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PROJECT ON:
RE-INSURANCE

UNIVERSITY OF MUMBAI

K.P.B. HINDUJA COLLEGE OF
COMMERCE

T.Y.B.COM (BANKING &INSURANCE)

SEMESTER VI

SUBMITTED BY:
HEMALI PARAB

PROJECT GUIDE:
PROF. HEMAT BHATTI

ACADEMIC YEAR
2011-2012
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DECLARATION BY THE STUDENT

I, Ms. HEMALI PARAB student of T. Y. B. Com., Banking and
Insurance, Semester VI, Roll No. 37, hereby declare that this
Project Report entitled “RE-INSURANCE” is being submitted
as a partial fulfilment of the course, which is a necessary
requirement to pass the Semester VI examination. I further
declare that the Report is the output of my personal research and
all the information contained herein is correct to the best of my
knowledge.


Name: Hemali Parab






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CERTIFICATE

This is to certify that Ms. HEMALI PARAB of B.Com (Banking
and Insurance), Semester V [2011-2012] has successfully completed the
Project on “RE-INSURANCE” under the guidance of Prof. HEMANT
BHATTI.



Project Guide ________________


Course Coordinator ________________


Internal Examiner ________________


External Examiner ________________




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ACKNOWLEDGEMENT


With a deep sense of gratitude I express we thanks to all those who have been
instrumental in the development of the project report.
I am also grateful to all the co-coordinator and professors of my college
who gave me a valuable opportunity of involving me in real live business
project. I am thankful to all the professors whose positive attitude, guidance
and faith in my ability spurred me to perform well.
I am also indebted to all lecturers, friends and associates for their valuable
advice, stimulated suggestions and overwhelming support without which the
project would not have been a success.

HEMALI PARAB











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OBJECTIVES:

 To understand the importance of the RE-INSURANCE
 To set out the main structural features of the reinsurance industry.
 To briefly portrait the industry, including its scale, recent performance
and approach to risk management.

SOURCES OF DATA:

 The secondary data has been collected from the internet and books

RESEARCH METHODOLOGY:

 The methodology adopted in preparing this project involves a lot of
secondary data as well as the use of World Wide Web for the updated
information.








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(((CONTENT)))

CHAPTER
NO.
SUBJECT COVERED Pg. No
1. HISTORY OF REINSURANCE 07-09
2. REINSURANCE – DEFINITION & INTRODUCTION 10-12
3. REINSURANCE NEEDS 13-16
4. THE FORMS OF RE-INSURANCE 17-21
5. TYPES OF RE-INSURANCE 22-26
6. FUNCTIONS OF RE-INSURANCE 27-30
7. PARTICIPANTS OF THE REINSURANCE INDUSTRY 31-33
8. REINSURANCE IN INDIA
-GENERAL INSURANCE CORPORATION OF INDIA
34-37

9. TOP 10 GLOBAL REINSURANCE COMPANIES 38-39
10. CHALLENGES FOR REINSURANCE MARKET 40-41
11. RESEARCH/PUBLICATIONS 42
12. REINSURANCE SUPERVISION 43
13. CANCLUSION 44
14. BIBLIOGRAPHY 45






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HISTORY OF RE-INSURANCE
Insurance and reinsurance contracts had their origin in Marine transportation
activities, way back in the XIV century. Initially, the Insurer would transfer a
certain portion of a given risk to some other party, thus fractionating possible
losses, with such operation determining that the reinsurance would then be
characterized as just another type of insurance contract. Such a
conceptualization, thus conceived and disseminated, does not keep the whole
truth, as the reinsurance encompasses several other functions. A typical
reinsurance contract is not just intended to transfer or assign part of the risk
insured by one Insurer to Reinsurers. It also involves some other functions
constructed over the centuries, according to the evolution experienced by this
particular system of concentrated pulverization of risks and interests.
Certain trips were only insured, in fact, should a reinsurance contract be
available for its most hazardous portion, i.e., from a point of origin to a given
port - an insurance contract would be established and, from that port to
another port - with reinsurance coverage. Such sharing model does not
configure, in itself, a mere parcelling of liabilities over one single risk. In
other words, it presents and operates other equally differentiated situations and
interests.
In the XVII and XVIII centuries the first judicial sentences have been sculpted
about reinsurance, highlighting the independent nature of this contract.
The development of European societies has dictated the need for organizing
reinsurance companies, not only for the Marine risks, but also for the urgent
demand of fire insurers. In 1846, the first independent reinsurers - Kölnishe
Rückversicherungs-Gesellschaft - obtained the necessary permit to operate in

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Germany, with the first reinsurance contract being entered into by that
company in 1852. The Swiss Reinsurance Company was established in
Zurich, in 1863; and the Münchener Rückversicherungsgesellschaft in 1880,
in Germany. Lloyd's underwriter, which also operates with reinsurance, was
constituted in London as early as 1688. In the USA, reinsurance companies
started to be organized just before the end of the year 1900.
As of the growing evolution of the insurance markets in the world, along the
timeline, even modifying risk conditions and economic interests, the Ceding
Insurers were forced to retain part of the risks. The function related to the
portfolio homogeneity of the Insurer, through a reinsurance operation, was
certainly aggregated at much more modern times. The uncontrolled
widespread of the productive system created disparate risks, not always
properly conducted toward the same parameter, for which reason Insurers
have had to limit their losses. The Insurers have to homogenize their results,
eliminating the volatility they are absorbing from their insured customers.
Upon absorbing such Insurer volatility, Reinsurers are, in turn, capable of
homogenizing their portfolios by combining a certain number of portfolios
comparable to each other and particularly in view of the internationality of
their operations. Two or more catastrophic events would hardly occur within
the same period and in one single place, let alone the possibility of occurring
at the same time the world over, although, on a probabilistic basis, this could
happen under certain conditions (pandemic diseases, for example).
In many countries, the insurance industry and, more specifically, Reinsurers
are being faced with new impact scenarios not caused by natural catastrophes.
Terrorist attacks, anthropic climatic changes and also financial market crises
have all been disturbing societies and their institutions. Such a problematic
constitutes new challenges for the insurance and reinsurance industry. At

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present, one should imagine what was previously unimaginable, in the search
for more remote loss events scenarios. The due appraisal of risks, the
adjustment of coverages and prices, in addition to establishing adequate
underwriting controls and policies, are the essential requirements at a time
when a sustainable corporate planning is being required with a view into a
future. In view of such new scenarios, always in evolution, the reinsurance
acquired the modernity status of a financial product, to the extent of allowing
Insurers to be more capable of underwriting risks, increasing the offer of
insurance products and reducing capital costs. It then propitiates the
guaranteed financial strength of the system, for stabilizing direct insurance
markets and other intermediary entities, as well as institutional investors.
A reinsurance operation is international by excellence, to the extent of being
healthy for local markets to have their liabilities spread over different
countries, thus diluting claimed losses, particularly those of a catastrophic
nature.
In a very brief manner, and consolidating the whole theory described in the
previous paragraphs, the chief function of a reinsurance agreement (treaty) is
to guarantee the indemnity to the Insurer resulting from a claim. All other
underlying functions will be subject to changes over the time and according to
the interests and even requirements of each insurance market. And, for being
dynamic, it will then require constant adaptations of all those integrating the
system.





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RE-INSURANCE

DEFINITION OF 'REINSURANCE'

“The practice of insurers transferring portions of risk portfolios to other parties
by some form of agreement in order to reduce the likelihood of having to pay
a large obligation resulting from an insurance claim. The intent of reinsurance
is for an insurance company to reduce the risks associated with underwritten
policies by spreading risks across alternative institutions.”
Also known as "insurance for insurers" or "stop-loss insurance".

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, above some
specified dollar amount).
The nature and purpose of insurance is to reduce the financial cost to
individuals, corporations, and other entities arising from the potential
occurrence of specified contingent events. An insurance company sells
insurance policies guarantying that the insurer will indemnify the
policyholders for part of the financial losses stemming from these contingent
events. The pooling of liabilities by the insurer makes the total losses more
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predictable than is the case for each individual insured, thereby reducing the
risk relative to the whole. Insurance enables individuals, corporations and
other entities to perform riskier operations. This increases innovation,
competition, and efficiency in a capitalistic marketplace.
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 innovation, competition, and
efficiency in the marketplace. The cession of shares of liability spreads risk
further throughout the insurance system. Just as an individual or company
purchases an insurance policy from an insurer, an insurance company may
purchase fairly comprehensive reinsurance from one or more reinsurers.
There are many reasons for an insurance company to seek reinsurance for all
or part of its liability, which could include but not limited to the followings:

Risk Transfer
The main purpose of reinsurance is to allow the ceding insurance company to
write and assume individual risks that are greater than its capital size would
allow, thus offering larger limits of protection to policyholders than otherwise
possible. Reinsurance also protects insurers against catastrophic losses.

I ncome Smoothing
In taking all or part of the risks, reinsurance helps to smooth out the financial
results of an insurance company, making them more predictable by absorbing
larger losses. This enables easier business planning and financial projections.

Surplus Relief
Under some typical reinsurance arrangments, insurance companies are
allowed to reduce the amount of net liability they need to hold on its balance

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sheet by an amount equals to the reserve credit. Very often, reinsurers offer an
initial commission or rebate to the insuance companies, thus further helping
them to reduce the strain of writing new business.

Product Development
In many circumstances, reinsurers are able to provide expertise about
development of the more sophisticated product types. They work closely
together with the insurance companies‟ actuarial team to design the best tailor
made products.

Source of Profit
Although more of an enhanced benefit instead of a core driver, insurance
companies may be motivated by the fact that they are able to reap “arbitrage”
profits by purchasing reinsurance coverage at a lower rate than what they
believe the cost is for the underlying risk. This is achievable because
reinsurers are more specialised in certain types of risks, allowing them to
attain critical mass and hence a good economy of scale.










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REINSURANCE NEEDS
There are several reasons for an insurance company to use reinsurance. We
will discuss here the most important ones.

Increasing underwriting capacity
Insurance companies are often offered risks that may surpass their financial
strength. Ceding part of the risk may allow them to accept the full risk thus
satisfying client‟s needs. For this purpose insurance companies may also use
coinsurance. However in this case the insur- ance company will have to
contact competitors to share part of the risk which might not be to its best
interest, especially in a competitive market. Another disadvantage to the use of
coinsurance is the burden put on the insured that will need to deal with each
one of the participating insurance companies with regard to premium
payments and claim settlements.

Risk capital improvement and diversification
Insurance companies having a more diversified portfolio of risks will tend to
have more stable financial results. Using reinsurance will allow insurance
companies to participate in a diversity of risks using the same working capital
by ceding part of the risk and keeping a smaller portion of each risk. This
reduction in the concentration on risk will diminish the volatility of the annual
results. Figure 2 illustrates this reinsurance effect. Here, without reinsurance
the company‟s capital commitment allows its participation in only one risk.
Using reinsurance, the same committed capital allows the company to
participate in four different risks with a total higher sum insured.



Surplus relief
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The use of reinsurance allows insurance companies to partially transfer risks
off their balance sheet. While the ultimate responsibility to the policy holders
still remains with the insurance company, most jurisdictions recognize
reinsurance as a risk managing tool that allows a reduction of statutory surplus
requirements. The guarantee implicit on a reinsurance contract to pay the
reinsured claims is recognized in the capital requirements for the cedant.
Hence it is not uncommon to base the prudential requirements on the insured
premium net of reinsurance. Reinsurance thus removes a technical risk but it
introduces a counterparty risk since, as mentioned above, the ultimate
responsibility to the policy holders still remains with the insurance company.
To offset the counterparty risk additional surplus is usually required. This
additional capital will vary depending on the solvency rating of the reinsurer.
Also the amount of surplus relief granted will depend on that rating.

Catastrophic protection
Well run insurance companies accept risk exposure according to their
financial strength. However, the risks may also be exposed to extreme
infrequent events, like earthquakes, floods, plane crashes and other mayor
catastrophic events. Holding enough capital for those extreme events would
make the insurance operation economically unviable or at least very
expensive. Transferring this exposure to catastrophic events to the reinsurers is
a more effective way to address very infrequent events. Reinsures offer
catastrophic protection in a more economic feasible way than insurance
companies by participating in catastrophic exposures through out the world
and thus geographically better diversifying the risk. Usually reinsurers are also
more capitalized than insurance companies. They also operate dedicated


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departments that have gained substantial knowledge of the physical
characteristics and history of catastrophic events thus allowing them to price
and underwrite properly the exposure and accept those risks.

Expertise transfer
Through the reinsurance activity reinsurers acting in several markets with
different insurance companies have the ability to acquire significant
knowledge of the different products, markets and insurance techniques like
underwriting, administration of the policies and claims assessment. This is
particularly important when entering a new market, a new line of business or
simply launching a new product. Transferring the risk through reinsurance
may also include the shift of the underwriting, administration, or other activity
related to the risk transferred to the reinsurer. Such a reinsurance agreement
allows insurers to focus in their core business outsourcing to experts the non
core activities.

Financing new business
As discussed in Module 1 a rapidly growing insurance activity can require
upfront financing. This is particularly true in the case of Life Insurance
business. Here the insurance company has to finance the agents or broker‟s
commissions that can be as high as the full first year‟s premium as well as the
underwriting costs that may include medical examinations and financial
assessments. Reinsuring part of the business can provide a source of financing
especially if the reinsurer agrees to advance the future expected profits of the
business in the form of reinsurance commission. This source of financing of
insurance business can be attractive compared to other sources such as bank
loans or equity. Reinsurers, knowing the business, will have lower risk


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charges than non insurance financing sources. Also, in most reinsurance
agreements the pay back is contingent on the performance of the reinsured
business. i.e. the advancement of future profits are only recovered by the
reinsurer if the business actually generates those expected profits. If the
payback of the reinsurance financing is totally contingent on the performance
of the reinsured business, in most jurisdictions 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
above mentioned reasons. There might be other special situations where
reinsurance is used as a valid financial and operational tool, however if none
of the above mentioned needs is present, special scrutiny of the transaction is
required. The great flexibility of reinsurance treaties that allows effective
tailor-made solutions to meet individual insurance company‟s needs has been
abused in the past to design tax avoidance, money laundry and other illegal
activities. A reinsurance agreement that does not transfer any type of risk is
always questionable.











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THE FORMS OF RE-INSURANCE

Facultative Certificates

A facultative certificate reinsures just one primary policy. Its main function is
to provide additional capacity. It is used to cover part of specified large,
especially hazardous or unusual exposures to limit their potential impact upon
the cedant‟s net results or to protect the cedant‟s ongoing ceded treaty results
in order to keep treaty costs down. The reinsurer underwrites and accepts each
certificate individually; the situation is very similar to primary insurance
individual risk underwriting. Because facultative reinsurance usually covers
the more hazardous or unusual exposures, the reinsurer must be aware of the
potential for antiselection within and among classes of insureds. Property
certificate coverage is sometimes written on a proportional basis; the reinsurer
reimburses a fixed percentage of each claim on the subject policy. Most
casualty certificate coverage is written on an excess basis; the reinsurer
reimburses a share (up to some specified dollar limit) of the part of each claim
on the subject policy that lies above some fixed dollar attachment
point (net retention).

Facultative Automatic Agreements or Programs

A facultative automatic agreement reinsures many primary policies of a
specified type. These policies are usually very similar, so the exposure is very
homogeneous. Its main function is to provide additional capacity, but since it
covers many policies, it also provides some degree of stabilization. It may be
thought of as a collection of facultative certificates underwritten
simultaneously. It may cover on either a proportional or excess basis. It
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is usually written to cover new or special programs marketed by the cedant,
and the reinsurer may work closely with the cedant to design the primary
underwriting and pricing guidelines.
For example, a facultative automatic agreement may cover a 90% share of the
cedant‟s personal umbrella business, in which case the reinsurer will almost
certainly provide expert advice and will monitor the cedant‟s underwriting and
pricing very closely. Facultative automatic agreements are usually written on a
fixed cost basis, without the retrospective premium adjustments or variable
ceding commissions sometimes used for treaties (as we shall see below).
There are also non-obligatory agreements where either the cedant may not be
required to cede or the reinsurer may not be required to assume every single
policy of the specified type.

Treaties

A reinsurance treaty represents the terms of agreement between an insurer and
a reinsurer. Reinsurance treaties can either be written on a continuous basis or
on a term basis. A continuous contract continues indefinitely, but generally
has a defined noticing period whereby either party can give its intent to cancel
or amend the treaty within a period of about 60 to 90 days. On the contrary, a
term agreement has an explicitly built-in expiration date. It is typical for
insurers and reinsurers to have long term relationships that span many years.
Reinsurance can also be purchased on a per policy basis in which case it is
known as facultative reinsurance, which is commonly used for large or
unusual risks that do not fit within standard reinsurance treaties due to their
exclusions. The term of a facultative agreement coincides with the term of the
specific policy in concern. Almost all insurers do not place reinsurance
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agreements with one single reinsurer but with treaties shared among a number
of reinsurers. The reinsurer who sets the terms and contract conditions for
the reinsurance contract is the lead reinsurer, whereas the other companies
subscribing to the contract are the following reinsurers.

Treaty Proportional Covers


A quota-share treaty reinsures a fixed percentage of each subject policy. Its
main function is financial results management, although it also provides some
capacity. The reinsurer usually receives the same share of premium as claims,
and pays the cedant a ceding commission commensurate with the primary
production and handling costs (underwriting, claims, etc.). Quotashare
treaties usually assume in-force exposure at inception. The cedant‟s financial
results are managed because the ceding commission on the ceded unearned
premium reserve 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 quota-share treaties is often defined to vary
within some range inversely to the loss ratio. This allows the cedant to retain
better-than-expected profits, but protects the reinsurer somewhat from adverse
claims experience. The term quota-share is sometimes (mis-)used when the
coverage is a percentage share of an excess layer; we will more properly treat
this kind of coverage as being excess. A surplus-share treaty also reinsures a
fixed percentage of each subject policy, but the percentage varies by policy
according to the relationship between the policy limit and the treaty‟s
specified net line retention. Its main function is capacity, but it also provides
some stabilization. A surplus-share treaty may also assume in-force exposure
at inception, which together with a ceding commission provides some
management of financial results. This is typically a property cover; it is rarely
used for casualty business.
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Treaty Excess Covers

An excess treaty reinsures, up to a limit, a share of the part of each claim that
is in excess of some specified attachment point (cedant‟s retention). Its main
functions are capacity and stabilization. An excess treaty typically covers
exposure earned during its term on either a losses-occurring or claims-made
basis, but run-off exposure may be added in. The definition of “subject
loss” is important. For a per-risk excess treaty, a subject loss is defined to be
the sum of all claims arising from one covered loss event or occurrence for a
single subject policy. Per-risk excess is mainly used for property exposures. It
often provides protection net of facultative coverage, and sometimes also net
of proportional treaties. It is used for casualty less often than per-occurrence
coverage. For a per-occurrence excess treaty, a subject loss is defined to be
the sum of all claims arising from one covered loss event or occurrence for all
subject policies. Per-occurrence excess is used for casualty exposures to
provide protection all the way up from working cover layers through clash
layers. A working cover excess treaty reinsures an excess layer for which
claims activity is expected each year. The significant expected claims
frequency creates some stability of the aggregate reinsured loss. So working
covers are often retrospectively rated, with the final reinsurance premium
partially determined by the treaty‟s loss experience. A higher exposed layer
excess treaty attaches above the working cover(s), but within policy limits.
Thus there is direct single policy exposure to the treaty. A clash treaty is a
casualty treaty that attaches above all policy limits. Thus it may be only
exposed by:
1. extra-contractual-obligations (i.e., bad faith claims)
2. excess-of-policy-limit damages (an obligation on the part of the insurer to
cover losses above an insurance contract‟s
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stated policy limit)
3. catastrophic workers compensation accidents
4. the “clash” of claims arising from one or more loss events involving
multiple coverages or policies. Both higher exposed layers and clash are
almost always priced on a fixed cost basis, with no variable commission or
additional premium provision.

Catastrophe Covers

A catastrophe cover is a per-occurrence treaty used for property exposure. It is
used to protect the net position of the cedant against the accumulation of
claims arising from one or more large events. It is usually stipulated that two
or more insureds must be involved before coverage attaches. The coverage is
typically of the form of a 90% or 95% share of one or more layers (separate
treaties) in excess of the maximum retention within which the cedant can
comfortably absorb a loss, or for which the cedant can afford the reinsurance
prices.

Aggregate Excess, or Stop Loss Covers

For an aggregate excess treaty, also sometimes called a stop loss cover, a loss
is the accumulation of all subject losses during a specified time period, usually
one year. It usually covers all or part of the net retention of the cedant and
protects net results, providing very strong stabilization. Claims arising from
natural catastrophes are often excluded, or there may be a per-occurrence
maximum limit.



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TYPES OF RE-INSURANCE

Quota share

Quota share, or proportional reinsurance, involves one or more reinsurers
taking on a specified percentage share of each policy from an insurance
company. The reinsurance agreement is typically administered on a periodic
basis such as quarterly. At the end of each quarter, the reinsurer(s) will receive
that specified percentage of each dollar of premiums from the insurer and will
in turn pay that percentage of each dollar of losses as claims recoverable to the
insurer. In addition, the reinsurer will normally make an upfront ceding
commission payment to the insurer to compensate it for the costs of writing
and administering the business. This type of reinsurance allows insurers to
write business which they may not have sufficient capital to retain fully. While
premiums and claims are all shared on a pro rata basis, ceding commission
from the reinsurer(s) helps the relief of new business strains. Another, though
less common, form of proportional reinsurance is surplus share. An insurance
company defines a policy limit amount X and each additional amount of X is
considered as a layer.
In the simplest form of arrangement, if the insurance company issues a policy
with X = US$100,000 coverage, all of the premiums and claims generated
from the policy will be retained by the insurer. If a


US$200,000 policy is issued then half of the premiums and claims will be
ceded to the reinsurer (1 additional layer); whereas for a US$800,000 policy
the additional 7 layers of coverage will be ceded to reinsurer(s) implying a
quota share percentage of 87.5%. There is usually a maximum number of
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layers defined in the terms of agreement between the insurer and reinsurer,
and this in turn determines the maximum policy limit that can be offered by
the insurance company to policyholders.

Excess of loss

Excess of loss reinsurance is in essence non-proportional reinsurance, under
which an insurer sets a retention limit of policy coverage, and the reinsurer
will take on any losses in excess of that
specified retention amount. An example of this form of reinsurance is where
the insurer is prepared to accept a loss of HK$1 million for any loss which
may occur and purchases reinsurance of HK$4 million in excess of the
retention limit. If a HK$2.5 million claim occurs the insurer is able to recover
the extra HK1.5 million from the reinsurer. In this case, for any claims
exceeding HK$5 million, the insurer will not be able to fully recover the
claims payable from the reinsurer, hence insurance companies often purchase
a few excess layers of reinsurance. This type of excess of loss reinsurance is
typically known as per risk reinsurance.


Excess of loss reinsurance can also be on a per occurrence, or catastrophe,
level. In catastrophe excess of loss, the insurance policy limits must be less
than the reinsurance retention amount.
An example of this form of reinsurance involves an insurance company
writing a homeowner's contract with policy limit up to HK$1,000,000 and
then purchase catastrophe reinsurance of HK$60,000,000 in excess of
HK$1,000,000. In such circumstances, the insurance company would recover
from reinsurers in the event of multiple losses in one event such as earthquake,
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flood or typhoon. This is more commonly seen in the general insurance
domain.

Retrocession

Sometimes, reinsurance companies themselves also resort to purchasing
reinsurance and this is known as a retrocession. The type of reinsurance is
normally offered by some other reinsurance
companies. The reinsurance company who sells the reinsurance in this case is
known as retrocessionaires whereas the ceding reinsurance company is known
as the retrocedent. Demand for retrocession arises when a reinsurer providing
quota share reinsurance capacity to direct insurers may want to protect its own
exposure to catastrophes by purchasing excess of loss protection.
Alternatively, a reinsurer offering excess of loss reinsurance protection may
look to protect itself against an accumulation of losses in different branches of
business which may all become affected by the same catastrophe.

Financial reinsurance

Financial Reinsurance, also known as Finite Reinsurance or Fin Re, is an
innovative alternative to traditional forms of reinsurance as described above,
and its recent popularity has led to a significant rise in premiums devoted to
this category. Financial reinsurance is a practical risk management tool,
especially useful when the motivations of the ceding insurance company are
focussed not only on managing underwriting risk but also on explicitly
recognising and addressing other financially oriented risks.The use of
financial reinsurance, which represents a combination of risk transfer and risk
financing, could add value to an insurer's risk management by providing
flexibility and liquidity. A major function of financial reinsurance is to
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distribute an extraordinary negative or positive expected underwriting result
by the ceding company in a certain year over a longer time period. In this way,

financial reinsurance stabilises the business result of the year involved. The
opposite approach is to create a highly positive underwriting result for a
particular year by bringing forward future earnings. For instance, the reinsurer
pays a ceding commission equal to the embedded value of a portfolio which is
amortised during the run-off of the business, this is effectively a loan taken
and such embedded value financing is not uncommon in case of life insurance
company acquisitions. Depending on the domestic regulations governing the
respective jurisdiction, insurance companies may be required to obtain
approval from the relevant authority on a case-by-case basis for every
financial reinsurance transaction they are looking to enter into. If there has
been a material change in contract terms during the period of the contract then
the insurer must reapply for approval. A typical application process involves
the direct insurer describing to the authority the reasons for purchasing
financial reinsurance, an analysis of projected cash flows reflecting the
possibleoutcomes of the treaty, and descriptions of the expected impact of the
proposed arrangement on actuarial statutory reserves and surplus. In
particular, underwriting risk and timing risk are important criteria for
supervisory and tax authorities when deciding whether a financial reinsurance
contract is reinsurance, pure loan or investment. Most of the insurance
authorities require there to be a significant underwriting risk and the
possibility of a loss to the reinsurer in order to acknowledge a financial
reinsurance contract as reinsurance.
Underwriting risk – Underwriting risk is defined as the risk that actual claims
within a period of insurance will deviate from expected claims, which equals
the pure risk premium. Deviations may occur in the number and size of claims
as well as in the timing of the claims events within the period of insurance.
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Timing risk – Timing risk results from uncertainty about the time when claims
must be paid out. This is the risk that claims will have to be paid out earlier
than expected.



















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FUNCTIONS OF RE-INSURANCE
Almost all insurance companies have a reinsurance program. The ultimate
goal of that program is to reduce their exposure to loss by passing the
exposure to loss to a reinsurer or a group of reinsurers. Therefore, they are
'transferring some of the risk to the reinsurer or a group of reinsurers
Risk transfer
With reinsurance, the insurer can issue policies with higher limits than it
would otherwise be allowed, therefore being permitted to take on more risk
because some of that risk is now transferred to the reinsurer. Reinsurance has
gone from a relatively unsophisticated business to a highly sophisticated
endeavor. The reason for this is the number of reinsurers that have suffered
significant losses and become financially impaired. From 2000 onward,
reinsurers have become much more reliant on actuarial models and tight
review of the companies they are willing to reinsure. They review their
financials closely, examine the experience of the proposed business to be
reinsured, review the underwriters that will write that business, review their
rates, and much more. Almost all reinsurers now visit the insurance company
and review underwriting and claim files and more.
Arbitrage
The insurance company may be motivated by arbitrage in purchasing
reinsurance coverage at a lower rate than they charge the insured for the
underlying risk, which can be in the area of risk associated with any form of
the asset that is being issued or loaned against. It can be a car, a mortgage, an

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insurance (personal, fire, business, etc.) and the like. In general, the reinsurer
may be able to cover the risk at a lower premium than the insurer because:
 The reinsurer may have some intrinsic cost advantage due to economies
of scale or some other efficiency
 Reinsurers may operate under weaker regulation than their clients. This
enables them to use less capital to cover any risk, and to make less
prudent assumptions when valuing the risk.
 Even if the regulatory standards are the same, the reinsurer may be able
to hold smaller actuarial reserves than the cedant if it thinks the
premiums charged by the cedant are excessively prudent.
 The reinsurer may have a more diverse portfolio of assets and
especially liabilities than the cedant. This may create opportunities for
hedging that the cedant could not exploit alone. Depending on the
regulations imposed on the reinsurer, this may mean they can hold
fewer assets to cover the risk.
 The reinsurer may have a greater risk appetite than the insurer.

Creating a manageable and profitable portfolio of insured risks
By choosing a particular type of reinsurance method, the insurance company
may be able to create a more balanced and homogenous portfolio of insured
risks. This would lend greater predictability to the portfolio results on net basis
(after reinsurance) and would be reflected in income smoothing. While income
smoothing is one of the objectives of reinsurance arrangements, the
mechanism is by way of balancing the portfolio.

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Managing cost of capital for an insurance company
By getting a suitable reinsurance, the insurance company may be able to
substitute "capital needed" as per the requirements of the regulator for
premium written. It could happen that the writing of insurance business
requires x amount of capital with y% of cost of capital and reinsurance cost is
less than x*y%. Thus more unpredictable or less frequent the likelihood of an
insured loss, the more profitable it can be for an insurance company to seek
reinsurance.
Stabilization

Reinsurance can help stabilize the cedant‟s underwriting and financial results
over time and help protect the cedant‟s surplus against shocks from large,
unpredictable losses. Reinsurance is usually written so that the cedant retains
the smaller, predictable claims, but shares the larger, infrequent claims. It
can also be written to provide protection against a larger than predicted
accumulation of claims, either from one catastrophic event or from many.
Thus the underwriting and financial effects of large claims or large
accumulations of claims can be spread out over many years. This decreases
the cedant‟s probability of financial ruin.

Management Advice

Many professional reinsurers have the knowledge and ability to provide an
informal consulting service for their cedants. This service can include advice
and assistance on underwriting, marketing, pricing, loss prevention, claims
handling, reserving, actuarial, investment, and personnel issues. Enlightened
self-interest induces the reinsurer to critically review the cedant‟s operation,
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and thus be in a position to offer advice. The reinsurer typically has more
experience in the pricing of high limits policies and in the handling of large
and rare claims. Also, through contact with many similar cedant companies,
the reinsurer may be able to provide an overview of general issues and trends.
Reinsurance intermediaries may also provide some of these same services for
their clients.



















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PARTICIPANTS OF THE REINSURANCE INDUSTRY

As discussed above the main participants in the reinsurance industry are the
professional reinsurers, the retrocessionaires and the insurance companies.
Reinsurance brokers also play a fundamental role in the placement of
reinsurance programs, in particularly when dealing with special programs.
Captives, Pools and Offshore Reinsurers complete the reinsurance industry.

Reinsurance brokers
For complex reinsurance programs or when the reinsurance capacity is scarce,
insurance companies utilize the services of reinsurance brokers. Reinsurance
brokers are companies or professional individuals that are licensed and
supervised dedicated to provide professional advice to insurance companies on
the placement of their reinsurance programs. Reinsurance brokers are paid
through reinsurance commissions that are proportional to the placed
reinsurance premium. Reinsurance brokers also offer administrative services
and product development. In most jurisdictions reinsurance brokers are
required to hold an error and omissions liability policy for the protection of the
insurance companies. In recent years the press has reported on major financial
scandals related to the non transparency of the reinsurance commissions.
Professional reinsurance brokers have reacted offering detailed disclosure
of their commissions. As an example we have attached in Annex 3 a
disclosure commitment issued by Guy Carpenter.

Captives
Large industrial conglomerates that are interested in keeping their risks within
the group usually operate with a captive. A captive is a legal entity, usually a

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stock insurance company owned by the group that accepts and retains risks
emanating only from the same industrial group.

Pools
Insurance companies may want to insure an unusual or new type of risk but
fear they will not have enough business of that type to benefit from the law of
large numbers. In an insurance pool, several companies agree to share all their
risks of this type. This will provide a large enough sample to give 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 how
much business each company puts into the pool or it could be a formula
relating to how much risk each company would accept on any one case.
Pooling was in fact the way insurance of modern passenger airplanes began.
The World Bank has been promoting pools to cover catastrophic risks like the
Turkish Catastrophic Insurance Pool (TCIP) and the Caribbean Catastrophic
Risk Insurance Facility (CCRIF).

Offshore reinsurance
Offshore reinsurance companies are reinsurers which operate in special
geographic zones, often with less demanding regulatory and favorable tax
environments. 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, London and New York. The purpose of
offshore reinsurance has been to optimize the use of capital and thus create
competitive advantage. However, special scrutiny is required when offshore
reinsurance is involved. The lack of a strict regulation or the low capital
requirements in some offshore centers can lead to failing reinsurers in case of

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mayor claims. Also money laundering activity has used this type of
reinsurance in the past.






















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REINSURANCE IN INDIA

Until GIC was notified as a National Reinsurer, it was operating as a holding /
parent company of the 4 public sector companies, controlling their reinsurance
programmes. GIC would receive 20% obligatory cession of each policy
written in India. Since deregulation, GIC has assumed the role of the markets
only professional re-insurer. In order to focus on reinsurance, both in India
and through its overseas offices and trading partners, GIC has divested itself
of any direct business that it wrote prior to November 2000, with the
temporary exception of crop insurance. It currently manages Hull Pool on
behalf of the market, which receives a cession from writing companies and
after a pool protection the business is retro-ceded back to the member
companies. GIC also manages the „Terrorism Pool‟.

REINSURANCE REGULATION
The placement of reinsurance business from be Indian market is now governed
by Reinsurance Regulations formed by the IRDA. The objective of the
regulation is to maximize the retention of premiums within the country and to
ensure that IRDA has issued the following instructions:
Placement of 20% of each policy with National Re subject to a monetary limit
for each risk for some classes
 Inter-company cession between four public sector companies.
 Indian Pool for Hull managed by GIC.
 The treaty and balance risk after automatic capacity are to be first
offered to other insurance companies in the market before offering it to
international re-insurers.
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 Each company is free to arrange its own reinsurance program, which
has to be submitted to the IRDA 45 days before commencement.

 Not more than 10% of reinsurance premium to be placed with one re-
insurer.
 No re-insurer will have a rating of less than „BBB‟ from Standard and
Poor‟s or an equivalent rating from AM Best.


General Insurance Corporation of India
GIC as a national re-insurer is providing useful capacity to all insurance
companies.

BREAK-UP OF NET PREMIUM INCOME & CLAIMS

Division Premium Claims
Indian Reinsurance 21,996.3 19,898,2
Foreign Inward 1591.4 1498.9
Aviation 244.1 186.1
Crop 2,880.6 1367.6
Total 26,712.3 2,950.8





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In November 2000, GIC was renotified as India's Reinsurer, but its
supervisory role over its subsidiaries was ended. This was followed by the
General Insurance Business (Nationalisation) Amendment Act of 2002.
Coming into effect from 21 March 2003, this amendment ended GIC's role as
a holding company of its subsidiaries. The ownership of the subsidiaries was
transferred to the Government of India, which in turn divested its stake in the
companies through listings on Indian stock exchanges.
As a result of these reforms, GIC became the sole Re-Insurer in India, and is
now called GIC Re. Indian insurance companies are required by law to cede
10% of every policy value to GIC Re, subject to some limitations and
exceptions. GIC Re has diversified its operations and is now emerging as an
important Re-Insurer in SAARC countries, Southeast Asia, Middle East and
Africa. GIC Re has also expanded its international operations through
branches in London and Moscow.




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GIC as International Re-insurer

Backed by experience of more than three decades in handling the reinsurance
requirement of the Indian market, GIC has now placed itself as an effective
Reinsurance Partner. To Afro-Asian countries and also other markets. If offers
a capacity of US$ 50 million on facultative risks and US$ 10 million for treaty
business.
GIC reinsurance as part its strategy to expand its operation and to make its
present felt globally has recently upgraded its representative offices in London
and Dubai. Incidentally, the sole national reinsurer of india also has another
representative office in Moscow.
GIC has developed necessary skills and has qualified manpower to take care
of growing needs of the expanding Indian industry.
3rd Asian Reinsurers‟ Summit was organised by GIC of India, in February
2003at Mumbai. Eleven reinsurers from Japan, China, Hong Kong, Singapore,
Taiwan, Korea, Indonesia, Malaysia, Singapore, Philippines and India
participated in the summit with the aim of reinforcing of strengths for mutual
development, undertaking joint research, data sharing & information
management and furthering business co-operation.








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TOP 10 GLOBAL REINSURANCE COMPANIES















The goal of the reinsurance policy is to transfer the risk of the insurer to the
reinsurer. Reinsurance companies basically insure consumer insurance
companies who supply coverage for various types of contracts. Most insurance
companies have a reinsurance program in place in order to make them more
financially secure. Under a reinsurance contract, the reinsurer agrees to pay a
portion of the insurer‟s losses in return for the premium paid to them by the
insurer. Insurers with a reinsurance program in effect are capable of issuing
policies with higher limits meaning they can shoulder more risk since a
Rank Company Net Premiums
($ billions)
1 Munich Re 24,218
2 Swiss Re 23,202
3 Berkshire Hathaway Re 11,577
4 Hannover Re 8,907
5 Lloyd's of London 7,950
6 SCOR 6,948
7 Everest Re Group 3,875
8 PartnerRe 3,689
9 Transatlantic Holdings 3,633
10 ACE Tempest Reinsurance 3,405
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portion of that risk is shifted to the reinsurer. Due to record losses suffered
during recent financial crisis, the top reinsurers fluctuate in their ranks, among
them are Swiss Re, Munich Re, and Hannover Re. While reinsurance aids in
making an insurance company‟s bottom line more foreseeable by lowering the
amount of capital required to supply compensation to policyholders, natural
catastrophes are unpredictable and are something that reinsurer‟s have to be
prepared for, particularly events like earthquakes that can occur any time of
the year.
Reinsurance policies fall under the proportional and the non-proportional type.
Further proportional reinsurance can be divided in to quota share and surplus
reinsurance. Under proportional reinsurance, one or more reinsurers take a
percentage share of every policy written by an insurer. What it means is that
the reinsurer will receive a percentage on the dollar for premiums paid to the
insurer, however they are required to pay that same percentage to compensate
losses. Premiums and losses are shared on a pro rata basis under a quota share
treaty. A surplus share treaty is also seen as a variable quota share contract, in
this type of policy a retention limit is set for each policy as a specific dollar
amount, the reinsurer pays anything above that amount up to a maximum
limit. In the event of a loss, the insurer and the reinsurer would compensate
based on the same proportion as that policy‟s provided coverage.
Only if the losses suffered by an insurer exceed a particular amount, then will
the non-proportional reinsurance respond. Among the types of non-
proportional insurance coverage are excess of loss and stop loss. Excess of
loss reinsurance covers the insurer against all or a part of the loss that exceeds
the specified loss retention. Stop loss covers the insurer for the amount the
losses they sustain surpass an agreed amount.
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CHALLENGES FOR REINSURANCE MARKET
Prior to nationalization in 1973, the reinsurance market in India had a much
diluted presence in the industry. The foreign companies operating in India
were managing their risk portfolio with their parent companies overseas. To
safeguard the identified and limited risk of insurance companies, local
companies created India Insurance Pool. The developments after
nationalizations insurance industry created a new body with the merger of
India Reinsurance and Indian Guarantee for its reinsurance business to support
the technology and engineering mega projects. Some of the major issues in
accounting have been undertaken considering there cent developments in the
business. The return from foreign companies are to be incorporated when
received up to 31stmarch and returns from Indian companies and state
insurance funds received as of different dates are accepted up to the date of
finalization of accounts. Arising out of the occurrence of disastrous like
terrorist attack on world trade center etc. which brought about unprecedented
loss of life and property and thereby unbearable liability and operational crisis
onto the reinsurance industry world over. There is a wide difference between
the rates required by the international reinsurers and those charged by the
domestic insurers leading to the price affordability as an issue. Where there
are tarrifs, like a case of India, the customers cushioned from the rate of
increase in the international market. Such impositions are required to be self –
absorbed. The Indian market is in absence of the competitive environment of
the international reinsurers at the local level, and has depended mainly on the
domestic market understanding and basing probability of business ceded
rather than on underwriting and risk information criteria. A regular interaction
for regional co-operation has to be developed to set up a framework of the
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areas of co-operation and the mechanism, with this India has to compete with
the global reinsurance giants. However, the tightening of reinsurance premium
in India has been attributed to the low volumes. As market become global,
country regulators face challenges in policy formulation for creating a market
that develops and keeps confidence of the industry and for keeping
international trade regulation intact.

















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RESEARCH/PUBLICATIONS

Key players in the reinsurance field produce and release periodic research
reports, many of which are available on subscription basis, on specialised
reinsurance related topics including:

 Dread disease survey
 Group life market survey
 Long term and managed care
 Medical advancement and health insurance
 Casualty reports
 Underwriting system
 Worker‟s compensation
 Occupational disease
 Enterprise risk and captial management
 Genetics engineering
 Terrorism
 Climate change and natural disasters
and many others.








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REINSURANCE SUPERVISIONS

The International Association of Insurance Supervisors (IAIS), established in
1994, provides the highest level of supervisory guideline on insurance issues
including the practice of reinsurance. IAIS represents insurance regulators and
supervisors of some 180 jurisdictions. Its members in Asia include the
following key insurance authorities in the respective region:
 China Insurance Regulatory Commission (CIRC), China
 Office of the Commissioner of Insurance (OCI), Hong Kong
 Monetary Authority of Macao (AMCM), Macau
 Insurance Bureau of Financial Supervisory Commission (IB), Taiwan
 Monetary Authority of Singapore (MAS), Singapore
 Bank Negara Malaysia (BNM), Malaysia
 Financial Services Agency (FSA), Japan
 Financial Supervisory Service (FSS), Korea
 Insurance Regulatory and Development Authority (IRDA), India
 Insurance Board of Sri Lanka (IBSL), Sri Lanka

IAIS has issued a number of principle, standards and guidelines for its
insurance supervisory members to use as best practices to work towards. In
particular, the Reinsurance and other forms of Risk Transfer Subcommittee
has developed reinsurance guidelines both from the perspective of evaluating
the reinsurance cover of primary insurers and of supervising reinsurers.




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CONCLUSION

Reinsurance means insuring again. It is transfer of insurance risk from
one insurer to another. Under reinsurance the original insurer who has insured
a risk, insures a part of that risk with another insurer. Reinsurance premium is
an income to there insurer and an expense to the insurer. Reinsurance is a
good method to diversify and distribute risks of an insurer. Reinsurance even
provide technical assistance and rating assistance to the original insurers.
Reinsurance is also a contract of indemnity. The object of underwriting is to
make a reasonable profit, it is equally essential that the business ceded to
reinsurers should also give them a margin. For profit, therefore, the overall
quality of business accepted by direct insurers should be good.
The complexity of the reinsurance business has been treated in numerous
publications. Basically every professional reinsurer offers excellent learning
material that go from basics into complex topics. Here we have aimed to pass
enough information to the reader to make her/him familiar with the basic
concepts of reinsurance in a compressed manner. At the same time we hope
that the course will allow and encourage the reader to reach out for further
literature to satisfy the individual needs of knowledge in the matter.








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WEBILIOGRAPHY

 www.actuaries.org.hk
 www.casact.org
 www.wikipedia.org





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