Innovation Hrd Cpy

8/7/2019 Innovation Hrd Cpy

http://slidepdf.com/reader/full/innovation-hrd-cpy 1/21

Re-insurance

MEANING

Reinsurance is a means by which an insurance company can

protect itself against the risk of losses with other insurance

companies. Individuals and corporations obtain insurance policies to

provide protection for various risks (hurricanes, earthquakes,lawsuits, collisions, sickness and death, etc.). Reinsurers, in turn,

provide insurance to insurance companies.

It is a financial management tool. It is always behind the high

quality insurance program or a complex commercial risk of any

good insurer. Reinsurance industries are maintaining upward surge

all round growth, both in the domestic and global fronts in the last

few years. The untapped, both in life and non life insurance,

particularly in growing economies like India and china, is the center

of attraction to leading players in insurance and reinsurance,

thanks to globalizations and liberalizations of financial services

particularly in last decades.

It is a tool of risk management, mutually support and supplements

each other in providing risk mitigation to the individuals and

organizations at micro level and to the country. Reinsurance is

instrument of risk transfer and risk financing.Reinsurance can be described as contract made between an

insurance company (insurer) and a third party (reinsurer) where in

the later will protect the former by paying losses sustained by it

under the original contract of insurance, unlike primary insurance,

the reinsurance mainly deals with catastrophic risk which are not



only highly unpredictable but have the potential capacity to cause

hugedevastation thereby threatening the solvency of the insurance

company.

FUNCTIONS OF REINSURENCE

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 offerhigher 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.

Reinsuranced s highly refined uses in recent yearsinclude 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 pre ictable by absorbing

larger losses an re ucing the amount of capital

nee e to provi e coverage.

(3) SURPLUS RELIEF

An insurance company's writings are limite by its

balance sheet (this test is known as the solvency

margin). When that limit is reache , an insurer can

either stop writing new business, increase its capitalor buy "surplus relief" reinsurance. The latter is

usually one on a quota share basis an is an

efficient way of not having to turn clients away or

raise a itional capital.

(4 ) ARBITRAGE

The insurance company may be motivate by

arbitrage in purchasing reinsurance coverage at a

lower rate than what they charge the insure for

the un erlying risk.

(5) REINSURER S EXPERTISE



The insurance company may want to avail of the

expertise of a reinsurer in regard to a specific

(specialized) risk or want to avail of their rating

ability in odd risks.

(6) 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 ie after reinsurance an would be

reflected in income smoothing. While income smoothing

is one of the objectives of reinsurance

arrangements, the mechanism is by way of balancingthe portfolio.

(7) MANAGING THE COST OF CAPITAL FOR AN

INSURANCE COMPANY

By getting a suitable reinsurance, the insurancecompany 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, more profitable it

can be for an insurance company to seek

reinsurance.

TYPES OF REINSURENCE

(1) PROPORTIONAL

Proportional reinsurance (the types of which are

quota share & surplus (reinsurance) involves one or

more reinsurers taking a stated percent share of

each policy that an insurer produces ("writes"). This

means that the reinsurer will receive that stated

percentage of each dollar of premiums and will pay

that percentage of each dollar of losses. In addition,

the reinsurer will allow a "ceding commission" to theinsurer to compensate the insurer for the costs of

writing and administering the business (agents'

commissions, modeling, paperwork, etc.).



The insurer may seek such coverage for several

reasons. First, the insurer may not have sufficient

capital to prudently retain all of the exposure that it

is capable of producing. For example, it may only be

able to offer $1 million in coverage, but by

purchasing proportional reinsurance it might double or

triple that limit. Premiums and losses are then shared

on a pro rata basis. For example, an insurance

company might purchase a 50% quota share treaty;

in this case they would share half of all premium andlosses with the reinsurer. In a 75% quota share, they

would share (cede) 3/4 of all premiums and losses.

The other form of proportional reinsurance is surplus

share or surplus of line treaty. In this case, a

retained e linef is defined as the ceding company's

retention - say $100,000. In a 9 line surplus treatythe reinsurer would then accept up to $900,000 (9

lines). So if the insurance company issues a policy

for $100,000, they would keep all of the premiums

and losses from that policy. If they issue a $200,000

policy, they would give (cede) half of the premiums

and losses to the reinsurer (1 line each). Themaximum underwriting capacity of the cedant would

be $ 1,000,000 in this example. Surplus treaties are

also known as variable quota shares.



2) NON-PROPORTIONAL

Non-proportional reinsurance only responds if the

loss suffered by the insurer

exceeds a certain amount, which is called the

"retention" or "priority." An example of this form of

reinsurance is where the insurer is prepared to

accept a loss of $1 million for any loss which may

occur and they purchase a layer of reinsurance of

$4 million in excess of $1 million. If a loss of $3million occurs, the insurer pays the $3 million to the

insured, and then recovers $2 million from its

reinsurer(s). In this example, the reinsured will retain

any loss exceeding $5 million unless they have

purchased a further excess layer (second layer) of

say $10 million excess ofs$5smillion.The main forms of non-proportional reinsurance are

excess of loss and stop

(2) RISK ATTACHING BASIS

A basis under which reinsurance is provided forclaims arising from policies commencing during the

period to which the reinsurance relates. The insurer

knows there is coverage for the whole policy period

when written.



All claims from cedant underlying policies incepting

during the period of the reinsurance contract are

covered even if they occur after the expiration

date of the reinsurance contract. Any claims from

cedant underlying policies incepting outside the period

of the reinsurance contract are not covered even if

they occur during the period of the reinsurance

contract.

(3)

LOSS OCCURING BASIS

A Reinsurance treaty from under which all claims

occurring during the period of the contract,

irrespective of when the underlying policies incepted,

are covered. Any claims occurring after the

contract expiration date are not covered.As opposed to claims-made policy. Insurance

coverage is provided for losses

occurring in the defined period.

(4) CLAIMS MADE BASIS

A policy which covers all claims reported to an

insurer within the policy period

irrespective of when they occurred.



CONTRACTS Reinsurance can also be purchased on a per policy basis, in

which case it is known as facultative reinsurance.

Facultative reinsurance can be written on either a quota

share or excess of loss basis. Facultative reinsurance 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 coincideswith the term of the policy. Facultative reinsurance is

usually purchased by the insurance underwriter who

underwrote the original insurance policy, whereas treaty



reinsurance is typically purchased by a senior executive at

the insurance company.

Reinsurance treaties can either be written on a

e continuous

or e term

basis. A continuous contract

continues inde

initely, but generally has a e notice

periodwhereby either party can give its intent to cancel or

amend the treaty within 90 days. A term agreement has a

built-in expiration date. It is common

or insurers and

reinsurers to have long term relationships that span many

years.

There are two important goals o

contract wording whichwe need to keep in

mind:

1. A contract should be short, concise and easy to

understand;

2. The contract should contain terms and provisions thatlend

Themselves to ready and uniform interpretation;The focus of the contract should imply the utmost good

faith principle. This principle assumes that both parties are

so knowledgeable on the subject matter to be dealt with

and possess such a degree of sophistication as to preclude

the necessity for long complex declarations of intent and

implementation



REINSURENCE INDUSTRY

As one of the business market research paper has put it

e Reinsurance is an international, multibillion dollar industry

that is vital to the financial stability of all types of

insurance companies.f It is a method of ceding part of the

financial risk the direct insurers assume by accepting risk

from risk owners, particularly mega risk, mainly against the

earthquakes, tsunami, terrisom, etc.



However, in terms of magnitude / size, reinsurance is

highly complex global business and for example, it accounts

for more than 9% of the total premiums generated from

property.

The whole mechanism of insurance and reinsurance being adynamic process. The electronic media and internet

technology have substantially added to the efficiency and

simplification of mechanism of reinsurance operations. The

increased use of information and internet technology by

the insurance companies have made collecting, compiling,

and data warehousing of updated technical data on millionsof mega risk faster and also revolutionized the procedural

input on underwritings, accounting and claims processing

and settlement by both primary insurance and reinsurance.

The new type of electronic system specific transactional

methodology since put in place has cut short the

embarrassing delays in reinsurance acceptance, cessions

and adjustment or settlement among the participatingcompanies. Looking to the latest trend and overwhelming

success rate of multi benefit life insurance products like

ULIPs and pension plans, which combine risk cover with

investment components.

GENERAL INSURANCE

COMPANY

GIC, the sole reinsurance company of our country, by

virtue of its experience and exposure in providing



reinsurance support and guidance to its erstwhile non life

insurance subsidiaries for more than three decades, has

excellent organizational and technical skills in taking care

of reinsurance arrangements for the present insurance

market of India life and non life and has sinceadequately established itself as the national reinsurance

leader.

Meanwhile, 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 Indiaalso 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.

For the financial year 2006-07, through GIC

reinsurance recorded an overall underwriting loss of Rs.

75.95 cr, it has achieved a robust growth of more than156% in its net profit at Rs. 1531 cr, as against rs.598 cr

during the corresponding period period in the previous year.

GIC ranks 21st among non life insurers with a net worth of

$1.4 bn. As per GIC reinsurance chairman, it is positioned

as the lead reinsurer in the Afro-Asian region and other

emerging economies. during 2006- 07, the premium incomefor GIC Reinsurance went up from Rs. 200 to Rs.270 cr. It

is learnt that its international reinsurance business

amounted to 22% of its total turnover for the year.

3rd Asian Reinsurersd Summit was organized by GIC of

India, in February 2003 at 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 andfurthering business co-operation

CHALLENGES FOR

REINSURENCE 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 insurancecompanies, 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 beenundertaken considering the recent developments in the

business. The return from foreign companies are to be

incorporated when received up to 31st march 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 anissue. Where there are tariffs, 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 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.



WHAT INDIA NEEDS TO DO?

The opening up of the market as a whole and insurance

sector in specific has created a potential for the Indian

companies also to pool up bigger fund to support the

capital intensive sectors. The market has to ensure that

the domestic companies increase their own capacities and

introduce more strict guidelines as first hand risk

carriers. Insurance companies have to establish the

business relations with their reinsurer to prevent them

from worldwide reinsurance cycle that affects on capacityand stability.

Worldwide the reinsurers are becoming strict on technical

results of the insurance, therefore a disciplinary watch is

required on insurance business as it is the base of

reinsurance. The above problems or difficulties are not

very new for a sector that is the transition. Since, some

of the products are losing the importance (like proportiona

treaty), it is necessary to have sufficient premium income

to maintain the balance and to bear unexpected losses. To

have the best rates and terms from reinsures, the risk

profile and exposure to catastrophe risk information

transfer to reinsurer should be comprehensive and reliable.

Due to the market opening through the WTO operation,there is net outflow expected in the premium from the

developing countries as they have a low capitalization in

most of the insurance companies. This could lead to

weaken the objective of the serious efforts for the

regional cooperation developments amongst the nations.



The efforts towards developing a synergetic approach to

model a successful cooperation will require to work on

many areas simultaneously rather than organizing efforts

only for one direction and loosing others, they are as

follow:

Pooling of financial resources

Creating Investment opportunities

Pooling of technical resources

Joint ventures, alliance and partnership

Research and developments Pooling of information

Developing standard accounting system for business



GLOBAL POSITION Arising out of the occurrence of disastrous likeHurricane ,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. The huge amount of losses incurred, in the

aforesaid events, forced the reinsurers to hike therates substantially and also change the terms and

conditions of reinsurance arrangements. The law and

regulations governing reinsurance operation in some of

the advance and developing countries have seen few

changes, making them more stringent in reinsurance

acceptance and compulsory cessions to the local

reinsurance companies.



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 the reinsurer and an

expense to the insurer. Reinsurance is a good method todiversify and distribute risks of an insurer. Reinsurance

even provides 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. Forprofit, therefore, the overall quality of business accepted

by direct insurers should be good.

Today, the environment is more like a business than a

gentlemen's club. You have more players, more deals, and

contracts can vary greatly between reinsurers. Disputes

are no longer resolved by a handshake. They are more

frequent and more difficult to resolve.



Documents

Innovation Hrd Cpy