CHAPTER 1

INTRODUCTION TO REINSURANCE

INTRODUCTION
The term ‘Reinsurance, also termed as insurance of insurance’.
Means that an insurer who has assumed a large risk may arrange with
another insurer to insure a proportion of the insured risk. In other words, in
the event of loss, if it would be beyond the capacity of the insurer than this
reinsurance process is restored to. In reinsurance, therefore, one insurer
insures the risk which has been undertaken by another insurer. The original
insurer who transfers a part of the insurance contract is called the
reinsured and the second insurer is called the reinsurer. Of course the
reinsurance has to pay reinsurance premium for risk shifted. For example, a
man wishing to insure his premium for 10 lakhs goes to an insurance
company, which will accept the risk if it is satisfied as to the condition of
the property. But if it its own limit is probably Rs 5 lakhs, it will arrange with
another company to reinsure or to take up so much of the risk as exceeds
its limits, i.e. Rs 5 lakhs, so that if the house is burnt down the original
insurer would pay the owner Rs 10 lakhs. But they would be recouped 5
lakhs, by the reinsurance offices.
To be effective, the reinsurance policy must be formulated after
carefully considering all aspects of the situation to which it is to be applied.
DEFINITION
Reinsurance is a transaction in which one insurer agrees, for a
premium, to indemnify another insurer against all are part of the loss that
insurer may sustain under its policy or policy or policies of insurance. The
company purchasing reinsurance is known as the ceding insurer: the
company selling reinsurance is known as the assuming insurer, or, more
simply, the reinsurer. Reinsurer can also be described as the “insurance of
insurance companies”
Reinsurance provides reimbursement to the ceding insurer for lasses
covered by the reinsurance agreement. It enhances the fundamental
objectives of insurance to spread the risk so that no single entity finds itself
saddled with a final burden beyond its ability to pay. Reinsurance can be
acquired directly from a reinsurance intermediary.

OBJECTIVES OF REINSURANCE
Insurer purchases reinsurance for essentially four reasons:
1)To limit liabilities on specific risks
2)To stabilize loss expanses
3)To protect against catastrophes; and
4)To increase capacity.
Different types of reinsurance contract are available in the market
commensurate with the ceding company’s goals.

1. Limiting liability:
 By providing a mechanism in which companies limit loss exposure to
levels commensurate with net asset, reinsurance companies allows
insurance companies to offer coverage limits considerably higher then
they could otherwise provide. This function of reinsurance is crucial
because they allow all companies, large and small, to offer coverage
limits to meet their policyholders’ needs. In this manner, reinsurance
provides an avenue for small-to-medium size companies to compete
with industry giants. In calculating an appropriate level of reinsurance, a
company takes in to account the amount of its available surplus and
determines its retention based on the amt of loss it cam absorb
financially. Surplus, sometime referred to as policyholders surplus, in the
amount by which the asset of an insurance exceeds its liabilities
A company’s retention may range from a few lakhs rupees o
thousand of crores. The reinsurer indemnifies the loss exposure above
the retention, up to the policy limits of the reinsurance contract.
Reinsurance helps to stabilize loss experience on individual risks, as well
as an accumulated loss under many policies occurring during a specified
period.

2. Stabilization:
Insurance often seeks to reduce the wide swing in profit and loss
margins inherent to the insurance business. These fluctuations result, in
part, from the unique nature of insurance, which involves pricing a
product whose actual cost will not be known until sometime in the
 future. Though reinsurance, insurance can reduce these fluctuations in
loss experience, thus stabilizing the company overall operating result.

3. Catastrophe protection:
Reinsurance provides protection against catastrophe loss in much the
same way it helps stabilize an insurer’s loss experience. Insurer uses
reinsurance to protect against catastrophes in two ways. The first is to
protect against catastrophic loss resulting from a single event, such as
the total fire loss of large manufacturing plant. However, an insurer also
seeks reinsurance to protect against the aggregation of many smaller
claims, which could result from a single event affecting many
policyholders simultaneously, such as an earthquake as a major
hurricane. Financially, the insurer is able to pay losses individually, but
when the losses are aggregated, the total may be more than the insurer
wishes to retain.
Though the careful use of reinsurance, the descriptive effect
catastrophes have on an insurer’s loss experience can be reduced
dramatically. The decision a company makes when purchasing
catastrophe coverage are unique to each individual company and vary
widely depending on the type and size of the company purchasing the
reinsurance and the risk to be reinsured.

4. Increased capacity:
Capacity measures the rupee amount of risk an insurer can assume
based on its surplus and the nature of the business written. When an
 insurance company issues a policy, the expenses associated with issuing
that policy-taxes, agents commissions, administrative expenses-are
changed immediately against the company’s income, resulting in a
decrease in surplus, while the premium collected must be set aside in an
unearned premium reserved to be recognized as income over a period
of time. While this accounting procedure allows for strong solvency
regulation, it ultimately leads to decreased capacity because the more
business an insurance company writes, the more expenses that must be
paid from surplus, thus reducing the company’s ability to write
additional business.

PURPOSES OF REINSURANCE
"Reinsurance achieves to the utmost extent the technical ideal of
every branch of insurance, which is actually to effect
(1) The atomization,
(2) The distribution and
(3) The homogeneity of risk. Reinsurance is becoming more and
more the essential element of each of the related insurance
branches. It spreads risks so widely and effectively that even
the largest risk can be accommodated without unduly
burdening any individual."

ORIGIN AND DEVELOPMENT OF REINSURANCE

In the years 1871 to 1873, no less than twelve independent
reinsurance institutions were founded in Germany, of which very few
survive today. The pressure of competition led to unwholesome practices,
and soon many of these newly formed companies found themselves in dire
straits. In branches of insurance, other than fire insurance, we find no
definite tendency in the '70's toward the establishment of separate
reinsurance facilities in Germany. Ernst Albert Masius, in his "Rundschau" in
1846, deplored the lack of reinsurance facilities in hail insurance. Even at
the present time, this branch of the business lacks adequate reinsurance
service.

Fundamentals
In the most widely accepted sense, reinsurance is understood to be
that practice where an original insurer, for a definite premium, contracts
with another insurer (or insurers) to carry a part or the whole of a risk
assumed by the original insurer. By insurers we mean all persons,
partnerships, corporations, associations, and societies, associations
operating as Lloyd's, inter-insurers or individual underwriters authorized by
law to make contracts of insurance. We may define insurance as an
agreement by which one party, for a consideration, promises to pay money
or its equivalent, or to do an act valuable to the insured, upon the
happening of a certain event or upon the destruction, loss or injury of
something in which the other party has an interest. The insurance business
is the business of making and administering contracts of insurance.
Insurance contracts are of two types those which engage merely to pay a
sum of money on the happening of an event, or merely to begin a series of
payments on or after the happening of a certain event, are contracts of
investment. Contracts of insurance which engage to pay money or its
equivalent, or the doing of acts valuable to the insured, upon destruction,
loss or injury involving things, are contracts of indemnity.
And so, reinsurance may be second insurance of
(a) Contracts of investment and/or
(b) Contracts of indemnity.
There may exist, therefore, two types of insurance business,
depending upon which of these two organic contracts the business engages
to administer.

Risks carried by the insurer

The need for reinsurance arises out of the fact that a first or primitive
insurer bears two distinctly different major risks:
(1) The risk that the events insured against will happen among a
number of homogeneous risks;
(2) The risk that certain events insured against will happen among a
heterogeneous group of risk to one or several insured entitled by contract
to an exceptional payment in money or its equivalent, or entitled to
exceptional, costly service.
Case 1:
An insurer contracts to pay $10,000 to the beneficiary of each of 806
persons insured by him at 21 years of age, in event of the death of the
insured during the contract year. This group is homogeneous in respect to
amount insured and class of risk. He charges a net premium of 1.22 per
cent., or $98,332 to meet the expected claims in that year of age.
Case 2:
Assume, however, that the insurer has accepted, as a second
instance, a heterogeneous group composed of 805 risks at $10,000 each
and one risk at $100,000. This produces $99,430 in premiums.
If in Case 1, only 8 deaths actually occur with a uniform coverage of
$I0, 000 each, the premiums are $98,332 and the claims $80,000, leaving
an underwriting profit of $18,332. If in Case 2, the $100,000 policyholder
and seven $10,000 policyholders die, the premiums are $99,430, and the
claims $170,000, or an underwriting loss of $70,570. We had in the first
case the carrier of a group of primary, homogeneous risks, with only a slight
hazard to him that the number of actual claims would exceed the expected.
Against this slight hazard the insurer is supposed to hold paid-in capital and
surplus (or "guarantee capital" in case he was a mutual underwriter).
Slightly exceptional losses above the expected are to be made up by slightly
favorable underwriting profits in the long run of the business. In the second
case, the insurer is not only carrying a group of primary, homogeneous risks
but also the secondary risk of selective loss through the death of the
$100,000 policyholder. The quality of the second group of risks is
heterogeneous with respect to the carrier's interests. Insurers have
historically met the second risk through the practice of two varieties of
coinsurance:
(1) External or true coinsurance or
 (2) Internal coinsurance or reinsurance.

HISTORY OF REINSURANCE
Reinsurance has a rather illustrious history eating back 10 the
fourteenth century. Even though there is no authentic information of the
first reinsurance contract, it is widely recognized that Lombardians beggar
Develop the concept of reinsurance in circa 1200 AD and from whence the
concept of reinsurance took ground.

1200-1600 AD
The emergence of the reinsurance concept and its slow pace of
expansion was one of the remarkable features of this time. Marine
business was one of the earliest fields that recognized the need of
reinsurance to protect its business from the dangers and rakes of marine
transport.

1600-1850AD
Though marine insurance nourished during this period in Europe, it
suffered a set back in UK, where it went largely unrecognized except when
the insurer became insolvent or went bankrupt or died. This ban lasted till
1864 and as such there was no recorded reinsurance business in England.
After the great fire of London in 1666, an interest to insure against fire suit
faced and regulators soon made modifications to reduce their losses. In
the year 1776 royal concession was granted to the Royal Chartered Fire
insurance Company of Copenhagen to undertake fire insurance one of the
earliest recorded fire reinsurance transactions place in 1813 when the
Eagle hire Insurance Company of New York assumed all of the outstanding
rim the Union Insurance Company, but it really executed, as the insurer
did not avail this facility and after this the earliest recorded fire insurance
then which was executed dates back to the year I821 between the
National Assurance Company, Paris, France and the assuming reinsurer
the United Proprietors of Belgium.
Validation of the reinsurance contract by the Supreme Court of New
York boosted a number o\ reinsurance contracts contracted. In l883 the
Supreme Court gave its consent in the case between New York Browery
Insurance Company, the cedent, and the New York Fire Insurance
Company, the reinsurer. This case acted as a catalyst for the emergence of
reinsurance companies and thus began a new era in the reinsurance
sector and in \S4A the current system of life reinsurance took seed. The
first life treaty as such dates back to 1858.

From 1850 onwards

By he mid nineteenth century there was a boom in the European
reinsurance business and Germany became the hotbed for reinsurance
activity. Many German reinsurance companies undertook business of;
large scale and new reinsurance companies flourished. But the after-
effects of the two world wars spilled over to the reinsurance markets
leading to the emergence of London as a strong player in the reinsurance
sector. One of the pioneers of the insurance industry, Lloyd's of London,
began its operations in the year 1688. It initially ventured into life
insurance only and because of the ban imposed on marine insurance they
could not make much headway. Once the ban was lifted it opened its
business in all the spheres of insurance activity and with the introduction
of excess of loss reinsurance it aggressively jumped into the fray and
became one of the strongest players in the industry.

THE FIRST INDEPENDENT REINSURANCE COMPANY

In 1846, the first independent reinsurance company was founded in
Germany, the Cologne Reinsurance Company. This was the idea of
Mevissen. He held that an independent reinsurance company would be no
competitor of the direct-writing companies and that it was certain to be
welcomed by and to receive a good volume of business from those
companies. Mevissen's idea of 1846 did not mature, however. For various
reasons the company did not begin business until 1852, and then only with
the assistance of considerable French capital. This marked the
establishment of reinsurance as a specific, independent branch of the
business. Out of small beginnings, this company began to prosper and its
example began to attract other enterprising persons. During the first three
years of its business life the Cologne Reinsurance Company extended its
operations in Germany, Austria, Switzerland, Belgium, Holland and France,
and then tried to arrange treaty contracts with English companies. It seems
that domestic English reinsurance business, at that time, was quite
unprofitable to the reinsures and the Manager of the Cologne was obliged
to keep out Of the English market. On June 24, 1853, a fire treaty was
concluded between the Aachen and Munchener Fire Insurance Company
and its subsidiary, the Aachener Reinsurance Company. This was an early
example of a true "first surplus" treaty under which the reinsurer was
allotted one-tenth of every surplus risk, with certain modifications in
respect to various classes of risk enumerated in the contract. It is
interesting to note that the Aachen - Munchener Company had an earlier
arrangement with L' Urbaine, Paris.

FIRST RECORDED REINSURANCE CONTRACT

The first reinsurance contract on record relates to the year 1370,
when an underwriter named Guilano Grillo contracted with Goffredo
Benaira and Martino Saceo to reinsure a ship on part of the voyage from
Genoa to the harbor of Bruges.
As early as the twelfth century, marine insurance began to be
transacted through the so-called "Chambers or Exchanges of Insurance,"
which had for their object, first, the promotion of the marine insurance
business on a solid basis and, second, the settling of disputes arising among
merchants and others concerned in bottomry and respondentia contracts.
In later years, these Chambers or Exchanges of Insurance became corporate
bodiesand instead of remaining confined to the original function of
regulating and registering insurance made by others, actually undertook an
insurance business themselves. With the establishment and functioning of
Lloyd's in 1710, there was a marked decline in the transaction of insurance
business through these Chambers or Exchanges. There is a suggestion of
reinsurance practice in the "Antwerp Customs" of 1609. Some mention of
reinsurance practice is to be found also in the "Guidon de la Mer," a code of
sea laws in use in France from a very early date. These marine regulations
were consolidated and published at Bordeaux in 1647 and at Rouen in
1671. The author of the consolidations was said to have been Cleirac. With
the shift of centers of commerce from the south, southwest and west of
Europe to the north, England's foreign trade grew. Marine insurance
followed in its wake. Some underwriters found they could affect
reinsurance with others. Underwriters were accustomed to assign parts of
risks to others at lower rates, and these reinsures had hopes of finding
other persons who would take parts of these risks at still lower rates. This
traffic in premium differences was so greatly abused that in 1746 it was
forbidden. (19 Geo. II, c 37, Section 4). Under this statute, reinsurance was
permitted only if the party whose risk was reinsured was insolvent,
bankrupt or in debt and if the transaction was expressed in the policy to be
a reinsurance. The statute was more or less of a dead letter and was
repealed by 27 and 28 Vict.c 56, Section I on July 25, 1864

CHAPTER 2
 PRINCIPLES OF REINSURANCE

WHAT IS REINSURANCE?

Insurers take out their own insurance - this is called reinsurance.

When you look at the risks that insurers take on, it is not surprising
that they themselves might want to have insurance. When insurers insure a
risk again, it is called reinsurance.

Reinsurance is an extension of the concept of insurance, in that it

passes on part of the risk for which the original insurer is liable. Reinsurance
contracts are slightly more specialists than insurance contracts but for most
part they work in exactly the same way – it is just that the ‘insured’ is
another insurer, known as the ‘reinsured’ (See the Basics of Insurance for an
explanation of how insurance contracts work).

A contract of reinsurance is between the insurer and reinsurer only

and legally there is no direct link between the original insured and any
reinsurer. The original insurer is still the one who must pay any claim from
the insured – the insurer must then make its own separate claim against the
reinsurer.

Reinsurance is important for a number of reasons, including:

1) To protect against large claims. For example, in the case of a fire in a

large oil refinery or a large city hit by an earthquake, insurers will
spread the risk by reinsuring part of what they have agreed to insure
 with other reinsures so that the loss is not so severe for any one
insurer.
2) To avoid undue fluctuations in underwriting results. Insurers want to
ensure a balanced set of results each year without ‘peaks and troughs’.
They can therefore get reinsurance which will cover them against any
unusually large losses. This keeps a cap on the claims the insurer is
exposed to having to pay it.
3) To obtain an international spread of risk. This is important when a
country is vulnerable to natural disasters and an insurer is heavily
committed in that country. Insurance may be reinsured to spread the
risk outside the country.
4) To increase the capacity of the direct insurer. Sometimes insurers
want to insure a risk but are not able to do so their own. By using
reinsurance, the insurer is able to accept the risk by insuring the whole
risk and then reinsuring the part it cannot keep for itself to other
reinsures.

Like the direct insurance market, reinsurance usually involves

specialist brokers who have expert knowledge of the market and access to
reinsurance underwriters on behalf of their clients.

REINSURANCE IN INDIA
Reinsurance in India dated back to the 1960’s. After independence
there was rapid development of the insurance business. With various
sectors growing in the post independence era the need for reinsuring the
development work was also felt. Since reinsurance industry has negligible
presence in India after independence, the domestic requirement of
reinsurance was netted from mostly was foreign markets mainly British and
continental. For undertaking reinsurance by Indian entities meant drain of
precious foreign exchanged earned by the country. To prevent the outflow
of foreign exchange, in year 1956 Indian Reinsurance Corporation, a
professional reinsurance company was formed by some general insurance
companies. This company started receiving the voluntary quote share
cession from member companies.

Selection of Customers:
In the reinsurance industry business is acquired in two ways. One is
when a customer directly approaches the reinsurance for ceding their
claims and the other method is when the reinsurer gets their business from
the reinsurance broker appointed by he customer. In certain parts of the
world, reinsurance accepts business routed only through a reinsurance
broker. The important thing to be noted here is that it is not the quantum
of business generated by the reinsurer but the customer for whom they are
undertaking the business. Some go that extra mile by going to their
business and accordingly tailor their policies to fit their needs and business.
The more the reinsurance knows about the business nature of their clients,
they can serve them.

The Quality of Service:

The quality of services offered by the reinsurer to their customers
matter a lot in the reinsurance industry. Most customers go for reinsurance
for extra benefits like expertise, experience, and the advisory role of the
insurer. If these services cannot meet customers, expectations, then
reinsurance can accepts a rundown of their businesses which the customer
shifting base to the other players providing better services. It is to be
remembered that the reinsurance industry is a highly competitive market
and hence the reinsurance needs to carefully grade its customer.

The Skill Set:

The skill set of the reinsurance is the most important aspect of a
contract to the customer. It matters a lot to a reinsurance too because a
skill set represent the basic amour which it can showcase to its costume.
The skill set generally refers to the underwriting, financial, actuarial, claims
management and last but not the least management skills which it can
serve its clients. Hence the reinsurance gives due consideration to its
available skill set and sees how best it can serve the client with such skills.
Thus reinsurer who takes risk in the hope of gaining the premium volume
ceded to him, as part of a contract, would like to reap the benefits over a
period of time and hope for a long-term relation with its customers.

WHY REINSURANCE?

Risk managers and other buyers of insurance rarely think about how
reinsurance affects their company or the insurance they purchase for their
company. Insurance buyers mainly focus on the direct insurers – the
primary, excess, and umbrella carriers that provide the coverage. Smart
insurance buyers look for A--rated or better insurance companies with long
histories. Other buyers rely on their brokers to put together the best quality
insurance program with the best insurance security available. After all, the
insured must rely on the insurance policy issued by the direct insurer.

But what stands behind the A--rated carrier or the high quality
program for a complex risk? The answer is “Reinsurance”. Commercial
insurance cannot exist without reinsurance. The quality of the reinsurance
security purchased by the direct insurer is what helps to insure that loss will
be paid. Quality reinsurer provides special expertise to their direct insurer
client and assists the direct insurer in providing the best possible protection
and risk management for the direct insurer’s own client. Some large
professionals reinsure help small insurance companies expand into new
areas and provide them with technical, actuarial, and claims expertise and
training

FUNCTIONS OF REINSURANCE

There are many reasons why an insurance company would choose to

reinsure as part of its responsibility to manage a portfolio of risks for the
benefit of its policyholders and investors :

1. Risk transfer

The main use of any insurer that might practice reinsurance is to allow
the company to assume greater individual risks than its size would otherwise
allow, and to protect a company against losses. Reinsurance allows an
insurance company to offer higher limits of protection to a policyholder than
its own assets would allow. For example, if the principal insurance company
can write only $10 million in limits on any given policy, it can reinsure (or
cede) the amount of the limits in excess of $10 million.
 Reinsurance’s highly refined uses in recent years include applications
where reinsurance was used as part of a carefully planned hedge strategy.

2. Income smoothing

Reinsurance can help to make an insurance company’s results more

predictable by absorbing larger losses and reducing the amount of capital
needed to provide coverage.

3. Surplus relief

An insurance company's writings are limited by its balance sheet (this

test is known as the solvency margin). When that limit is reached, an
insurer can stop writing new business, increase its capital or buy "surplus
relief" reinsurance. The latter is usually done on a quota share basis and is
an efficient way of not having to turn clients away or raise additional
capital.

4. Arbitrage

The insurance company may be motivated by arbitrage in purchasing

reinsurance coverage at a lower rate than what they charge the insured for
the underlying risk

TYPES OF REINSURANCE:
 There are two kinds of reinsurances, treaty reinsurance and
facultative reinsurance.

1. Treaty reinsurance:

This kind of reinsurance requires that the reinsurer will assume part
or all of a ceding company’s responsibility for certain sections or classes
of business in accordance with the terms of the policy. It is an obligatory
contract as the ceding company has to cede the business and the
reinsurer is obliged to assume the business as per the treaty. It is the
preferred type of reinsurance when groups of homogenous risks are
considered.

2. Facultative reinsurance:

This kind of reinsurance is used while considering a particular

underlying risk of an individual contract. It is the reinsurance of all or
part of a single policy after the terms and conditions have been
negotiated. It reduces the ceding company’s exposure to risk from an
individual policy. It is non- obligatory.

In another way, reinsurance is classified as proportional and non-

proportional reinsurances.

A. PROPORTIONAL REINSURANCES:

The two companies share the premium as well as risk. The

reinsurer usually pays a ceding commission.
 a) Pro-rata reinsurance:

It is a classification based on the way the two companies share

the risk. The cedent and the reinsurer share a pre decided
percentage of the premium and losses. It is used widely as it
provides surplus protection. There are two types of pro-rata
reinsurance, quota share and surplus share.

b) Quota share pro-rata reinsurance:

The primary insurer cedes a fixed percentage of

premiums and loses for every risk accepted.

c) Surplus share pro-rata reinsurance:

It is different in that not every risk is ceded but only those that exceed
certain predetermined amounts.

B. NON-PROPORTIONAL REINSURANCE:

As the name suggests it is not proportional and the reinsurer

only responds if the loss suffered by the insurer exceeds a certain
amount.

a) Excess of loss:
 It covers a single risk or a certain type of business.
Catastrophe reinsurance is a type of excess of loss reinsurance.
It provides the captive with a great deal of flexibility.

b) Stop loss reinsurance:

It covers the whole account and is also known as

excessive loss ratio reinsurance.

These are the various types of reinsurances. There are firms that
offer their services as well as their products to help new business start up
flourish and succeed.

DOUBLE INSURANCE

The subject matter of the double insurance implies that it is insured

with two or more insurers and the total sum insured exceeds the actual
value of the subject matter. It is called as Double insurance. In other words,
the subject mater of double insurance must be insured with different
insurers. If the actual value of the subject matter is more than the total sum
insured, it is not treated as double insurance. In the case of life insurance,
double insurance can be shone profitable because the insured can get full
policy money under all policies. For example if a premises worth of Rs.
2,00,000 is insured with ‘y’ for Rs. 1,40,000 and Rs. 1,50,000 it is treated as
double insurance because the total value of the subject matter i.e. total of
all the policies exceeds the actual value of the premises. Suppose if it is
insured with X and Y for Rs 70,000 each, there is no double insurance.
OVER INSURANCE

When the amount for which a subject matter is insured is more than
its actual value it is called as over insurance. For over insurance, the only
criterion is the amount of insurance. It can even be with one insurer alone.

Lords Mansfield, while dealing with these rules of contribution in

case of over-insurance lay down as follows:

In the case of over insurance, the different sets of policies are

considered as making but one insurance, and are good to the extent of the
value of the effects put in risk: the assured can cover an the different
policies, and recover from those, he so sued, to the full extent of his loss,
supposing it to be covered by the policies on which he effects to sue,
leaving the underwriter on the policy to recover a ratable sum by way of
contribution from the underwriters of the other policy.

For Example:

Where a merchant, the value of those whose whole interest is

$22001, first effected a policy on his interest at Liverpool for $ 17001, and
hen without fraud another policy on the same interest at London for
$22001, he is allowed to recover the whole amount on the London Policy,
and the London underwriters are allowed to recover a ratable amount by
way of contribution from the Liverpool underwrite.

EXTERNAL AND INTERNAL INSURANCE

 Depending on their nature and scope, the risk insurance may be
broadly classified as External insurance and Internal Insurance.

1) EXTERNAL INSURANCE

External insurance is referred to any insurance a firm facing in

the commercial market. Captive insurers, risk retention group and
risk sharing pools are the important alternative techniques that have
been developed for commercial insurance. The group captives may
be classified into pure captive and association or group captives. Risk
retentions groups are formed for the purpose of retention or pooling
risk.

2) INTERNAL INSURANCE

Internal insurance may be described as an alternative to

purchasing insurance in the commercial market. Some public
organisation, enterprise, individual and institutions have established
a fund to meet the insurable losses. As the risk is retained within the
organisation, here is no market transaction of buying insurance
cover. Internal insurance is also termed as self insurance. This mainly
focuses attention and effort on the high frequency and low severity
profile and implies that the losses are predictable. Own damages
motor claims are the best example of self insurance.
NEW ECONOMY & NEW RISKS- ARE REINSURANCE COMPANIES
LISTENING?
The "New Economy" present'; new and significant challenges to
business, government, education; religion, and culture. Geographic borders
are becoming anachronistic symbols of the old economy as the powerful
force of e-commerce tears down artificial obstacles to trans-border trade.
What do all these issues mean for the insurance and reinsurance industry.
While all industries are affected by this electronic sea change in the
world's economy, no industry is more affected than the insurance industry.
It is the insurance and reinsurance industry that provides the protection
against risk that allows businesses to produce their products and expand
their markets and it is this industry that must meets the challenges of the
now economy and protect against old and new risks generated by e-
commerce.
Reinsures must constantly monitor court decisions, new e-commerce
coverage products, and changes in technology. The new economy already
has claimants seeking coverage for a range of losses from damaged
hardware and software to claims of defamation. Coverage disputes have
arisen about whether this looses is covered under traditional commercial
liability policies ("CGL") or under newer policies specifically designed for e-
commerce risk. Reinsures must be prepared to address new risks as they
arise out of e-commerce transaction.
The following are some of the important issues that reinsurance
companies have to tread undertaking new economy risk.
 Ecommerce risk insurance and reinsurance companies have to take
new kind of risks that come bundled with the e-commerce are a variety of
risks that present loss both to the business undertaking e-commerce and
the companies which are writing their risks.

THE IMPORTANT E-COMMERCE RISKS ARE:

Physical damage:
As the new economy’s dominated by computer-base operations,
physical damage losses caused to computerand networks, damage caused
to the infrastructure of the c-commerce business due to power failures or
power surges leading to network or system failures, etc., will become
commonplace.

Business interruption:
These costs may include remediation costs and the addition of
hardware and software such as routers, firewalls and upgrade anti-virus
programs. A mere difficult coverage question arises when business
interruption leads to third party liability.

Privacy issues:
Among the e-commerce risks that have garnered significant publicity
are those concerning rights of privacy. These risks are similar to the
traditional risks inherent in the banking, financial services, and medical
industries. Because so much more personal and financial data is
collected today and stored electronically this issue has become the focal
point for market regulators, governments and also for consumer advocacy
groups.

Intellectual property risks:

The new economy has stretched the boundaries of intellectual

property law to the breaking point. New economy entrepreneurs are
finding ways to use the Internet to allow consumers to locate and "share"
copyrighted works. As many websites compete to provide the best of the
online material, this trend has led to numerous infringement lawsuits
involving the downloading of copyrighted clipart, software, music movies
and TV shows, etc As more and more businesses move onto the Internet,
claims involving intellectual property will only multiply in die coming days.

Third-party negligence claims:

Reinsures can expect to see third party liability claims arising out of
e-commerce and related websites risk in coming years. Medical, legal,
accounting, and financial services websites are just a few examples of
Internet sites distilling advice, displaying advertising, and encountering
negligence claims for erroneous information posted on the Sites.

OTHER POTENTIAL E-COMMENCE RISKS:

The nature of e-commerce and its modalities of doing business give

rise is to new exposures for insured in the new economy. Reinsures need to
be aware of these potential exposures. Apart from the risk highlighted
above, some of the potential risks lurking which can affect insurance and
reinsurance industry are highlighted below.

Hackers:
E-commerce business activities require that key information and
business processes exist in digital |form and be accessible through web
portals and websites. Should the security of their servers be breached,
these insured and their customers and business partners could suffer
significant harm
Viruses:
With new kind of viruses hitting the www everyday, the potential
damage they can wreck on an e-commerce business is of significant level.
The damage of "I Love You" bug outbreak in 2000 has experts put it may
had caused a worldwide economic impact of $8.75 billion. I he mid-2001
"Code Red" attacks am estimated to have cost $2.62 billion worldwide.

Electronic & digital signatures:

The issues concerning electronic and distal signatures are no longer

whether they are valid or not nationwide, the real issue is what happens
when a hacker or an inquisitive minor forges a signature on an electronic
contract without authorization. Even though new solutions are being
developed to overcome the problem of digital signatures like
developments of Digital IDs, encryption, etc, reinsures should stay
informed about any litigation that may ensue from individuals or entities
tampering with digital signatures and the methods of proving authenticity.
 Over the course of history, as new ways of doing business have
emerged, the insurance and reinsurance industry has provided protection
against new risks of loss. The e-commerce revolution is no different than
previous changes in the world economy. Insurers and reinsures will have to
adapt and provide the necessary security for the new economy. Reinsures
should start working with their clients to craft properly underwritten new
forms of coverage for these new economy exposures. Reinsurer should
consider reinsuring web based liability covers separately from traditional
liabilities to better analyze these new exposures. Reinsurer must also be
alert to judicial alterations in coverage provisions of traditional CGL and
other third party liability policies as the courts cope with claims for
ecommerce and emotional damages arising cut of e-commerce activities
and the industry/ should reinvent itself to confront the new e-challenges
facing the business community across the world.

CHAPTER 3
 REINSURANCE UNDERWRITING

INTRODUCTION

Reinsurance underwriting is the process of building up a portfolio of

assumed risks; ii involves selecting the accounts and defining the
conditions/rates at which the accounts are to be accepted for assumption
of risk. It is one of the most vital functions of the management and the
ultimate results of the company depend upon the efficacy. Several
arguments have been put forth as to whether underwriting is an art or a
science in fact it several traits of both – one has to consider the previous
results, make quantitative/qualitative analysis of the results of the previous
years. At the same time it involves a g deal of the underwriter's intuitive
judgment and often his gut-feeling. In the long run it is the correct and
positive dynamics of underwriting that decide the success of a reinsurance
company, just as much as that of an insurance company. Underwriting
being a function of such vital importance holds the key to the success of an
organization. History is witness that very rarely has a reinsurance company
got into difficulties due to a poor investment decision but a major
underwriting loss can critically impair the company and throw it out of
business.

FACTORS THAT AFFECT REINSURANCE BUSINESS

For underwriting to be effective in the long run, a clear
understanding of the reinsurance contract is absolutely essential for both
the parties. The cedent company needs this understanding to plan its risk-
retention, types of reinsurance required etc. For the reinsurer, it is
necessary to plan for his portfolio, with an eye on the possible
accumulations of losses, underwriting a single large risk etc. After
identifying the type of contracts that a reinsurance company has to
underwrite during a period, it has to identify the various sources of
business that it wanes to get involved in. The different sources of
reinsurance business are:

● Domestic direct underwriting companies

● Foreign direct underwriting companies

● Other reinsurance companies

● Reinsurance brokers
Domestic business has various advantages like low acquisition costs,
easy manageability etc and further it is free from ether complications like
adverse fluctuation of foreign exchange, economic instability of the
country etc. It suffers from the drawbacks of low volume and spread of
business, which is essential to build up a stable and profitable portfolio.
Further, the expertise and experience of the reinsures that are spread
across the globe are also denied in case of domestic business. Or the other
hand, overseas business has the advantages of wide geographical spread
but the cost of maintenance may be higher. Further, other complications
like difference in language, legal systems, market practices and exchange
control regulations may surface hence, a healthy balance of domestic and
overseas business will enable the reinsurer to develop a strong, stable and
profitable portfolio. Retrocession treaties among various reinsures could be
a source of underwriting international business with a balanced
geographical spread. But the company should closely watch for higher
costs of acquisition and low profitability. One possible solution to
overcome these difficulties is to develop business through intermediaries
or brokers, subject to cost of brokerage, delays in remittances and
underwriting being in control. Another aspect which has to be considered
in finalizing a reinsurance contract is the class and spread of risks. The
reinsurance company will have to make a selection of risks depending on
the size and intensity. A single aviation portfolio may consist of a very small
number of large risks, whereas there can be several small household
burglary accounts with limited risk exposure. Similarly, even within a class,
mere can be variation in risk exposure, like fire policy for residential
dwellings as against that of a large industrial undertaking or industrial
complexes. Hence a proper balance will have to be struck between various
classes; and within a class, between various risks
CLASSES OF BUSINESS POLICY
It is of paramount importance for an underwriter to know at the
outset as to what classes of risks are to be covered viz. Property, Casualty,
etc. It must be ensured that the particular class is a genuine insurance risk
which can be defined and quantified properly so that premium
considerations do not lead to avoidable conflicts. Further, within the class,
method of reinsurance whether proportional/non-proportional,
facultative/treaty etc., lias to be selected, depending on the reinsurer
choice as well as suitability.

DESIGNING A REINSURANCE PROGRAM

 Having decided a particular class and amount of business to be
involved in, a company must decide some form of reinsurance which it
requires. Basically the facultative form is more cumbersome, time-
consuming and also more expensive. As such it is always wiser to consider a
suitable combination of treaties.

The ultimate choice as regards a particular treaty or a combination of

treaties would depend upon whether the portfolio is exposed to large
individual losses or accumulation of losses from sporadic, isolated events.
Apart from the above, other considerations that have a bearing on a
company's choice of portfolio are:

● Administrative costs and ease of operations.

● Effect on company's net retained premium income

● Whether it wishes to have reciprocal arrangements with

other insurers.

In case of large risks on classes of business such as Fire, Engineering,

Marine hull, etc., a surplus treaty would be the best option for the cedent
company as it would enable retention of a large part of premium income.
However, because of the special skills involved, a company might be
inclined towards reinsuring the business on a risk excess of loss. Further,
the administrative hassles of maintaining a suipbis treaty are more as
compared to those of quota share or excess of icss. It would also enable the
company to attain a higher rate of commission on a quota share treaty.
The excess of loss treaty is also very beneficial in that it is very simple to
operate. The company after deciding on the amount of excess of loss cover
protection need not go for any reinsurance on individual risks. If the
company is in the habit of issuing policies for unlimited liability (motor third
party), the final layer of excess of loss cover should also be for an unlimited
amount.

An insurance company which is also involved in inward reinsurance

can increase its capacity to accept large reinsurance risks. However, in
order to keep a check on its net retention, retrocession facility should be
made use of. Depending on its net retention ability, the company can
retrocede the surplus amounts to retrocession Aires, for which it may make
use of the quota-share retrocession policy. For the protection of its net
retained part an excess loss cover would be useful. Need for reinsurance is
paramount because a company has to target the maximum amount of
business in order to ensure growth and achievement of its goals. However,
while assuming high amounts of risks it is possible for the growth to sustain
large losses which may have an impact on the capital reserves. To avoid
this, an insurance company has to necessarily go for reinsurance. Several
obligatory treaties can help achieve this requirement by providing
automatic cover with minimum exclusion. Ii is particularly useful for a new
insurance company with a low retention capacity. While arranging for
reinsurance, a company must concentrate on good security of the
reinsurer. Good security amounts to power of withstanding any large risk
and not the offer of large commissions and lower premium rates. Similarly,
the reinsurer also judges whether the cedent company is worth entering
into a contract with. Mutually, the two should decide upon the level of
reinsurance arrangements and the rates at which it is to be finalized.
RECIPROCAL BUSINESS
A company may seek reciprocal arrangement with another reinsurer
in order to have a spread of its business and also to maintain a large
volume of premium income, without affecting its solvency strengths.
However a totally reciprocal arrangement (100%) is not possible and the
reinsurance companies should aim at a mutually agreeable balance. For
entering into reciprocal business, a company should look for the following
points.

● Companies with whom reciprocal business is being planned should

be fundamentally strong, should possess good business ethics, and
should have a good history of treaties. Besides, a thorough
knowledge of the conditions of the country in which a party in is
operating, is absolutely essential.

● The treaties proposed to be exchanged should be reasonably

balanced with an acceptable ratio of
● Host of other services apart from providing reinsurance coverage
 CHAPTER 4

REINSURANCE REGULATION

INTRODUCTION

As recently as fifteen years ago, reinsures’ accounting requirements

were minimal and were addressed in the space of two or three pages in the
NAIC Accounting Practices and Procedures Manual. Since that time,
reinsurance regulatory oversight has increased significantly. The areas in
which these increases have been found include:

● Disclosure

● Risk transfer assessment and accounting and

● Security
 This increased regulation has resulted from the regulators’ realization
that the solvency of primary insurers often depends on their ability to
collect under their reinsurance agreements. Since primary insurers cede
more than $50 billion in premiums in any given year to reinsures, the ability
to collect under reinsurance agreements is a very serious issue.

Another significant factor in the pressure that state regulators feel

towards their regulation of the reinsurance industry is the federal
government’s interest in this area. The failure of several large property &
casualty insurers resulting from their inability to collect under their
reinsurance agreements has spurred this federal interest.

Several natural catastrophes occurred during the decade of the

1990s that caused many to fear the imminent collapse of the reinsurance
industry. Even Lloyd’s of London would have difficulty meeting its
obligations. Due to these natural disasters and the growing concern about
reinsures’ financial stability, the Financial Accounting Standards Board has
tightened generally accepted accounting principles (GAAP) for reinsurance
transactions. Following FASB’s lead, the National Association of Insurance
Commissioners developed new accounting guidance for reinsurance that
was based on the Standards Board’s action.

DISCLOSURE

The first area to feel the increase in regulatory oversight is disclosure.

The required additional disclosure permits regulators to perform a more
extensive analysis of a primary insurer’s reinsurance programs and a more
thoroughgoing evaluation of its exposure to additional risk in the event any
of its reinsures fail to fulfill their contractual obligations.

Schedule F in the NAIC Annual Statement provides a detailed

disclosure of information regarding the insurer’s reinsurance. All of the
information on the ceded business can be found there. This schedule was
greatly expanded in 1992 to include eight separate parts. While an analysis
of each part of the schedule would probably provide little in the way of
important information, it is instructive to appreciate the magnitude of the
change between the old part 1 of Schedule F and the new part 1. While the
old part 1 only required financial information concerning reinsurance
payable on paid and unpaid losses to each reinsured, the new part 1
requires substantial increases in disclosure.

In fact, the new part 1 requires, for each reinsured, that the following
disclosures be made:

● The paid losses and loss adjustment expenses

● The known case losses

● The incurred but not reported losses

● The contingent commission payable

● The assumed premium receivable

● The funds held or on deposit

● The letters of credit posted and

 ● The amount of assets pledged or compensating balances

The net effect is a significant increase in the disclosure requirements

of reinsurance operations.

ASSESSMENT OF RISK TRANSFER & ACCOUNTING

In additional to substantially increased disclosure requirements, the

NAIC’s Accounting Practices and Procedures Task Force has modified the
NAIC’s accounting guidance.

The Accounting Practices and Procedures Manual identify the

essential ingredient of a reinsurance contract as the transfer of insurance
risk. This element of insurance risk transfer is essential because it enables a
reinsurance contract to qualify for loss reserve credit, and this credit is an
important financial consideration. The Manual goes on to state that
investment risk is not an element of insurance risk.

The result of this requirement that there be an insurance risk is to

curb a practice that the insurance regulators consider a misuse of
reinsurance contracts. However, the regulators have used changes in
accounting requirements rather than regulatory restraint to bring about the
change. A failure of a reinsurance contract to contain insurance risk will
result in the reinsurance balances being accounted for as deposits rather
than qualifying for loss reserve credit.
SECURITY

Heightened regulatory oversight is primarily the result of concern

about the financial soundness of reinsurers. This heightened oversight is
intended to assure that reinsurance assures security.

Under the law, if security is not deemed to exist, then a credit for
reinsurance against loss reserves is not allowed the ceding company. The
effect on the ceding company in the event that security is not seen to exist
is a charge against its surplus. Since surplus is the vital ingredient in an
insurer’s ability to write business, this is a significant issue.

Security is not deemed to exist if:

● The reinsurer is not authorized or accredited and

● The reinsurance from the unauthorized insurer is not secured

by funds withheld, trust funds or letters of credit

The result of this increased regulatory oversight is a much

increased security for primary insurer and, ultimately, for their
policy owners. For reinsurers, the decade of this heightened
regulatory oversight has been a period of significant turmoil and
change.

PROCEDURE TO BE FOLLOWED FOR REINSURANCE ARRANGEMENTS

(1) The Reinsurance Programme shall continue to be guided by the

following objectives to:
 a) maximize retention within the country;
b) develop adequate capacity;
c) secure the best possible protection for the reinsurance costs
incurred;
d) Simplify the administration of business.

(2) Every insurer shall maintain the maximum possible retention

commensurate with its financial strength and volume of business. The
Authority may require an insurer to justify its retention policy and may
give such directions as considered necessary in order to ensure that
the Indian insurer is not merely fronting for a foreign insurer.

(3) Every insurer shall cede such percentage of the sum assured on each
policy for different classes of insurance written in India to the Indian
reinsurer as may be specified by the Authority in accordance with the
provisions of Part IVA of the Insurance Act, 1938.

(4) The reinsurance Programme of every insurer shall commence from the
beginning of every financial year and every insurer shall submit to the
Authority, his reinsurance programmes for the forthcoming year, 45
days before the commencement of the financial year;

(5) Within 30 days of the commencement of the financial year, every

insurer shall file with the Authority a photocopy of every reinsurance
treaty slip and excess of loss cover note in respect of that year
 together with the list of reinsures and their shares in the reinsurance
arrangement;

(6) The Authority may call for further information or explanations in

respect of the reinsurance Programme of an insurer and may issue
such direction, as it considers necessary;

(7) Insurers shall place their reinsurance business outside India with only
those reinsures who have over a period of the past five years counting
from the year preceding for which the business has to be placed,
enjoyed a rating of at least BBB (with Standard & Poor) or equivalent
rating of any other international rating agency. Placements with other
reinsures shall require the approval of the Authority. Insurers may also
place reinsurances with Lloyd’s syndicates taking care to limit
placements with individual syndicates to such shares as are
commensurate with the capacity of the syndicate.

(8) The Indian Reinsurer shall organize domestic pools for reinsurance
surpluses in fire, marine hull and other classes in consultation with all
insurers on basis, limits and terms which are fair to all insurers and
assist in maintaining the retention of business within India as close to
the level achieved for the year 1999-2000 as possible. The
arrangements so made shall be submitted to the Authority within
three months of these regulations coming into force, for approval.

(9) Surplus over and above the domestic reinsurance arrangements class
wise can be placed by the insurer independently with any of the
 reinsures complying with sub-regulation (7) subject to a limit of 10% of
the total reinsurance premium ceded outside India being placed with
any one reinsurer. Where it is necessary in respect of specialized
insurance to cede a share exceeding such limit to any particular
reinsurer, the insurer may seek the specific approval of the Authority
giving reasons for such cession.

(10) Every insurer shall offer an opportunity to other Indian insurers

including the Indian Reinsurer to participate in its facultative and
treaty surpluses before placement of such cessions outside India.

(11) The Indian Reinsurer shall retrocede at least 50% of the obligatory
cessions received by it to the ceding insurers after protecting the
portfolio by suitable excess of loss covers. Such retrocession shall be
at original terms plus an over-riding commission to the Indian
Reinsurer not exceeding 2.5%. The retrocession to each ceding insurer
shall be in proportion to its cessions to the Indian Reinsurer.

(12) Every insurer shall be required to submit to the Authority statistics

relating to its reinsurance transactions in such forms as the Authority
may specify, together with its annual accounts.
INWARD REINSURANCE BUSINESS
Every insurer wanting to write inward reinsurance business shall
have a well-defined underwriting policy for underwriting inward
reinsurance business. The insurer shall ensure that decisions on acceptance
of reinsurance business are made by persons with necessary knowledge
and experience. The insurer shall file with the Authority a note on its
underwriting policy stating the classes of business, geographical scope,
underwriting limits and profit objective. The insurer shall also file any
changes to the note as and when a change in underwriting policy is made.

OUTSTANDING LOSS PROVISIONING

(1) Every insurer shall make outstanding claims provisions for
every reinsurance arrangement accepted on the basis of loss
information advices received from Brokers/ Cedants and
where such advices are not received, on an actuarial
estimation basis.

(2) In addition, every insurer shall make an appropriate provision

for incurred but not reported (IBNR) claims on its reinsurance
accepted portfolio on actuarial estimation basis.

CHAPTER 5

THE INDIAN REINSURANCE MARKET

INTRODUCTION
Prior to nationalization, India had as many as 63 domestic
companies and 44 foreign insurers operating in the country. As soon as the
government nationalized the insurance industry, five insurance companies
were left to take care of the general insurance needs apart from LIC taking
care of health insurance. The General Insurance Corporation of India and
its four subsidiaries viz. National Insurance Co. Ltd., The New India
Assurance Co. Ltd., Oriental Insurance Co. Ltd. and United India
Insurance Co. Ltd. take care of the general insurance needs in the country.
Apart from these companies, certain state governments like Maharashtra,
Gujarat. Kerala and Karnataka have their own departments of insurance
funds i.e take care of insurance needs.
● Before nationalization, a large number of domestic and foreign
companies used to operate in India. For their reinsurance needs, they
used to access international reinsurance markets and hence there was
no visible reinsurance market in the country. But the formation of
two reinsurance corporal ions in the country to take care of domestic
needs has provided the much-needed impetus for the growth of
domestic reinsurance industry.
● Early Reinsures in India
● The year 1956 saw the launch of the India Reinsurance Corporation,
a professional reinsurance company formed by some general
insurance companies. This company started receiving the voluntary
quota share cessions from member companies. Yet another
reinsurance corporation called Indian Guarantee and Genera!
Insurance Co. was opened in the year 1961 this company was
formed to supplement the role of the Indian Reinsurance
 Corporation. With this set-up, a regulation was promulgated which
made it statutory on the part of every insurer to cede twenty percent
in Fire and Marine Cargo, ten percent in Marine Hull and
Miscellaneous insurance and five percent in Credit and Solvency
business to two approved Indian reinsures as mentioned above.
● As new innovations started appearing in the market, the idea of
formation of pools received a boost in the country during the late
1960s. Under this method, a pool was created to deal with certain
hazardous classes of business or as a means of increasing the
business retained within the country. The premium income and
claims are pooled together and usually divided in proportion to
premium written by each member. As a consequence, in the year
1966, the Indian Insurance Companies Association initiated the
formation of reinsurance pools in Fire and Hull departments to
increase the retained premiums in the country.

INDIAN REINSURANCE PROGRAM

The Indian reinsurance industry is characterized by development of a
market reinsurance Programme, which influences the working of Indian
business entities and the way they do reinsurance.
The chief features of the Programme are as follows:

1. To achieve maximization of the retention capacity within the country.

2. Retention of the domestic insurers to be achieved through obligatory

cessions, pools, etc.
3. To protect inter-company and individual retentions by providing them with
excess of loss covers.

4. To make provisions, wherein different classes of business can be ceded to

treaties based on quota share or surplus basis.

5. To make most of the outward treaties by the companies by providing

automatic covers and restore facultative reinsurance in few case?

As we have noted earlier, general reinsurance business in India is

carried on by four subsidiaries of the General Insurance Lid. These
companies, to meet their own reinsurance needs, made arrange a man is
with foreign companies. Apart from reciprocal arrangements, G1C and its
subsidiaries accept non-reciprocal inward reinsurance from overseas
markets. Apart from providing the above two facilities, GIC also takes care
of inward facultative reinsurance.

Since the business generated by the Indian Markets if not of huge

amount in international markets, they have to merely follow the trend in
the markets and only in some cases, do the Indian players get to dictate the
terms of the agreement in the intentional markets.

STATE REINSURANCE CORPORATION (SRC)

The role and importance of establishment of state reinsurance
corporations was highlighted by world development organizations like
UNCTAD (United Nations Conference on Trade and Development). With the
encouragement received from multilateral bodies like UNCTAD many
countries have established their own stale reinsurance corporations to take
care of the reinsurance needs arising out of their domestic insurance
industry. Many countries in Africa, Asia, including India have opened state
reinsurance corporations.

The main principles behind the encouragement of domestic

reinsurance corporations are as follows:

● To conserve foreign exchange:

For developing countries like India, foreign exchange is a

precious resource and it needs to be spent very cautiously. The
setting up of these corporations will prevent draining of foreign
exchange resources from the country in the form of premiums to
overseas reinsure.

● To prevent excessive dependence:

Depending on a foreign country for reinsurance coverage for

a long period of time is not advisable. Because at the times of war,
especially, and political tensions, the reinsurer country may not allow
the reinsurer to discharge its liability and it may drastically affect the
insured's business.

● Creation of market place:

The setting up of state reinsurance corporation will help in

developing the domestic reinsurance market and lay a strong
foundation for development and growth of the domestic reinsurance
industry.
 ● To avoid competition:

In a domestic market, where the insurance industry has not

advanced on, the presence of a strong state reinsurance corporation
will help prevent setting up of new reinsurance companies, betting
up - of more reinsurance companies in less advanced will create
wasteful and destructive forces.

● Better bargaining capacity:

Presence of a single state reinsurance corporation will

increase bargaining capacity of the country vis-à-vis internal agencies.

● Develop local market:

The presences of state reinsurance corporations will help

nurture the domestic reinsurance industry and develop the reinsurance
skills.

It is to encourage the growth of SRCs, many rules were

implemented to ensure that SRCs get their due business and grow
strongly in the market.

The following are some of the measurers:

1. SRCs receive their business by means of statutory access by way of a

certain percentage of all insurance business from domestic insurance
companies.

2. The insurance companies in the country are encouraged to voluntarily

utilize the facilities and services of SRCs, apart from meeting their
obligatory cessions with SRCs.
3. Even though the provision of obligator) cessions is thrust upon the
domestic companies, they have the freedom lo reinsure their exposures
with global market players and utilize their services once they have
fulfilled compulsory cessions to SRCs.

How SRCs Contain Their Exposures

When a state reinsurance corporation takes exposures of the
domestic insurance companies, SRCs will be exposed to the risks of their
customers from all angles. In order to prevent the havoc of running their
business with heavy and bad exposures (which may occur sometimes),
SRCs go in for retrocession (The method wherein a reinsurer will go in for
reinsurance coverage with another reinsurance company). Thus, state
reinsurance corporations may receive all the reinsurance business from
local direct insurers to foreign reinsures any business they do not wish to
retain. Even SRCs have a provision wherein they can retrocede shares out
of the national pool to each company in proportion to the volume of its
cession to the pool. Hence, retrocession plays an important role for
working of state reinsurance corporations.

THE ROLE OF REGIONAL REINSURANCE CORPORATIONS

Similar to the need of setting up SRCs. a need was felt to set up
reinsurance corporations on geographical regional countries wise.
Basically, a regional reinsurances corporation will look into the reinsurance
reduces arising among a group of neighboring nations. These corporations
were proposed to be set up in different developing nations of the world. \n
 example of this method of forming a regional reinsurance corporation is
the Asian Reinsurance Compotation, which was set up at Bangkok. The
participants in this corporation are Afghanistan, China, India, Philippines,
South Korea, Sri Lanka and Thailand.

The basis for setting up regional reinsurance corporations

depends upon some common features which the member countries share
due to their close proximity to each other. Some of the common features,
which make it viable for member countries to be in the RRC are:

1. The member countries have commercial boundaries.

2. Well-developed communication facility exists between the member

countries.

3. The economic and trade ties between the member countries being well-
developed, free flow of trade exists between them.

4. The member countries may share some common customs, language and
identity.

Setting up an RR.C is no easy task, especially with many member

countries participating; each of them can have their own set of preferences
to choose the best market place to locate the headquarters. The
headquarters may have the following features like well-developed
accessibility and good communication facilities, a well-established
commercial background. Added to that, the presence of a good banking
system will provide the smooth environment for functioning of the RRC.

PROFESSIONALISM IN THE REINSURANCE INDUSTRY

 Running a reinsurance company is not similar to running any other
business. It requires in-depth knowledge of the insurance industry apart
from requiring specialized skills, proper control, and a nack to brood over
statistics and devise appropriate policies to meet customer needs. Ml these
have necessitated a professional approach towards the industry. With
increased demand for cover and keener competition among insurance
companies, specialized reinsurance companies like marine reinsurance, life
reinsurance etc, emerged. For a successful growth, the reinsures realized
the need to fan out across the globe and soon started seizing business
opportunities wherever they existed.

This thinking process led to the emergence of a professional global

reinsurance industry.

The last hundred years have seen tremendous industrialization the

world over and with it the need and necessity to protect against various
risks inherent in the business. The emergence of New York as an important
financial hub apart from London and the opening of reinsurance exchanges
in the USA, and setting up of new insurance centers in Bermuda, Panama,
Hong Kong, Singapore and West Asia with tax concessions and easy
regulatory affairs has led droves of insurance companies to set up their
operations in these places. Today, it has become a norm rather than an
exception in this industry to broker deals worth several billions.
 The youth and development of reinsurance has brightened many
changes in the practice of the reinsurance industry. Today's professional
reinsurance companies are they which are financially sound. Technically
resourceful and who have the expertise in their domain of reinsurance
coverage today we find all the reinsurance companies extending one or
more of the following services to their clients.

1. Give valuable suggestions and help the reinsured tide over the crisis:
2. Helping clients in seeing up a suitable reinsurance
program.
3. Organize training program for the executives of the reinsured
companies.

Thus, over the years the reinsurance industry has matured in terms of
improved development services and policies offered to the clients. But, it is
to he noted here that the development of reinsurance market is restricted
mostly to the developed economies. Developing economics like India, a few
South East Asian countries, etc, have just recently started their long march
towards the development of more mature Reinsurance market domestically.
 CHAPTER 6

CASE STUDY ON GIC

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 programmers’. 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... Not more than 10% of reinsurance premium to be placed
with one re-insurer.

REINSURANCE REGULATION
 The placement of reinsurance business from the Indian market is
now governed by Reinsurance Regulations formed by the IRDA. The
objective of the regulation is to maximize the retention of premiums within
the country 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. . Each company is free to arrange its own reinsurance program,
which has to be submitted to the IRDA 45 days before commencement. .
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

Figures in INR millions
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
Corporation's Financial Results - (Class Wise)
Figures in INR million
Fire Miscellaneous Marine Total
Net Premium 6,349.9 18,286.5 2,075.9 26,712.3
Net Earned Premium 5,070.8 17, 46.4 2,267.5 2,384.7
Net claims 3,562.3 18,078.3 1,310.2 22,950.8
U/W Profit/loss -672.5 -5,013.7 512.2 -5,174.0
Class-wise Profit/Loss after
Investment income -13.7 -544.5 1077.5 519.3

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.

CAPACITIES OFFERED BY GIC FOR FOREIGN INWARD BUSINESS:

Figures in USD
Other than Aviation PML SI Spares
Treaty 4 Mln. 10 Mln.
Facultative 20 Mln. 50 Mln.
Hull Liability Spares
Aviation
Facultative 5 Mln.* 30 Mln.* 5 Mln.*
Treaty 300,000***
CASE HISTORY: INSURANCE COMPANY SAVES 33% IN TIME
AND UP TO 55% IN COST FOR POLICY UNDERWRITING

THE PROBLEM

A global reinsurance company wanted to reduce the time required

for submitting quotes and writing policies.  Depending upon the complexity
of the coverage requested and the required reviews, underwriters would
take from a few hours to a few weeks to issue a quote and write a policy. 
The company wanted a solution that would shorten the cycle time, bring
quick return-on-investment, and require minimal time commitment from
lead underwriters.

THE SOLUTION

Over an eleven-week period, the company's best underwriters spent

2-3 hours per week working with Acappella ® Software consultants to
implement a streamlined quoting and policy writing processes.  This
included not only supporting the information gathering efforts, but also
guiding the thinking behind the quoting process.  In addition, the
customized software application was to produce most of the written policy
automatically.

THE RESULTS

The company achieved all of its goals.  Using the Acappella-generated

application, the company achieved a 33% reduction in the time it takes to
develop a quote and document a submission (time-to-decision).

Savings in the cost of underwriting were also significant.  Previously, the

underwriters spent an average of 16 hours per quote.  Using the Acappella
generated application, they now spend about six hours.  A greater
percentage of the background research and other data gathering activities
is now being handled by the assistant underwriters, following the best
practices laid out in the application.  The new workload redistribution saved
42% in the cost of quoting and 55% in the cost of writing a policy (cost-to-
decision).
 Conclusion

1. Every insurer should retain risk proportionate to its financial strength

and business volumes.
2. Certain percentage of the sum assured on each policy by an
insurance company is to be reinsured with the National Reinsurer.
National reinsurer has been made compulsory only in the non-life
sector.
3. The reinsurance programme will begin at the start of each financial
year and has to be submitted to the IRDA, forty-five days before the
start of the financial year.
4. Insurers must place their reinsurance business, in excess of limits
defined, outside India with only those reinsurers who have a rating of
at least BBB (S&P) for the preceding five years. This limit has been
derived from India's own sovereign rating, which currently stands at
BBB.
5. Private life insurance companies cannot enter into reinsurance with
their promoter company or its associates, though the LIC can
continue to reinsure its policies with GIC.
6. The objective of these regulations is to expand retention within India,
ensure the best protection for the reinsurance costs incurred and
simplify administration.