WHAT IS REINSURANCE ?

REINSURANCE

Whereby the insurer passes on that

part of any risk which surpasses his
financial strength to a reinsurer.
WHAT IS REINSURANCE ?

RISK INSURER REINSURER

 REINSURANCE CONTRACT

•There is no legal bond between the insured person and the reinsurer.

•Insurance and Reinsurance are the objects of two absolutely separate

different contracts

INSURED INSURER REINSURER

Insurance Reinsurance
contract contract

4
REINSURANCE MARKET

REINSURERS

R/I BROKERS

LLOYDS

INSURERS

Broker / Agent

INSUREDS
5
COMMON TERMS USED IN REINSURANCE

CEDE : To give away a part of the risk by a company to another

company.

CESSION : The amount given away by way of reinsurance.

CEDING COMPANY : The primary insurer, also called the REINSURED.

COMMISSION : The part of the reinsurer’s share of premium retained

by the insurer.

RETROCESSION :Reinsurance of reinsurance.

LINE : The amount of retention of the insurer .

FUCTION OF REINSURANCE

1. It provides additional underwriting

capacity to the insurer.
2. It makes possible further spreading of risks
internationally (some countries are traditionally
exposed to natural disasters like earthquake, floods
which can severely damage an economy, there is
also the risk of man made disasters like Bhopal gas
tragedy, WTC attack.

3. It helps a direct insurance company to expand

the volume of business it writes at a faster rate
than otherwise would be possible without a
corresponding increase in its capital base.
FUCTION OF REINSURANCE

One of the most common causes of failure of an insurance company

is that claims exceed available funds generated by premiums, the
main reasons being

1. Random increase in the frequency and/or severity of very large

individual losses

2. Random increase in the frequency and/or severity of an

accumulation of losses arising from one event

3. Random adverse fluctuation in the annual aggregate claims

experience

Traditionally the basic role of reinsurance is to offer

protection against the above risks
 METHODS OF REINSURANCE

Facultative and Treaty

Facultative
1.separate reinsurance contract FACULTATIVE HYBRID TREATY
negotiated on each risk
2.No obligation on either party’s
behalf to place or accept the risk

Treaty Pro Rata Excess of Loss

1.certain group or class of business
reinsured under a single contract
2.Obligatory nature – if it “fits” the Quota Surplus Per Per Aggregate
contract it must be ceded, and Share Share Risk Occurrence Excess of Loss
accepted.
Per Risk Per Risk
Excess of Loss Aggregate Excess of Loss
 Reasons to Buy Treaty Reinsurance

• Spread of risk

• Stabilization of underwriting results

• Catastrophe relief
(one occurrence affecting multiple policies, i.e., Hud-hud, J&K Flood Loss)

• Underwriting assistance

• Premium capacity

• Ease of use
 Reasons to Buy Fac Reinsurance

• Large line capacity

• Treaty-excluded business

• Treaty protection

• Accommodation for a good agent or insured

• Catastrophe (a large loss affects one policy versus five)

• Underwriting expertise

• Flexibility
METHODS OF REINSURANCE

M E TH O D S O F R E IN S U R A N C E

P R O P O R TIO N A L N O N - P R O P O R TIO N A L
METHODS OF REINSURANCE – PROPORTIONAL

Premiums and claims are shared in the

same proportion between the insurer
and the reinsurer. The reinsurer accepts
a fixed share of the claims of the insurer.
METHODS OF REINSURANCE – PROPORTIONAL

Example : Proportional Reinsurance

A accepts an insurance for Rs. 100,000
A cedes Rs. 70,000 or 70% to Reinsurer B
B accepts 70% of the liability
B received 70% of premium
If a claim of Say Rs.1000 arises,
B will pay to A his 70% share = Rs. 700
PROPORTIONAL REINSURANCE

A B A B

C2

C2

D2 D2

C1 C1

D1
D1

PREMIUM CLAIMS
RETENTION RETENTION 15
REINSURANCE – FOR CAPACITY

WHAT IS CAPACITY ?
Net Retention
+
Obligatory Cession
+
Pool – if any
+
Inter-company cession – if any
+
Company’s Surplus Treaty (ies)
+
RETENTION

The retention is the amount that the

insurance company can put at stake
for its own account when underwriting
a single risk or a group of risks.
RETENTION

An amount expressed either in S.I. or

PML applied on the S.I. or PML of the
risk to arrive at the percentage of the risk
retained.
RETENTION

In practice insurance companies prefer to

follow the empirical rule of fixing retention
between 1 – 5% of the capital and free
reserve, depending on portfolio experience
and expected cost for the net protection, etc.
RETENTION – GRADING DOWN

Having fixed the maximum retention

the same may be graded down
depending upon the adverse features
of the risk.
REINSURANCE - TREATY

What is a Treaty :

“A treaty is an agreement invariably (though not

necessarily) in writing between a ceding
company and one or more reinsurers, whereby
the ceding company agrees to cede and re-
insuer agrees to accept all the risks written by
the ceding company which fall within the terms
of the treaty, subject to the limits specified
therein”
- R.L.Carter
REINSURANCE - TREATY

Quota Share : A fixed proportion of all risks

accepted by the insurer are ceded to the
reinsurer.
Surplus : Only amounts accepted by the primary
insurer above its own retention are ceded to the
reinsurer.
Facultative : Facultative means optional. The
reinsurer is free to accept or decline each risk,
the reinsured is also not compelled to cede. No
obligation on either side.
REINSURANCE

When Does a Surplus Arise?

Example 1 : Sum Insured : Rs. 1,00,00,000
Net Retention : Rs. 20,00,000
Obligatory 20% : Rs. 20,00,000
Surplus Treaty : :Rs. 60,00,000
Example : 2 : S.I. : Rs. 2,00,00,000
Net Retention : Rs. 20,00,000
Obligatory 20% : Rs. 40,00,000
Surplus Treaty 1 : Rs. 60,00,000
Surplus Treaty 2 : Rs.60,00,000
Facultative : Rs. 20,00,000
METHODS OF REINSURANCE – FACULTATIVE

Insurer
•Increase in gross capacity without upsetting
automatic treaties.
•Market for risks of undesirable nature.

Reinsurer
•Individual examination and selection of risk.
•Possibility of exercising some underwriting control
by suggesting risk improvement measures.
•Adequacy of premium.
•A more advantageous position for accurately
determining the commitment per risk and
accumulation.
METHODS OF REINSURANCE – FACULTATIVE

• First Type Of Reinsurance.

• Reinsurance Of Individual Risk.
• Underwritten In The Same Way As
Insurance (Original Rates, Terms &
Conditions).
METHODS OF REINSURANCE – FACULTATIVE

Extensively used in :-

Large property and engineering risk.

Aviation.
Liability.
Oil & energy.
Any new type of business.
METHODS OF REINSURANCE – PROPORTIONAL TREATY

• Automatic and immediate cover

• Allocation of premium/claims totally related to amount
retained/ reinsured
• Normally placed as a “continuous” contract for an annual
period.
• Can be placed with few or many reinsurers. (Depends on
size of the treaty and state of reinsurance market)
• Quarterly accounts not “individual closing instructions’
• All claims will be shared between reinsured and reinsurer
irrespective of how small.
• Two Types: QUOTA SHARE & SURPLUS
 REINSURANCE METHODS

Proportional Non-proportional

Quota Share Surplus Facultative Facultative Excess of Loss

Risk to Risk Basis

Risk XL Event/ Cat Xl Umbrella XL

28
METHODS OF REINSURANCE – PROPORTIONAL – SURPLUS TREATY

The insurance company only cedes

those amounts which it cannot retain
for its own account, i.e. the SURPLUS
over its net retention up to a certain
limit.
 SURPLUS TREATY
CESSION LOSS
80

RETENTION 20 LOSS 20

40

20 20 20 20

A B C A 25% A B C
SURPLUS
B 50%
RETENTION SURPLUS
C 100%
30
RETENTION
PROPORTIONAL REINSURANCE SURPLUS TREATY

A SURPLUS TREATY IS USUALLY ARRANGED IN TERMS

OF LINES

THERE MAY BE MORE THAN ONE SURPLUS TREATY

IN A PARTICULAR CLASS OF BUSINESS
METHODS OF REINSURANCE – PROPORTIONAL – SURPLUS TREATY

• Is used by Cedant to obtain automatic underwriting

capacity, enabling Cedant to compete in chosen
market
• There must be a mutual understanding between
Cedant and Reinsurers as to structure, content
and original rating of the business ceded to
Surplus
• Cedant decides the limit of liability it wishes to
retain on anyone risk or class of risks.
• This limit - the retention - will be the maximum
which Cedant retains - a lesser amount may be
retained if desired. The surplus amount over and
above the retention is allotted to Surplus
Reinsurers
METHODS OF REINSURANCE – PROPORTIONAL – SURPLUS TREATY

Obligatory Treaty
Maximum Retention and Treaty Line
Structure
Full Use of Capacity
Partial Use of Capacity
METHODS OF REINSURANCE – PROPORTIONAL – SURPLUS TREATY

• Ceding Company • Effective Date

• Notice of Cancellation • Type of Treaty
• Class of Business • Territorial Limits
• Maximum Liability for 100%
• Maximum Limit for Quota Share/Surplus
• Maximum Limit for Retention • Commission
• Profit Commission • Portfolio
• Reserve Deposits • Interest on Deposits
• Cash Loss Limit • Accounts – Period
• Deductions : Taxes, Charges,
• Estimated Premium Income (100%)
• General Conditions
• Exclusions
METHODS OF REINSURANCE – PROPORTIONAL – QUOTA SHARE TREATY

• Is an automatic reinsurance whereby the

Cedant is bound to cede a fixed percentage
of every risk written by it in an agreed class
of business.
• The same percentage of every risk in the
class of business covered is reinsured - No
matter how large or small the sum insured
and irrespective of whether the risk is
“good” or “bad”.
• Premiums and claims are subject to same
percentage
METHODS OF REINSURANCE – PROPORTIONAL – QUOTA SHARE TREATY

CESSION

LOSS

A 25% B 25% A 25% B 25%

METHODS OF REINSURANCE – PROPORTIONAL – QUOTA SHARE TREATY

ADVANTAGES
Reinsurer participates on each and every risk –
useful for new company or a new class of
business
Very little administrative work

DISADVANTAGES
Gives away profitable business which otherwise
could have been retained by the company.
METHODS OF REINSURANCE – PROPORTIONAL – QUOTA SHARE TREATY

Obligatory Treaty

Fixed Retention %

Fixed Cession %
METHODS OF REINSURANCE – NON-PROPORTIONAL

While proportional treaty offers capacity in

addition to the retention on individual risks,
the reinsured should be concerned if an
event loss ( where a number of policies are
involved) causes a substantial loss on its net
account.
METHODS OF REINSURANCE – NON-PROPORTIONAL

Premiums and claims are not shared in the

same proportion between the insurer and
the reinsurer.

The reinsurer only becomes liable if the

claims incurred by the insurer exceeds
some predetermined figure
METHODS OF REINSURANCE – NON-PROPORTIONAL

NON
LOSS AMOUNT PER RISK
REINSURED

EXCESSE CARRIED
BY REINSURER

XL COVER

INSURER’S LOSS
RETENTION
METHODS OF REINSURANCE – NON-PROPORTIONAL

REFERS MOSTLY TO
Non proportional treaties known as excess
of loss (xl) treaties

CAN ALSO BE FACULTATIVE

METHODS OF REINSURANCE – NON-PROPORTIONAL FACULTATIVE

• First type of reinsurance conceived

• Reinsurance of an individual risk
• Both sides free to decide
• Reduces individual peak exposure &
Element of uncertainty
• Administration - cumbersome and
Expensive
METHODS OF REINSURANCE – NON-PROPORTIONAL - TREATIES

Non-Proportional Contracts are called Excess of Loss

Contracts (XL)
•A Accepts an insurance for Rs. 100,000
•A takes out a reinsurance with B should the risk
suffer a loss exceeding Rs. 30,000 up to Rs.100,000.
Scenario 1 : In the event of a claim upto Rs. 30,000.
B pays nil
Scenario 2 : If the loss is for Rs. 40,000
B pays 40,000 – Rs. 30,000 = Rs. 10,000
METHODS OF REINSURANCE – NON-PROPORTIONAL - TREATIES

EXCESS OF LOSS TREATIES CAN

BE

PER RISK
or
PER EVENT
NON PROPORTIONAL REINSURANCE PER EVENT C OVER

Also known as catastrophe XL (CAT XL)

cover as it protects the insurer against the
accumulations resulting from numerous
losses caused by the same event ( cyclone,
earthquake, conflagration )
EXCESS OF LOSS TREATY

It can be arranged in
• Risk XL
• Cat XL
• Stop Loss/Aggregate XL

This protection is basically arranged for

any company’s net A/c exposure – it can
be on Risk Attaching or Loss occurring
during the period.
GENERAL CHARACTERISTICS OF TREATY

All treaties, whether proportional or non

proportional

•Are obligatory on both sides

•Are automatic in nature
•Have a limit
•Are annual contracts
CO- INSURANCE

By coinsurance whereby one insurer

shares direct responsibility of a risk
with one or more insurer. This may be
adopted for one or two risks but not
practicable for thousands of risks
underwritten by an insurer.
INTER-COMPANY CESSION

100
100Cr
CrPML
PML
100
100Cr
CrPML
PML UIIC
UIIC
OIC
OIC

National’s
National’s
Retention
Retention
100
100Cr
CrPML
PML

100
100Cr
CrPML
PML
NIA
NIA

Total Inter-company Capacity : Rs 400 Cr PML (Fire)

50
LET US LEARN Quota Share Example
LET US LEARN Quota Share Example
LET US LEARN Surplus Share Example
LET US LEARN Surplus Share Example
 LET US LEARN Example of per policy / per occurrence excess

Example of Per Policy Excess Example of Per Occurrence

Excess
LET US LEARN CAT XL Example
LET US LEARN CAT XL Example
LET US LEARN UNDERWRITING

Example : Non-Proportional

100 shops are insured. Each shop is valued @Rs.

100. Total Exposure is 100x100 = Rs.10,000

Reinsurance : Net 50% = Rs.50 Q.S.50% = Rs. 50.

Total Accumulated Liability in Net Account : Rs.

50 x Rs. 100 = Rs. 5,000

An XL cover can be arranged as Rs. 3,000 Excess

Rs. 2,000
 (Figs in INR Cr)

NET 1ST SURPLUS 2ND OTHERS TOTAL

SURPLUS
Property 200.00 250.00 100.00 -- 550.00

Engineering 200.00 300.00 50.00 -- 550.00

Marine Hull 15.00 75.00 -- -- 80.00

Marine Cargo 30.00 90.00 -- -- 120.00

Miscellaneous Various 120.00 -- -- --

 (Figs in INR Cr)

COVERAGES COVERAGES
LIMIT DEDUCTIBLE LIMIT DEDUCTIBLE

RISK XL 470 30 MOTOR XL 30 2

CAT XL 600 40 Motor Sub Layer 1.25 0.75

TOP CAT XL 300 640 Oil & Energy XL 225 15

TIP TOP XL 400 940 Liability XL 85 20

EQ CAT XL 500 1340 Aviation XL 210 6

MARINE XL 200 15 Foreign Inward 45 25