Re Insurance

PROJECT ON:

RE-INSURANCE

UNIVERSITY OF MUMBAI

K.P.B. HINDUJA COLLEGE OF COMMERCE
T.Y.B.COM (BANKING &INSURANCE) SEMESTER VI
SUBMITTED BY:

JYOTI GHADI
PROJECT GUIDE:

PROF. HEMAT BHATTI
ACADEMIC YEAR 20 2-20 !

RE-INSURANCE

DECLARATION BY THE STUDENT

I, M". JYOTI GHADIstudent of T. Y. B. Com., Banking and Insurance, Semester VI, Roll No. 26, here ! declare that this "ro#ect Re$ort entitled %RE-INSURANCE# is eing su mitted as a $artial fulfilment of the course, &hich is a necessar! re'uirement to $ass the Semester VI e(amination. I further declare that the Re$ort is the out$ut of m! $ersonal research and all the information contained herein is correct to the est of m! kno&ledge.

N$%& JYOTIGHADH

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CERTIFICATE
This is to certif! that M". JYOTI GHADIof B.Com )Banking and Insurance*, Semester V +2,--.2,-2/ has successfull! com$leted the "ro#ect on %RE-INSURANCE# under the guidance of "rof. JYOTI GHADI.

"ro#ect 0uide

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Course Coordinator

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Internal 2(aminer

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2(ternal 2(aminer

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ACKNO'LEDGEMENT

4ith a dee$ sense of gratitude I e($ress &e thanks to all those &ho ha5e een instrumental in the de5elo$ment of the $ro#ect re$ort. I am also grateful to all the co.coordinator and $rofessors of m! college &ho ga5e me a 5alua le o$$ortunit! of in5ol5ing me in real li5e usiness $ro#ect. I am thankful to all the $rofessors &hose $ositi5e attitude, guidance and faith in m! a ilit! s$urred me to $erform &ell. I am also inde ted to all lecturers, friends and associates for their 5alua le ad5ice, stimulated suggestions and o5er&helming su$$ort &ithout &hich the $ro#ect &ould not ha5e een a success.

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RE-INSURANCE

OBJECTIVES: • To understand the im$ortance of the R2.INS7R8NC2 • To set out the main structural features of the reinsurance industr!. • To riefl! $ortrait the industr!, including its scale, recent $erformance and a$$roach to risk management. SOURCES OF DATA: • The secondar! data has een collected from the internet and ooks RESEARCH METHODOLOGY: • The methodolog! ado$ted in $re$aring this $ro#ect in5ol5es a lot of secondar! data as &ell as the use of 4orld 4ide 4e for the u$dated information.

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RE-INSURANCE

(((CONTENT)))
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RE-INSURANCE

HISTORY OF RE-INSURANCE
Insurance and reinsurance contracts had their origin in Barine trans$ortation acti5ities, &a! ack in the GIV centur!. Initiall!, the Insurer &ould transfer a certain $ortion of a gi5en risk to some other $art!, thus fractionating $ossi le losses, &ith such o$eration determining that the reinsurance &ould then e characteriHed as #ust another t!$e of insurance contract. Such a conce$tualiHation, thus concei5ed and disseminated, does not kee$ the &hole truth, as the reinsurance encom$asses se5eral other functions. 8 t!$ical reinsurance contract is not #ust intended to transfer or assign $art of the risk insured ! one Insurer to Reinsurers. It also in5ol5es some other functions constructed o5er the centuries, according to the e5olution e($erienced ! this $articular s!stem of concentrated $ul5eriHation of risks and interests. Certain tri$s &ere onl! insured, in fact, should a reinsurance contract $ort . an insurance contract &ould e a5aila le for its most haHardous $ortion, i.e., from a $oint of origin to a gi5en e esta lished and, from that $ort to another $ort . &ith reinsurance co5erage. Such sharing model does not configure, in itself, a mere $arcelling of lia ilities o5er one single risk. In other &ords, it $resents and o$erates other e'uall! differentiated situations and interests. In the GVII and GVIII centuries the first #udicial sentences ha5e een scul$ted a out reinsurance, highlighting the inde$endent nature of this contract. The de5elo$ment of 2uro$ean societies has dictated the need for organiHing reinsurance com$anies, not onl! for the Barine risks, ut also for the urgent demand of fire insurers. In -C66, the first inde$endent reinsurers . EIlnishe RJck5ersicherungs.0esellschaft . o tained the necessar! $ermit to o$erate in
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RE-INSURANCE

0erman!, &ith the first reinsurance contract

eing entered into

! that

com$an! in -C92. The S&iss Reinsurance Com$an! &as esta lished in Kurich, in -C63L and the BJnchener RJck5ersicherungsgesellschaft in -CC,, in 0erman!. Dlo!dMs under&riter, &hich also o$erates &ith reinsurance, &as constituted in Dondon as earl! as -6CC. In the 7S8, reinsurance com$anies started to e organiHed #ust efore the end of the !ear ->,,. 8s of the gro&ing e5olution of the insurance markets in the &orld, along the timeline, e5en modif!ing risk conditions and economic interests, the Ceding Insurers &ere forced to retain $art of the risks. The function related to the $ortfolio homogeneit! of the Insurer, through a reinsurance o$eration, &as certainl! aggregated at much more modern times. The uncontrolled &ides$read of the $roducti5e s!stem created dis$arate risks, not al&a!s $ro$erl! conducted to&ard the same $arameter, for &hich reason Insurers ha5e had to limit their losses. The Insurers ha5e to homogeniHe their results, eliminating the 5olatilit! the! are a sor ing from their insured customers. 7$on a sor ing such Insurer 5olatilit!, Reinsurers are, in turn, ca$a le of homogeniHing their $ortfolios ! com ining a certain num er of $ortfolios com$ara le to each other and $articularl! in 5ie& of the internationalit! of their o$erations. T&o or more catastro$hic e5ents &ould hardl! occur &ithin the same $eriod and in one single $lace, let alone the $ossi ilit! of occurring at the same time the &orld o5er, although, on a $ro a ilistic asis, this could ha$$en under certain conditions )$andemic diseases, for e(am$le*. In man! countries, the insurance industr! and, more s$ecificall!, Reinsurers are eing faced &ith ne& im$act scenarios not caused ! natural catastro$hes. Terrorist attacks, anthro$ic climatic changes and also financial market crises ha5e all een distur ing societies and their institutions. Such a $ro lematic constitutes ne& challenges for the insurance and reinsurance industr!. 8t
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RE-INSURANCE

$resent, one should imagine &hat &as $re5iousl! unimagina le, in the search for more remote loss e5ents scenarios. The due a$$raisal of risks, the ad#ustment of co5erages and $rices, in addition to esta lishing ade'uate under&riting controls and $olicies, are the essential re'uirements at a time &hen a sustaina le cor$orate $lanning is eing re'uired &ith a 5ie& into a future. In 5ie& of such ne& scenarios, al&a!s in e5olution, the reinsurance ac'uired the modernit! status of a financial $roduct, to the e(tent of allo&ing Insurers to e more ca$a le of under&riting risks, increasing the offer of insurance $roducts and reducing ca$ital costs. It then $ro$itiates the guaranteed financial strength of the s!stem, for sta iliHing direct insurance markets and other intermediar! entities, as &ell as institutional in5estors. 8 reinsurance o$eration is international ! e(cellence, to the e(tent of eing health! for local markets to ha5e their lia ilities s$read o5er different countries, thus diluting claimed losses, $articularl! those of a catastro$hic nature. In a 5er! rief manner, and consolidating the &hole theor! descri ed in the $re5ious $aragra$hs, the chief function of a reinsurance agreement )treat!* is to guarantee the indemnit! to the Insurer resulting from a claim. 8ll other underl!ing functions &ill e su #ect to changes o5er the time and according to the interests and e5en re'uirements of each insurance market. 8nd, for eing d!namic, it &ill then re'uire constant ada$tations of all those integrating the s!stem.

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RE-INSURANCE

RE-INSURANCE

DEFINITION OF *REINSURANCE* %The $ractice of insurers transferring $ortions of risk $ortfolios to other $arties ! some form of agreement in order to reduce the likelihood of ha5ing to $a! a large o ligation resulting from an insurance claim. The intent of reinsurance is for an insurance com$an! to reduce the risks associated &ith under&ritten $olicies ! s$reading risks across alternati5e institutions.N 8lso kno&n as Oinsurance for insurersO or Osto$.loss insuranceO. INTRODUCTION Reinsurance is a form of insurance. A reinsurance contract is legally an insurance contract. The reinsurer agrees to indemnify the cedant insurer for a specified share of specified types of insurance claims paid by the cedant for a single insurance policy or for a specified set of policies. The terminology used is that the reinsurer assumes the liability ceded on the subject policies. The cession or share of claims to be paid by the reinsurer may be defined on a proportional share basis !a specified percentage of each claim" or on an excess basis !the part of each claim or aggregation of claims abo#e some specified dollar amount". The nature and purpose of insurance is to reduce the financial cost to indi#iduals corporations and other entities arising from the potential occurrence of specified contingent e#ents. An insurance company sells insurance policies guarantying that the insurer $ill indemnify the
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RE-INSURANCE policyholders for part of the financial losses stemming from these contingent e#ents. The pooling of liabilities by the insurer ma%es the total losses more predictable than is the case for each indi#idual insured thereby reducing the ris% relati#e to the $hole. Insurance enables indi#iduals corporations and other entities to perform ris%ier operations. This increases inno#ation competition and efficiency in a capitalistic mar%etplace. The nature and purpose of reinsurance is to reduce the financial cost to insurance companies arising from the potential occurrence of specified insurance claims thus further enhancing inno#ation competition and efficiency in the mar%etplace. The cession of shares of liability spreads ris% further throughout the insurance system. &ust as an indi#idual or company purchases an insurance policy from an insurer an insurance company may purchase fairly comprehensi#e reinsurance from one or more reinsurers. There are man! reasons for an insurance com$an! to seek reinsurance for all or $art of its lia ilit!, &hich could include ut not limited to the follo&ingsP

Risk Transfer
The main $ur$ose of reinsurance is to allo& the ceding insurance com$an! to &rite and assume indi5idual risks that are greater than its ca$ital siHe &ould allo&, thus offering larger limits of $rotection to $olic!holders than other&ise $ossi le. Reinsurance also $rotects insurers against catastro$hic losses.

Income Smoothing
In taking all or $art of the risks, reinsurance hel$s to smooth out the financial results of an insurance com$an!, making them more $redicta le ! a sor ing larger losses. This ena les easier usiness $lanning and financial $ro#ections.

Surplus Relief
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RE-INSURANCE 7nder some t!$ical reinsurance arrangments, insurance com$anies are allo&ed to reduce the amount of net lia ilit! the! need to hold on its alance sheet ! an amount e'uals to the reserve credit. Ver! often, reinsurers offer an initial commission or re ate to the insuance com$anies, thus further hel$ing them to reduce the strain of &riting ne& usiness.

Product Development
In man! circumstances, reinsurers are a le to $ro5ide e($ertise a out de5elo$ment of the more so$histicated $roduct t!$es. The! &ork closel! together &ith the insurance com$aniesQ actuarial team to design the est tailor made $roducts.

Source of Profit
8lthough more of an enhanced enefit instead of a core dri5er, insurance com$anies ma! e moti5ated ! the fact that the! are a le to rea$ %ar itrageN $rofits ! $urchasing reinsurance co5erage at a lo&er rate than &hat the! elie5e the cost is for the underl!ing risk. This is achie5a le attain critical mass and hence a good econom! of scale. ecause reinsurers are more s$ecialised in certain t!$es of risks, allo&ing them to

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RE-INSURANCE

REINSURANCE NEEDS
There are se#eral reasons for an insurance company to use reinsurance. 'e $ill discuss here the most important ones. Increasing underwriting capacity Insurance companies are often offered ris%s that may surpass their financial strength. Ceding part of the ris% may allo$ them to accept the full ris% thus satisfying client(s needs. )or this purpose insurance companies may also use coinsurance. *o$e#er in this case the insur- ance company $ill ha#e to contact competitors to share part of the ris% $hich might not be to its best interest especially in a competiti#e mar%et. Another disad#antage to the use of coinsurance is the burden put on the insured that $ill need to deal $ith each one of the participating insurance companies $ith regard to premium payments and claim settlements. Risk capital improvement and diversification Insurance companies ha#ing a more di#ersified portfolio of ris%s $ill tend to ha#e more stable financial results. Using reinsurance $ill allo$ insurance companies to participate in a di#ersity of ris%s using the same $or%ing capital by ceding part of the ris% and %eeping a smaller portion of each ris%. This reduction in the concentration on ris% $ill diminish the #olatility of the annual results. )igure + illustrates this reinsurance effect. *ere $ithout reinsurance the company(s capital commitment allo$s its participation in only one ris%. Using reinsurance the same committed capital allo$s the company to participate in four different ris%s $ith a total higher sum insured.

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Surplus relief The use of reinsurance allo$s insurance companies to partially transfer ris%s off their balance sheet. 'hile the ultimate responsibility to the policy holders still remains $ith the insurance company most ,urisdictions recogni-e reinsurance as a ris% managing tool that allo$s a reduction of statutory surplus re.uirements. The guarantee implicit on a reinsurance contract to pay the reinsured claims is recogni-ed in the capital re.uirements for the cedant. *ence it is not uncommon to base the prudential re.uirements on the insured premium net of reinsurance. Reinsurance thus remo#es a technical ris% but it introduces a counterparty ris% since as mentioned abo#e the ultimate responsibility to the policy holders still remains $ith the insurance company. To offset the counterparty ris% additional surplus is usually re.uired. This additional capital $ill #ary depending on the sol#ency rating of the reinsurer. Also the amount of surplus relief granted $ill depend on that rating. Catastrophic protection 'ell run insurance companies accept ris% e/posure according to their financial strength. *o$e#er the ris%s may also be e/posed to e/treme infre.uent e#ents li%e earth.ua%es floods plane crashes and other mayor catastrophic e#ents. *olding enough capital for those e/treme e#ents $ould ma%e the insurance operation economically un#iable or at least #ery e/pensi#e. Transferring this e/posure to catastrophic e#ents to the reinsurers is a more effecti#e $ay to address #ery infre.uent e#ents. Reinsures offer catastrophic protection in a more economic feasible $ay than insurance companies by participating in catastrophic e/posures through out the $orld and thus geographically better di#ersifying the ris%. Usually reinsurers are also more capitali-ed than insurance companies. They also operate dedicated
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RE-INSURANCE

departments that ha#e gained substantial %no$ledge of the physical characteristics and history of catastrophic e#ents thus allo$ing them to price and under$rite properly the e/posure and accept those ris%s. Expertise transfer Through the reinsurance acti#ity reinsurers acting in se#eral mar%ets $ith different insurance companies ha#e the ability to ac.uire significant %no$ledge of the different products mar%ets and insurance techni.ues li%e under$riting administration of the policies and claims assessment. This is particularly important $hen entering a ne$ mar%et a ne$ line of business or simply launching a ne$ product. Transferring the ris% through reinsurance may also include the shift of the under$riting administration or other acti#ity related to the ris% transferred to the reinsurer. Such a reinsurance agreement allo$s insurers to focus in their core business outsourcing to e/perts the non core acti#ities. Financing new business As discussed in 0odule 1 a rapidly gro$ing insurance acti#ity can re.uire upfront financing. This is particularly true in the case of 2ife Insurance business. *ere the insurance company has to finance the agents or bro%er(s commissions that can be as high as the full first year(s premium as $ell as the under$riting costs that may include medical e/aminations and financial assessments. Reinsuring part of the business can pro#ide a source of financing especially if the reinsurer agrees to ad#ance the future e/pected profits of the business in the form of reinsurance commission. This source of financing of insurance business can be attracti#e compared to other sources such as ban% loans or e.uity. Reinsurers %no$ing the business $ill ha#e lo$er ris%
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charges than non insurance financing sources. Also in most reinsurance agreements the pay bac% is contingent on the performance of the reinsured business. i.e. the ad#ancement of future profits are only reco#ered by the reinsurer if the business actually generates those e/pected profits. If the paybac% of the reinsurance financing is totally contingent on the performance of the reinsured business in most ,urisdictions no liability needs to appear in the balance sheet of the cedant. Other reinsurance needs and a word of warning Insurance companies enter reinsurance agreements for one or more of the abo#e mentioned reasons. There might be other special situations $here reinsurance is used as a #alid financial and operational tool ho$e#er if none of the abo#e mentioned needs is present special scrutiny of the transaction is re.uired. The great fle/ibility of reinsurance treaties that allo$s effecti#e tailor-made solutions to meet indi#idual insurance company(s needs has been abused in the past to design ta/ a#oidance money laundry and other illegal acti#ities. A reinsurance agreement that does not transfer any type of ris% is al$ays .uestionable.

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THE FORMS OF RE-INSURANCE
Facultative Certificates
A facultati#e certificate reinsures ,ust one primary policy. Its main function is to pro#ide additional capacity. It is used to co#er part of specified large especially ha-ardous or unusual e/posures to limit their potential impact upon the cedant(s net results or to protect the cedant(s ongoing ceded treaty results in order to %eep treaty costs do$n. The reinsurer under$rites and accepts each certificate indi#idually3 the situation is #ery similar to primary insurance indi#idual ris% under$riting. 4ecause facultati#e reinsurance usually co#ers the more ha-ardous or unusual e/posures the reinsurer must be a$are of the potential for antiselection $ithin and among classes of insureds. 5roperty certificate co#erage is sometimes $ritten on a proportional basis3 the reinsurer reimburses a fi/ed percentage of each claim on the sub,ect policy. 0ost casualty certificate co#erage is $ritten on an e/cess basis3 the reinsurer reimburses a share !up to some specified dollar limit" of the part of each claim on the sub,ect policy that lies abo#e some fi/ed dollar attachment point !net retention".

Facultative Automatic Agreements or Programs
A facultati#e automatic agreement reinsures many primary policies of a specified type. These policies are usually #ery similar so the e/posure is #ery homogeneous. Its main function is to pro#ide additional capacity but since it co#ers many policies it also pro#ides some degree of stabili-ation. It may be
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RE-INSURANCE thought of as a collection of facultati#e certificates under$ritten simultaneously. It may co#er on either a proportional or e/cess basis. It is usually $ritten to co#er ne$ or special programs mar%eted by the cedant and the reinsurer may $or% closely $ith the cedant to design the primary under$riting and pricing guidelines. )or e/ample a facultati#e automatic agreement may co#er a 678 share of the cedant(s personal umbrella business in $hich case the reinsurer $ill almost certainly pro#ide e/pert ad#ice and $ill monitor the cedant(s under$riting and pricing #ery closely. )acultati#e automatic agreements are usually $ritten on a fi/ed cost basis $ithout the retrospecti#e premium ad,ustments or #ariable ceding commissions sometimes used for treaties !as $e shall see belo$". There are also non-obligatory agreements $here either the cedant may not be re.uired to cede or the reinsurer may not be re.uired to assume e#ery single policy of the specified type.

T+&$,-&"
8 reinsurance treat! re$resents the terms of agreement et&een an insurer and a reinsurer. Reinsurance treaties can either e &ritten on a continuous asis or on a term asis. 8 continuous contract continues indefinitel!, ut generall! has a defined noticing $eriod &here ! either $art! can gi5e its intent to cancel or amend the treat! &ithin a $eriod of a out 6, to >, da!s. ;n the contrar!, a term agreement has an e($licitl! uilt.in e($iration date. It is t!$ical for insurers and reinsurers to ha5e long term relationshi$s that s$an man! !ears. Reinsurance can also e $urchased on a $er $olic! asis in &hich case it is kno&n as facultative reinsurance, &hich is commonl! used for large or unusual risks that do not fit &ithin standard reinsurance treaties due to their e(clusions. The term of a facultati5e agreement coincides &ith the term of the
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RE-INSURANCE s$ecific $olic! in concern. 8lmost all insurers do not $lace reinsurance agreements &ith one single reinsurer ut &ith treaties shared among a num er of reinsurers. The reinsurer &ho sets the terms and contract conditions for the reinsurance contract is the lead reinsurer, &hereas the other com$anies su scri ing to the contract are the follo&ing reinsurers.

Treaty Proportional Covers
A quota-share treaty reinsures a fi/ed percentage of each sub,ect policy. Its main function is financial results management although it also pro#ides some capacity. The reinsurer usually recei#es the same share of premium as claims and pays the cedant a ceding commission commensurate $ith the primary production and handling costs !under$riting claims etc.". 9uotashare treaties usually assume in-force e/posure at inception. The cedant(s financial results are managed because the ceding commission on the ceded unearned premium reser#e transfers statutory surplus from the reinsurer to the cedant. The cession of premium also reduces the cedant(s netpremium- to-surplus ratio. The ceding commission on .uota-share treaties is often defined to #ary $ithin some range in#ersely to the loss ratio. This allo$s the cedant to retain better-than-e/pected profits but protects the reinsurer some$hat from ad#erse claims e/perience. The term .uota-share is sometimes !mis-"used $hen the co#erage is a percentage share of an e/cess layer3 $e $ill more properly treat this %ind of co#erage as being e/cess. A surplus-share treaty also reinsures a fi/ed percentage of each sub,ect policy but the percentage #aries by policy according to the relationship bet$een the policy limit and the treaty(s specified net line retention. Its main function is capacity but it also pro#ides some stabili-ation. A surplus-share treaty may also assume in-force e/posure at inception $hich together $ith a ceding commission pro#ides some
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RE-INSURANCE management of financial results. This is typically a property co#er3 it is rarely used for casualty business.

Treaty Excess Covers
An e/cess treaty reinsures up to a limit a share of the part of each claim that is in e/cess of some specified attachment point !cedant(s retention". Its main functions are capacity and stabili-ation. An e/cess treaty typically co#ers e/posure earned during its term on either a losses-occurring or claims-made basis but run-off e/posure may be added in. The definition of :sub,ect loss; is important. )or a per-risk excess treaty a sub,ect loss is defined to be the sum of all claims arising from one co#ered loss e#ent or occurrence for a single sub,ect policy. 5er-ris% e/cess is mainly used for property e/posures. It often pro#ides protection net of facultati#e co#erage and sometimes also net of proportional treaties. It is used for casualty less often than peroccurrence co#erage. )or a per-occurrence excess treaty a sub,ect loss is defined to be the sum of all claims arising from one co#ered loss e#ent or occurrence for all sub,ect policies. 5er-occurrence e/cess is used for casualty e/posures to pro#ide protection all the $ay up from $or%ing co#er layers through clash layers. A working cover e/cess treaty reinsures an e/cess layer for $hich claims acti#ity is e/pected each year. The significant e/pected claims fre.uency creates some stability of the aggregate reinsured loss. So $or%ing co#ers are often retrospectively rated $ith the final reinsurance premium partially determined by the treaty(s loss e/perience. A higher exposed layer e/cess treaty attaches abo#e the $or%ing co#er!s" but $ithin policy limits. Thus there is direct single policy e/posure to the treaty. A clash

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RE-INSURANCE treaty is a casualty treaty that attaches abo#e all policy limits. Thus it may be only e/posed by< 1. e/tra-contractual-obligations !i.e. bad faith claims" +. e/cess-of-policy-limit damages !an obligation on the part of the insurer to co#er losses abo#e an insurance contract(s stated policy limit" =. catastrophic $or%ers compensation accidents >. the :clash; of claims arising from one or more loss e#ents in#ol#ing multiple co#erages or policies. 4oth higher e/posed layers and clash are almost al$ays priced on a fi/ed cost basis $ith no #ariable commission or additional premium pro#ision.

Catastrophe Covers
A catastrophe co#er is a per-occurrence treaty used for property e/posure. It is used to protect the net position of the cedant against the accumulation of claims arising from one or more large e#ents. It is usually stipulated that t$o or more insureds must be in#ol#ed before co#erage attaches. The co#erage is typically of the form of a 678 or 6?8 share of one or more layers !separate treaties" in e/cess of the ma/imum retention $ithin $hich the cedant can comfortably absorb a loss or for $hich the cedant can afford the reinsurance prices.

Aggregate Excess, or Stop Loss Covers
)or an aggregate excess treaty also sometimes called a stop loss co#er a loss is the accumulation of all sub,ect losses during a specified time period usually one year. It usually co#ers all or part of the net retention of the cedant and protects net results pro#iding #ery strong stabili-ation. Claims arising
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RE-INSURANCE from natural catastro$hes are often e(cluded, or there ma! e a $er. occurrence ma(imum limit.

TYPES OF RE-INSURANCE ./),$ "0$+&
Ruota share, or $ro$ortional reinsurance, in5ol5es one or more reinsurers taking on a s$ecified $ercentage share of each $olic! from an insurance com$an!. The reinsurance agreement is t!$icall! administered on a $eriodic asis such as 'uarterl!. 8t the end of each 'uarter, the reinsurer)s* &ill recei5e that s$ecified $ercentage of each dollar of $remiums from the insurer and &ill in turn $a! that $ercentage of each dollar of losses as claims reco5era le to the insurer. In addition, the reinsurer &ill normall! make an u$front ceding commission $a!ment to the insurer to com$ensate it for the costs of &riting and administering the usiness. This t!$e of reinsurance allo&s insurers to &rite usiness &hich the! ma! not ha5e sufficient ca$ital to retain full!. 4hile $remiums and claims are all shared on a $ro rata asis, ceding commission from the reinsurer)s* hel$s the relief of ne& usiness strains. 8nother, though less common, form of $ro$ortional reinsurance is sur$lus share. 8n insurance com$an! defines a $olic! limit amount G and each additional amount of G is considered as a la!er.

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RE-INSURANCE In the sim$lest form of arrangement, if the insurance com$an! issues a $olic! &ith G S 7ST-,,,,,, co5erage, all of the $remiums and claims generated from the $olic! &ill e retained ! the insurer. If a

7ST2,,,,,, $olic! is issued then half of the $remiums and claims &ill e ceded to the reinsurer )- additional la!er*L &hereas for a 7STC,,,,,, $olic! the additional = la!ers of co5erage &ill e ceded to reinsurer)s* im$l!ing a 'uota share $ercentage of C=.9U. There is usuall! a ma(imum num er of la!ers defined in the terms of agreement et&een the insurer and reinsurer, and this in turn determines the ma(imum $olic! limit that can e offered ! the insurance com$an! to $olic!holders.

E12&"" )3 4)""
2(cess of loss reinsurance is in essence non.$ro$ortional reinsurance, under &hich an insurer sets a retention limit of $olic! co5erage, and the reinsurer &ill take on an! losses in e(cess of that s$ecified retention amount. 8n e(am$le of this form of reinsurance is &here the insurer is $re$ared to acce$t a loss of :ET- million for an! loss &hich ma! occur and $urchases reinsurance of :ET6 million in e(cess of the retention limit. If a :ET2.9 million claim occurs the insurer is a le to reco5er the e(tra :E-.9 million from the reinsurer. In this case, for an! claims e(ceeding :ET9 million, the insurer &ill not e a le to full! reco5er the claims $a!a le from the reinsurer, hence insurance com$anies often $urchase a fe& e(cess la!ers of reinsurance. This t!$e of e(cess of loss reinsurance is t!$icall! kno&n as $er risk reinsurance.

23

RE-INSURANCE 2(cess of loss reinsurance can also e on a $er occurrence, or catastro$he, le5el. In catastro$he e(cess of loss, the insurance $olic! limits must e less than the reinsurance retention amount. 8n e(am$le of this form of reinsurance in5ol5es an insurance com$an! &riting a homeo&nerMs contract &ith $olic! limit u$ to :ET-,,,,,,,, and then $urchase catastro$he reinsurance of :ET6,,,,,,,,, in e(cess of :ET-,,,,,,,,. In such circumstances, the insurance com$an! &ould reco5er from reinsurers in the e5ent of multi$le losses in one e5ent such as earth'uake, flood or t!$hoon. This is more commonl! seen in the general insurance domain.

R&,+)2&""-)5
Sometimes, reinsurance com$anies themsel5es also resort to $urchasing reinsurance and this is kno&n as a retrocession. The t!$e of reinsurance is normall! offered ! some other reinsurance com$anies. The reinsurance com$an! &ho sells the reinsurance in this case is kno&n as retrocessionaires &hereas the ceding reinsurance com$an! is kno&n as the retrocedent. @emand for retrocession arises &hen a reinsurer $ro5iding 'uota share reinsurance ca$acit! to direct insurers ma! &ant to $rotect its o&n e($osure to catastro$hes ! $urchasing e(cess of loss $rotection. 8lternati5el!, a reinsurer offering e(cess of loss reinsurance $rotection ma! look to $rotect itself against an accumulation of losses in different ranches of usiness &hich ma! all ecome affected ! the same catastro$he.

F-5$52-$4 +&-5"/+$52&
<inancial Reinsurance, also kno&n as <inite Reinsurance or <in Re, is an inno5ati5e alternati5e to traditional forms of reinsurance as descri ed a o5e,
26

RE-INSURANCE and its recent $o$ularit! has led to a significant rise in $remiums de5oted to this categor!. <inancial reinsurance is a $ractical risk management tool, es$eciall! useful &hen the moti5ations of the ceding insurance com$an! are focussed not onl! on managing under&riting risk ut also on e($licitl! recognising and addressing other financiall! oriented risks.The use of financial reinsurance, &hich re$resents a com ination of risk transfer and risk financing, could add 5alue to an insurerMs risk management ! $ro5iding fle(i ilit! and li'uidit!. 8 ma#or function of financial reinsurance is to distri ute an e(traordinar! negati5e or $ositi5e e($ected under&riting result ! the ceding com$an! in a certain !ear o5er a longer time $eriod. In this &a!, financial reinsurance sta ilises the usiness result of the !ear in5ol5ed. The o$$osite a$$roach is to create a highl! $ositi5e under&riting result for a $articular !ear ! ringing for&ard future earnings. <or instance, the reinsurer $a!s a ceding commission e'ual to the em edded 5alue of a $ortfolio &hich is amortised during the run.off of the usiness, this is effecti5el! a loan taken and such em edded 5alue financing is not uncommon in case of life insurance com$an! ac'uisitions. @e$ending on the domestic regulations go5erning the res$ecti5e #urisdiction, insurance com$anies ma! e re'uired to o tain asis for e5er! a$$ro5al from the rele5ant authorit! on a case. !.case

financial reinsurance transaction the! are looking to enter into. If there has een a material change in contract terms during the $eriod of the contract then the insurer must rea$$l! for a$$ro5al. 8 t!$ical a$$lication $rocess in5ol5es the direct insurer descri ing to the authorit! the reasons for $urchasing financial reinsurance, an anal!sis of $ro#ected cash flo&s reflecting the $ossi leoutcomes of the treat!, and descri$tions of the e($ected im$act of the $ro$osed arrangement on actuarial statutor! reser5es and sur$lus. In $articular, under&riting risk and timing risk are im$ortant criteria for su$er5isor! and ta( authorities &hen deciding &hether a financial reinsurance
29

RE-INSURANCE contract is reinsurance, $ure loan or in5estment. Bost of the insurance authorities re'uire there to e a significant under&riting risk and the $ossi ilit! of a loss to the reinsurer in order to ackno&ledge a financial reinsurance contract as reinsurance. Underwriting risk ? 7nder&riting risk is defined as the risk that actual claims &ithin a $eriod of insurance &ill de5iate from e($ected claims, &hich e'uals the $ure risk $remium. @e5iations ma! occur in the num er and siHe of claims as &ell as in the timing of the claims e5ents &ithin the $eriod of insurance. Timing risk ? Timing risk results from uncertaint! a out the time &hen claims must e $aid out. This is the risk that claims &ill ha5e to e $aid out earlier than e($ected.

26

RE-INSURANCE

FUNCT !NS !F "E# NSU"ANCE
8lmost all insurance com$anies ha5e a reinsurance $rogram. The ultimate goal of that $rogram is to reduce their e($osure to loss ! $assing the e($osure to loss to a reinsurer or a grou$ of reinsurers. Therefore, the! are Mtransferring some of the risk to the reinsurer or a grou$ of reinsurers R-"6 ,+$5"3&+ 4ith reinsurance, the insurer can issue $olicies &ith higher limits than it &ould other&ise e allo&ed, therefore eing $ermitted to take on more risk ecause some of that risk is no& transferred to the reinsurer. Reinsurance has gone from a relati5el! unso$histicated significant losses and reinsurers ha5e usiness to a highl! so$histicated endea5or. The reason for this is the num er of reinsurers that ha5e suffered ecome financiall! im$aired. <rom 2,,, on&ard, ecome much more reliant on actuarial models and tight

re5ie& of the com$anies the! are &illing to reinsure. The! re5ie& their financials closel!, e(amine the e($erience of the $ro$osed usiness to e reinsured, re5ie& the under&riters that &ill &rite that usiness, re5ie& their rates, and much more. 8lmost all reinsurers no& 5isit the insurance com$an! and re5ie& under&riting and claim files and more. A+7-,+$(&

2=

RE-INSURANCE The insurance com$an! ma! e moti5ated ! ar itrage in $urchasing

reinsurance co5erage at a lo&er rate than the! charge the insured for the underl!ing risk, &hich can e in the area of risk associated &ith an! form of the asset that is eing issued or loaned against. It can e a car, a mortgage, an

insurance )$ersonal, fire, usiness, etc.* and the like. In general, the reinsurer ma! e a le to co5er the risk at a lo&er $remium than the insurer ecauseP
•

The reinsurer ma! ha5e some intrinsic cost ad5antage due to economies of scale or some other efficienc! Reinsurers ma! o$erate under &eaker regulation than their clients. This ena les them to use less ca$ital to co5er an! risk, and to make less $rudent assum$tions &hen 5aluing the risk. 25en if the regulator! standards are the same, the reinsurer ma! e a le to hold smaller actuarial reser5es than the cedant if it thinks the $remiums charged ! the cedant are e(cessi5el! $rudent. The reinsurer ma! ha5e a more di5erse $ortfolio of assets and es$eciall! lia ilities than the cedant. This ma! create o$$ortunities for hedging that the cedant could not e($loit alone. @e$ending on the regulations im$osed on the reinsurer, this ma! mean the! can hold fe&er assets to co5er the risk. The reinsurer ma! ha5e a greater risk a$$etite than the insurer.

•

•

•

•

C+&$,-5( $ %$5$(&$74& $58 9+)3-,$74& 9)+,3)4-) )3 -5"/+&8 +-"6"

2C

RE-INSURANCE B! choosing a $articular t!$e of reinsurance method, the insurance com$an! ma! e a le to create a more alanced and homogenous $ortfolio of insured risks. This &ould lend greater $redicta ilit! to the $ortfolio results on net asis )after reinsurance* and &ould e reflected in income smoothing. 4hile income smoothing is one of the o #ecti5es of reinsurance arrangements, the mechanism is ! &a! of alancing the $ortfolio.

M$5$(-5( 2)", )3 2$9-,$4 3)+ $5 -5"/+$52& 2)%9$5: B! getting a suita le reinsurance, the insurance com$an! ma! e a le to su stitute Oca$ital neededO as $er the re'uirements of the regulator for $remium &ritten. It could ha$$en that the &riting of insurance usiness re'uires ( amount of ca$ital &ith !U of cost of ca$ital and reinsurance cost is less than (V!U. Thus more un$redicta le or less fre'uent the likelihood of an insured loss, the more $rofita le it can e for an insurance com$an! to seek reinsurance. Sta$ili%ation Reinsurance can help stabili-e the cedant(s under$riting and financial results o#er time and help protect the cedant(s surplus against shoc%s from large unpredictable losses. Reinsurance is usually $ritten so that the cedant retains the smaller predictable claims but shares the larger infre.uent claims. It can also be $ritten to pro#ide protection against a larger than predicted accumulation of claims either from one catastrophic e#ent or from many. Thus the under$riting and financial effects of large claims or large accumulations of claims can be spread out o#er many years. This decreases the cedant(s probability of financial ruin.
2>

RE-INSURANCE

&anagement A'vice 0any professional reinsurers ha#e the %no$ledge and ability to pro#ide an informal consulting ser#ice for their cedants. This ser#ice can include ad#ice and assistance on under$riting mar%eting pricing loss pre#ention claims handling reser#ing actuarial in#estment and personnel issues. Enlightened self-interest induces the reinsurer to critically re#ie$ the cedant(s operation and thus be in a position to offer ad#ice. The reinsurer typically has more e/perience in the pricing of high limits policies and in the handling of large and rare claims. Also through contact $ith many similar cedant companies the reinsurer may be able to pro#ide an o#er#ie$ of general issues and trends. Reinsurance intermediaries may also pro#ide some of these same ser#ices for their clients.

3,

RE-INSURANCE

PARTICIPANTS OF THE REINSURANCE INDUSTRY
As discussed abo#e the main participants in the reinsurance industry are the professional reinsurers the retrocessionaires and the insurance companies. Reinsurance bro%ers also play a fundamental role in the placement of reinsurance programs in particularly $hen dealing $ith special programs. Capti#es 5ools and @ffshore Reinsurers complete the reinsurance industry. Reinsurance brokers )or comple/ reinsurance programs or $hen the reinsurance capacity is scarce insurance companies utili-e the ser#ices of reinsurance bro%ers. Reinsurance bro%ers are companies or professional indi#iduals that are licensed and super#ised dedicated to pro#ide professional ad#ice to insurance companies on the placement of their reinsurance programs. Reinsurance bro%ers are paid through reinsurance commissions that are proportional to the placed reinsurance premium. Reinsurance bro%ers also offer administrati#e ser#ices and product de#elopment. In most ,urisdictions reinsurance bro%ers are re.uired to hold an error and omissions liability policy for the protection of the

3-

RE-INSURANCE insurance companies. In recent years the press has reported on ma,or financial scandals related to the non transparency of the reinsurance commissions. 5rofessional reinsurance bro%ers ha#e reacted offering detailed disclosure of their commissions. As an e/ample $e ha#e attached in Anne/ = a disclosure commitment issued by Auy Carpenter. Captives 2arge industrial conglomerates that are interested in %eeping their ris%s $ithin the group usually operate $ith a capti#e. A capti#e is a legal entity usually a

stoc% insurance company o$ned by the group that accepts and retains ris%s emanating only from the same industrial group. ools Insurance companies may $ant to insure an unusual or ne$ type of ris% but fear they $ill not ha#e enough business of that type to benefit from the la$ of large numbers. In an insurance pool se#eral companies agree to share all their ris%s of this type. This $ill pro#ide a large enough sample to gi#e more predictable and consistent results from year to year. The pool could be reinsured or the sharing of each policy in the pool may be according to ho$ much business each company puts into the pool or it could be a formula relating to ho$ much ris% each company $ould accept on any one case. 5ooling $as in fact the $ay insurance of modern passenger airplanes began. The 'orld 4an% has been promoting pools to co#er catastrophic ris%s li%e the Tur%ish Catastrophic Insurance 5ool !TCI5" and the Caribbean Catastrophic Ris% Insurance )acility !CCRI)". Offshore reinsurance
32

RE-INSURANCE @ffshore reinsurance companies are reinsurers $hich operate in special geographic -ones often $ith less demanding regulatory and fa#orable ta/ en#ironments. A great deal of reinsurance is conducted through these centers although much of the actual management of these companies is done in the parents( home offices in Europe 2ondon and Ne$ Bor%. The purpose of offshore reinsurance has been to optimi-e the use of capital and thus create competiti#e ad#antage. *o$e#er special scrutiny is re.uired $hen offshore reinsurance is in#ol#ed. The lac% of a strict regulation or the lo$ capital re.uirements in some offshore centers can lead to failing reinsurers in case of

mayor claims. Also money laundering acti#ity has used this type of reinsurance in the past.

33

RE-INSURANCE

REINSURANCE IN INDIA
7ntil 0IC &as notified as a National Reinsurer, it &as o$erating as a holding F $arent com$an! of the 6 $u lic sector com$anies, controlling their reinsurance $rogrammes. 0IC &ould recei5e 2,U o ligator! cession of each $olic! &ritten in India. Since deregulation, 0IC has assumed the role of the markets onl! $rofessional re.insurer. In order to focus on reinsurance, oth in India and through its o5erseas offices and trading $artners, 0IC has di5ested itself of an! direct usiness that it &rote $rior to No5em er 2,,,, &ith the tem$orar! e(ce$tion of cro$ insurance. It currentl! manages :ull "ool on ehalf of the market, &hich recei5es a cession from &riting com$anies and after a $ool $rotection the usiness is retro.ceded ack to the mem er com$anies. 0IC also manages the WTerrorism "oolQ. REINSURANCE REGULATION The $lacement of reinsurance usiness from e Indian market is no& go5erned ! Reinsurance Regulations formed ! the IR@8. The o #ecti5e of the

36

RE-INSURANCE regulation is to ma(imiHe the retention of $remiums &ithin the countr! and to ensure that IR@8 has issued the follo&ing instructionsP "lacement of 2,U of each $olic! &ith National Re su #ect to a monetar! limit for each risk for some classes • • • Inter.com$an! cession et&een four $u lic sector com$anies. Indian "ool for :ull managed ! 0IC. The treat! and alance risk after automatic ca$acit! are to e first offered to other insurance com$anies in the market efore offering it to international re.insurers. • 2ach com$an! is free to arrange its o&n reinsurance $rogram, &hich has to e su mitted to the IR@8 69 da!s efore commencement.

• Not more than -,U of reinsurance $remium to e $laced &ith one re. insurer. • No re.insurer &ill ha5e a rating of less than WBBBQ from Standard and "oorQs or an e'ui5alent rating from 8B Best.

General Insurance Corporation o In!ia
GIC as a national re-insurer is providing useful capacity to all insurance companies. "REA#-UP OF NET PREMIUM INCOME $ C%AIMS

Division

Premium 21,996.3

Claims

Indian Reinsurance 19, 9 ,2

39

RE-INSURANCE
!oreign In"ard 1$9 .9 %viation 1 6.1 Crop 136'.6 (otal 2,9#&. 1#91.$ 2$$.1 2, &.6

26,'12.3

In No5em er 2,,,, 0IC &as renotified as IndiaMs Reinsurer, ut its su$er5isor! role o5er its su sidiaries &as ended. This &as follo&ed ! the General Insurance Business (Nationalisation) Amendment Act of 2,,2. Coming into effect from 2- Barch 2,,3, this amendment ended 0ICMs role as a holding com$an! of its su sidiaries. The o&nershi$ of the su sidiaries &as transferred to the 0o5ernment of India, &hich in turn di5ested its stake in the com$anies through listings on Indian stock e(changes. 8s a result of these reforms, 0IC ecame the sole Re.Insurer in India, and is no& called GIC R&. Indian insurance com$anies are re'uired ! la& to cede -,U of e5er! $olic! 5alue to 0IC Re, su #ect to some limitations and e(ce$tions. 0IC Re has di5ersified its o$erations and is no& emerging as an im$ortant Re.Insurer in S88RC countries, Southeast 8sia, Biddle 2ast and 8frica. 0IC Re has also e($anded its international o$erations through ranches in Dondon and Bosco&.

36

RE-INSURANCE

GIC as International Re-insurer
Backed ! e($erience of more than three decades in handling the reinsurance re'uirement of the Indian market, 0IC has no& $laced itself as an effecti5e Reinsurance "artner. To 8fro.8sian countries and also other markets. If offers a ca$acit! of 7ST 9, million on facultati5e risks and 7ST -, million for treat! usiness. 0IC reinsurance as $art its strateg! to e($and its o$eration and to make its $resent felt glo all! has recentl! u$graded its re$resentati5e offices in Dondon and @u ai. Incidentall!, the sole national reinsurer of india also has another re$resentati5e office in Bosco&. 0IC has de5elo$ed necessar! skills and has 'ualified man$o&er to take care of gro&ing needs of the e($anding Indian industr!. 3rd 8sian ReinsurersQ Summit &as organised ! 0IC of India, in <e ruar! 2,,3at Bum ai. 2le5en reinsurers from Xa$an, China, :ong Eong, Singa$ore, Tai&an, Eorea, Indonesia, Bala!sia, Singa$ore, "hili$$ines and India $artici$ated in the summit &ith the aim of reinforcing of strengths for mutual de5elo$ment, undertaking #oint research, data sharing A information management and furthering usiness co.o$eration.
3=

RE-INSURANCE

Ran( & 0 5 1 6 ; 7 3 9 &'

Net Pre)iu)s +, -illions. Munic/ Re 0120&3 S4iss Re 0520'0 "er(s/ire Hat/a4a* Re &&2677 Hanno8er Re 329'7 %lo*!:s o %on!on 7296' SCOR ;2913 E8erest Re Group 52376 PartnerRe 52;39 Transatlantic Hol!in<s 52;55 ACE Te)pest Reinsurance 521'6

Co)pan*

TOP &' G%O"A% REINSURANCE COMPANIES

3C

RE-INSURANCE

The goal of the reinsurance $olic! is to transfer the risk of the insurer to the reinsurer. Reinsurance com$anies asicall! insure consumer insurance com$anies &ho su$$l! co5erage for 5arious t!$es of contracts. Bost insurance com$anies ha5e a reinsurance $rogram in $lace in order to make them more financiall! secure. 7nder a reinsurance contract, the reinsurer agrees to $a! a $ortion of the insurerQs losses in return for the $remium $aid to them ! the insurer. Insurers &ith a reinsurance $rogram in effect are ca$a le of issuing $olicies &ith higher limits meaning the! can shoulder more risk since a

$ortion of that risk is shifted to the reinsurer. @ue to record losses suffered during recent financial crisis, the to$ reinsurers fluctuate in their ranks, among them are S&iss Re, Bunich Re, and :anno5er Re. 4hile reinsurance aids in making an insurance com$an!Qs ottom line more foreseea le ! lo&ering the amount of ca$ital re'uired to su$$l! com$ensation to $olic!holders, natural catastro$hes are un$redicta le and are something that reinsurerQs ha5e to e $re$ared for, $articularl! e5ents like earth'uakes that can occur an! time of the !ear.

3>

RE-INSURANCE Reinsurance $olicies fall under the $ro$ortional and the non.$ro$ortional t!$e. <urther $ro$ortional reinsurance can e di5ided in to 'uota share and sur$lus reinsurance. 7nder $ro$ortional reinsurance, one or more reinsurers take a $ercentage share of e5er! $olic! &ritten ! an insurer. 4hat it means is that the reinsurer &ill recei5e a $ercentage on the dollar for $remiums $aid to the insurer, ho&e5er the! are re'uired to $a! that same $ercentage to com$ensate losses. "remiums and losses are shared on a $ro rata asis under a 'uota share treat!. 8 sur$lus share treat! is also seen as a 5aria le 'uota share contract, in this t!$e of $olic! a retention limit is set for each $olic! as a s$ecific dollar amount, the reinsurer $a!s an!thing a o5e that amount u$ to a ma(imum limit. In the e5ent of a loss, the insurer and the reinsurer &ould com$ensate ased on the same $ro$ortion as that $olic!Qs $ro5ided co5erage. ;nl! if the losses suffered ! an insurer e(ceed a $articular amount, then &ill the non.$ro$ortional reinsurance res$ond. 8mong the t!$es of non. $ro$ortional insurance co5erage are e(cess of loss and sto$ loss. 2(cess of loss reinsurance co5ers the insurer against all or a $art of the loss that e(ceeds the s$ecified loss retention. Sto$ loss co5ers the insurer for the amount the losses the! sustain sur$ass an agreed amount.

CHALLENGES FOR REINSURANCE MARKET
"rior to nationaliHation in ->=3, the reinsurance market in India had a much diluted $resence in the industr!. The foreign com$anies o$erating in India &ere managing their risk $ortfolio &ith their $arent com$anies o5erseas. To safeguard the identified and limited risk of insurance com$anies, local com$anies created India Insurance "ool. The de5elo$ments after nationaliHations insurance industr! created a ne& od! &ith the merger of
6,

RE-INSURANCE India Reinsurance and Indian 0uarantee for its reinsurance usiness to su$$ort the technolog! and engineering mega $ro#ects. Some of the ma#or issues in accounting ha5e een undertaken considering there cent de5elo$ments in the usiness. The return from foreign com$anies are to e incor$orated &hen recei5ed u$ to 3-stmarch and returns from Indian com$anies and state insurance funds recei5ed as of different dates are acce$ted u$ to the date of finaliHation of accounts. 8rising out of the occurrence of disastrous like terrorist attack on &orld trade center etc. &hich rought a out un$recedented loss of life and $ro$ert! and there ! un eara le lia ilit! and o$erational crisis onto the reinsurance industr! &orld o5er. There is a &ide difference et&een the rates re'uired ! the international reinsurers and those charged ! the domestic insurers leading to the $rice afforda ilit! as an issue. 4here there are tarrifs, like a case of India, the customers cushioned from the rate of increase in the international market. Such im$ositions are re'uired to e self ? a sor ed. The Indian market is in a sence of the com$etiti5e en5ironment of the international reinsurers at the local le5el, and has de$ended mainl! on the domestic market understanding and asing $ro a ilit! of usiness ceded rather than on under&riting and risk information criteria. 8 regular interaction for regional co.o$eration has to e de5elo$ed to set u$ a frame&ork of the

areas of co.o$eration and the mechanism, &ith this India has to com$ete &ith the glo al reinsurance giants. :o&e5er, the tightening of reinsurance $remium in India has een attri uted to the lo& 5olumes. 8s market ecome glo al, countr! regulators face challenges in $olic! formulation for creating a market that de5elo$s and kee$s confidence of the industr! and for kee$ing international trade regulation intact.

6-

RE-INSURANCE

RESEARCH=PU"%ICATIONS
Ee! $la!ers in the reinsurance field $roduce and release $eriodic research re$orts, man! of &hich are a5aila le on su scri$tion asis, on s$ecialised reinsurance related to$ics includingP • @read disease sur5e! • 0rou$ life market sur5e! • Dong term and managed care
62

RE-INSURANCE • • • • • • • • • Bedical ad5ancement and health insurance Casualt! re$orts 7nder&riting s!stem 4orkerQs com$ensation ;ccu$ational disease 2nter$rise risk and ca$tial management 0enetics engineering Terrorism Climate change and natural disasters and man! others.

REINSURANCE SUPER>ISIONS
The International 8ssociation of Insurance Su$er5isors )I8IS*, esta lished in ->>6, $ro5ides the highest le5el of su$er5isor! guideline on insurance issues including the $ractice of reinsurance. I8IS re$resents insurance regulators and su$er5isors of some -C, #urisdictions. Its mem ers in 8sia include the follo&ing ke! insurance authorities in the res$ecti5e regionP • China Insurance Regulator! Commission )CIRC*, China
63

RE-INSURANCE • • • • • • • • • ;ffice of the Commissioner of Insurance );CI*, :ong Eong Bonetar! 8uthorit! of Bacao )8BCB*, Bacau Insurance Bureau of <inancial Su$er5isor! Commission )IB*, Tai&an Bonetar! 8uthorit! of Singa$ore )B8S*, Singa$ore Bank Negara Bala!sia )BNB*, Bala!sia <inancial Ser5ices 8genc! )<S8*, Xa$an <inancial Su$er5isor! Ser5ice )<SS*, Eorea Insurance Regulator! and @e5elo$ment 8uthorit! )IR@8*, India Insurance Board of Sri Danka )IBSD*, Sri Danka

I8IS has issued a num er of $rinci$le, standards and guidelines for its insurance su$er5isor! mem ers to use as est $ractices to &ork to&ards. In $articular, the Reinsurance and other forms of Risk Transfer Su committee has de5elo$ed reinsurance guidelines oth from the $ers$ecti5e of e5aluating the reinsurance co5er of $rimar! insurers and of su$er5ising reinsurers.

CONC%USION
Reinsurance means insuring again. It is transfer of insurance ris% from one insurer to another. Under reinsurance the original insurer $ho has insured a ris% insures a part of that ris% $ith another insurer. Reinsurance premium is an income to there insurer and an e/pense to the insurer. Reinsurance is a good method to di#ersify and distribute ris%s of an insurer. Reinsurance e#en
66

RE-INSURANCE pro#ide technical assistance and rating assistance to the original insurers. Reinsurance is also a contract of indemnity. The ob,ect of under$riting is to ma%e a reasonable profit it is e.ually essential that the business ceded to reinsurers should also gi#e them a margin. )or profit therefore the o#erall .uality of business accepted by direct insurers should be good. The comple/ity of the reinsurance business has been treated in numerous publications. 4asically e#ery professional reinsurer offers e/cellent learning material that go from basics into comple/ topics. *ere $e ha#e aimed to pass enough information to the reader to ma%e herChim familiar $ith the basic concepts of reinsurance in a compressed manner. At the same time $e hope that the course $ill allo$ and encourage the reader to reach out for further literature to satisfy the indi#idual needs of %no$ledge in the matter.

'EBILIOGRAPHY
• &&&.actuaries.org.hk • &&&.casact.org
•

&&&.&iki$edia.org
69

RE-INSURANCE

66