Chapter—I 'X

RE-INSURANCE: Definition-Reasons for reinsurance- Types

of reinsurance-App/ication of reinsurance to various branches
of insurance- Certain lega/ considerations.

The chapter shall exclusively deal in reinsurance and

would get into little bit more detail than what is usually
expected of the students of this elementarycourse. This is so
because the student is less likely to get an opportunity of
knowing this subject further in detail as his study advances
through various phases, unless of course he specialises in
reinsurance subsequently or gets into knowing the subject
by private studies. It is also felt that whatevermore the
student can retain would be of positive use to him in his
professional career. With this aim in view this chapter shall
deal in questions like :
a) What reinsurance is.
b) Necessity of an insurance companyfor taking reinsu-
rance protection.
c) Various types of reinsurancecovers available and the
implications of such cover.
d) What types of covers are well suited to different
branches of insurance.
e) Certain legal considerations arising out of the rela-
tionship amongst reinsurer, reinsured and original
insured, co-insurance, double insurance, utmost good
faith and insurable interest.
SOME IMPORTANT TERMINOLOGIES :
Before proceeding to the study of reinsurance it is
required of the students to understand the meaning of certain
terminologiescommonlyused in the transaction of reinsura-
nce business. In the absence of such understanding the
 ( 139 )
studentis likely to get confused and the study might mean
obsolete to him. Tho terminologies are :

REINSURANCE
REASSURANCE
This means insurance of insurance. The original insurer
gets the risk, assumed from the original insured (primary
insured), covered (reinsured) with another insurer (known as
reinsurer) for the same reason as the primary insured does.
The primary insurer, here, infact becomes the insured (known
as reinsured) and the personor body or company giving him
the protection becomes the insurer (known as reinsurer)

REINSURER
REASSURER
Meaning the person, body or company giving reinsurance
cover. They protect the interest of the insurer in case of
loss/damage of the property or subject-matter insured and for
which the insurer is liable underthe policy of insurance.

REINSURED/REASSURED/CEDING COMPANY
DIRECT CO-PRIMARY OR ORIGINAL INSURER.
All these terms relate to or indicate or indentify the
insurer who primarily assumes the risk from the primary
insured and then gets the same reinsured according to need.
When, therefore, an insurer reinsures the risk he becomes
known as reinsured/reassured/cedingcompany/direct com-
pany/original or primary insurer.

CEDING COMPANY
The companyceding the risk, i. e., getting the risk reins.
ured, and has already been discussed.

CESSION
Means the amount of risk ceded for reinsurance, i. e.,
the
amount reinsured.

Elements of Insuronce
 ( 140 )

RETROCESSION
Means reinsuronce of reinsurance. A reinsurer may
to get his interest protected by furtherreinsurance and so om

RETENTION
This refers to the amountof risk retained by the ceding
company. The balance is usually reinsured. The amount of
retentionis basically dependenton the financial strength of
the ceding company for that class of business. It is the
refined figure of another term known as LIMIT. Normally
"Limit" is a rough guide of the ceding company and depend.
ing on the quality and nature of the risk the ceding co.
may decide to enhance or reduce the limit for the purpose ot
actuat retention.

LINE
A line is equivalent to retention.i.e., the amount retained
by the ceding co. A reinsurancearrangementis usually
expressed in terms of •'ljne••meaning that if a ceding com.
pany has got a ten-line or twelve-line reinsurance arrangement
(TREATY) it can automatically cede or reinsura upto ten
tunes or twelve times of the amount retained.

PRIMARY INSURED/ASSURED:
This refers to the primary insured (assured) originally
insuring the risk at the first instance. He is one of the patties
to the insurance contract and not in the reinsurance contract.

RECIPROCITY ;
This is a widely used term in the transaction ot the bus-
of reinsurance. indicating • situation involvingdesoo
foj satisf.ction of natuat interest. Notmaiiy. the
at one time or the other, veinsutanco
in oddition insurance busine€$. When they
cede anothe( companythey
also diff.ont time. that company also would
 ( 141 )
cede jeinsurance business to them, This understanding of
looking after each other's interest is expressed by the term

WHAT RE-INSURANCE IS
Broadly speaking reinsurance is insurance of insurance.
This means that the original insurer (who originally accepted
the risk from the original insured) gets the risk covered with
another (Reinsurer) for the same reason the original insured
got protection for. There are many risks in almost all classes
of business which may be too big for an insurer to digest or
to bear on his own account. Because the financial strength of
the insurer on that account may not be potent enough to bear
a loss if it at all takes place. Moreover, there is the question
of big catastrophe losses which might cripple down the
insurer financially and force him to disown any liability to the
insured simply because of inability to honour a claim. Whilst
this possibility is very much there, on the other hand the
insured is also most reluctant to go from insurer to insurer
and to place only that amountof business to each, as each
would be able to bear. It is indeed amidst these two
extremes that we see the development of a system wherein the
insured goes to one insurer who usually takes the whole
risk and reinsures any balance beyond his retention capacity
(i. e., beyond which he cannot consumefrom the viewpoint
of financial strength for that class of business) with the
reinsurers.
Reinsurance, like insurance in general, has the element
of chance involved. The reinsurer hopes that his premiums
will take Care of his losses and that in the course of events
he will obtain a profit. When an insurer accepts a risk for a
very large amount against one event, although he may be in
a position to make a reasonable gain, yet indeed he has
subjected himself to serious possible liabilities. Under such
circumstanceshe may desire to reinsure a part or atl of
the risk with some other companyor insurer. Reinsurance
 ( 142 )
steps in as a method whereby the insurer may receive
indemnity from his reinsurer in the event of reinsured's
liability to the original insured.
Some examples may be considered at this stage.

Example : 1

In life insurance the actuary can predict with some

certainty as to how manylives of a given age will die within
a certain period. What he cannot forecast is, which of the
named persons will exactly die. This ignorance or limitation
Of knowledge in fact has aggravated the necessity of re-
insurance further. If a life companyhas 100000 lives all aged
20 and each insured for Tk. 10,000, and if this companynow
gets a fresh proposal from a man aged 20 but for an amount
of Tk. 30,000 then problem would arise since the company
shall have to run the risk of an additional amountof Tk.20000
which will definitely imbalance the account if simply the
new entrant dies first. Therefore, this company shall feel
the necessity of getting its load ( Tk. 20000 in this case)
reinsured with another company.

Example: 2
A general insurancecompanymay have the capacity to
bear upto Tk. 100000 for any property insurance or liability
insurance. If a risk is placed for Tk. 300000 by the insured
then the insurer shall have to reinsure Tk. 200000, In case
of assuming unlimited liabilities the extent of loss may be
sometimesvery big and, therefore,in all fairness should have
reinsurance arrangement beyond capacity.

DEFINITIONS :
Numbers of definitions of reinsurancewill be tried here
and it is believed thåt the students will be able to clear
their concept by well grasping the definitions.
"By a reinsurance agreement, the reinsurer may under-
take to reinsurethe assured (i.e., the reinsured or reassured).
Elements of insurance
 ( 143 )
in consideration of the assured paying him a portion of
tho premium the assured receives, against the proportionate
amountof all assured's losses arising from insurances along
a certain line. This arrangementcould not constitute a
partnershipbut would infact be a contract of reinsurance
(English Insurance VS. National Benefit Insurance (1929),
A. C. 114). This definition understandablyrefers to a treaty
agreement discussed later.
"Reinsurance is an agreementto indemnify the assured
(meaning reassured), partially or altogether, against a risk
assumedby it in a policy issued to a third party" (Friend
Bros V. Seaboard Surety co, 56 N. E. 2d 6).
A direct company may find that it has placed itself
under liability to a very large numberof policy-holders. It
may consider that it has undertakenmore than it can safely
carry. Therefore the company, because of its outstanding
contractual obligations, may desire to protect itself. It may
seek to lessen its burden by getting some other company to
assume a part of its liability in case of a loss. The ORIGINAL
OR PRIMITIVE OR DIRECT insurer, as is often called to
represent direct-writing company, may transfer or cede the
whole or part of a risk to anothercompany. The first insurer
or ceder in turn enters into a contractual relation with
the second company which is called the REINSURER. The
original or the primary insurer is obligated directly to his
insured or the policy-holder. The reinsureris obligated to the
ceding company. The original insurer has to account to its
original assured in case of loss undera primarypolicy. The
direct company, known as the reinsured, by its contract
may obtain the power to collect from the reinsurer by reason
of the loss suffered by the original assured under the terms
of the original policy. From the business relationship
established between the reinsurer and the reinsured there
may arise a contract of reinsurance. The students should
appreciate that the risk assumed in reinsurance is necessarily
to be determinedby examiningthe intentionof the parties
to reinsurance contract itself, since it may so happen that
Elements of Insurance
 ( 144 )
the risk covered by the reinsurance contract is not the same
as that covered by the original policy.
"A reinsurance transaction is a relationshipof utmost
good faith, established between two parties, which is based
primarily on contract or understanding whereby one party,
called the reinsurer, in consideration of a premium paid by
the reassured agrees to indemnify under certain terms and
conditions, another party, the reassured, against a risk
previously assured by the latter, the direct writer, in its
primary insurance covering the original assured" ( Kenneth
Thompson
"Reinsurance is a contract which one insurer makes with
another to protect the first insurer from risk already assumed",
(Bethke Vs. CosmopolitanLife InsuranceCo., 262, APP 586).
*'It involves the principle of indemnity" ( Union Central
Life Insurance Co. Vs. Lowe, 182 N. E. 611).
The contract of reinsurance was also defined in the
Americancase of Stickel Vs. Excess InsuranceCo. of America,
Ohio SupremeCourt, Nov. 22, 1939, 23 N. E. ( 2nd ) 839 as :
"'A contract wherebyone, for a consideration, agrees to
indemnify another wholly or partially against loss or liability
by reason of a risk the latter has assumed under a separate
and distinct contract as insurer of a third party".
It should be recalled by the students that the primary
concept of insurance is to spread the risk or loss of one
onto the shoulders of many. Whilst it becomes unbearable
for a man alone to bear the load of a loss, it becomesquite
easier when a group collectively shares the same. In reinsur-
ance also the same principle or concept is involved. It is
indeed sharing and resharing of risks or spreading and further
spreading of risks. The necessity emerges out of the
same need as is felt by the original assured. Reinsurance
is not double insurance or co-insurance ( discussedlater )
since in such contracts, unlike reinsurance,there is a direct
contractual relationship in between the insured and insurer
or co-insurer.
Elements of Insuraneo
 ( 145 )

The students should get themselves acquainted with a

very common term, known as retrocession, widely used in
reinsurance transactions. This virtually means reinsurance
of reinsurance. It should be appreciated by the students
that reinsurance enjoys no immunity from the operation of the
principles governing sound practice for insurers. The reinsurer
also must avoid a concentration in conflagration areas or
catastrophe situations, and must maintain a wide distribution
of its risks assumed fromthe ceding company. It is probable
that the reinsurer may have sufficient amounts ceded from a
number of .different sources and unfortunately the cession
may relate to the same risk. To relieve itself from this
undesirable accumulation, the reinsurer would itself have to
resort to reinsurance. This act of reinsuring any part of a
reinsurance is termed as retrocession and comes within the
same study of reinsurance.
To sum up, therefore, it may be said that :
i) In order to secure a large number of similar risks to
permit the prediction of losses with a reasonabledegree
of certainty, insurance companies have devised the
practice of reinsurance.
ii) Reinsurance is the transfer of insurance business from
one insurer to another. Its purpose is to shift risks from
an insurer, whose financial security may be threatened
by retaining too large an amount of risk, to other
reinsurers who will share in the risk of large losses.
iii) Reinsurance tends to stabiliso profits and losses and
permits more rapid growth.
iv) The entire area of reinsurance and retrocession is an
example of/ the essential•need for spread of risk among
many risk bearers. Much of the process goes on without
the policy-holder being aware of its existence since he is
not a party to the reinsurancearrangement.
v) Reinsurance enables a risk to be scattered over a much
wider area which is the primary concept of the whole
business of insurance.
 ( 146 )
vi) The need for reinsurance arises in the same way as an
original insured needs insurance protection.
vii) Original insured is not a party to the reinsurancecontract.

REASONS FOR REINSURANCE

From what has been said so far the students should be
able to grasp the reason as to why reinsuranceis resorted to.
However, to sum up in a systematic disciplined way the
reasons can be grouped as under :

i) RISK MINIMISATION BY SPREADING:

The fundamentalconcept of insurance is to spread the
risk over as wider an area as possible as so to reduce the
burdenof loss at each stage. Reinsurance enables a risk
to be scattered over a much wider area and the principle
of insuranceis taken well care of. This really helps in the
ultimate viability of insurance operation.
ii) RISK TRANSFER :
To an insurer, the need for reinsurance protection arises
in the same way as the insured needs insurance protec-
tion. But for reinsurance, the business of insurance
would not have developed to the extent of the present
day growth,
iii) FLEXIBILITY :
In the absence of reinsurance, insurers would have been
bound to limlt their acceptance of risk only upto such an
amountwhich they could possibly digest. In other words,
the insurers would have been unable to accept a risk
beyond their financial strength or resources for that
class of business. Consequently insurers' service to the
public would also have been limited. Reinsurance gives
a flexibility to insurers by creating a condition which
enables them to accept a risk beyond their financial
capacity or resources. The insuring community is also
Elements of Insurance
 ( 147 )
left care-free with regard to various risks to which they
are subjected to, irrespective of whatever may be the
value per single risk.

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

v) DEVELOPMENT :
The growth of an insurance company is particularly
dependent on sound financial standing, which is prim-
arily based on the stability of profit and loss. Profit
cannot be expected if there is an untoward charge on
the fund by way of claim which it cannot sustain or
for which there is no provision. Reinsurance tends to
stabilise profits •and losses and permits more rapid
growth of an insurancecompany.

vi) PREDICTION FOR RATING :

An insurer needs to have large number of similar cases
in his book for the purpose of predicting an accurate
rating structure. But assuming a large number of similar
Elements of Insurance
 ( 148)
risks is in itself undesirableunless somoprocautionory
measure is taken. It may not also be possible to got
a large numberof a similar cases by an insurer because
of the operation of numbers of insurers in tho market,
Whatever it is, reinsurance takes care of such a situation
in both the ways. On the ono hand it provides protoc-
tion to the insurer by way of providing unsustainable
losses, and on the other creates a forum of getting
large numberof similar cases through reciprocity.
vii) A NEW INSURER who has recently startedtransacting
insurance business cannot certainly develop and possibly
cannot survive in the absence of reinsurance protection.

TYPES OF REINSURANCE
Broadly, there are two main ways through which reinsur-
ance may be effected. These are ;

FACULTATIVE
TREATY
Discussions are now made about these two broad divi-
sions, along with their sub-divisions, indicating what
these are and how these work. Examples will also bo
given under each through mathematical calculations
indicating the practical applications of all such types.

1. FACULTATIVE REINSURANCE ;
This is the original form of reinsurance. Participation
by reinsurerin a risk is not pre-arranged through a standing
treaty contract ( see later ). Reinsurance has to bo
arranged by the insurer after ge tting a proposal of insurance
from the would-be insured and preferably before giving any
cover to the proposer. Normally, after getting a proposal
for insurance, the insurer decides as to how much he can
retain on that particular risk. If there remains a balance after
retention, he goes to facultative market with the request to
make reinsurersinterestedin the risk. This requestis usually
Elements of Insurance
 ( 149 )
made through a slip detailing the particularsof the risk.
If
a reinsurer is interestedin the risk then he initials the slip
clearly indicating the percentage or amount of risk ho is
willing subscribe. In this way the insurer goes from re-
insurer to reinsurerunless 100% of the risk is absorved. It is
only then that the insurer is theoretically safe in issuing a
cover to the insured for full amount. It should be knownby
the students that reinsurers are not bound to accept a risk
when approach ed.

Example :
Insurance company XYZ has received a proposal for Tk.
from a jute mill. For a jute mill the company's
retention is Tk. The companyhas no standing
treaty arrangement.
This meansthat if companyXYZ has to accept the full
risk, it must go for facultative reinsurance and try the market
until the full Tk. 1 crore is absorved. After trying ten compa-
nies, say by the names A, B, C, D, E, F, G, H, I andJ, the
final closure of the business may look as follows :

Percentage of Amount of
Company : acceptance. acceptance.
20% Tk.
15% Tk.
c 15% Tk.
-10% Tk.
Tk.
10% Tk.
10% Tk.
Tk.
XYZ ( Retention ) 100% TTöTöTTöT
absorvedand
In this way the whole amount has been
Companyin assum-
there is no difficulty of the XYZ Insurance
the jute mill. The
ing the whole risk of Tk. 1 crore from
example that companies
student should realise from the above
F and I were also tried but they refused to participatein
D.
Elements of Insurance
 ( 150 )
the risk as reinsurers. The student
should also appreciate
that if the ceding company (XYZ), after
trying all possible
sources, could only manage upto 90% (including
its retention)
then, in theory, it would not have been possible
on its part
to assume the risk from the jute mill for the full amount,
since
such an attempt would create an undesirable additional
pressure on its fund to the extent of Tk. for which
there is no provision there.
It should be borne in mind by the students that in case
of a loss, it will also be paid by the reinsurersin the same
proportion.

MERITS :
i) This type of reinsuranceis advantageous to ceding com-
pany since it can pick and choose as to which risks are
to be reinsured and which risks are not.
It is advantageous to reinsurers because they can apply
underwriting judgment case by case and may accept o
reject. This is not so in treaty arrangements.

DEMERITS :
i) The formalities involved in obtaining cover is much more
expensive in comparison to treaty.
ii) Lot of inconvenienceis envisaged in the procedure
involved.
iii) The insured is left insecured during the time required
for the arrangement of facultative cover. Any mishap
may take place during this period.
iv) Such a situation arising out of (iii) above may cause the
business to be lost to a competitorwho might have
automatic treaty cover.
The students should, however, note that oven though
the demerits outweigh the merits, nevertheless, such a
practice is still there for necessity and shall remain, howso-
ever advantageous the treaty arrangements might be.
Elements of insurance
 ( 151 )
2. TREATY REINSURANCE :
A reinsurance treaty is merely an agreement in between
two or more insurance companies whereby one (direct
insurer) agrees to cede and the other or others (reinsurer)
agree to accept reinsurance business as per provisions
specified in the treaty. More specifically, it is a pre-arranged
agreement whereby the direct insurer cedes and the
reinsurer(s) accepts cessions within a pre-determinedlimit.
The important feature here is that if cessions are made as
per terms of the treaty, the reinsurer(s) connot refuseto
accept.

TYPES OF TREATIES :
Treaties are of various types and the importantones are :
QUOTA SHARE
SURPLUS
EXCESS OF LOSS
EXCESS OF LOSS RATIO ( OR STOP LOSS )
POOLS
Discussion, with examples, will now follow :
i) QUOTA SHARE :
This type of treaty requires the direct insurer to cede
a predeterminedproportionof all its businessaccepted
in a certain class to the reinsurer(s), and the reinsurer(s)
also agrees to accept that proportion in return for a corres-
ponding proportionof the premium.
Example l.
Quota share arrangement: Direct Insurer : 10%
All Reinsurersj 90%
100%
Risk assumed : Tk.
Therefore, risk distribution will be as follows :
Direct Insurer
All Reinsurers Tk.
100% Tk. 10,OO.OOO

Elements of Insurance
 ( 152 )
Example—2 .
Quota share arrangement : Samo as before. Risk assumed
Tk. (same type of risk) Therefore, risk distribution
will be •
Direct insurer 10,ooo
All Reinsurers 900/0 Tk. 90,000
100% Tk.
It should be noticed by the students from the above two
examples that for a similar type of risk the amount talling
onto the shoulder of the direct insurer is varying simply
because of the term of the treaty, eventhough he could
safely retain more. May be in the 2nd example the direct
company could retain the full amount of Tk. there-
by earning the whole of the premium. But the contract is
debarringhim from doing so as he must cede as per pre-
determined percentage.
Inspite of the aboveshortcomings,this type of arrange-
ment is, however, particularly helpful for small offices or
for new office or for offices who are starting a new type of
business.
In case of a loss, it will be borne by all in the same
proportion.
ii) SURPLUS TREATY :
The important featurehere is this that the direct insurer
agrees to reinsure only the surplus amount, after its reten-
tion, and the reinsurersagree to accept such cessions, usually
upto a predeterminedupper limit. Surplus treaties are usually
arranged in lines, each line being equal to insurer's own
retention. This means that the insurer can automatically
make a gross acceptance of the risk to the extent of his own
retention, plus, the amount of retention multiplied by the
numberof lines for which treaty has been made.
Example l.
Proposition: ABC InsuranceCo. has receiveda proposal
for fire insurance, from a textile mill for an amount Of Tk.
Elements of insutdnco
 ( 153 )

The company's retention for this class of

businessis Tk. A 9-line surplustreaty exists.
The arrangementwill be as follows :
ABC's Retention Tk.
Treaty consumes (9 x 10 lac Tk.
Tk.

Example—2.
Proposition Same as in Example 1, but the sum
insured is Tk.
Arrangement
will be .
ABC's Retention : Tk.
Treaty receives : Tk.
Tk.
It will be observed by the students that the treaty
receives the balance only after teding Co's retention and
even though the treaty has got a higher capacity, it is under
placed because the sum-insured itself is lower than capacity
and therefore they get the full balance of the sum-insured.

Example-—3.
Proposition: Same as in Example- 1, but the sum
insured is Tk. and a treaty
upper limit •existsfor Tk.
Arrangement will be :
ABC's Retention : Tk.
Treaty consumes : Tk.
(upper limit applies )
Automatic cover : Tk.
The students should observe that here, ABC company has
got an automatic arrangement upto Tk. and there
still remainsa surplus of Tk. for which no previous
arrangement is there. The insurer, therefore,can only make
a gross acceptance of Tk. Alternatively, a
facultative arrangement( unless a Second Surplus exists )
Elements of Insurance
 ( 164)
must bo made for the balance of Tk. 60.00,000
before issuing
a cover tor tho full amounts
Losses are borne by all tho reinsurers in the
samo
proportion of reinsurance arrangement.
An unhealthy approach: Arising out of example3, if
no facultative arrangementcan be made, then sometimes an
attempt may be made by the ceding company to get tho
entire money absorved within the treaty arrangement.
particularly where there is no upper limit stipulated. The
ceding company may raise retention to Tk. 15 lace instead
of Tk. 10 lac permissible by its own fund & resources. Then
the arrangement may be as follows :
ABC's Retention : 15,00.ooo
Treaty consumes (9 x 15 lac) Tk.

The students must realise here that the principle of

reinsurance is being violated by such an attempt. On the
one hand the excess retention of T k. 5.00,000 will create
an additional charge on the company's fund for which there
is no provision and which attempt is bound to disturb the
company's financial stability and profitability. and on tho
other is sure to create an adverse impact on the reinsurer•s
interest. in addition to the creation of a mistrust which is
totally undesirablein this trusted profession.
MERITS :
Because of the merits involved, this is the most accepted
form of reinsurance now-a-days, Whilst all the advantages
of facultative and quota share system are there, the disadvan-
tages of these two types are missing. Important advantages
of surplus treaty are :
a) Cover is automatic as opposed to facultative system.
b) It is less expensive in comparisonto facultative and little
procedural formalities are involved.
c) Unlike quota system. the ceding company can retain
whateverit likes and the balance only ceded,
Cjemente of Insurance
 ( 155 )
necessary cession of business and premium is not
envisaged.
d) This method is of particular advantage to established
companies who are growing concerns and who have
scope for gradually increasing their retention with the
increase in financial strength.

DEMERITS :
Demerits are very little and some of the minorones are :
a) For big liability insurances or for protection against
losses of catastrophe nature, other methodslike Excess
of Loss or Stop Loss arrangementsare better suited•
b) Reinsurers cannot usually apply underwriting judgment
for each and every individual case, even though they
might have entries into ceding company's account at
periodical intervals.
c) This method is not suitable for new insurance companies.
iii) EXCESS OF LOSS :
The approach of reinsurance arrangement is quite
different here from those methods already discussed. Under
this system, unlike facultative, quota or surplus, the sum-
insured does not form any basis and it is not expressed in
terms of proportion or percentageof the sum-insured. Here,
the insurer first decides as to how muchamountof loss he
can bear on each and every loss under a particular class of
business. The arrangementis such that if a loss exceeds
this predetermined amount then only reinsurers will bear the
balance amountof loss. Nothing is payable by the reinsurers
if the amount of loss falls below this selected amount.
There may usually be an upper limit of liability of the
reinsurers beyond which they will not pay.

Example:
Proposition: Against all public liability insurances. the
insurer decides to bear a loss upto Tk. in respect

Elements ot Insurance
 ( 156 )

of each and every loss. The reinsurers agree to bear any

balanceamount beyond Tk. The loss is for Tk.
There is an upper limit of Tk. 80,000.
The recovery under the reinsurance arrangement will be
as follows :
Loss: Tk. Upper limit: Tk. 80,000
Insurer bears :
Reinsurer bears : Tk. 80,000
Insurer again bearsthe balance
because of upper limit : Tk. •20,000

Therefore, Insurer bears Tk.

Reinsurer bears : TIC. 80,000

The students should realise that if there would have been

no upper limit, reinsurerswould have borne Tk.
This type of reinsurance arrangement is particularly
helpful in cases of big liability insurances and for obtaining
proteetion against catastrophe losses.
iv) EXCESS OF LOSS RATIO :
This type of arrangement is also known as STOP LOSS
reinsuranceand is a bit different from the Excess of Loss
arrangement,eventhoughboth basically base on loss rather
than sum-insured. Here, a relationship is usually drawn in
between the gross premium and the gross claim over a year
in a particularclass of business. The ceding companydecides
a gross loss ratio upto which it can sustain. The arrangement
with the reinsurersis such that if at the year end it is found
that the total of all losses within the class has exceeded the
predetermined loss ratio then the reinsurers will pay the
balance loss so as to keep the loss ratio of the ceding
company within the predetermined ratio. The treaty may
contain an upper limit also.
Example •
Proposition: Company ABC has arranged an Excess Of
Loss Ratio Treaty with reinsurers whereby it will bear losses
Elements of Insurance
 ( 157 )
upto an amount not exceeding 70% of the gross premiumof
the class. The reinsurers have agreed to bear any balance so
that the ceding company's gross loss ratio is maintainedat
70%, but not exceeding say 90% of the balance. Ceding
company's premium income is Tk. and the total
loss over the year is Tk.
The implication of loss distribution will be as follows :
Loss TIC, 80eoo,ooo.
This is 80% of the gross premium and therefore,
reinsurers come into picture to keep this 'loss ratio' down to
predetermined 70%
Therefore,
Ceding Co. bears (70% of Tk.
Reinsurer pays 90% of Tk.
(which is the balance of loss)
Ceding Co. again bears balance
Tk.
Therefore,
Ceding Co. bears : Tk.
Reinsurers pay
Tk.
The students should realise that had there been no
upper limit the full balanceof Tk. would have
been paid by the reinsurers and the predeterminedloss
ratio of the ceding company would have beenmaintained.
In this case, because of the upper limit, the predetermined
loss ratio has been partly disturbed.
This type of reinsurance is widely used for liability
insurances and for catastrophe losses.

v) POOLS :
Pools are basically treaties, either quota share or surplus.
in the sense that under these arrangements various member
countries or member companies join their hands together
beforehand for sharing each other's premium as well as
Elements of Insurance
 ( 158 )
claim. Those pools usually operatein respect
of specially
hazardous classes of business or where the
market as a
whole is weak to absorb the risk. In
such circumstances,
such pools providing mutual support
become very useful.
Examples of risks may be crop insurance, workmen's compen-
sation insurance etc.

FORMS OF REINSURANCE
Having completed the various types of reinsurance
arrangements, discussions will now be madeas to the forms
they usually take. Basically there are two formsof reinsu-
rance, irrespctive of the rype of reinsurancediscussed so
far. These are
i) PARTICIPATING OR PRO-RATA : Wherethe proportion
of amounts payable by the insurer and the reinsurers
in respect of a loss is determinedand agreed beforehand,
i.e., beforea loss. Here the premiumreceivedby the
insurer is also distributed in between himselfand the
reinsurers in the same proportion. Examplesare, faculta-
tive, quota share, surplus or pool.
NON-PROPORTIONAL: Where the reinsurance is on
different terms and the reinsurers do not stand to be
proportionatelyliable for a loss. Therefore,premium
received by the insurer is also not required to be
proportionately distributed to the reinsurers. Examples
are, excess of loss treaty, stop loss treaty etc.

APPLICATION OF REINSURANCE TO
VARIOUS BRANCHES OF INSURANCE
Indications will now be made as to the proper applicabfiity
of various types ot reinsurance in different branches of
insurance.
FIRE: Surplus treaty is most widely used. Quota
sharo treaties are used by the newly established companies
or with regard to now business of established companies,
Elements of Insurance