer which provides excess of
loss reinsurance protection may wish to protect itself against
an accumulation of losses in different branches of business
which may all become affected by the same catastrophe.
This may happen when a windstorm causes damage to
property, automobiles, boats, aircraft and loss of life, for

This process can sometimes continue until the original

reinsurance company unknowingly gets some of its own
business (and therefore its own liabilities) back. This is
known as a spiral and was common in some specialty
lines of business such as marine and aviation. Sophisticated

reinsurance companies are aware of this danger and through
careful underwriting attempt to avoid it.

Well-written software can either detect reinsurance spirals,

or poor software will ignore it, with the latter amplifying the
effect of spiraling.

In the 1980s, the London market was badly affected by the

creation of reinsurance spirals. This resulted in the same loss
going around the market thereby artificially inflating market
loss figures of big claims (such as the Piper Alpha oil rig).
The LMX spiral (as it was called) has been stopped by
excluding retrocessional business from reinsurance covers
protecting direct insurance accounts.

It is important to note that the insurance company is obliged

to indemnify its policyholder for the loss under the insurance
policy whether or not the reinsurer reimburses the insurer.
Many insurance companies have experienced difficulties by
purchasing reinsurance from companies that did not or could
not pay their share of the loss (these unpaid claims are
known as uncollectibles). This is particularly important on
long-tail lines of business where the claims may arise many
years after the premium is paid.


To overcome the high administration costs and uncertainty

of reinsuring large numbers of individual risks on a
facultative basis, the reinsurance treaty came into being

Proportional treaties include quota shares, various levels of

surpluses and facultative obligatory treaties. Non
proportional treaties include risk excess of losses,
catastrophe excess of losses, stop losses and aggregate

A proportional treaty may he referred to as a pro-rata or

surplus lines or excess lines treaty. A nonproportional
treaty may be referred to as an excess of loss, excess or X/L
treaty or emit ram.

The party passing on liability may be termed the cedant,

insured, reinsured or retrocedant and the party accepting the
liability may be termed the reinsurer or retrocessionaire.
Apart from the term cedant, which can be applied to all
parties passing on liability, the terminology used depends on
where the party is in the chain of reinsurance buying and

Financial reinsurance

Financial Reinsurance, also known as 'fin re', is a form of

reinsurance which is focused more on capital management
than on risk transfer. In the non-life segment of the insurance
industry this class of transactions is often referred to as finite

One of the particular difficulties of running an insurance

company is that its financial results - and hence its
profitability - tend to be uneven from one year to the next.
Since insurance companies generally want to produce
consistent results, they may be attracted to ways of hoarding
this year's profit to pay for next year's possible losses (within
the constraints of the applicable standards for financial
reporting). Financial reinsurance is one means by which
insurance companies can "smooth" their results.

A pure 'fin re' contract for a non-life insurer tends to cover a

multi-year period, during which the premium is held and
invested by the reinsurer. It is returned to the ceding
company - minus a pre-determined profit-margin for the
reinsurer - either when the period has elapsed, or when the
ceding company suffers a loss. 'Fin re' therefore differs from
conventional reinsurance because most of the premium is
returned whether there is a loss or not: little or no risk-
transfer has taken place.

In the life insurance segment, fin re is more usually used as a
way for the reinsurer to provide financing to a life company,
much like a loan except that the reinsurer accepts some risk
on the portfolio of business reinsured under the fin re
contract. Repayment of the fin re is usually linked to the
profit profile of the business reinsured and therefore
typically takes a number of years. Fin re is used in
preference to a plain loan because repayment is conditional
on the future profitable performance of the business
reinsured such that, in some regimes, it does not need to be
recognised as a liability for published solvency reporting.

'Fin re' has been around since at least the 1960s, when
Lloyd's syndicates started sending money overseas as
reinsurance premium for what were then called 'roll-overs' -
multi-year contracts with specially-established vehicles in
tax-light jurisdictions such as the Cayman Islands. These
deals were legal and approved by the UK tax-authorities.
However they fell into disrepute after some years, partly
because their tax-avoiding motivation became obvious, and
partly because of a few cases where the overseas funds were
siphoned-off or simply stolen.


Basis of Insurance and Need for


General insurance business is still largely untouched by the

discipline of a mathematical base. It is obvious that
insurance operates on the law of probability. The risk
premium should represent the sum total expected value of
loss during a year using the probability of occurrence of
losses of different magnitudes affecting the risk. In practice,
this estimation is derived from the observed incidence of
losses on the insured portfolio. Even if an accurate
mathematical determination of the expected value of loss be
possible, the actual observed losses will be different from
this figure. The extent of variation will depend on the size of
the insured portfolio. The financial impact of such variation
must be kept within the sustaining reason for limiting
exposure to loss on one risk according to a schedule of
retentions. Since a large number of risks offered insurance in
practice exceed the retention capacity of a company,
reinsurance becomes essential for any companys operation.

Good Reinsurance Management

Optimization of a companys profits and growth prospects

involve optimization of its retention and designing of its
reinsurance program to best advantage. Reinsurance should
not be limited to getting rid of the portion of risk that cannot
be retained. It should contribute more positively to the
companys prosperity. Since the nature of a companys
portfolio is generally not static, the reinsurance
arrangements have to be kept under review continuously.
Hence, the concept of dynamic reinsurance management is

The objectives of a good reinsurance program are as

(a) Provide adequate reinsurance capacity to enable the

business of different branches to operate without any

(b) Provide maximum possible freedom in rating and claims


(c) Facilitate development of knowledge and skills for the

underwriting staff.

(d) Help the company to optimize its retention both in terms

of premium as well as profits. Progressive increase in
retention without disruption of arrangements should be

(e) Ensure stable reinsurance arrangements both with regard

to availability of cover as well as terms.

(f) Help minimize profit ceded on reinsurances placed. Such

minimization should be equitable and should not be entirely
subject to forces.

(g) Establish business relationships with reinsurers of the

highest standing. Reinsurers who will willingly and readily
honour their obligations, who will take a long-term view and
stand by the company.

(h) Generate a flow of satisfactory inward reinsurance
business. Such business will help to improve the spread and
balance the net retained account and should help to increase
net premium and profits.

i) Keep administration of reinsurance simple and economic.

Proper Retention Policy

Reinsurance is not the means to get-rid-of bad business.

Automatic reinsurance arrangements are like products
manufactured by an industrial company. Similar attention to
quality of product and the reputation of the company is
necessary. When there was easy availability of reinsurance
(which may not continue for ever) some companies have
been able to expand premium volume without attention to
quality and have produced good net results by keeping very
low retentions and reinsuring out. However, this is a
dangerous management policy and exposes the entire future
of the company to the operation of market forces. The
reinsurance program should be based on a sound retention


The existence of a market does not require the presence of
buyers and sellers in one particular building or area; the
main criterion for its successful operation is that traders can
communicate to transact business. It could be said that there
is really only one reinsurance market that is the worldwide
market. According to a Swiss Reinsurance study, the
worldwide demand for reinsurance in 1992 was some
$l5Obn (LlOObn), with the top 10 markets accounting for
three quarters of the total. The US remains by far the biggest
purchaser at $43.3bn, followed by Germany at 23.8bn and
the UK at $16.4bn.The reinsurance market(s) operate in a
constantly changing environment. What makes a risk
attractive to reinsurers today, may make it unattractive
tomorrow and tax regulations, accounting and legal
processes all have an effect on reinsurers attitude to risk.

As one market contracts, another expands, taking up the

surplus capacity which over-spills and, with the current
harmonising of EU insurance and reinsurance regulations,
this may also bring about further changes which will
influence reinsurers future business strategies. The five
main international trading areas or markets of Reinsurance

The United Kingdom

The Continent of Europe

The United States of America

The Far East


The United Kingdom

London is an international centre for the placing of

protections for insurance and reinsurance companies
throughout the world. It has a reputation for the strength of
its security and its innovative style of underwriting, leading
the way in electronic risk placement and electronic claim
advice and settlement systems.

The London Markets underwriting resources are produced

by Lloyds and the company market, and in 1992 the total
market generated a gross premium income of approximately
L10.8bn (Swiss Re Study); 52 per cent was written by
companies and P&I clubs and 48 per cent by Lloyds. The
uniqueness of the Lloyds operation and the position of the
surrounding reinsurance companies is considered to have
made London the major reinsurance centre it is today.

The Continent of Europe

There is a vast amount of reinsurance capacity available

from the large number of insurance and reinsurance
companies operating on the Continent.

In Germany the market is dominated by the largest

reinsurance company in the world, the Munich Re. The
Cologne Re, Hannover Re & Eisen & Stahl and Gerling

Glohale Re rank among the top 10 in the world league table
of reinsurance companies

In Switzerland the market is dominated by the Swiss Re,

which ranks second in the world and writes approximately
65 per cent of Switzerlands reinsurance premiums. The
Winterthur Group is based there too.

France, Italy and Holland also provide substantial amounts

of international capacity through companies such as Scor SA
Group, Generali and NRG.

Many continental companies, particularly in Germany, have

developed their reinsurance accounts through strong
domestic insurance portfolios. Some of the direct accounts
were built up through links with particular sections of
industry and commerce, e.g. trade unions and trade
associations. Companies based in countries such as
Switzerland, with a relatively small domestic market,
developed with the help of a widely spread international
network of offices.

Many major continental companies have also set up UK

registered companies, which accept business in the London

Reinsurers receive offers of reinsurance direct from cedants

and from domestic and international brokers. In addition,
risk placement via electronic networks should also be

available to continental based underwriters when URZvIAs
European market strategy comes to fruition. An increasing
number of reinsurers and brokers are members of the
l3russels based network, RINET (Reinsurance and Insurance

The United States of America

The United States is mainly a domestic reinsurance market

and the largest market of its kind in the world. The high
volume of domestic business and the continental spread of
risk has encouraged this development, and the amount which
is reinsured internationally, especially with Lloyds and
London companies, is substantial.

The comparatively small volume of business which it

accepts from outside its boundaries is continuing to grow. Its
top two reinsurers, Employers Re and General Re, are
among the top 10 largest global reinsurance companies in
the world.

Insurance legislation is mainly a matter for the individual

state, with the Federal government taking a role in broader
constitutional matters. Reinsurance operations can be
divided into admitted and non-admitted reinsurers.

Admitted reinsurers are licensed in at least one state and

include alien, or non-US, companies and Lloyds
underwriters. Non-admitted reinsurers are not licensed in
any state, but operate subject to compliance with various
requirements imposed by the insurance departments within
each state.

All states are members of the National Association of

Insurance Commission which is a forum for discussing
aspects of insurance regulations, including securities
valuation and accounting practices. Its standards form the
basis for many state regulations.

Business throughout the US can be conducted direct with

reinsurance professionals, through reciprocal exchanges or
through domestic and international brokers. Over the years a
number of American brokers have developed into large
international organisations, mainly through company
mergers and acquisitions.

The two main associations representing the American

reinsurance market are BRM.A (Brokers & Reinsurers
Market Association), and RAA (Reinsurance Association of
America). BRMA is made up of leading US reinsurance
brokers and broker orientated reinsurers, and the RAA
represents all the major US reinsurance companies.

The Far East

The main insurance centres in the Far East are situated in
Japan and Hong Kong and, although their international
reinsurance markets are still relatively small, they are
considered to have considerable growth potential.

Japan is one of the most highly regulated insurance markets

in the world and all its domestic insurers accept both
insurance and reinsurance business. Quota shares of
marketwide pools and reciprocal exchanges of business have
ensured a well-spread domestic account for insurers. Based
on net written premium income in 1994, the Tokio Marine
and Fire, Toa Fire & Marine and Yasuda Fire & Marine are
three of its top reinsurance writers, the Tokio and Toa being
among the top 15 largest reinsurance companies in the
world. There are only two professional reinsurance
companies, the Toa and Japan Earthquake Re, the latter
accepting only domestic earthquake business.

It was through reciprocal exchanges on their proportional

treaty business that Japan first entered the international
markets. Non-reciprocal business, particularly catastrophe
excess of loss protection, is now freely placed and although
there is considerable reinsurance capacity in Tokyo,
international reinsurance has not proved to be particularly
attractive to Japanese companies.

Reinsurance brokers feature heavily in servicing the

Japanese market. The main market association to which all

Japanese property/casualty insurance companies belong is
the Marine and Fire Insurance Association of Japan.

Hong Kong has established itself as a regional insurance

centre for the Asia Pacific Rim and in 1993 there were 224
authorised insurers. There are approximately 10 reinsurance
companies based in Hong Kong, which have traditionally
serviced northern Asia, China, Korea, Taiwan, the
Philippines and Thailand.

Offshore markets

A large, and growing number of governments around the

world have set up international financial centres or
havens, with the purpose of encouraging, through tax
incentives and other financial benefits, captive insurance
companies and reinsurance operations into their country.

A captive insurance company is owned by a company, or

companies, not primarily engaged in the business of
insurance, and all, or a major portion of the risks accepted
by the captive relate to the risks of its parent and affiliated

The rapid growth of the captive insurance industry is

relatively recent and in 1996 there were approximately 3,600
captives worldwide. The rise in popularity of establishing
captives in offshore domiciles can be attributable to the less
restrictive insurance regulations, freedom from exchange
control, and the absence or low rates of taxation which

The major offshore centres arc situated in:


The Cayman Islands


Isle of Man.

Bermuda is the largest of the offshore markets, housing over

1200 captives. It is heavily supported by the US and it is
estimated that two-thirds of all US foreign reinsurance flows
through the island.

The island has also become a major reinsurance market and

has attracted a number of highly capitalised reinsurance
companies with high levels of international reinsurance

Reinsurance Contracts

The relationship between the insurer and reinsurer rests

upon the wordings of the contracts, which consist of
important ingredients such as premium, commission,
retention and limit. The key lies in clarity while drafting the
contract, the absence of which, results in a dispute later on.
The negotiating process plays an important role while
drafting the contract. Therefore, senior executives of both
the parties should take a lead role in the process and identify
the loopholes in the contract and leave no communication

Reinsurance generally operates under the same legal

principles as insurance, and reinsurance agreements, as with
any legally binding contract, must satisfy fundamental
criteria to ensure that a valid contract is formed.

In order to decide whether a contract has been entered into,

it is necessary to establish that the basic elements of offer,
acceptance and an intention to form a legal relationship are

A further essential element in establishing a contract is

consideration, which in insurance and reinsurance
contracts equates to the premium. This is the missing
ingredient in the formation of proportional reinsurance
agreements such as quota share and surplus treaties and,
therefore, these treaties are termed contracts for reinsurance.
Whereas other contracts, such as facultative and excess of
loss agreements, are termed contracts of reinsurance. A
contract for reinsurance becomes a contract of reinsurance

as each individual cession is ceded to the treaty and
premium becomes due.

A valid insurance contract must additionally satisfy the

following criteria:

There must be an insurable interest in the risk.

The principles of indemnity must be observed.

The principle of utmost good faith must be observed.

A breach of the principle of utmost good faith or, to give it

its Latin name, uberrimae fidei, has been the grounds for
many a legal battle between contracting parties. The
principle of uberrimae fidei is probably a more onerous one
in reinsurance negotiations than insurance, due to the way in
which reinsurance business is transacted. In order that the
principle may be satisfied, all material facts relating to the
risk must be disclosed to underwriters; it is not a
requirement that underwriters must ask the right questions to
uncover the facts.


Worlds Top 10 Reinsurers

Company premiums
Swiss Re $27,680,19
Group 9,200
Munich $23,760,16
Re Group 1,400
Hannover $9,661,392
Re Group ,406
Hathawa $9,491,000
y/Gen Re ,000
5 of
6 XL Re
7 Re Group
8 PartnerRe $3,615,878

Ltd. ,000
ntic $3,466,353
Holdings ,000
1 Tempest $2,848,758
0 Reinsura ,000
nce Ltd.

The growth of insurance premium by years is shown on the
following chart:

Reinsurance In India


General Insurance Corporation of India (GIC) has assumed

the role of National Reinsurer for the market. It provides
treaty and facultative capacity to the insurance company.
It continues to manage Hull Pool on behalf of the market
(mainly public sector Insurance companies).

The Pool received cession on fixed percentage basis from

direct companies and after protection; the business is retro-
ceded back to member companies.
Large risks opt for Package Policies, insurance terms for
which are obtained from International Market.
Each direct writing company arranges surplus treaties and
excess of loss protection.GIC arranges market surplus treaty
for Property, Cargo, and Miscellaneous accident business
and direct company can utilize the market surplus treaties
after utilization of their own treaties.
Public sector Insurance companies are adopting inter-
company cession to utilize other companies net retention.


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
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
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.
Not more than 10% of reinsurance premium to be placed
with one re-insurer

Procedure to be Followed for Reinsurance

Arrangements as per IRDA

The Reinsurance Program shall continue to be guided by

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
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.
Every insurer shall cede such percentage of the sum assured
on each policy for different classes of insurance written in
India to the Indian insurer as may be specified by the
Authority in accordance with the provisions of Part lV-A of
the Insurance Act, 1938.
The reinsurance program of every insurer shall commence
from the beginning of every financial year and every insurer
shall submit to the Authority, his reinsurance programs for
the forthcoming year, 45 days before the commencement of
the financial year.
Within 30 days of the commencement of the financial year,
every in surer shall file with the Authority a photocopy of
every reinsurance treaty slip and excess of loss cover
covernote in respect of that year together with the list of
reinsurers and their shares in the reinsurance arrangement.
The Authority may call for further information or
explanations in respect of the reinsurance program of an

insurer and may issue such direction, as it considers
Insurers shall place their reinsurance business outside India
with only those reinsurers 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 reinsurers
shall require the approval of the Authority. Insurers may also
place reinsurances with Lloyds syndicates taking care to
limit placements with individual syndicates to such shares as
are commensurate with the capacity of the syndicate.
The Indian Reinsurer shall organize domestic pools for
rcinsurancc surpluses in fire. marine hull and other classes in
consultation with all insurers on basis, limits and terms
which arc 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.
Surplus over and above the domestic reinsurance
arrangements class wise can be placed by the insurer
independently with any of the reinsurers complying with
sub-regulation (7) subject to a limit of 10 percent of the total
reinsurance premium ceded outside India being placed with

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.
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
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.
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

The Indian Reinsurer shall retrocede at least 50 percent of

the obligatory cessions received by it to the ceding insurers
after protecting the portfolio by suitable excess of loss
Some Important News on the
Reinsurance Industry

Foreign reinsurers may get India access

Government May Allow Cos To Open Local Branches; No
Move Yet To Allow PSU Insurers To Go Public
The Economic Times 24/05/2005

THE government may allow foreign reinsurance

companies to set up branch offices in the country with
certain regulatory restrictions, according to a senior finance
ministry official.
This is one of the areas, where there is a broader
political consensus with respect to foreign investment in the
insurance sector, said joint secretary (banking & insurance)
GC Chaturvedi after a seminar here on Wednesday.
At present, foreign reinsurers are already allowed to set up
representative offices in the country. However, these outfits
cannot underwrite business, which branches would be in a
position to do.
The proposal to allow foreign reinsurers is one of the
113 amendments proposed in the IRDA Act and the group of
ministers (GoM) looking into this has already met thrice.
The GoM is expected to meet again soon, he said. Mr
Chaturvedi also clarified that there is no move to allow
public sector insurance companies to tap the capital market
to meet the fund requirement for their overseas expansion
plans. The general insurance companies have reserves of
over Rs 1, 000 crore, which was adequate to meet their
overseas expansions plan, he said. As for Life Insurance

Corporation (LIC), the government has given the
corporation Rs 160 crore exclusively for its foreign business.
However, there could be some revisions to the norms
for standalone health insurance companies. There could be
differential capital bases and the overall equity cap could be
brought down from Rs 100 crore to Rs 50 crore.
Earlier, speaking on the trends in the sector, PC James,
member of IRDA, said that as the economy is moving from
an industrial economy to service economy, the need for risk
cover on various services is increasing, which, in turn,
makes a strong case for more liability products. Already in
FY07, liability products have recorded the fastest growth, he
New India plans mortgage insurance JV
NEW India Assurance (NIA), the country's
largest general insurer by premium income,
plans to team up with General Insurance
Corporation (GIC) and National Housing Bank
(NHB) to float India's first mortgage insurance
company, report Atmadip Ray & Debjoy
Sengupta in Kolkata. NIA is in talks with
potential partners in the mortgage insurance JV.
When contacted, NIA chairman and managing
B Chakrabarti confirmed his company is in
discussions with other promoters on picking up
stakes in the proposed JV. However, it is
undecided how much NIA will hold in the
company. "A final decision is yet to be taken as
there are regulatory issues involving both
Reserve Bank of India and Insurance
Regulatory & Development Authority, he said.
GIC Housing Finance, a subsidiary of the
countrys only reinsurer GIC, is also slated to
buy a tiny stake in the proposed mortgage
insurance company.

Case: I

Munich Re In a Whirlpool?

Munich Re, the largest reinsurer in the world is facing a

threat of getting trapped into a vicious circle. Recently there
has a downgrade in ratings by S&P that might lead to
another downgrade if the company resorts to inferior quality
of business or less premium rates. The business has been
Tough for the company due to the ripple effects of 9/11
attacks coupled by dismal investment performance. Von
Bombard has recently assumed the position of CEO and has
a daunting task of sailing the company out of this storm.

Munich Re, the worlds largest reinsurer has reported losses

of $680 million in e first-half of 2003 and its rating is
downgraded by SAP from AA- to A+ resulting Munich Re
the lowest rated reinsurance company in the European
region. The ratings downgrade was on account of bad equity
investments and its stakes in Allianz, HVB and
Commerzbank, whose performances were unsatisfactory.
The company is facing a threat that this ratings cut may be a
trigger to get trapped in a vortex. Since the ability to attract
new business is reduced, a compromize either on quality of
business or premium levels may lead to fall in profits which
may further lead to ratings downgrade. How will the new
CEO Von Bomhard, take stock of this situation?

Munich Re - The History

The insurance industry was initially triggered by the rapid

commercial activity in Germany. Carl Thieme started
Munich Re in 1880 at a time when there was a sense of
disappointment for insurance and reinsurance companies in
the country. The company was started in two rented rooms
with five employees and a share capital of three million
marks. After eight years of its commencement it was quoted
in the stock exchange and its share capital was increased to
4.8 million marks. The number of staff also kept rising. It
employed 55 people by 1890, 348 in 1900, 450 in 1914, 614
in 192O

The company faced its first tough time in April 1906 when
an earthquake occurred in California devastating the city of
San Francisco. Around 3,000 people died and there was a
property damage to the tune of 500 million dollars of which,
11 million Goldmark happened to be of Munich Re The
prompt settlement of claims fetched Carl Thieme the
complement, Thieme is money instead of time is money
from the clients This event triggered the idea of reinsurance
especially in. the US. It was the first company to prepare set
of terms and conditions for machinery insurance in 1900. In

the 1930s, the companys medical staff developed life
insurance manuals by the help of which it was possible to
insure chronically ill who were considered uninsurable until
then. In 1970, it created a geo-sciences research group to
analyze natural hazards covers from a technical point of
view. As of 2003, the company employs engineers and
scientists from 80 different disciplines meteorologists,
geologists, geographers doctors, ships masters and experts
with a wide range of qualifications. Currently the company
is the largest player in the reinsurance segment with
competitors such as Swiss Re and Berkshire Hathaway.

The Reinsurance Market

The origin of reinsurance can be traced to 14th or 15th

century in marine insurance The concept of reinsurance
evolved when a single party found it difficult to insure high
risks involving large payouts. In other words insurance for
the primary insure is reinsurance. It is mainly a tool to
increase capacity enhance stability, protection against
catastrophes, obtain surplus relief to enable growth, gain
underwriting ability and withdraw from territory or line of
business. Reinsurance is mainly classified under two
categories; facultative and treaty. A facultative contract is for
a single risk and treaty is for multiple risks of certain type.
0ver years, reinsurance industry has been handling various
catastrophes such of Hurricane Andrew and successfully
paying the claims.
September 11, 2001 attacks at the World Trade Center had a
big blow to insurance industry including the reinsurers. The
attacks resulted in insurance industry paying $40 billion as
claims, two-thirds of which was paid by reinsurance
industry. This setback was coupled with the stock market
losses trend following the attacks has forced many reinsurers
across the globe to revise their core business of reinsurance
and withdraw from businesses such as management,
investment banking and also the lines business in which they
specialize. With the changed scenario the reinsurers cannot
depend on investment income in their toughtimes. Days
when reinsurers could rely on cushion of investment income,
or seek new markets to make-up for the stage in their own
are long gone Reinsurers now need to focus on delivering
better more consistent underwriting results in their core

A BusinessWeek article mentioned that, The pricing
pressure is starting at top. Reinsurers, the large entities such
as Swiss Re and Munich Re that primary insurance carriers
buy coverage from to reduce risk, have upped their rates to
recover capital reserves depleted by large September 11
claims and stock market losses. Another AON survey report
for the year 2003 mentioned the views of reinsurance
buyers, who expect that the softening trends, which emerged
over the course of 2003, will continue. In the same report,
underwriters felt that slight softening will continue in some
lines of business but rates in others will be driven higher by
contracting supply.

The Current Problem of Munich Re

The company is facing troubles on various fronts. Firstly, the

investment losses have been excessive. As quoted by The
Economist , At the end of 2001 Munich Re had 33% of its
assets in equities; new, it has less than 10%, Besides its stake
in HypoVereinsbank (HVB), Munich Re owns one-fifth of
Allianz, the company situated at its neighbor in
Koniginstrasse. Both holdings have lost more than 75% of
their value in the past three years.

In March 2003, the company announced reduction of its
cross shareholding with Allianz to about 15%. This was a
step taken to strengthen the capital base of Munich Re, since
the performance of Allianz was not up to the mark. The
press release from the company said, The effect of reducing
shareholdings on both sides will be that the respective
participations are no longer valued at equity; consequently,
Munich Re will in future book the dividend of Allianz
instead of the proportional result for the year in its income
statement. Furthermore, the groups free floats and thus the
weightage of their shares in stock market indices will

The news of Mr. Hans-Jurgen Schinzlers retirement on

April 28, 2003 was delicate considering the turbulent times
of the company. Mr. Schinzler who is 62 has to retire as per
corporate Germany standards. The company made profits in
the year 2002 only because it sold 4.7 billion-worth of
shares to Allianz. Un Mr. Schjnzler the company initiated a
diversification strategy. It shares 25 ownership in HVB, the
countrys second biggest bank. It also Owns 10% of
Commerzbank, One of its subsidiaries ERGO is Germanys
biggest primary insurer however it incurred a loss of 1.1
billion last year mainly due to investments these
circumstances when Mr. Bernhard has to takeover the
charge, there was daunting task ahead of him.

Following that the biggest blow came with the ratings
downgrade by S&P on account of weak profits and reduced
capital base. The company in press release next day claimed
the downgrade to be unjustified. The company bragged of its
AAA rating. A Business Week article commented All the
more so in the cloistered world of reinsurance, where
billions of dollars on corporate and private-risk coverage are
guaranteed by a few lop firms. The slightest slip in
creditworthiness is a big blow, since it raises questions about
the underwriters ability to make good on claims when
disaster This had put the company into a vicious circle
where the competitors had an edge over company due to
ratings and hence it was tough to obtain new business, since
ratings have a large role to play in the business of insurance
and reinsurance Secondly, this would force Munich Re to
lessen the premium in order to retain clients. A London
insurance broker rightly commented, The big worry is that
ratings cut can be the start of a vicious circle, you have to
pay more for business as a result, which means profits fall
and your rating can get cut again.

Future Outlook

On July 10, 2003 Munich Re became the first nationwide

reinsurer in China after receiving the country-wide operating
license from China Insurance Regulatory Commission. This
was an important move for Munich Re to enter into high
growth- oriented Asian market in testing times. Though the
company had business relationships with China through
offices in Beijing, Shanghai and Hong Kong since 1956, this
license opens the door to an opportunity of an industry that
has a double-digit growth rate.

With this backdrop the new CEO has the challenge to bring
the company out from the vicious circle and continue its
image of the largest reinsurer in the world. At the time of
succession of CEO the issues confronting the new CEO are,
how to come out of the loss-making investments of Munich
Re at Allianz, HVB and Commerzbank? How to retain the
existing customers without straining profits? How to attract
new business despite the ratings cut? And finally, how to
win the AAA rating by S&P, which it used to enjoy?

Case: I I

Swiss Re: Expansion in Asia
Swiss Re is one of the leading global players in the market.
The company has a strong history of profitability that was
only affected by the claims related to 9/1l. The company is
in the expansion spree in Asia particularly in China, India
and Japan. It has a liaison office in all these countries and
has got a branch license in china and Japan. Swiss Re is
currently lobbying for obtaining a branch license in India as
well. After starting of business, the countries will get access
to the global capital and for Swiss Re its a new market
added with diversification of risks.

Swiss Re was founded in 1863 at Zurich, It is one c f the

leading reinsurers of the world. Currently, it does business
from over 70 offices in more than 30 countries and has on its
rolls around 8,100 employees. The company provides risk
transfer, risk management, alternative risk transfer (ART)
and asset management services to its global clients through
its three business groups property and casualty; life and
health; and financial services. The gross premiums written
by the company in the financial year 2002 amounted to CHF
32.7 billion. The rating of Swiss Re from Standard & Poors
is AA, Moodys is Aal, and AM Best is A+ (superior). It is a
public listed company and the shares are being traded in the
Swiss exchange.

Brief History

Swiss Res incorporation was triggered by a major fire on

10-11 May 1861 when 500 houses got burnt and 3000
people became homeless. The inade insurance cover among
the households was highlighted at that point of time provide
more effective means of coping with the risks posed by such
developed the Helvetia General Insurance Company in St.
Gall, the Schweizt Kreditanstalt (Credit Suisse) in Zurich
and the Basler Handeisbank founded the Swiss Reinsurance
Company in Zurich with a capital of six Swiss Francs. The
fire also happened to be the motivation behind the company
s fast growth in the initial years after its formation. Initially
Swiss Re offered fire, marine reinsurance and later on added
life insurance after two years business in 1880.

In 1906, the company suffered one of its biggest losses after

the earthquake San Francisco. Swiss Re opened its overseas
branch in the United States in its first step to overseas
business. The company was also affected by the Titanic on
14/15 April 1912. It acquired major shareholding in
Mercantile General in 1916 and acquired Bavarian Re in
1923. After the World War II was a season of economic
boom. During the period, lot of developments took with
regard to Swiss Re. In the same period Swiss Res business
presence increased in the United States, Canada, South
Africa and Australia. An advisory committee called, Swiss
Re Advisers Limited was found in Hong Kong. In 1959, the
corn premium income crossed one billion mark with 1,043
million Swiss Francs.

In 1977, Swiss Re acquired 94% shares of Switzerland

General Insurance Company Ltd, Zurich. Swiss Re started
selling its majority shareholdings in insurance companies
from 1994. It merged with Union Re in 1998 of which it
acquired majority stake holding in 1988. In 2001, Bavarian
Re was made as Swiss Re Germany and Swiss Re
restructured itself in making three business groups at the
corporate center.

Swiss Re and the Impact of September 11

Swiss Re resulted in loss for the first time in its history of

138 years of profitability in 2001. This was mainly due to
the impact of huge payouts of September attacks. Where the
firm reported profit of 2.97 billion CHF in 2000, it reported
loss of 165 million CHF in 2001 and 9l million in 2002. The
payouts arising from September 11 attacks amounted to
CHF 2.95 billion. Chief executive Walter Kielholz said in an
interview, Despite the worst year ever for insured losses,
Swiss Re strengthened its position during 2001 and is now
well placed to capitalize on improving markets and achieve
superior results in the coming years. At the end of 2001,
Swiss Res shareholders equity amounted to CHF 22.6
billion (USD 13.6 billion) and the total balance sheet stood
at CHF 170 billion (USD 02.4 billion).

In the first-half of 2002, Swiss Re profits came down to
50.91 million from 582 million corresponding to the
previous year. On this Mr. Kielholz said, however, in tough
times experience tells us the opportunities are greatest for
the strongest players. I believe this remains so now for Swiss

Expansion in Asian Countries

Swiss Re has been eying Asian market for long, specifically

Japan, China and India and has taken significant steps to
pursue the same. It has got entry into Chinese and Japanese
market and is lobbying for an entry through branch network
in India. In early 2002, Swiss Re relocated its Asian head
quarters from Zurich to Hong Kong. This move was
strategic and made in order to oversee and manage 14
offices in Asia. The chief executive of Swiss Res Asia
division, Mr. Pierre Oaendo, said The move to Hong Kong
is designed to expand Swiss Res market leadership and to
meet the current and future requirements of the Asian
insurance industry. We chose Hong Kong as our Asian huh
because it, has a strong infrastructure, is the gateway to
China, is located centrally within Asia, and is already home
to a number of other Swiss Re operations. There is also the
availability of insurance and other financial professionals
here, he added.


Swiss Re opened its representative offices in Beijing and
Shanghai in 1996 and 1997 respectively. In August 2002,
Swiss Re received an authorization from China Insurance
Regulatory Commission (CIRC) for operating a branch for
both property! casualty as well as life reinsurance.
According to Swiss Re officials, this is a step towards
obtaining a full license and will enable them to establish
local services within China in order to support and
contribute to the growth of countrys insurance and
reinsurance industry and economy per Se. Insurance market
in China steadily growing and the growth in premium
income has been 23.6% over the 10 years. Foreign insurance
companies have increased from two in 1992 to date.

Commenting on this important approval, Mr. Pierre Ozendo,

chief executive Swiss Res Asia Division, said Swiss Res
close relationship to the China insurance industry is an
excellent foundation upon which to build as China to meet
the growing needs of its economy and its people in
protecting live property as well as business and asset

Swiss Re also believes in tile social growth of the Chinese

economy and mat. of fact it has set up a research center on
natural catastrophe exposure insurance risks together with
the Beijing Normal University in Beijing in 1999. The
research center is dedicated to collecting and interpreting
NatCat data, developing risk measures and maintaining
close ties to other research Institutions and state
organizations of interest. The main objective lies in
developments of models for assessing risks and respective
economic and insurance. models

On December 19, 2003, Swiss Re officially opened the

branch office in Beijing The Chinese insurance market
today is demonstrating exciting growth. I delighted that
Swiss Re has received authorization to open this branch and
now participate directly in tile development of the market,
said Swiss Re CEOJohn Coomber, on the occasion.


December 2003, Swiss Re received a branch

license to provide reinsurance service in Japan
for both property/casualty as well as life and
health domains. Swiss happens to be the first
leading global reinsurance player to obtain a
full license to run a branch in Japan. We are
delighted to receive approval for our branch
license Japan which will strengthen our ability
to service our portfolio of valued clients Japan,
stated Swiss Re CEO, John Coomber on this
occasion.Companys relationship with Japan
dates back to 1913 according to Swiss Re
officials. The company runs a services company
in Japan since 1999 in order to provide global

business expertise to local players. Apart from
this, the company was holding a representative
office in Japan since 1972. Swiss Re though
received non-life insurance license intends to
extend services limited to reinsurance only.

Swiss Re has presence in India from over 70 years.

Swiss Re through Swiss Re Services India Private Limited
offers clients exclusive and specialized risk management
services, international technical expertise and other support
services. It also has a wholly-owned subsidiary in India,
Swiss Re Shared Services (India) Private Limited
incorporated in 2000 for providing back office
administration support. The center will handle contract
administration, claims administration and reinsurance
accounting support for all Swiss Re offices in Asia.

Indian regulations allow foreign reinsurers to set up a

reinsurance company with an Indian partner and minimum
capital of Rs. 200 crore where foreign participation is
restricted to 26%. Swiss Re has been urging Indian regulator
for de-linking reinsurance from direct insurance regulations
and allowing reinsurance branching. Calling for an end to
the joint venture requirements currently imposed on foreign
reinsurers. Mr. Davinder Rajpal, Swiss Re Head of India,
Turkey and Middle-East, pointed out the key benefits

available from allowing wholly-owned reinsurance

A full range of technology know-how and services,

available locally to serve Indias increasingly complex risk

Local insurers can access reinsurers global balance


Increased security and reduced credit risk due to the

regulators direct supervision of reinsurance branches; and

Encourages more foreign direct investment to India.

Swiss Re expects Asian market to grow substantially in the

coming years and says, In Asia, sound economic
fundamentals will continue to support robust insurance
business growth in 2004. Life insurance will in particular
benefit from increasing affluence and rising risk awareness.
Compared to more mature markets, emerging Asia, in
particular China and India, will remain highly attractive
international insurers.

Future Outlook

Swiss Re has been the first entrant in all the three emerging
markets of Asia. The company is backed by strong
fundamentals, financials and global expertise. It possesses
all the prerequisites to be a market leader in these countries.
The presence of Swiss Re has been long in these nations and
the representative offices had been opened at the right time.
The major challenge for Swiss Re as of now especially in
India is the regulatory barrier. So far Swiss Re is the first
and only global player involved in reinsurance services in all
the three markets. The company has already proven its
expertise for long in the global market and the presence has
to be increased in these liberalized markets only by the
passage of time.

Case: I I I
General Insurance Corporation of India
This case provides the history of General Insurance
corporation of India (GIC since nationalization. GICS role
has been significant in the indian insurance industry and it is
currently the sole national reinsurer. GIC is also aspiring to
be a global player in reinsurance. It is evolving itself as an
effective reinsurance solutions partner for the Afro- Asian
region. In addition to that, it has also started leading
reinsurance programmes for several insurance companies in
SAARC countries, South EastAsia, Middle East and Africa.

Insurance has always been a growth-oriented industry

globally. On the Indian scene too, the insurance industry has
always recorded noticeable growth vis-a-vis other Indian
industries. In 1850, the first general insurance company,
Triton Insurance Co. Ltd., was established in India and the
shares of the company were mainly held by the British. The
first Indian general insurance company, lndias Mercantile
Insurance Co. Ltd., was set up in 1907. After independence,
General Insurance Council, a wing of Insurance Association
of India, framed a code c conduct for ensuring fair conduct
and sound business practices in the area ct general
insurance. The Insurance Act was amended and tariff
advisory committee was set up in 1968. In 1972, general

insurance industry was nationalized through the
promulgation of General Insurance Business
(Nationalisation) Act. Around 55 insurers were amalgamated
and general insurance business undertaken by the General
Insurance Corporation of India (GJC) and it subs Oriental
Insurance Company Limited, New India Assurance
Company Limited, National Insurance Company Limited
and United Insurance Company Limited.

The Indian insurance industry saw a new sun when the

Insurance Regulatory. And Development Authority (JRDA)
invited the application for registration for insurers in August,
2000. General Insurance Corporation of india and
subsidiaries have been the erstwhile monarch of non-life
insurance for almost three decades. After donning the role of
the national reinsurer, by GIC, delink of its subsidiaries
and entry of foreign players through joint ventures have
changed the outlook of the whole general insurance industry
and forced GIC to enter arena of competition.

GIC and its four subsidiaries functioned through a huge

network of 4,167 offices spread cross the country. The main
customer interface for these units were in agents,
development officers and employees at branch, divisional
and region. offices in various parts of the country. The total
workforce of GIC and its subsidiaries was around 85,000.
GIC has made a huge contribution to the overall
development of the nation, through investments in the
socially-oriented sectors. The Government of India had
entrusted to, GIC, the administration of various social
welfare schemes, such as personal accident insurance and
hut insurance schemes operated all over the country.

in addition to this, its joint ventures in the form

of GIC mutual fund and GIC housing finance
have contributed not only to the development of
the nation but also to the income growth of the
corporation. GICs net premium and
investments stood at Rs.1,710.26 crore and
Rs.4,556.5 crore as of March 31, 1999. During
the same period, the capital and funds of the
Corporation stood at Rs.2,914.64 cror.
History How was it Formed?

The general insurance industry was nationalized through

General Insurance Business (Nationalization) Act, 1972
(GIBNA). The Government of India took over the shares of
55 Indian insurance companies and 52 insurance companies
carrying on general insurance business. GIC was formed in
pursuance of Section 9(1) of GIBNA. Incorporated on
November 22, 1972, under the Companies Act, 1956, GIC
was formed for the purpose of superintending, controlling
and carrying on the business of general insurance. After the
formation of GIC, the central government transferred all the
shares held by it of various general insurance companies to
GIC, Thus, after the whole process of mergers and
acquisitions in the insurance industry, the whole business
was transferred to General Insurance Corporation and its
four subsidiaries.

Among its four subsidiaries, National Insurance Company

was incorporated in the year 1906. As a subsidiary of the
GIC, it operates general insurance business in India with its
head office located at Kolkata. New India Assurance
Company was formed in the year 1919 and operates general
insurance business in India with its head office at Mumbai.
New India Assurance company is considered as the most
successful company in the field of general insurance.
Oriental Insurance Company was established in the year
1947 and its head office is located in New Delhi. United
India Insurance Company operating its general insurance
business with its head office at Chennai.

What Went Wrong?

General Insurance Corporation recorded a net premium of

$1.3 billion in the year 1995-96. Its claim settlement ratio
was 74% higher than the global average of 10%. So, what
went wrong for this public sector monolith? GIC and its
subsidiaries faltered, when it came to customer satisfaction.
Large scale of operations, public sector bureaucracies and

cumbersome procedures hampered the progress of not only
GIC, but also LIC (Life Insurance Corporation of India).
The huge staff of agents of GIC and its four subsidiary
companies failed to penetrate into the rural hinterland to sell
general insurance whether it was crop insurance or any other
form of personal line insurance. As evident from the
condition of farmers in the country, GIC has failed in its
object to provide insurance cover to the needy, which really
required the much-needed financial security. The
nationalized insurers, both GIC and LIC employ almost half-
a-million employees. They are the highest paid but still the
both organizations suffer from low productivity, corruption,
indiscipline and total ignorance of the basic principles of the
insurance business. GIC suffered due to corruption within its
own specific business divisions motor insurance and
mediclaim policy. Collusion between the surveyors and
customers also bled GIC, leading to low morale among the
employees and public discontentment

The main reason for such a pathetic condition lies within the
management of these public sector companies. The
management of these units is strongly dominated by
employee unions, which transformed the insurance sector to
a class business from a value-based company. The domestic
insurance companies, meeting their social objectives of
going into the deepest interiors of the country lagged behind
in meeting customer expectations in products and services.

Malhotra Committee

As the process of liberalization started from the year 1991,

reforms were targeted various sectors of the economy. In the
same league, insurance sector had to wait almost nine years
before, reforms were implemented. The whole process starts
with the setting up of the Malhotra Committee in 1993,
headed by R N Malhotra former governor of Reserve Bank
of India. Although the achievement of LIC CIC in spreading
insurance awareness and mobilizing savings for national
development and financing core social sectors was
acknowledged, the committee gave a concise report on the
Indian insurance industry dominated by the public sector. l
report indicated that both the LIC and GIC were overstaffed
and faced no competition at all. Thus, consumers were
deprived of wider range of products efficient service and
lower-priced insurance products.

The report indicated that net premium income in general

insurance hush had grown from Rs.222 crore in 1973 to
Rs.3,863 crore in 1992-93. In addition this, investments also
increased from Rs.355 crore to Rs.7,328 crore over the said
period. GIC also acquired high reputation in the
international reinsurance market But there was the other side
of the coin. Excessive control coupled with absence
competition led to stagnation of both the public sector units
hampering the improvement and operational efficiency.

Insurance industrys funds were mainly invested in
government-mandated investments with low yield, which
affected the financial performance of the insurance c This
led to high rates of insurance premia but low returns on
savings invested in insurance. In addition to that, due to
absence of competition, there was laxity among the insurers
to perform well and improve customer satisfaction.

Thus, Malhotra Committee made a number of

recommendations for the well-being of the Indian insurance
industry. The committee recommended proper training of
insurance agents, adequate pricing of insurance products and
periodic review of premium rates. Malhotra Committee
recommended for establishing a strong and effective
authority for the insurance sector similar to the Securities
and Exchange Board of India (SEBI). In addition to this, the
committee also recommended that all the four subsidiaries
of GIC should function as independent companies and GIC
should cease to be the holding company.

Malhotra Committee Report submitted in 1994 gave various

recommendations for the insurance sector, such as capital
investment in the insurer company should be increased to
100 crore for life insurance business or general insurance
and Rs.200 crore for the reinsurance business. It also
recommended that the share of the foreign investment to the
total investment should not be more than 26% of the share
capital in the insurance joint venture company.
Recommendations Specific to GIC:

The government should takeover the holdings of GIC and

subsidiaries, so that they can act as independent

GIC and subsidiaries are not to hold more to an 5% in any

company. The current holdings of the companies should be
brought down to the specified level over a period of time.

Considering the above recommendations, the central

government enacted, The Insurance Regulatory and
Development Authority Act, 1999. The Act is applicable to
all states except Jammu and Kashmir, for which this Act is
applicable with modifications made by the government.


The Insurance Regulatory and Development Authority Act,

1999, is the product of a Bill submitted to the Parliament in
December 1999. Insurance Regulatory and Development
Authority Bill was passed on December 2, 1999. The IRDA
Bill opened the Indian insurance sector to the rest of the
world, through the entry of competitive players in the
insurance sector and the inflow of long-term capital. The
IRDA Bill provided for the establishment of Insurance
Regulatory and Development Authority, as an authority to
protect the interests of the holders of insurance policies and
for the regulation and promotion of Indian insurance

industry. The IRDA Act provides statutory status to the
regulator. The IRDA Bill has amended the Insurance Act,
1938, the Life Insurance Act, 1956, and the General
Insurance Business (Nationalization) Act, 1972. The Bill
allowed foreign participation in the insurance sector. The
foreign companies could have an equitystake up to 26% of
the total paid-up capital.

IRDA Act also fixed minimum capital requirement for life

and general insurance at Rs.100 crore and for reinsurance
firms at Rs.200 crore. The minimum solvency margin for
private insurers is Rs.500 million for life insurance
companies, Rs.500 million or a sum equivalent to 20 percent
of net premium income for general insurance and Rs.1
billion for reinsurance companies. The Authority is a ten
member team consisting of a chairman, a five whole-time
members and four part-time members.

Breaking Up of GIC

The delinking of the four national subsidiaries of GIC was

recommended by the Poddar committee. The committee also
recommended transforming GIC as a national re On
August 7, 2002, the President of lndia later gave his assent
to the Geural Insurance Business (Nationalization)
Amendment Bill, 2002 and the Insu, nce (Amendment) Bill
2002. The General Insurance Business (Nationalization)
Amendment Act, 2002, amended the General Insurance

Business (Nationalization) Amendment Act, 1972, and
delinked the General insurance Corporation (GIC) from its
four subsidiaries the National Insurance Company Ltd,
the New India Assurance Company Ltd, the Oriental
Insurance Company Ltd and the United India Insurance
Company Ltd. Thus, as per the amendment, General
Insurance Corporation was required to carry on reinsurance
business, as the national reinsurer of the Indian insurance

The subsidiaries were asked to increase their equity base to

Rs.100 crore, to comply with the regulations of IRDA. All
these public sector companies had an equity base of Rs.40
crore previously. The shares of these companies previously
held by the dC, were transferred to the government.
According to officials, hiking capital base is a part of an
overall effort to restructure the entire nationalized general
insurance industry. The restructuring was aimed at providing
autonomy to public sector companies.

GIC The National Reinsurer

Reinsurance business in India dates hack to the 1960s. After

independence there rapid development of the insurance
business, hut there was negligible presence reinsurance

companies in India. Thus, the domestic requirement of
reinsurance was netted mostly from foreign markets mainly
British and continental. As undertaking reinsurance business
by Indian companies meant huge outflow of foreign
exchange and in 1956 Indian Reinsurance Corporation was
established. It formed as a professional reinsurance company
by some general insurance companies. The company
received voluntary quota share cessions from member
companies. Later another reinsurance company, the Indian
Guarantee and General Insurance Co. was formed in 1961.
With this set up, a regulation was promulgated which made
it statutory on the part of every insurer to cede 20% in Fire
and Marine Cargo, 10 % in Marine hull and miscellaneous
insurance, and five percent in credit solvency business.

Prior to nationalization, there were 55 non-life domestic

insurers and each company had its own reinsurance
arrangement. After nationalization, all these companies were
brought under the aegnts of General Insurance Corporation
and four subsidies were formed, with GIC as the holding
company. With this backdrop, it has been a quantum jump
for the Indian reinsurance market, with GIC being
established as the national reinsurer. Earlier insurance
companies had to depend on foreign markets, but now after
the IRDA Act has been passed, GIC has focused on
competing with the best in the world.

GICs reinsurance business can be divided into two
categories; domestic reinsurance and international
reinsurance. On the domestic front, GIC provides
reinsurance to the direct general insurance companies in the
Indian market. GIC receives statutory cession of 20% on
each and every policy subject to certain according to the
current statute It leads many of domestic companies
programs and facultative placements. As the sole reinsurer
of the d insurance market, GIC s capacity for each class of
business on treaty and facultative ( business is given below:

GIC is also emerging as an international player in the global
reinsurance evolving itself as an effective reinsurance
solutions partner for the African region. In addition to that, it
has also started leading reinsurance programmes several
insurance companies in SAARC countries, South East Asia,
MidAfrica. GIC provides the following capacities for treaty
and facultative the international market on risk emanating
from international market 1 merits of the business.

General Insurance Corporation, as the Indian Reinsurer,

completed year on March 31, 2002. Although, there has
been an increasing presence in international markets, the
focus of the Corporations operations continue domestic
market, as it constitutes around 94% of its total portfolio.
The Corporation increased to Rs.10,378.84 crore from
Rs.7,773.67 cr0

March 31, 2002. Similarly the total investments of the
Corporation stood

Rs.7135.83 crores as against Rs.6,345.33 in the previous

year. The total investment income of the corporation was
Rs.961.80 crore as against Rs.873.40 crore in the previous
year and gross direct premium income of GIC for the year
amounted Rs.311.57 crore. According to industry sources,
General Insurance Corporation (GIC) is targeting significant
growth for its inward foreign reinsurance business. The
reinsurer is planning to open its branch in Dubai in the near
future. The reinsurance business

the Middle East region targeted by GIC ranges between

Rs.3-5 million. Around 23% of the total inward business for

GIC comes from the Middle East countries. In addition to
that GIC is planning to establish its presence in London,
Moscow, China, Korea, and Malaysia. In 2002, GIC floated
Tarizlndia in Tanzania through Kenlndia, which is a joint
venture with Life Insurance Corporation. At present it is also

a strategic partnership with African reinsurance major, East

Africa Re.

On the domestic front, the Indian Reinsurer, plays the role

of reinsurance facilitator for the Indian insurance companies.
The Corporation continues to act as Manager of the Marine
Hull Pool on behalf of the insurance industry. The
Corporations reinsurance program is designed to fulfill the
objectives maximizing retention within the country,
developing adequate capacity, security the best possible
protection for the reinsurance costs incurred and simplifying
ti administration of business.

The Present Scenario

General Insurance Corporation has been well adapting itself

to the changing reforms scenario. To focus itself on the
reinsurance market both domestic an international, it has
taken various decisions to support its new corporate vision. I
January 2004, GIC has decided to exit its mutual fund arm,
GIC Mutual Fund, so to focus on core reinsurance
operations. The fund had been constantly underperforming
for the last few years. In 2002 -2003, there has been
whopping increase in the foreign inward reinsurance
premium at Rs.600 crore. This increase has pushed the total
reinsurance premium to over Rs.3,800 crore. The India
reinsurer, is willing to write more risks in the domestic
market. The underwriting, losses fell below the Rs.500
crore-mark. Though the severe drought, took its toll cii
GICs underwriting with agricultural losses zooming to
Rs.400 crore in 2002-03 The claims ratio reduced during the
year from 94 to 86%. Though the quantum o foreign inward
premium is low in the total premium income, the increase in
it: share over the last one year is significant. In 2002-03, the
share of foreign premiun has been over 15% compared to
just 6% in the previous year.

International credit rating agency, A M Best, has given A

(Excellent) rating tc the corporation indicating its financial
strength. The rating reflects not only th Corporations
excellent financial position and conservative investment
portfolio but also recognizes its leading position in the
global insurance market. General Insurance Corporation has
formulated plans to capitalize its strengths and capabilities
in the international market and consolidate its operations in
India to provide requisite expertise and technical skills to the
domestic players. Thus, we can conclude that our National
Reinsurer has the requisite and inherent capability of
meeting the future challenges and is ready to make strenuous

efforts to achieve its corporate vision of becoming leading
international reinsurer in the years to come.


With the outster of such terrorist attacks, calamities and stiff
competition the reinsurers have to fight with each other to
grab their share of premium market share this will be more
stiffer and difficult in the times to come.



Reinsurance Concepts And Cases Abhishek Agrawal, ICfai


Practice of Reinsurance in Uk

Reinsurance IC-85, III

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