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Insurance is a means of protection from financial loss. It is a form of risk

management primarily used to hedge against the risk of a contingent,

uncertain loss.

An entity which provides insurance is known as an insurer, insurance

company, or insurance carrier. A person or entity who buys insurance is

known as an insured or policyholder. The insurance transaction involves

the insured assuming a guaranteed and known relatively small loss in the

form of payment to the insurer in exchange for the insurer's promise to

compensate the insured in the event of a covered loss. The loss may or

may not be financial, but it must be reducible to financial terms, and must

involve something in which the insured has an insurable interest

established by ownership, possession, or preexisting relationship.




1) Motorotor Insurance: Motor Insurance can be divided into two groups, two and four
wheeled vehicle insurance.
2) Health Insurance: Common types of health insurance includes: individual health
insurance, family floater health insurance, comprehensive health insurance and critical
illness insurance.
3) Travel Insurance: Travel insurance can be broadly grouped into: individual travel
policy, family travel policy, student travel insurance, and senior citizen health insurance.
4) Home Insurance: Home insurance protects a house and its contents.
5) Marine Insurance: Marine cargo insurance covers goods, freight, cargo, and other
interests against loss or damage during transit by rail, road, sea and/or air.
6) Commercial Insurance: Commercial insurance encompasses solutions for all sectors of
the industry arising out of business operations

Types of LIC Life Insurance:

Endowment Money Back Pension Term ULIP Plan Group Plan

plan policy Plan Insurance

1) Endowment plan
2) Money Back policy
3) Pension Plan
4Term Insurance
5) ULIP Plan
6) Group Plan
1. Endowment plan:

Endowment Plan is a participating non-linked plan which offers an attractive

combination of protection and maturity benefit. In case of uncertain death of the
policy holder LIC offers financial protection to the family of the insured. Moreover at
the time of maturity a lump-sum amount is paid under this plan.

In this policy declare a bonus every year. The bonus declared is not payable
immediately. Bonus is payable only when the policy matures or in case the policy
holder dies.

LIC of India, endowment policies still plays a major role of the insurance policies it

2. Money Back policy:

The money-back policy is a popular insurance policy. It provides life coverage during
the period of the policy and the maturity benefits are paid in installments by way of
survival benefits at regular intervals, instead of getting the lump sum amount at the
end of the term. It is an endowment plan with the benefit of liquidity.

In this policy declare a bonus every year. The bonus declared is not payable
immediately. Bonus is payable only when the policy matures or in case the policy
holder dies. The bonus is also calculated on the full sum assured.

3. Pension Plan:

LIC Pension Plan is most suited for senior citizens and those planning a secure future,
so that you never give up on the best things in life.

This pension plan help the individual to save money for future so that the life can be
secured after the retirement.

4. Term Insurance:
Term Insurance is a protection and traditional plan which provides financial
protection to the insured’s family in case of unfortunate demise with very low

It is a pure life cover policy. Under this policy, against payment of regular premium,
the insurer agrees to pay your beneficiaries the sum assured in event of your
premature death during policy term. However, if you survive till the end of the policy
term, nothing is payable to you.

5. ULIP Plan:

Unit Linked Insurance Plan (ULIP) is a combination of insurance as well as

investment. In ULIP returns are depends on investment performance. This ULIP plans
are more costly than Term and Endowment plan. A part of premium paid are assigned
towards the life cover, while the remaining portion is invested in various equity and
debt schemes. The way ULIP is performs just like Mutual Funds.

6. Group Plan:

The Group plan is a protection to groups of people. This scheme is ideal for
employers, associations, societies etc. and allows you to enjoy group benefits at really
very low costs.

A claim may arise in three basic conditions

The Claimant should look about the following points before intimate a claim:

Whether the policy is in force?

Whether the policyholder has performed his part? - The policy status with regard to
payment of premium, age admission, outstanding loan & interest if any, legal
restrictions if any.
Whether insured event has taken place?
What are the obligations assumed under the contract?
Is there any assignment done under the policy?
Whether all the premiums are paid?

Claim Settlement Process: Death Claim

Step One: Intimation of Claim

The claimant must submit the written intimation as soon as possible to enable the
insurance company to initiate the claim processing. The claim intimation should
consist of basic information such as policy number, name of the insured, date of
death, cause of death, place of death, name of the claimant etc .Claim intimation form
can be availed from nearest branch of the insurance company or/and by downloading
it from the company website.

Step Two: Documentation

The claimant will be required to provide the following documents along with a
claimant's statement:

I. Certificate of Death
II. Proof of age of the life assured (if not already given)
III. Deeds of assignment / reassignments (if required)
IV. Policy document
V. Any other document as per requirement of the insurer

For early death Claim, (If the claim has accrued within three years from the beginning
of the policy), the following additional requirements may be called for:

I. Statement from the hospital if the deceased had been admitted to hospital
II. Certificate of medical attendant of the deceased giving details of his/her last illness
III. Certificate of cremation or burial to be given by a person of known character and
responsibility present at the cremation or burial of the body of the deceased
IV. Certificate by employer if the deceased was an employee

In special cases as per following the poof of death will be different from the standard

In case of an air crash the certificate from the airline authorities would be necessary
certifying that the assured was a passenger on the plane.
In case of ship accident a certified extract from the logbook of the ship is required.
In case of death from medical causes, the doctors’ certificate and/or treatment records
may be required.
If the life assured had a death due to accident, murder, suicide or unknown cause the
police inquest report, panchanama, post mortem report, etc would be required.

Step Three: Submission of required Documents for Claim Processing

For faster claim processing, it is essential that the claimant submits complete
documentation as early as possible.

Step Four: Settlement of Claim

As per the regulation 8 of the IRDA (Policy holder's Interest) Regulations, 2002, the
insurer is required to settle a claim within 30 days of receipt of all documents
including clarification sought by the insurer. If the claim requires further
investigation, the insurer has to complete its procedures within six months from
receiving the written intimation of claim.

After receiving the required documents the company calculates the amount payable
under the policy. For this purpose, a form is filled in which the particulars of the
policy, bonus, nomination, assignment etc. should be entered by reference to the
Policy Ledger Sheet. If a loan exists under the policy, then the section dealing with
loan is contacted to give the details of outstanding loan and interest amount, which is
deducted from the gross policy amount to calculate net payable claim amount.
Generally all claim payments would be made through the electronic fund transfer.

Maturity & Survival Claims:

The payment by the insurer to the insured on the date of maturity is called maturity
payment. The amount payable at the time of the maturity includes a sum assured and
bonus/incentives, if any. The insurer sends in advance them intimation to the insured
with a blank discharge form for filling various details in it. It is to be returned to the
office along with Original Policy document, ID proof, Age proof if age is not already
submitted, Assignment /reassignment, if any and Copy of claimant’s Bank Passbook
& Cancelled Cheque. Settlement procedure for maturity claim is simple after receipt
of completed and stamped discharge form from the person entitled to the policy
money along with policy documents, claim amount will be paid by account payee

The function of insurance is to protect the insured against potential heavy losses that
he might incur from his daily activities. Almost any human endeavour carries some
risks, but some are more risky than others. The Reinsurers provides a similar
protection to the insurers and reinsurance exists because of insurance.
It is basically impossible to have a reinsurance placed without there being insurance
in the first place. Simply put, without insurance, there would be no need for
reinsurance. Fundamentally, reinsurance follows the same concept of insurance of
spreading of risks both individually (one risk at a time) and aggravated
(Catastrophes), following the Insurance Risk pattern:
Risk-Insurance- Reinsurance- Retrocession. Reinsurance therefore plays a very
important, if not vital role in the insurance Industry. The Roles can be summarized
under four headings; namely:-
Providing capacity
Creating stability
Strengthening of finances
Mobilization of funds for investment.
The importance of reinsurance is reflected in the costs insurers are willing to pay to
acquire reinsurance protection and the fact that without adequate protection the
Insurance Companies might not be licensed to do business. Even without legal
requirements, reinsurance is important because without it, a company would be
exposed to liabilities it might not be able to meet. Shareholders funds would be at risk
as one large claim might wipe out the whole of the shareholders investments. Risks
threaten our prime objective, which is survival in the face of accidental occurrence.

What is 'Reinsurance'
Reinsurance, also known as insurance for insurers or stop-loss insurance, is the
practice of insurers transferring portions of risk portfolios to other parties by some
form of agreement to reduce the likelihood of having to pay a large obligation
resulting from an insurance claim. The party that diversifies its insurance portfolio is
known as the ceding party. The party that accepts a portion of the potential obligation
in exchange for a share of the insurance premium is known as the reinsurer.

Objectives of Reinsurance

The following are the main objectives of reinsurance:

1. Wide distribution of risk to secure the full advantages of the law of averages;
2. Limitation of liability of an amount which is within the financial capacity of the
insurers; .

3. Stability in underwriting over a period; and

4. A safeguard against serious effects of conflagrations. Apart from these, sometimes

an insurer may undertake the insurance of certain risks at a higher rate of premium and may
reinsure part of these or the whole of it with some other insurers at a lower rate with the objective
of earning of profit out of it i.e., making profits by way of retaining the difference between the two

History of reinsurance
1370 : First recorded reinsurance contract covering a ship sailing from Genoa to

c1688 Opening of Lloyd’s Coffee House in London, which became a leading

reinsurance market.

c1820 First fire reinsurance treaty in Germany.

1852 Cologne Re – the first independent reinsurance company – began writing

business following the Great Fire of Hamburg in 1842.

1863 The predecessors of UBS and Credit Suisse formed Swiss Re in Zurich
following a large fire in Glarus, which destroyed two-thirds of the town.

1880 Munich Re was established in Germany.

c1885 The first excess of loss reinsurance was sold by Cuthbert Heath at Lloyd’s.

1906 The San Francisco earthquake demonstrated the ability of the reinsurance
market to fund catastrophic losses.

1967 Berkshire Hathaway bought National Indemnity, its first reinsurance business.

1985/86 ACE and XL were established in Bermuda.

1993 Bermuda’s Class of ’93 was capitalised with over $3.5 billion following
Hurricane Andrew in August 1992. New reinsurance companies included
Renaissance, Partner, and Tempest (now part of Chubb).
1998 Piper Alpha North Sea offshore platform disaster was one of the triggers of the
‘LMX spiral’ that almost caused the Lloyd’s market to collapse.

2001 The Class of ’01 (AWAC, Arch, Aspen, AXIS, Endurance, Montpelier and
Platinum) raised more than $8 billion following the 9/11 terrorist attacks.
2005 Following Hurricanes Katrina, Rita, and Wilma (and Charley, Francis Ivan, and
Jeanne the year before) the reinsurance industry was recapitalised with the Class of
’05. New companies including Ariel, Lancashire and Validus raised over $5 billion. In
addition to this, several London Market companies followed Catlin in capitalising
Bermuda-based entities and investors used sidecars on a large scale to access the
reinsurance market.

2011 Record losses for the reinsurance industry following a series of loss events
including floods in Thailand, tornadoes in the US and earthquakes in Japan and New
Zealand. No new reinsurers were established but the inflows to insurance-linked funds

2012 Hurricane Sandy caused significant destruction in the US North East.

2015 A record 19% of property catastrophe limit was ‘alternative’ capital including
catastrophe bonds and collateralised reinsurance.


Characteristics of Reinsurance

1. Reinsurance is a contract between the two insurance companies.

2. The original insurer agrees to transfer part of his risk to other insurance

company on the same terms and conditions.

3. The fundamental principles of insurance such as insurable interest,

utmost good faith, indemnity, subrogation and proximate cause also apply

to reinsurance.

4. In the event of fire, the insured is entitled to get the amount of claim
only from the original insurer and not from reinsurer.

5. Original insurer cannot insure the risk with a re-insurer, more than the

sum assured, originally by the insured.

6. The original insurer should intimate to the reinsurer about the

alteration, if any, made in terms and


conditions with the insured.

Under proportional reinsurance, one or more reinsurers take a stated percentage share
of each policy that an insurer issues ("writes"). The reinsurer will then receive that
stated percentage of the premiums and will pay the stated percentage of claims. In
addition, the reinsurer will allow a "ceding commission" to the insurer to cover the
costs incurred by the insurer (mainly acquisition and administration).

The arrangement may be "quota share" or "surplus reinsurance" (also known as

surplus of line or variable quota share treaty) or a combination of the two. Under a
quota share arrangement, a fixed percentage (say 75%) of each insurance policy is
reinsured. Under a surplus share arrangement, the ceding company decides on a
"retention limit" - say $100,000. The ceding company retains the full amount of each
risk, with a maximum of $100,000 per policy or per risk, and the balance of the risk is

The ceding company may seek a quota share arrangement for several reasons. First, it
may not have sufficient capital to prudently retain all of the business that it can sell.
For example, it may only be able to offer a total of $100 million in coverage, but by
reinsuring 75% of it, it can sell four times as much.

The ceding company may seek surplus reinsurance to limit the losses it might incur
from a small number of large claims as a result of random fluctuations in experience.
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 automatic underwriting capacity of the cedant would be $1,000,000 in this
example. Any policy larger than this would require facultative reinsurance.

Under non-proportional reinsurance the reinsurer only pays out if the total claims
suffered by the insurer in a given period exceed a stated amount, which is called the
"retention" or "priority". For instance the insurer may be prepared to accept a total
loss up to $1 million, and purchases a layer of reinsurance of $4 million in excess of
this $1 million. If a loss of $3 million were then to occur, the insurer would bear $1
million of the loss and would recover $2 million from its reinsurer. In this example,
the insurer also retains any excess of loss over $5 million unless it has purchased a
further excess layer of reinsurance.

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 cedant's 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. These contracts usually contain event limits
to prevent their misuse as a substitute for Catastrophe XLs.

In catastrophe excess of loss, the cedant's retention is usually a multiple of the

underlying policy limits, and the reinsurance contract usually contains a two risk
warranty (i.e. they are designed to protect the cedant against catastrophic events that
involve more than one policy, usually very many policies). For example, an insurance
company issues homeowners' 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 (e.g., hurricane, earthquake, flood).

Aggregate XL affords a frequency protection to the reinsured. For instance if the

company retains $1 million net any one vessel, $5 million annual aggregate limit in
excess of $5m annual aggregate deductible, the cover would equate to 5 total losses
(or more partial 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" contracts.

Risks attaching basis

A basis under which reinsurance is provided for claims arising from policies
commencing during the period to which the reinsurance relates. The insurer knows
there is coverage during the whole policy period even if claims are only discovered or
made later on.

All claims from cedant underlying policies incepting during the period of the
reinsurance contract are covered even if they occur after the expiration date of the
reinsurance contract. Any claims from cedant underlying policies incepting outside
the period of the reinsurance contract are not covered even if they occur during the
period of the reinsurance contract.

Losses occurring basis

A Reinsurance treaty under which all claims occurring during the period of the
contract, irrespective of when the underlying policies incepted, are covered. Any
losses occurring after the contract expiration date are not covered.

As opposed to claims-made or risks attaching contracts. Insurance coverage is

provided for losses occurring in the defined period. This is the usual basis of cover for
short tail business.

Claims-made basis
A policy which covers all claims reported to an insurer within the policy period
irrespective of when they occurred.


Most of the above examples concern reinsurance contracts that cover more than one

policy (treaty). Reinsurance can also be purchased on a per policy basis, in which case it

is known as facultative reinsurance. Facultative reinsurance can be written on either a

quota share or excess of loss basis. Facultative reinsurance contracts are commonly

memorialized in relatively brief contracts known as facultative certificates and often are

used for large or unusual risks that do not fit within standard reinsurance treaties due to

their exclusions. The term of a facultative agreement coincides with the term of the
policy. Facultative reinsurance is usually purchased by the insurance underwriter who

underwrote the original insurance policy, whereas treaty reinsurance is typically

purchased by a senior executive at the insurance company.

Reinsurance treaties can either be written on a "continuous" or "term" basis. A continuous

contract has no predetermined end date, but generally either party can give 90 days notice

to cancel or amend the treaty. A term agreement has a built-in expiration date. It is

common for insurers and reinsurers to have long term relationships that span many years.

Reinsurance treaties are typically longer documents than facultative certificates,

containing many of their own terms that are distinct from the terms of the direct insurance

policies that they reinsure. However, even most reinsurance treaties are relatively short

documents considering the number and variety of risks and lines of business that the

treaties reinsure and the dollars involved in the transactions. There are not "standard"

reinsurance contracts. However, many reinsurance contracts do include some commonly

used provisions and provisions imbued with considerable industry common and practice.


Sometimes insurance companies wish to offer insurance in jurisdictions where

they are not licensed: for example, an insurer may wish to offer an insurance

programme to a multinational company, to cover property and liability risks in

many countries around the world. In such situations, the insurance company
may find a local insurance company which is authorised in the relevant

country, arrange for the local insurer to issue an insurance policy covering the

risks in that country, and enter into a reinsurance contract with the local insurer

to transfer the risks. In the event of a loss, the policyholder would claim against

the local insurer under the local insurance policy, the local insurer would pay

the claim and would claim reimbursement under the reinsurance contract. Such

an arrangement is called "fronting". Fronting is also sometimes used where an

insurance buyer requires its insurers to have a certain financial strength rating

and the prospective insurer does not satisfy that requirement: the prospective

insurer may be able to persuade another insurer, with the requisite credit rating,

to provide the coverage to the insurance buyer, and to take out reinsurance in

respect of the risk. An insurer which acts as a "fronting insurer" receives a

fronting fee for this service to cover administration and the potential default of

the reinsurer. The fronting insurer is taking a risk in such transactions, because

it has an obligation to pay its insurance claims even if the reinsurer becomes

insolvent and fails to reimburse the claims.

Many reinsurance placements are not placed with a single reinsurer but are

shared between a number of reinsurers. For example, a $30,000,000 excess of

$20,000,000 layer may be shared by 30 or more reinsurers. The reinsurer who

sets the terms (premium and contract conditions) for the reinsurance contract is

called the lead reinsurer; the other companies subscribing to the contract are
called following reinsurers. Alternatively, one reinsurer can accept the whole of

the reinsurance and then retrocede it (pass it on in a further reinsurance

arrangement) to other companies.

Using game-theoretic modeling, Professors Michael R. Powers (Temple

University) and Martin Shubik (Yale University) have argued that the number

of active reinsurers in a given national market should be approximately equal to

the square-root of the number of primary insurers active in the same market.[3]

Econometric analysis has provided empirical support for the Powers-Shubik


Ceding companies often choose their reinsurers with great care as they are

exchanging insurance risk for credit risk. Risk managers monitor reinsurers'

financial ratings (S&P, A.M. Best, etc.) and aggregated exposures regularly.

Because of the governance effect insurance/cedent companies can have on

society, re insurers can indirectly have societal impact as well, due to reinsurer

underwriting and claims philosophies imposed on those underlying carriers

which affects how the cedents offer coverage in the market. However, reinsurer

governance is voluntarily accepted by cedents via contract to allow cedents the

opportunity to rent reinsurer capital to expand cedent market share or limit their

functions of a reinsurance company:

1)Increases stability and security.

As we have said, the major function of reinsurance
companies is to spread out risk. This is especially
in the case of an unusual or widespread loss event,
such as a hurricane or tornado.
2)Increases depth and width of coverage.
Whenhen an insurance company is secure and
stable, and when it is protected well for all manner
of loss events, it can afford to offer more insurance
policies. Also, it can offer a wider range of
insurance policies, thus improving business.
3)Helps with analysis and decision-making.
A reinsurance company won’t simply take an
insurance company on as a partner. It nee to know
that the investment is worthwhile. The reinsurance
company will help the insurance company evaluate
its reinsurance needs, devise an effective
reinsurance plan, and analyze risks and risk pricing.
4)Provides an array of services.
Reinsurance companies will also help the primary
insurance company understand and coordinate its
reinsurance needs. This is done by providing
technology, training, organization, management,
and even accounting.
Helps with expansion.
Because reinsurance companies provide security
and take on risk, they give insurance companies the
opportunity to expand their business through
launching new products services

advantages or benefits of reinsurance

1. Reinsurance boosts Insurance Business
The major advantage of reinsurance is that it assists in the boom of insurance
business. It enables every insurer to accept insurance business as the total risk will be
distributed among other reinsurers.

If there is no reinsurance, the insurer may not be willing to take up risks, particularly
when the risk exceeds beyond his capacity to manage.
2. Reinsurance reduces the risks
The prime principle of insurance is to reduce risk. As the risks are spread across wider
area, the loss of the individual is minimized which gives the insurer the secured feel.
The revenue of insurance companies are stable due to reinsurance. It also helps the
insurance companies to gain knowledge about various types of risks and the basis of
rating the risks in the future.
3. Reinsurance Increases Goodwill of Insurer
Reinsurance helps to boost the overall confidence and goodwill of insurer. When the
insurer develops confidence, he understands the nature of risks involved beyond his
So reinsurance increases goodwill of an insurer
4. Reinsurance Limits the Liability
Reinsurance motivates the insurers to undertake and spread the risks. Hence the
liability of insurer is limited to the maximum
5. Reinsurance Stabilizes premium Rates
The premium rates of insurance are stabilized by reinsurance. Generally, the premium
rates are calculated on the basis of the loss experienced by the insurer in the past, due
to the risk concerned. Reinsurance takes into account of all these data and fixes the
premium rate according for various types of risks under mutual agreement.
Thus reinsurance stabilizes the fluctuations in the premium rates of various types of
6. Reinsurance Protects the Insurance Funds
The insurance funds of the insurer is well protected due to reinsurance. Additional
security and peace of mind is an added advantage of reinsurance for the insurer and
the company that offers the insurance.
7. Reinsurance Reduces Competition
The competitions between inter company is reduced as everyone work in a
cooperative manner and with the helping tendency in the insurance business. Thus
reinsurance helps to control competition and increase overall morale of the employees
in the insurance business.
8. Reinsurance Reduces profit fluctuations
The reinsurance plans reduce, to a considerable extent the violent fluctuations in the
profits of the company. If on the other hand, heavy risks are retained by the original
insurer, his profits are greatly upset due to a heavy single loss.
9. Reinsurance Encourages new enterprises
It encourages the new underwriters, who in their early period of development, have
limited retentive capacity. In the absence of reinsurance facility, the tremendous
growth of new enterprises is doubtful.
10. Reinsurance Minimizes dealings
Due to the reinsurance scheme, the insurer is required to indulge in the minimum
dealings with only one insurer. In the absence of insurance facility, the insured will
have to approach several insurers to enter into various individual insurance agreement
on the same property. This involves considerable cost, loss of valuable time and
slower down the pace of protection cover


1. Collaboration is limited

Working with spreadsheets in reinsurance means only one person can

access and edit the data at a time, without taking or being sent a copy of

it. In some instances, recipients even end up being sent the wrong version
which can lead to errors in data. With a system, multiple people can look

at and work on the most up-to-date data simultaneously and have

confidence the data quality.

2. Lack of controls, vulnerable to fraud

Spreadsheets do not possess any built-in, automatic audit tracking

function. For example, who accessed the data last, who did what and

when to the spreadsheet? How do you know if the calculations are

correct? How do we know results remain accurate after months, quarters,

and years of use? There is always new data entering spreadsheets and

new users managing them. What controls are established to ensure the

spreadsheet remains bug free?

3. No log of change

Along the same lines of my previous point, the spreadsheet has no log of

change. As values/calculations/source data changes, the spreadsheet does

not maintain the prior value for auditing/control. Having this function in a

system allows you to review accuracy of data over time and return to

previous values if errors are detected.

4.Not prepared for disaster

If there are no best practices put in place for proper spreadsheet storage or

back up, your reinsurance programme is at major risk when disaster

strikes. If something happens, full data recovery can be very difficult if

not impossible, and will have a major impact on your business.

5. Susceptible to costly human errors

Spreadsheets are extremely susceptible to trivial human errors. Its

estimated that 9 out of 10 spreadsheets contain human errors. Missed

negative signs and misaligned rows may sound harmless, however they

can cause a considerable loss to the bottom line. Furthermore, costly

mistakes can damage the confidence of investors or other stakeholders

involved in your business.

6. Difficult to troubleshoot or test

Spreadsheets are notoriously difficult to trouble shoot or test, simply

because they aren’t built for that. However, testing should be an integral

component of the quality controls you put in place to maintain accuracy

across reinsurance programmes. When spreadsheets are saved in different

folders, departments or even geographical locations, it becomes that

much harder to implement and conduct quality control processes.

7. Regulatory compliance challenges

Ensuring regulatory compliance for your reinsurance programmes

becomes difficult when using spreadsheets given that data can be

susceptible to fraud and errors.

Which regulations affect spreadsheet-based reinsurance systems? Over

the last two decades, we’ve seen a surge in global regulation including:
Serbanes-Oxley (SOX)

Dodd-Frank, Basel III

Solvency II


FAS 157

Looking ahead to the future, the world will only become more regulated.

Which means finding ways to reduce operational risk and increase

compliance standards should be a huge priority.

8. Hard to mange data security

For any regulated ceding insurer or assuming reinsurer, there is a need to

keep some data restricted, and some data shareable. Controlling data

access and restrictions on spreadsheets can be difficult over time when

there are hundreds of spreadsheets to manage and scores of users

requiring access.

With a dedicated system, data security can be easily controlled by giving

users specific access rights. This gives you control over who has access to

authorised information and who does not.

9. Potential for errors and untimeliness in reporting

Management needs timely and accurate information to make robust

decisions about their reinsurance programme. Today we are living in an

‘on-demand’ society which increases expectations on getting data ‘right

now. This can be a difficult expectation to meet when using spreadsheets

because the data is often coming from multiple sources. It takes time to

coordinate and assemble and unfortunately can also be prone to errors

with multiple people managing the process.

A dedicated system makes on-demand reporting more achievable as

report production can be automated. Not to mention the amount of time it

saves from producing these reports manually. Having the process

automated also ensures more accuracy in data as human involvement is


10. Keeping up with the changing business world

Today’s world is full of major changes shaping and reshaping the

business landscape. We know first hand the insurance industry is part of

this change. Examples of this being large scale business transformation

programmes, M&A activity and Management Buyouts. In reinsurance

programmes, spreadsheets often become highly personalised per the user.

When it’s time for a new person to take over as part of a large-scale

business change, spreadsheets could be so personalised that the new

person must start from scratch. Unlike a system, there is no manual from

the spreadsheet user on how the spreadsheet functions. This causes major

productivity inefficiencies and once again the data susceptible to errors, if

a new person is left guessing what to do.

As an organisation’s reinsurance programme grows, data in spreadsheet-

based systems get more distributed; subsequently compounding all the

risks and issues outlined above.


1) Facultative Reinsurance

2) Treaty Reinsurance.

1. Facultative Reinsurance

This is the oldest method of reinsurance. This method is also known as “Specific
reinsurance“. Under this method, each individual risk is submitted by the ceding
insurer to the reinsurer who can accept or decline whatever sum they consider
appropriate subject to the amount of their acceptance being approved by the ceding

The reinsurer is offered a copy of proposal form which contains details of risk such as
the sum assured, salient features of the risk, perils covered, rate of premium and
period of insurance etc. The reinsurer will go through the contents of the proposal
form thoroughly and decide whether to accept or reject the risks. If he decides to
accept, he should specify the amount for which he would accept the reinsurance. In
case, the risk is not fully accepted, the original insurer may again have to approach
another insurer for the balance.
For example:
‘X’ insurance company has received a proposal for Rs.1,00,00,000. The
retention of the original insurer (i.e. X co) is Rs.50,00,000 and for the balance of
Rs.50,00,000, he approaches the insurer ‘A’ who accepts for only Rs.25,00,000.
The original insurer may again have to approach insurer ‘B’ for the balance of Rs.

Any alteration, in the terms and conditions made by the original insurer is to be
intimated immediately to the reinsurers. The claim is to be settled according to the
ratio of risk accepted by each insurer.

2. Treaty Reinsurance

Treaty reinsurance has been defined as

a formal, legally binding agreement or a treaty (agreement) between the principal and
the reinsurer that the reinsurer shall accept without the option of rejecting, a specified
proportion of the excess on any risk over the insurer’s limit of retention.

Thus, under this method, there is an agreement between the ceding company and the
reinsurance company that amount of every risk over and above the retention shall
automatically be transferred to the reinsurance company. As soon as the original
insurer accepts the risk, the excess above the retention is automatically reinsured.

For example, if the total sum insured on any risk is Rs.2,00,000 and the retention is
Rs.20,000 the balance of Rs.1,80,000 is reinsured. Accordingly premiums are also
paid to the reinsurers in the same proportion. In the even of loss, insurers also pay the
compensation in the same proportion.

Treaty reinsurance may be

Quota share treaty;

Surplus treaty and
1. Quota Share Treaty

Under this method, the ceding company is bound to cede and the reinsurer is bound to
accept a fixed share of every risk coming within the scope of the treaty.

This method is especially suitable for an insurer

recently established with a small premium income; or

entering a new class of business for which it may not have the necessary experience;
to protect a hazardous class of insurance, where selective ceding is difficult.
This method is highly beneficial to the reinsurer. The liability of the reinsurer attaches
as soon as the ceding office assumes the risk. Then, the ceding office provides the
accepting office with full details of each cession, copies of proposal papers. It does
not give the insurer an option of acceptance or rejection.

It enables the reinsurer to consider any marked divergence of underwriting standards

and if persistent to its disadvantage, it may indicate the need for revision or
cancellation of the treaty in respect of new business.

2. Surplus Treaty

Under this method, the insurers agree to accept the surplus i.e., the difference between
ceding insurers’ retention and gross acceptance. Surplus treaties are arranged on the
basis of ‘lines’. A ‘line’ is equivalent to the ceding insurer’s retention.

For example:
a treaty may be arranged on a ten line basis. Under this arrangement, the insurers
will accept automatically upto ten times the retention of ceding insurer.
forexampal f
f the gross acceptance is more than Rs.11,00,000, then the surplus treaty will absorb
only Rs.10 lakhs and the balance will have to be reinsured facultatively. It is usual to
arrange a second surplus treaty to take care of such excess amount. This method is the
most popular and greater part of the reinsurance business is now done under this
method, as it does not lay down any right rules.

It is of particular advantage to the ceding office as it saves a lot of time and expenses
and simultaneously provides for the reinsurance facility. However, it is not suitable for
policies with higher sums insured or where the limit of indemnity is very high.

3. Excess of Loss Treaty

This is a non-proportional method of reinsurance. The reinsurance protection arranged

is not linked with the sum insured but comes into operation when the total net loss
suffered by the insured due to one event exceeds the figure agreed in the treaty.

Thus, under this method the original insurer has to decide the maximum amount
which he can bear on any one loss and seeks reinsurance under which the reinsurer
will be responsible for the amount of any losses and above the amount retained by the
direct reinsurer. Such a treaty usually contains an upper limit so that the insurer, for
instance is content to bear the first Rs.20,000 of any loss, the treaty reinsurers will
bear any loss over Rs.20,000 but not exceeding, say Rs.2,00,000
In order to cover the catastrophe risks or risks beyond that maximum limit
(Rs.2,00,000 in the above case) an additional second layer ( further excess of loss)
treaty may be negotiated. In case, the direct insurer has not made any arrangement to
cover the loss over and above Rs.2,00,000, then he will have to bear all possible
claims beyond Rs.2,00,000 Sometimes, the insurer may be required to retain part of
the cost in excess of the retention.

Thus, to keep the reinsurers directly involved in the cost, the treaty may, for instance,
provide that the reinsurer will pay only a part of the excess of Rs.20,000 e.g., 95% of
the claims over Rs. 20,000 maybe paid by the reinsurers and the balance of 5% is met
by the insured. Generally, the retention is fairly high. In order to get protection under
this category, the insurers have to pay an agreed percentage of the annual premium
income for that class of risk to the reinsurers.

This method is employed mainly to protect large catastrophic losses such as those
caused by Special perils fire insurance i.e. storm, flood, earthquake etc. or where their
is an possibility of conflagration in large storage areas or where large marine
acceptances are involved in any ship through different sources. It is also applied to
protect legal liability classes i.e., motor third party, public liability, products liability
and workmen’s compensation risks. For example, a severe mining accident may
result in hundred of fatalities to workmen, resulting in a catastrophic loss.




It is probable that the reinsurer may have sufficient amounts ceded from a number of
different sources and unfortunately the cession may relate to the same risk. To relieve
itself from this undesirable accumulation, the reinsurer would itself have to resort to
reinsurance companies. This may be the principal reasons for reinsurance. There are
some other reasons for reinsurance which are given below:

i) Risk Minimization By Spreading: The basic concept of insurance is to spread the

risk over as wider an area as possible as so to decrease the burden of loss at each
stage. The reasons for reinsurance says, reinsurance facilitates a risk to be scattered
over a much wider area and the principle of insurance is taken well care of. This in
fact helps in the ultimate viability of insurance business.

ii) Risk Transfer: To an insurer, the need for reinsurance safeguard arises in the same
way as the insured needs insurance protection. But for reinsurance, the business of
insurance would not have developed to the extent of the present day growth.

iii) Flexibility : In the absence of reinsurance, insurers would have been bound to
limit their acceptance of risk only up to such an amount which they could possibly
digest. In other words, the insurers would have been unable to accept a risk beyond
their financial strength or resources for that class of business. As a result insurers’
service to the public would also have been limited. Reinsurance gives flexibility to
insurers by creating a condition which enables them to accept a risk beyond their
financial capacity or resources. The insuring community is also left care-free with
regard to various risks to which they are subjected to, irrespective of whatever may be
the value per single risk.

iv) Accumulation : Reinsurance reduces the possibility of getting involved in

undesirable additional risk-load, which is otherwise eminent from the accumulation of
risks coming from different sources. Examples of such accumulation are (a) heavy
commitment on the cargoes of the same vessel (b) heavy commitment on the cargoes
lying in the same port possibly because of the arrival of all vessels at the same time
and (c) heavy commitment of an insurer on the property of a particular hazardous
locality from the view point of fire or conflagration fire. It is possible that the various
branches of an insurer, without knowing each other’s position, may commit
individually thereby giving rise to a situation of heavy unbearable commitment as
mentioned in (a) (b) or (c) above. Reinsurance reduces such worries of insurers and
keeps down the pressure of accumulation to a sustainable limit.

v) Development : The growth of an insurance company is particularly dependent on

sound financial standing, which is primarily based on the stability of profit and loss.
Profit cannot be expected if there is an untoward charge on the fund by way of claim
which it cannot sustain or for which there is no provision. Reinsurance tends to
stabilize profits and losses and permits more rapid growth of an insurance company.

vi) Prediction For Rating : An insurer needs to have large number of similar cases in
his book for the purpose of predicting an accurate rating structure. But assuming a
large number of similar risks is in itself undesirable unless some precautionary
measure is taken. It may not also be possible to get a large number of similar cases by
an insurer because of the operation of numbers of insurers in the market. Whatever it
is, reinsurance takes care of such a situation in both the ways. On the one hand it
provides protection to the insurer by way of providing unsustainable losses, and on
the other creates a forum of getting large number of similar cases through reciprocity.

vii) A New Insurer who has recently started transacting insurance business cannot
certainly develop and possibly cannot survive in the absence of reinsurance
viii) Capacity Relief : Reinsurance which allows the company (reinsured) to write the
bigger amounts of insurance.

ix) Catastrophe Protection: The aim of reinsurance is to protect the company

(reinsured) from a large single, catastrophic loss or more than one big losses.

x) Stabilization :It helps to the betterment of the overall operating results of the
reinsured’s from year to year.

xi) Surplus Relief : Reinsurance heals the strain on the company’s (reinsured)
/cedent’s surplus during rapid premium growth.

xii) Market Withdrawal : Reinsurance provides a way for the reinsured company to
withdraw it from a market or business or from a geographic area.

Beyond the above 12 reasons for reinsurance, there might have some other reasons
identified in today’s reinsurance business.


1. Meaning
In double insurance, the insured gets the same subject matter insured with more than
one insurer or under more than one policy with the same insurer. But the reinsurance
business is entered into by the original insurer with other insurers.
2. Filing of claims
In double insurance, claims can be filed with all insurers but restricted to actual loss in
case of fire and marine policies. But in reinsurance, the insured will claim
compensation from original insurer, who will claim compensation from reinsurer.
3. Contribution
In double insurance, contribution will be made by each insurer in proportion to the
sum insured. But in reinsurance, reinsurer is not directly required to contribute for







Generally, Insurance plays a pivotal role in the transfer of risk across all spheres of
life. The concept of insurance refers to a contract between two parties where one party
promises to indemnify the other party for the occurrence of any risk covered under the
contract in exchange for a monetary consideration called premium (Ogwo, 2000). The
party who makes this promise is referred to as an insurer and is a limited liability
company. This company also faces several risks and this necessitates the ceding of
these risks with a larger insurance company. This process is conceptualized as

By definition and explanation, one can describe ‘Reinsurance’ as the practice of

insurers transferring portions of risk portfolios to other parties by some form of
agreement in order to reduce the likelihood of having to pay a large obligation
resulting from an insurance claim. The intent of reinsurance is for an insurance
company to reduce the risks associated with underwritten policies by spreading risks
across alternative institutions. Overall, the reinsurance company receives pieces of a
larger potential obligation in exchange for some of the money the original insurer
received to accept the obligation. The party that diversifies its insurance portfolio is
known as the ceding party. The party that accepts a portion of the potential obligation
in exchange for a share of the insurance premium is known as the reinsurer.

In developing and emerging economies, reinsurance companies spring up back bone

to support the insurance business. They serve as a supportive factor to establish
confidence policy holding in insurance companies, reinsurance also allow the direct
insurer to free themselves from the part of a risk that exceeds their underwriting
capacity, or risks which, they do not wish to bear alone. However, the situation in
Nigeria seems different. Despite the existence of reinsurance in insurance sector in
Nigeria, the development of the sector remains poor.


The contributions of reinsurance industry to the growth and development of Insurance

across the globe cannot be overemphasized. This is because Reinsurance is the
foundation upon which Insurance is built (Olugbemi 2016).

The business environment and lives of individuals is characterized with high risk
resulting from the dynamism associated with life as a whole. The essence of
Reinsurance is to preserve value to ensure strong and detailed protection in the event
of casualties that arise unexpectedly. This extra mile gone in the provision and
assurance of safety is known as Reinsurance.

The primary objective of reinsurance is to protect the primary insurer or the ceding
company from being crippled by land losses beyond its financial capacity. Where the
risk assumed by the reinsurer from the ceding company is so large that it cannot
comfortably handle alone, the reinsurer can reinsure or retrocede part of the risk to
another reinsurer. They also help to avoid possible financial strain due to rapid growth
of the portfolio and from the part of view of young insurance companies.

Reinsurance companies have added stability to the insurance industry and to the local
economies by declining out the results of the insurance companies as they continue to
absorb the impact of large losses which would have led to very damaging results to
the individual insurance companies. In Nigeria, reinsurance was introduced in the
insurance in 1977. The reinsurance companies in playing their role in the sub sector
attempts to support the effort of huge claims to restore confidence of the
policyholders in the business. In spite of the existence of reinsurance and their effort
to underwrite for the primary insurers, member of the public still double the ability of
primary underwriters. Especially in areas that require huge claims, such as aviation,
oil and gas. These areas sparingly patronized in Nigeria. Thus this study is set to
determine the role of reinsurance in the performance of insurance industry in Nigeria.


The main objective of this study is appraising the contributions of reinsurance to the
performance of insurance companies in Nigeria. Specific objectives include:

1. To evaluate the strength of the Nigerian Reinsurance Industry.

2. To examine the relationship between Insurance and Reinsurance companies in


3. To appraise the contributions of reinsurance to the Nigerian insurance Industry.

4. To assess regulations and policies of reinsurance in Nigeria.


1. What is the strength of the Nigerian Reinsurance Industry?

2. Is there any relationship between Insurance and Reinsurance companies in


3. What are the contributions of reinsurance to the Nigerian insurance Industry?

4. What are the regulations and policies of reinsurance in Nigeria?


Hypothesis 1

Ho: There is no significant relationship between insurance company and the

reinsurance company in Nigeria

Hi: There is significant relationship between insurance company and the

reinsurance company in Nigeria

Hypothesis 2

Ho: There is no significant contribution of reinsurance to the Nigeria insurance


Hi: There is significant contribution of reinsurance to the Nigeria insurance



This study will take a critical look at the role of reinsurance in the performance of
insurance industry in Nigeria, with particular emphasis on the contribution of
reinsurance in the insurance industry, the gross premium of non-life insurance and
non-life reinsurance companies. A range of time is taken from (1987 – 2011). The
study however suffered an initial and usual constraint of time, finance and relevant
data needed.


This study to a great extent has potentials of harnessing the position of Nigerian
economy with regards to insurance. This is because businesses of various sorts are the
main stay of any developing economy like Nigeria. Reinsurance as an extended
insurance structure for business and life risks ensures these demands- thus the
significance of this study. This work will be of significant contribution to the body of
knowledge in this area of study, and it will also be a reference point for future


This research study is arranged into five chapters, chapter one includes the general
introduction, statement of the problem, objective of the study, research hypotheses,
scope and limitations of study, significance of study as well as the definition of terms.
Chapter two is the literature review, chapter three focuses on the research design,
method of data collection and method of data analysis as well as statistical techniques
used for data analysis. Chapter four centers on data presentation, analyzes
interpretation and discussion of findings.


1. REINSURANCE: The practice of insurers transferring portions of risk portfolios to

other parties by some form of agreement in order to reduce the likelihood of having to
pay a large obligation resulting from an insurance claim. The intent of reinsurance is
for an insurance company to reduce the risks associated with underwritten policies by
spreading risks across alternative institutions (Ogala 1992).

2. DEPRECIATION: The gradual conversion of the cost of a tangible capital asset or

fixed asset into an operational expense over the asset’s estimated useful life (Mishra,

3. BROKERAGE: An organization that buys and sells foreign money, shares in

companies, etc. for other people (Irukwu, 1991).

4. BROKER: A person who serve as a trusted agent or intermediary in commercial

negotiation or transactions. Brokers are usually licensed professionals in fields where
specialized knowledge is required, such as finance, insurance, and real estate (Remi

5. OUTSTANDING CLAIM: - A summary of unsettled claims at the end of the

financial year (Akpan, 2004).
6. PREMIUM: - Premium is an amount paid periodically to the insurer by the
insured for covering his risk (Isimoya, 2003).

7. UNEARNED PREMIUM: This an insurance premium that is paid by the

customer in advance and which the insurance company has not earned (Ajayi, 2000).

8. CEDING COMMISSION: A fee paid by a reinsurance company to the ceding

company to cover administrative cost and acquisition expenses.

9. INSURANCE: The act of providing against risks in business, property ownership

and other life endeavors.


Insurers are in the business of aggregating risk. This makes enterprise risk
management (ERM) particularly important to insurers.

In addition, insurers have an incredibly flexible and powerful tool available for
sculpting their risks: reinsurance.

ERM is a very new approach to risk that has been embraced by insurers just in the
past 15 years. Reinsurance, on the other hand, has been around for almost as long as
insurance. Do they work together? Can the new ERM process learn from the mature
reinsurance approach?

The answers are yes and yes.

An insurer’s ERM process looks very much like the process of designing a
reinsurance program. Both start with the articulation of risk appetite and tolerance –
how much and what kind of risk does the insurer want to have (retain) at the end of
the process (though the reinsurance world may not have used those particular terms
until recently). The picture above shows how insurers look at risk from a variety of
perspectives and choose from a variety of reinsurance tools to achieve their desired

Because reinsurance purchasing is a familiar process, insurers seeking to establish an

ERM framework can draw upon this experience to inform their ERM risk appetite and

Management choices about reinsurance protection illustrate how much insurance risk
the company is willing to retain from individual insureds, single events, lines of
business, and annual underwriting results. ERM-related risk tolerances can be
developed by extending the reinsurance thinking to other risks.

ERM thinking may also influence reinsurance decisions. For insurers with significant
reinsurance purchases and a developing ERM program, the ERM thinking often spurs
an evolution of reinsurance philosophy.

Taking an enterprise-wide view of the risk profile, companies often choose to

consolidate historically separate purchases on similar risks – thereby taking advantage
of diversification benefits and efficiencies of scale.

As they develop greater confidence in their selected risk appetites, insurers may
decide to calibrate reinsurance structures to achieve better alignment with corporate
strategy. And they may adjust the balance of retained risk among lines of business in
light of temporary or longer term differences in risk adjusted returns.

Perspective of rating agencies and regulators

At the same time, outside bodies such as rating agencies and regulators have been
urging that insurers take up ERM. They all agree that reinsurance is a crucial risk
management tool, and will want to learn how well the reinsurance program fits with
ERM goals.

It is not that the goal of rating agencies and regulators is to give insurers more work to
do. Their interest lies in establishing the insurer’s resilience; and they recognize that
no one can understand an insurance company’s risks better than the company itself.
By asking insurers to explain and justify their own view of risk, these outside bodies
can gain a much better understanding of how effectively the selected risk mitigation
strategies – including reinsurance – support the company’s objectives.

Reinsurers’ perspective
The investment and insurance losses that major reinsurers experienced in 2001 served
as a “wake-up call” to the industry. Since that time, reinsurers have increasingly
sought to coordinate their risk acceptance and retrocession strategies through the lens
of ERM.

For many reinsurers formed following 2001, ERM has been a fundamental part of
their business strategy. While the 2008 financial crisis was an unprecedented shock to
world markets, reinsurers have for the most part weathered that storm – and the
ensuing economic challenges.

In recent years, prudent risk management is increasingly seen as a differentiator. For

example, since 2013 Partner Re has disclosed risk limits for a dozen major risks along
with their actual risk acceptance in their annual report. Other international reinsurers
have followed suit.

It’s hard to know to what extent ERM drives reinsurer behavior, but as ERM has
become further ingrained over the last several years, reinsurers have shown some
different behaviors, even in the face of an extremely competitive marketplace as
compared to prior decades. Catastrophic events have not created major dislocations in
the market or, in general, threatened reinsurer solvency. Capacity has been generally
available, and reinsurers are showing more discipline in avoiding over-concentration.

And, despite competitive pressure from alternative capital and the hardship of persistently low
investment returns, analyst consensus places reinsurer return on equity expectations in 5% to 10%
range, quite respectable in the current economic environment.


Managing risk lies at the heart of what reinsurers do. In recent decades, the scope of
risk management has widened significantly. It is no longer confined to traditional
underwriting risk, but also encompasses risks to a company’s investments, its capital
base and liquidity positions.

While it might look like reinsurers take a bet on whether an adverse event will happen
or not, decisions about risk-taking are made in a controlled way and enabled by a very
sophisticated risk management framework. It is about anticipating, identifying,
assessing, modeling and controlling risks.

Risk management has to start at the top of the organisation and it is important to
clarify roles and responsibilities and distinguish between the risk owner (board), the
risk taker (business unit) and the risk controller (independent risk manager). Senior
management is the ultimate risk owner of the company and plays an important risk
management role by defining the company strategy. Business unit managers are the
actual risk takers and have the responsibility for properly assessing and pricing risks.
The specific risk management function, under the stewardship of the chief risk officer,
is responsible for risk governance, risk oversight and independent monitoring of risk-
taking activities. Each risk that the company assumes contributes to the overall risk
profile and affects capital requirements.

A reinsurer’s capacity to safely assume complex and large risks depends, not only on
its capital strength, but also on its ability to spread its risks. Reinsurers achieve a high
degree of diversification by operating internationally, across a wide range of different
lines of business and by assuming a large number of independent risks.
Diversification over time is also an important factor. The more risks meeting these
criteria that are added to a reinsurer’s portfolio, the lower the volatility of that
reinsurer’s results. Lower volatility translates into reduced capital requirements, or
alternatively, allows the reinsurer to take on more risk with its existing capital base.

The core business of insurers is to take insurable risks off households’ and firms’
shoulders. Before assuming these risks on their balance sheet, insurers examine,
classify and price them. The underwriting process in the reinsurance industry is very
similar; the major difference is that the risks are assumed from insurance companies.

An insurer seeking coverage provides the reinsurer with the relevant data. The
reinsurer then determines whether additional information about the characteristics of
the insured objects or persons is needed. In non-life reinsurance, this usually includes
information about an object’s specific location, value and particular exposure to
certain risks. For individual buildings, for example, the specific exposure can be
established through flood or wind zone maps. In life reinsurance, underwriting
decisions are essentially based on information about the risk of death or illness of the
policyholder, such as age, gender, medical and lifestyle factors.

When assessing risks, any insurer or reinsurer must take into account the fundamental
principles – and limitations – of insurability. Disregarding these constraints would
ultimately jeopardise the (re)insurer’s solvency and ability to honour its obligations.
But that also means that certain exposures remain uninsurable.

The insurance business has two sides. One is taking the risks; the other is managing
assets to cover those risks. Reinsurers collect premiums and, in exchange, they
provide their clients with protection. Reinsurers are thereby obliged to indemnify their
client after a claim event. Generally, there is a time-lag between the premium payment
and the claim payment during which the funds are held on the reinsurer’s balance
sheet and can be invested in different asset classes. How long the funds are held
differs significantly between lines of business and contract structure and influences
the investment decision.

This may appear a straightforward task, but assets and liabilities move: the value of
invested reserves and estimated future claims can both change significantly with
fluctuations of the capital markets. Matching and then managing the relative changes
between liabilities and investments is a core competency of any reinsurance company.
This process is known as Asset-Liability Management (ALM). The ALM process also
takes into account other investment constraints, apart from the matching of the
liabilities, such as the company’s overall risk tolerance and regulatory restrictions.

For any insurer or reinsurer, capital is the prerequisite for assuming underwriting,
financial market, counterparty credit and operational risks. Capital provides a buffer
against unexpected losses. These could come from different sources, such as when
claims payments exceed premiums and investment income, when loss reserves turn
out to be insufficient or assets are impaired (for example, during severe stock market
slumps, as we witnessed in 2001-2003 and 2008-2009). Capital management must
ensure that the company is able to withstand unexpectedly high levels of loss. Any
discrepancy between a reinsurer’s risk profile and its capital base needs to be
addressed by raising additional capital, transferring risk to third parties (for example,
through retrocessions, which are cessions to other reinsurers, or Insurance-Linked
Securities) or by reducing the amount of risk assumed in underwriting and investment

Liquidity management ensures that the company is able to pay claims and meet all financial
obligations when they fall due. Insurance and reinsurance companies generate liquidity in their
core business through the premiums they receive up-front when providing a (re)insurance cover.
As such, they effectively pre-fund future claims payments. Therefore, liquidity risk is limited.
Nevertheless, it is important to monitor and manage liquidity actively to have sufficient liquidity
even in extreme situations. A reinsurer’s capital and liquidity management have to respond to
various and partially conflicting stakeholder interests: Customers, that is, primary insurers, care
about the prompt payment of claims. Regulators focus on policyholder protection and – in light of
the financial crisis – overall systemic stability. Rating agencies are primarily interested in capital
being sufficiently available to honour obligations to policyholders and debt holders. And investors
seek attractive risk-adjusted returns and put pressure on companies to maximise capital efficiency.
While all stakeholders agree that a reinsurer should have an adequate capital position, there are
different views as to how capital adequacy should be measured.
These differences in perspective reflect the dynamics of the regulatory, accounting and
competitive environments and add significantly to the complexity of a reinsurer’s capital and
liquidity management processes. The convergence of these perspectives towards a consistent
economic view has gathered pace recently (partly driven by Solvency II) and is ultimately
expected to prevail.

The Reinsurance Industry: An Inside Look

The global reinsurance industry experienced shrinking margins and declining demand
for catastrophic policies during the first half of 2016. Regulators continue to exert
influence on reinsurance decision-making, and uncertainty about future rules may be a
problem for 2017 and beyond. However, relatively low catastrophic losses and
increased efficiency helped offset the impact of negative factors. Capitalization
among major reinsurers remained strong.

Size and Trends

Total global reinsurance capital increased in the first quarter of 2016 to $580 billion, a
3% increase from the end of 2015. Most growth was derived from retained earnings
and unrealized investment gains. Demand for reinsurance remained flat after Q1 and
into June and July. New catastrophic bond issuance was a record $2.2 billion in Q1,
but slid to just $800 million in Q2.
Despite a general slowdown in catastrophic reinsurance policy demand, American
reinsurers saw strong renewals from insurers with large hurricane loss exposure in
southern states, especially the Florida Hurricane Catastrophic Fund (FHCF). Other
direct insurance markets with strong catastrophic demand include Australia and New

Lower Profit Margins

Brian Schneider, senior director at Fitch Ratings, wrote that reinsurance profits "will
decrease in 2016 across the global reinsurance sector." Fitch has maintained a
consistently bearish outlook on reinsurance since early 2014, thanks to an uptick in
market competition and a reduction in demand for reinsurance agreements. While this
is potentially good news for direct insurers and their customers, who might see a
wider and cheaper range of reinsurance services, it is problematic for established
reinsurance firms and their shareholders.

Other ratings agencies also published negative outlooks on the reinsurance market.
Some were due to macroeconomic factors, such as the impact of potential interest rate
increases on reinsurance company investment portfolios, which often have sizable
high-yield bond components. There is also a general expectation that claims against
catastrophic reinsurance will eventually return to normal levels. Catastrophic claims
in 2015 were 75% lower than the 20-year average from 1995 to 2014.

Capitalization and Regulation

Fitch does not expect soft markets to threaten the underlying safety of reinsurers.
"Capitalization is expected to remain strong," Schneider noted, "as reinsurers actively
manage capital for current market conditions." In particular, reinsurance providers
used strategic mergers and acquisitions (M&A) to realize economies of scale.

Capitalization is just as critical in the reinsurance market as in the direct insurance

industry. Reinsurers need to maintain sufficient capital reserves to meet their claim
obligations, and they must also maintain enough capital to satisfy regulators.
Regulation is a prevalent issue for reinsurance providers, and there is a lot of
uncertainty about future rules. As Deloitte pointed out in its 2016 regulatory overview,
"we are seeing unprecedented levels of interaction among various insurance
regulators - with a strong push for global standards in a broad range of areas from
capital requirements to risk management."

Deloitte also noted that reinsurers have more regulators to contend with and a more
aggressive tone than ever before. Some of this is related to the turmoil from the 2008-
2009 global recession, but another part is the result of different regulators jockeying
for power. Potential negative effects of increased regulation include higher capital
costs and reputational damage.

In the 2016 Willis Re Global Reinsurance and Risk Appetite Report, approximately
50% of surveyed reinsurers said regulatory capital ratings, not the ratings provided by
other ratings agencies or feedback from direct insurers, were the "most important
capital metric driving reinsurance decisions" and the "primary driver to measure the
capital efficiency of their reinsurance." The focus on regulatory control was much
stronger in Europe than North America. Only 2% of European reinsurance companies
reported valuing the influence of ratings agencies more than regulators. Nearly one-
third of North American reinsurers valued rating agencies the most.

Why do some companies in the insurance sector engage in reinsurance?

Some companies in the insurance sector engage in reinsurance because they want to
reduce risk. Reinsurance is basically insurance that insurance companies buy to
protect themselves from excess losses due to high exposure. Reinsurance is an
integral component of insurance companies' efforts to keep themselves solvent from
the risk of default due to payouts, and regulators mandate it for companies of a certain
size and type.

For example, an insurance company may write too much hurricane insurance based
on models that show low chances of a hurricane inflicting a geographic area. If the
inconceivable did happen with a hurricane hitting that area, considerable losses for the
insurance company could ensue. Without reinsurance taking some of the risk off the
table, insurance companies could go out of business whenever a natural disaster hit.

However, insurance companies are systemically important; many people rely on them
for their everyday needs such as health insurance, annuities or life insurance.
Therefore, the industry needs to manage risk tightly to prevent instability. Essentially,
the negative externalities of an insurance company going bust are massive.

Regulators mandate that an insurance company must only issue policies with a cap of
10% of its value, unless it is reinsured. Thus, reinsurance allows insurance companies
to be more aggressive in winning market share, as they can transfer risks.
Additionally, reinsurance smooths out the natural fluctuations of insurance
companies, which can see significant deviations in profits and losses, making the
sector more appropriate for investors.

For many insurance companies, it is more like arbitrage. They charge a higher rate for
insurance to individual consumers, and then they get cheaper rates reinsuring these
policies on a bulk scale.
1. Munich Reinsurance Company—$31,280
2. Swiss Reinsurance Company Limited—24,756
3. Hannover Rueckversicherung AG—15,147
4. Berkshire Hathaway Inc. —14,374
5. Lloyd’s—12,977
6. SCOR S.E. — 8,872
7. Reinsurance Group of America Inc. — 7,201
8. Allianz S.E. — 5,736
9. PartnerRe Ltd.— 4,881
10. Everest Re Group Ltd. —4,201
11. Transatlantic Holdings Inc. —4,133
12. Korean Reinsurance Company —4,114
13. China Reinsurance (Group) Corporation —3,796
14. London Reinsurance Group Inc. —3,266
15. MAPFRE RE, Compania de Reaseguros, S.A. —3,143
16. General Insurance Corporation of India —2,573
17. Assicurazioni Generali SpA —2,463
18. AEGON N.V. —2,391
19. QBE Insurance Group Limited —2,280
20. XL Group plc—2,255
21. MS&AD Insurance Group Holdings Inc.—2,206
22. The Toa Reinsurance Company Limited—2,021
23. Axis Capital Holdings Limited—1,834
24. Caisse Centrale de Reassurance—1,814
25. Odyssey Re Holdings Corp.—1,625
26. Tokio Marine Holdings Inc.—1,466
27. Catlin Group Limited—1,290
28. RenaissanceRe Holdings Ltd.—1,165
29. Aspen Insurance Holdings Limited—1,162
30. ACE Limited—1,146
50 largest reinsurance companos in India

31. Validus Holdings Ltd.—1,101

32. Flagstone Reinsurance aHoldings Limited—1,098
33. White Mountains Insurance Group, Ltd.—1,079
34. Amlin plc—1,004
35. Manulife Financial Corporation—972
36. American Agricultural Insurance Company—941
37. Endurance Specialty Holdings Ltd.—941
38. Alterra Capital Holdings Ltd.—892
39. Arch Capital Group Ltd.—875
40. IRB – Brasil Resseguros S.A.—780
41. Platinum Underwriters Holdings Ltd.—780
42. ACR Capital Holdings Pte, Ltd.—752
43. Montpelier Re Holdings Ltd.—720
44. NKSJ Holdings Inc.—690
45. Ariel Holdings Ltd.—644
46. Sun Life Financial Inc.—554
47. Maiden Holdings Ltd.—554
48. Allied World Assurance Company Holdings, AG—524
49. Central Reinsurance Corporation—457
50. W. R. Berkley Corporation—425

How reinsurance companies work

The idea behind reinsurance is relatively simple. Insurance companies write policies
covering their customers from potential losses. Yet those insurers have to take care to
manage their risk effectively, or else they might leave themselves open to devastating
losses that would jeopardize their business if an unlikely sequence of loss events
happens. In particular, insurance companies that primarily serve a specific
geographical area might find themselves with too much exposure in case of a
localized catastrophic event, and an insurer that covers very specific types of risk
could get overwhelmed if unfortunate circumstances lead to excessive losses.

Reinsurance companies help insurers spread out their risk exposure. Insurers pay part
of the premiums that they collect from their policyholders to a reinsurance company,
and in exchange, the reinsurance company agrees to cover losses above certain high
limits. That puts a cap on the insurer's maximum possible loss, and it leaves the
reinsurance company with the responsibility to figure out how to cover what can
amount to massive losses if a major disaster does strike.

Why reinsurance is profitable

Reinsurance companies make money in two ways. First, if reinsurers are smart about
what they insure, reinsurance underwriting should generate profits. Yet equally
important is the fact that reinsurance companies get to invest the premiums they
receive, and earn income until they have to pay out losses. Berkshire Hathaway has
used that model to perfection with its Berkshire Hathaway Reinsurance Group and its
General Reinsurance units, and the reinsurance business gives Berkshire the most
float of any of its insurance units.

However, the dynamics of those money-making opportunities change over time, and
that in turn affects the competitive landscape in the reinsurance industry. When
reinsurance companies have gone several years without major losses, new entrants
come into the space and start to write reinsurance policies. That puts pressure on
premiums, and the lower margins eat into profitability for all reinsurance companies.
When an inevitable major loss occurs, undercapitalized reinsurance companies go out
of business, and that improves the competitive picture for the survivors. Premiums go
up following catastrophic events, and the healthy remaining reinsurers enjoy a period
of larger profits until the cycle repeats.

To succeed, a reinsurance company has to adapt to changing conditions. For instance,

Berkshire Hathaway in 2015 recognized the stresses that the reinsurance market was
undergoing, and it therefore cut its stake in industry giant Munich Re by almost a
fifth. Berkshire has also gotten more careful with its own reinsurance business,
sticking to risks that it's comfortable taking and avoiding more perilous types of

What to watch for

If you're looking at investing in reinsurance companies, you need to understand not
just how reinsurance works but also how the industry rises and falls over time. That
way, you can weather the inevitable storms that all insurance companies face -- and
share in the profits that top reinsurers generate in the long run.

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The Role of Reinsurance

Reinsurance serves not only as a further risk-spreading mechanism but also as an

important component of the capital structure of nearly every insurance company.
Essentially, reinsurers supply capital to an insurance company in exchange for a share
of the premiums on the policies that the insurance company issues to its
policyholders. Basically, a reinsurance contract is an asset on the books of the
insurance company, which offsets the liabilities created by writing insurance policies
for policyholders to assume their risks. But this asset runs the risk of disappearing if
the losses the insurance policies generate and the reinsurer reinsures are so massive as
to cause the reinsurer to become insolvent.

Naturally, reinsurers are just as interested in emerging risks as the insurance

companies that purchase reinsurance are. Reinsurers, just like insurance companies,
want to know where their exposures will be coming from and at what loss amount.

Quite a few insurance companies with reinsurance subsidiaries and some smaller
reinsurers themselves became insolvent when they discovered that they had over-
accumulated asbestos and environmental exposures from old commercial policies
written in the 1950s, 1960s, and 1970s. This is what makes the concern about
emerging risks so important.

Because reinsurance companies typically reinsure an insurance company's entire

portfolio of insurance policies (except for those insurance policies reinsured
facultatively) rather than reinsure individual insurance policies, they generally are not
aware of all the potential exposure from any one individual policyholder. Reinsurers
rely on the ceding insurers to provide them with the risk analysis for the portfolio,
which should include any emerging risks that might arise.

Reinsurers, by contract, are typically required to indemnify the ceding insurers for
losses that are paid by the ceding insurers in good faith and that come within the terms
of the insurance and reinsurance contracts. Emerging risks can strain the principles of
follow-the-settlements, especially if the ceding insurer chooses to pay emerging losses
that were not previously anticipated under those policies.

Nevertheless, learning about emerging risks is critical to the reinsurers' knowledge of

their overall exposure.

What is Reciprocity?
This is a widely used term in the transaction of the business of reinsurance, indicating
a situation involving the desire for the satisfaction of mutual interest.
Normally, the direct insurers, at one time or the other, do transact reinsurance business
also in addition to the insurance business.

When they cede reinsurance business as such to another company, they also expect
that at different times that company also would cede reinsurance business to them.
This understanding of looking after each other’s interest is expressed by the term
Broadly, speaking reinsurance is insurance for insurance. This means that the original
insurer (who originally accepted the risk from the original insured) gets the risk
covered with another (Reinsurer) for the same reason the original insured got
protection for.

There are many risks in almost all classes of business that may be too big for an
insurer to digest or to bear on his own account.
Because the financial strength of the insurer on that account may not be potent enough
to bear a loss if it at all takes place.
Moreover, there is the question of big catastrophe losses, which might cripple down
the insurer financially and force him to disown any liability to the insured simply
because of inability to honor a claim.
Whilst this possibility is very much there, on the other hand, the insured is also most
reluctant to go from insurer to insurer and to place only that amount of business to
each, as each would be able to bear.
It is indeed amidst these two extremes that we see the development of a system
wherein the insured goes to one insurer who usually takes the whole risk and reinsures
any balance beyond his retention capacity (i. e., beyond which he cannot consume
from the viewpoint of financial strength for that class of business) with the reinsurers.
Reinsurance, like insurance in general, has the element of chance, involved. The
reinsurer hopes that his premiums will take care of his losses and that in the course of
events he will obtain a profit.
When an insurer accepts a risk for a very large amount of one event, although he may
be in a position to make a reasonable gain, yet indeed he has subjected himself to
serious possible liabilities.
Under such circumstances, he may desire to reinsure a part or all of the risk with some
other company or insurer. Reinsurance steps in as a method whereby the insurer may
receive indemnity from his reinsurer in the event of reinsured’s liability to the original
Some examples may be considered at this stage.
Example #1
In life insurance, the actuary can predict with some certainty as to how many lives of
a given age will die within a certain period. What he cannot forecast is which of the
named persons will exactly die.
This ignorance or limitation of knowledge, in fact, has aggravated the necessity of
reinsurance further.

If a life company has 100000 lives all aged 20 and each insured for $10,000, and if
this company now gets a fresh proposal from a man aged 20 but for an amount of
$30,000 then problem would arise since the company shall have to run the risk of an
additional amount of $20000 which will definitely imbalance the account if simply
the new entrant dies first. Therefore, this company shall feel the necessity of getting
its load ( $20000 in this case) reinsured with another company.

Example #2
A general insurance company may have the capacity to bear up to $100000 for any
property insurance or liability insurance.
If a risk is placed for $300000 by the insured then the insurer shall have to reinsure

In the case of assuming unlimited liabilities the extent of loss may be sometimes very
big and, therefore, in all fairness should have reinsurance arrangement beyond
Now after seeing the terms related to Re-Insurance and examples let us look at the
various definitions it given in following paragraphs.
By a reinsurance agreement, the reinsurer may undertake to reinsure the assured (i.e.,
the reinsured or reassured), in consideration of the assured paying him a portion of the
premium the assured receives against the proportionate amount of all assured’s losses
arising from insurances along a certain line.

This arrangement could not constitute a partnership but would, in fact, be a contract of
reinsurance (English Insurance VS. National Benefit Insurance (1929), A. C. 114 ).
This definition understandably refers to a treaty agreement discussed later.
Reinsurance is an agreement to indemnify the assured (meaning reassured), partially
or altogether, against a risk assumed by it in a policy issued to a third party.
– (Friend Bros V. Seaboard Surety Co, 56 N. E. 2d 6).
A direct company may find that it has placed itself under liability to a very large
number of policy-holders. It may consider that it has undertaken more than it can
safely carry.
Therefore the company, because of its outstanding contractual obligations, may desire
to protect itself. It may seek to lessen its burden by getting some other company to
assume a part of its liability in case of a loss.
The ORIGINAL OR PRIMITIVE OR DIRECT insurer, as is often called to represent
the direct-writing company, may transfer or cede the whole or part of a risk to another
The first insurer or cedar, in turn, enters into a contractual relation with the second
company which is called the REINSURER. The original or the primary insurer is
obligated directly to his insured or the policy-holder. The reinsurer is obligated to the
ceding company.
The original insurer has to account to its original assured in case of loss under a
primary policy.
The direct company, known as the reinsured, by its contract may obtain the power to
collect from the reinsurer by reason of the loss suffered by the original assured under
the terms of the original policy. From the business relationship established between
the reinsurer and the reinsured, there may arise a contract of reinsurance.
The students should appreciate that the risk assumed in reinsurance is necessary to be
determined by examining the intention of the parties to reinsurance contract itself,
since it may so happen that the risk covered by the reinsurance contract is not the
same as that covered by the original, policy.

A reinsurance transaction is a relationship of utmost good faith, established between

two parties, which is based primarily on contract or understanding whereby one party,
called the reinsurer, in consideration of a premium paid by the reassured agrees to
indemnify under certain terms and conditions, another party, the reassured, against a
risk previously assured by the latter, the direct writer, in its primary insurance
covering the original assured.
(Kenneth Thompson).
“Reinsurance is a contract which one insurer makes with another to protect the first
insurer from risk already assumed”.
The students should get themselves acquainted with a very common term, known as
retrocession, widely used in reinsurance transactions. This virtually means
reinsurance of reinsurance.
It should be appreciated by the students that reinsurance enjoys no immunity from the
operation of the principles governing sound practice for insurers.
The reinsurer also must avoid a concentration in conflagration areas or catastrophe
situations, and must maintain a wide distribution of its risks assumed from the ceding
It is probable that the reinsurer may have sufficient amounts ceded from a number of
different sources and unfortunately the cession may relate to the same risk.
To relieve itself from this undesirable accumulation, the reinsurer would itself have to
resort to reinsurance. This act of reinsuring any part of a reinsurance is termed as
retrocession and comes within the same study of reinsurance.

To sum up, therefore, it may be said that:

1) In order to secure a large number of similar risks to permit the prediction of losses
with a reasonable degree of certainty, insurance companies have devised the practice
of reinsurance.
2) Reinsurance is the transfer of insurance business from one insurer to another. Its
purpose is to shift risks from an insurer, whose financial security may be threatened
by retaining too large an amount of risk, to other reinsurers who will share in the risk
of large losses.
3) Reinsurance tends to stabilize profits and losses and permits more rapid growth.
4) ehe entire area of reinsurance and retrocession is an example of the essential need
for a spread of risk among many risk bearers. Much of the process goes on without
the policy-holder being aware of its existence since he is not a party to the reinsurance
5)Reinsurance enables a risk to be scattered over a much wider area, which is the
primary concept of the whole business of insurance.
6) The need for reinsurance arises in the same way as an original insured needs
insurance protection.
7) The original insured is not a party to the reinsurance contract.

Having completed the various types of reinsurance arrangements, discussions will
now be made as to the forms they usually take. There are two forms of reinsurance,
irrespective of the type of reinsurance discussed so far. These are;
PARTICIPATING OR PRO-RATA: Where the proportion of amounts payable by the
insurer and the reinsurers in respect of a loss is determined and agreed beforehand,
i.e., before a loss. Here the premium received by the insurer is also distributed in
between himself and the reinsurers in the same proportion.
Examples are facultative, quota share, surplus or pool.
NON-PROPORTIONAL: Where the reinsurance is on different terms and the
reinsurers do not stand to be proportionately liable for a loss.
Therefore, the premium received by the insurer is also not required to be
proportionately distributed to the reinsurers.
Examples are, an excess of loss treaty, stop loss treaty etc.