Reinsurance 100marks

L.N.
COLLEGE OF MANAGEMENT & TECHNOLOGY

MALAD (WEST) MUMBAI – 64.
ACADEMIC YEAR
(2007-2008)
SEMESTER II
PROJECT ON
Reinsurance: Insurance to Insurers’
(Business Environment)
PROJECT GUIDE
Prof. Mrs. Sucheta Pawar
SUBMITTED BY
Piyush Goyal
MBA Full Time
Roll NO - 11

 DECLARATION
WE students of MBA {full time} LN COLLEGE OF MANAGEMENT &

TECHNOLOGY (Semester II) hereby declare that we have completed
this project on “Reinsurance: Insurance to Insurers’” in the

academic year 2007-2008. The information submitted is true and
original to the best of our knowledge.
STUDENT OF LN COLLEGE
MBA (FULL TIME)
 CERTIFICATE
I, PROF Mrs. Sucheta Pawar hereby certify that HORLICKS

GROUP of MBA {Full Time} student of LN COLLEGE OF MANAGEMENT
& TECHNOLOGY (Semester II) has completed project in the academic
year 2007-2008. The information submitted is true and original to the
best of my knowledge.
SIGNATURE OF PROJECT GUIDE

ACKNOWLEDGEMENT
It gives me pleasure to present this project on “Reinsurance:

Insurance To Insurers’ ” to the student of MBA (full time). The
subject matter is made more compact and logical.
I gratefully acknowledging the valuable efforts, suggestion and

clarifications provided by many by making this project practical.
It would be rather unfair on our part for not thanking our college LN
College Management & Technology for having shown their
continuous faith in us.
I take this opportunity to express my sincere appreciation and

gratitude to our college administrative staff that helped us.
I express my grateful thanks to every one who have contributed

even in a small way towards successful completion of this project.
Last but not least, I would like to thank my parents for providing me
with such good education and our professors in the completion of
this project.

Index
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

“Man owes his success to his creativity. No one doubts the need for
it. It is more useful in good times and essential in bad”.
INTRODUCTION
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.
HISTORY OF INSURANCE INDUSTRY
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
5

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 much."
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, it refused to insure certain buildings where the risk of
fire was too great, such as all wooden houses. Nominee of the assured could
get the policy value either at maturity or by installments and an agreed
bonus.

HISTORY OF RE-INSURANCE
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 Lloyd’s, and nor until 1907 do we find
the establishment of Britain’s 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 Lloyd’s, 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.
By the end of the Second World War London had successfully established
itself at the heart of the international reinsurance market. The City of
London had become the centre for reinsurance capacity and expertise, with
capital provided by British and overseas companies and also those many
individuals who were members at Lloyd’s.
Other reinsurance markets overseas, particularly in Germany and the United

States, continued to develop their major domestic reinsurance markets

LITERATURE REVIEW
WHAT IS REINSURANCE?
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.
10

11

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 writers.
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
12

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.
○ Individual risk review ○ No individual risk scrutiny by

○ Right to accept or reject each the reinsurer
risk on its own merit ○ Obligatory acceptance by the
○ A profit is expected by the reinsurer of covered business
reinsurer in the short and long ○ A long-term relationship in
term, and depends primarily which the reinsurer’s
on the reinsurer’s risk profitability is expected, but
selection process measured and adjusted over
○ Adapts to short-term ceding an extended period of time
philosophy of the insurer ○ Less costly than “per risk”
13

○ A contract or certificate is reinsurance
written to confirm each ○ One contract encompasses all
transaction subject risks
○ Can reinsure a risk that is
otherwise excluded from a
treaty
○ Can protect a treaty from
adverse underwriting results
• 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
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
14

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
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
15

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. In catastrophe excess of loss, the cedant’s 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
Retrocession
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
16

in this scenario are known as “retrocessionaires.” The reinsurance company
that purchases the reinsurance is known as the “retrocedent.”
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 example.
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.
17

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.
Treaty
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 excesses.
A proportional treaty may he referred to as a pro-rata or surplus lines or

excess lines treaty. A non—proportional 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 selling.
18

19

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 reinsurance.
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
20

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.
More recently, the high-profile bankruptcy of the HIH group of insurance

companies in Australia revealed that highly questionable transactions had
been propping-up the balance-sheet for some years prior to failure. To be
clear, although fin re contracts were involved, it was the fraudulent
accounting for those contracts - and not the actual use of fin re - which was
the problem. As of June 2006, General Re and others are being sued by the
HIH liquidator in connection with the fraudulent practices.
21

A REINSURANCE PROGRAMME
22

23

Basis of Insurance and Need for Reinsurance
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
company’s operation.
Good Reinsurance Management
Optimization of a company’s 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
company’s prosperity. Since the nature of a company’s portfolio is generally
not static, the reinsurance arrangements have to be kept under review
continuously. Hence, the concept of dynamic reinsurance management is
important.
24

The objectives of a good reinsurance program are as follows:
(a) Provide adequate reinsurance capacity to enable the business of different

branches to operate without any handicaps.
(b) Provide maximum possible freedom in rating and claims settlement.
(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 possible.
(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.
25

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 policy. The schedule of
retentions is based on the following factors:
(a) Capital and surplus funds
(h) Complexion of the portfolio i.e., number of risks, types of risks, premium
volume, adequacy of terms, catastrophe exposures, etc.
(c) Management policy in risk-taking.
Retaining much lower than justified by these factors can insulate the
company from the effects of bad underwriting and encourage a reckless
development policy. High profitability cannot justify retaining much more
than technically feasible. However, in respect of a ‘portfolio’ of profitable
business with normal exposure of losses, it is possible to increase the net
retention to a higher figure based on the spread ov2r a period of five years
with a suitable working excess of loss protection. Working excess of loss
reinsurance is also the more appropriate method of keeping a reasonable
26

retention in classes such as marine cargo or motor insurance. However, it
can cause reduction of net retained profits in some circumstances for
business such as marine hull.
Linked with determination of the size of retention is the decision pattern of

reinsurance protection. It could either be the normal method of proportional
reinsurance with only catastrophe protection for the net account or it could
be an enlarged retention with excess of loss protection and proportional
reinsurance beyond the retention or it could be primarily excess of loss
protection with some control on exposure through proportional reinsurance.
Selection of the most appropriate system of reinsurance depends on the
nature of the portfolio, its pattern of exposure and losses.
27

THE REINSURANCE MARKETS
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
• Offshore.
28

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 Market’s underwriting resources are produced by Lloyd’s 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 Lloyd’s. The
uniqueness of the Lloyd’s 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 Switzerland’s
reinsurance premiums. The Winterthur Group is based there too.
29

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 market.
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
URZ’vIA’s European market strategy comes to fruition. An increasing
number of reinsurers and brokers are members of the l3russels based
network, RINET (Reinsurance and Insurance Network).
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 Lloyd’s and
London companies, is substantial.
30

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 Lloyd’s 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
31

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.
32

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
companies.
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 apply.
The major offshore centres arc situated in:

33

— Bermuda
— The Cayman Islands
— Guernsey
— 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 capacity.
The 1994 net premium income written by international insurance and

reinsurance companies was just over $18.8 billion. The Bermuda based
Centre Re is included in Standard and Poor’s top 30 reinsurers in the world.
Other financial centres, which may be included in the ever-lengthening list

of offshore domiciles, are situated in:
● Dublin
● Luxembourg.
34

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 gap.
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 present.
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:
35

● 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.
Indeed, silence can amount to misrepresentation, in the sense that

nondisclosure of some material fact by one of the parties to the contract will
give rise to a remedy for the injured party.
‘Where a broker is involved in negotiating terms, potential reinsurers must

be informed of all material facts which the cedant has disclosed to the
broker. Whether a non-disclosed fact is material or not is often decided by
the legal courts.
36

MARKET SHARE OF REINSURERS
37

World’s Top 10 Reinsurers
Rank Company Net premiums written
1 Swiss Re Group $27,680,199,200
2 Munich Re Group $23,760,161,400
3 Hannover Re Group $9,661,392,406
4 Berkshire Hathaway/Gen Re Group $9,491,000,000
5 Lloyd's of London $6,948,466,800
6 XL Re $5,012,910,000
7 Everest Re Group Ltd. $3,972,041,000
8 PartnerRe Ltd. $3,615,878,000
9 Transatlantic Holdings Inc. $3,466,353,000
10 ACE Tempest Reinsurance Ltd. $2,848,758,000
38

The growth of insurance premium by years is shown on the following chart:
39

Reinsurance In India
GIC RE
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.
GIC arrange excess of loss protection from International market.
REINSURANCE REGULATION
40

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 companies.
● Indian Pool for Hull managed by GIC.
● The treaty and balance risk after automatic capacity are to be first
offered to other insurance companies in the market before offering it
to international re-insurers.
● 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
41

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 necessary.
● 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 Lloyd’s syndicates taking care to limit
placements with individual syndicates to such shares as are
commensurate with the capacity of the syndicate.
42

● 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 companies.
● Indian Pool for Hull managed by GIC.
● The treaty and balance risk after automatic capacity are to be first
offered to other insurance companies in the market before offering it
to international re-insurers.
● 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
43

protecting the portfolio by suitable excess of loss covers. Such
retrocession shall be at original terms plus an over-riding commission
to the Indian Reinsurer not exceeding 2.5 percent. The retrocession to
each ceding insurer shall be in proportion to its cessions to the Indian
Reinsurer.
● Every insurer shall be required to submit to the Authority statistics
relating to its reinsurance transactions in such forms as the Authority
may specify, together with its annual accounts.
44

Terrorism & Natural Calamaties A Setback to the
Reinsurance Industry
Throughout the insurance industry, it is not business as usual. The attacks on

the World Trade Center on September 11, 2001, sent shock waves through
society and the business community that will significantly impact the
availability and cost of insurance for years to come.
The devastating floods, earthquakes, Hurricanes
and other natural calamities have added pain on every insurer and reinsurer
45

46

Total claims paid by all reinsurance companies in 2005 reached 15.951.878
million GEL, which was 25,9 % of total income. The dynamic of loss
according to the years has the following structure:
47

On the chart you can see claims paid by insurance companies by years:
48

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
49

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 said.
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
country’s only reinsurer GIC, is also slated to buy a tiny stake in the
proposed mortgage insurance company.
50

Global reinsurers’ capitalisation floor set at Rs 5,000 crore
09/11/2007 The Economic Times
INTERNATIONAL reinsurers, looking to start operations in India,

may soon be able to set up branches with a minimum capitalisation of Rs
5,000 crore. This forms part of a set of amendments to the Insurance Act,
1938. The minimum capitalisation amount has been linked to the existing
capitalisation of India’s only reinsurer, General Insurance Corporation
(GIC).
The amendments to the Act is pending before Parliament. Once the
amendments are approved, international reinsurers will have legal and
regulatory clearance to open branches of their parent company to transact
business in the country. The Insurance Act only permits companies having a
joint venture to sell products in India. Currently, only 26% FDI is allowed in
reinsurance sector. A joint venture company should have a minimum
capitalisation of only Rs 200 crore.
Reinsurance enables insurance companies to offload their risks by
placing part of the cover with reinsurers. Global reinsurance companies,
including Swiss Re and Munich Re, are keen on setting up branches in India,
instead of coming through joint ventures.
“International reinsurers having branches in India will ensure that the
liabilities of the branches will be accountable to the parent company,” Swiss
Re India managing director Dhananjay Date told ET. “Most reinsurers are
large enough to provide for claims arising from the mega insurance covers
provided by the general insurance companies. Stiff capitalisation
51

requirements of Rs 5,000 crore will ensure that only serious well-capitalised
international insurers will be able to enter the market,” he added. “On the
other hand, a joint venture with Rs 200 crore would have been under
capitalised and would not be able absorb huge claim payouts,” Mr Date said.
The amendments to the Act also has provisions to recognise a ‘society’
for reinsurance. This will facilitate UK’s Lloyd an entry into India. Lloyd’s
is a society and not a company that underwrites reinsurance risks.
Under free-pricing, international reinsurers are cautious about
underwriting practices adopted by domestic insurance companies. However,
with insurance companies in India being well-capitalised, it is increasing
their capacity to retain some of the smaller risks.
As the sole reinsurer in the domestic market, GIC receives a 20%
statutory cession (20% of the premium) on each policy subject to certain
limits. Hitherto, the policy for international reinsurers was determined by
concerns about retaining capital within the country.
The omnibus insurance legislation is pending in Parliament since last
year. The Left parties have raised objections to several amendments,
primarily the proposed hike in FDI in the sector from 26% to 49%.
52

Govt may cut reinsurance cap to 10%
02/01/2007 The Economic Times
AFTER getting their freedom in pricing, non-life insurers are set to

experience freedom in reinsurance — the process where an insurance
company buys cover to transfer some risks out of its books.
Until now, insurance companies have to mandatorily transfer 20% of
their risks and consequently 20% of their premium income to the General
Insurance Corporation (GIC), which has been designated by the government
as the national reinsurer. Moves are afoot to bring down this compulsory
reinsurance to 10% from April 2007. For insurers, this would give them the
ability to shop for best deals from international reinsurers. However, for
GIC, this would mean a loss of half of its captive business.
Industry officials say that public sector companies are likely to
reinsure less since they are well capitalised and in a position to retain risks.
Private companies, with a smaller capital base, are likely to continue to
reinsure. However, they now have the choice of buying cover from
international reinsurers. GIC, on its part, will have to be more proactive in
marketing its reinsurance services to companies. The Corporation has
already become more proactive in trying to get reinsurance business from
developing countries and has opened offices overseas, including the Middle
East. It has also sought permission from the FSA in London.
Incidentally, no private player has come forward to set up a
reinsurance company in India even after liberalisation. This is because the
53

economics of reinsurance supports having a giant corporation in financial
centre rather than distributing capital across countries.
The concept of compulsorily passing on risks (or ceding risks) to a
national reinsurer was common in most countries in the past. With
liberalisation, most countries have withdrawn the requirement for
compulsory cessions. The objection to the removal of compulsory cession
has been that this would result in flight of foreign exchange as companies
reinsure overseas, and secondly, policymakers felt that there was a need to
increase insurance capacity in India.
To ensure that there is no flight of capital; legislation has focussed on
increasing retention of risks in the country. While introducing the IRDA Act,
the government had assured Parliament that the level of retention of risks in
the country would not go down upon liberalisation. However, with the
economy witnessing large inflows by way of investment, capital outflows
are not a major concern. The concept of a national reinsurer was there in
most countries. With liberalisation, most countries have done away with the
national reinsurer tag and allowed free competition in the market.
54

55

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 world’s 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?
56

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 company’s 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
57

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
58

in their own are long gone Reinsurers now need to focus on delivering better
more consistent underwriting results in their core markets.
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
59

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 increase.”
The news of Mr. Hans-Jurgen Schinzler’s 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 country’s second biggest bank. It also
Owns 10% of Commerzbank, One of its subsidiaries ERGO is Germany’s
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
60

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 underwriter’s 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.”
61

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
62

enjoy?
63

64

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 it’s 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 & Poor’s is AA,
Moody’s 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 Re’s incorporation was triggered by a major fire on 10-11 May 1861
when 500 houses got burnt and 3000 people became homeless. The inade
65

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 Re’s 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.
66

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 Re’s
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 Re.”
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 Re’s Asia division, Mr. Pierre Oaendo, said “The move to Hong Kong
is designed to expand Swiss Re’s market leadership and to meet the current
67

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.
China
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 country’s 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 Re’s Asia Division, said “Swiss Re’s 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 growth.”
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
68

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.
Japan
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.Company’s 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.
India
Swiss Re has presence in India from over 70 years. Swiss Re through Swiss
Re Services India Private Limited offers clients exclusive and specialized
69

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 branches:
• A full range of technology know-how and services, available locally

to serve India’s increasingly complex risk landscape;
• Local insurers can access reinsurer’s global balance sheet;
• Increased security and reduced credit risk due to the regulator’s

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
70

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.
71

Case: I I I
General Insurance Corporation of India
This case provides the history of General Insurance corporation of India
(GIC’ since nationalization. GIC’S 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
72

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. GIC’s 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 croré.
73

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.
74

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
75

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 industry’s 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
76

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 corporations.
• 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.
77

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.
IRDA Act
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
78

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 industry.
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.
79

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.
80

GIC’s 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:
81

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 Corporation’s operations continue
domestic market, as it constitutes around 94% of it’s 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
82

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 looking
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 Corporation’s 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
83

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 GIC’s 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 it’s financial strength. The rating reflects
not only th Corporation’s 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.
84

CONCLUSION
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.
85

REFERENCES
Books
Reinsurance Concepts And Cases – Abhishek Agrawal, ICfai Press
Practice of Reinsurance in Uk
Reinsurance IC-85, III
Newspapers, Magazines & Journals
The Economic Times
Mint
The Times of India
Business Standard
Business Today
Business line
Websites
http://en.wikipedia.org/wiki/Reinsurance
http://www.scor.com/www/index.php?id=16&L=2
http://www.swissre.com/pws/research%20publications/sigma%20ins.%20research/sigma
%20archive/sigma%20archive%20%28english%29.html
http://www.zurich.com/main/productsandsolutions/industryinsight/2003/september2003/industryi
nsight20030826_001.htm
http://www.allbusiness.com/management/193921-1.html
86

www.irdaindia.org
www.insuranceinstituteofindia.com
www.google.com
www.indiainfoline.com
http://www.generalinsurancecouncil.org.in/
http://www2.standardandpoors.com/portal/site/sp/en/us/page.siteselection/site_selection/0,0,0,0,0
,0,0,0,0,0,0,0,0,0,0,0.html
http://www.businessinsurance.com/
http://www.ficci.com/media-room/speeches-presentations/2003
87

Reinsurance 100marks

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Reinsurance 100marks

Uploaded by

Copyright:

Available Formats

L.N.

COLLEGE OF MANAGEMENT & TECHNOLOGY

Reinsurance: Insurance to Insurers’

WE students of MBA {full time} LN COLLEGE OF MANAGEMENT &

this project on “Reinsurance: Insurance to Insurers’” in the

MBA (FULL TIME)

I, PROF Mrs. Sucheta Pawar hereby certify that HORLICKS

SIGNATURE OF PROJECT GUIDE

Reinsurance: Insurance to Insurers’

It gives me pleasure to present this project on “Reinsurance:

I gratefully acknowledging the valuable efforts, suggestion and

I take this opportunity to express my sincere appreciation and

I express my grateful thanks to every one who have contributed

Reinsurance: Insurance to Insurers’

Market Share of Reinsurers 37

Terrorism- A Setback to the industry 45

News on Reinsurance Industry 48

Some Case Studies 55

Reinsurance: Insurance to Insurers’

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

HISTORY OF INSURANCE INDUSTRY

The insurance tradition was performed each year in Norouz (beginning of

Reinsurance: Insurance to Insurers’

Benjamin Franklin helped to popularize and make standard the practice of

Reinsurance: Insurance to Insurers’

Reinsurance: Insurance to Insurers’

The development of a reinsurance market took a rockier road. Reinsurance

As reinsurance of fire business appeared unattractive to UK insurers, co-

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

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

Reinsurance: Insurance to Insurers’

It is in 1880 that we find the earliest trace of excess of loss reinsurance, as

Other reinsurance markets overseas, particularly in Germany and the United

Reinsurance: Insurance to Insurers’

Reinsurance is a means by which an insurance company can protect itself

Reinsurance: Insurance to Insurers’

Reinsurance: Insurance to Insurers’

• Treaty and Facultative Reinsurance

In treaty reinsurance, the ceding company is contractually bound to cede

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

In facultative reinsurance, the ceding company cedes and the reinsurer

Reinsurance: Insurance to Insurers’

○ Individual risk review ○ No individual risk scrutiny by

Reinsurance: Insurance to Insurers’

• Proprotional And Non-Propoertional Reinsurance

Reinsurance: Insurance to Insurers’

The other form of proportional reinsurance is surplus share or surplus of line

Reinsurance: Insurance to Insurers’

Reinsurance companies themselves also purchase reinsurance and this is

Reinsurance: Insurance to Insurers’

It is not unusual for a reinsurer to buy reinsurance protection from other

Well-written software can either detect reinsurance spirals, or poor software

Reinsurance: Insurance to Insurers’

To overcome the high administration costs and uncertainty of reinsuring

Proportional treaties include quota shares, various levels of surpluses and

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

Reinsurance: Insurance to Insurers’

Reinsurance: Insurance to Insurers’

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

One of the particular difficulties of running an insurance company is that its

Reinsurance: Insurance to Insurers’

More recently, the high-profile bankruptcy of the HIH group of insurance

Reinsurance: Insurance to Insurers’