Beruflich Dokumente
Kultur Dokumente
ARTICLE
ON
REINSURANCE IN INDIA
SUBMITTED TO
SUBMITTED BY
ACADEMIC YEAR
2007-09
SUBMITTED TO
AFFILIATED TO
It is not for nothing that the laws of the land prescribe a minimal portion of the
insurance business to be compulsorily reinsured with another insurer / reinsurer.
The insurance business is inherently and intrinsically risky as the losses are of a
probabilistic nature, and when they take place, they do so with a randomly
varying frequency. This is more so, in the case of new or small insurers, or where
existing insurance companies underwrite new classes of business. In such
cases, a certain portion of their insurance risk cover must, in their own interest,
be reinsured to ensure that the risks are spread.
In India, at least till the market attains maturity, it is essential for compulsory /
obligatory cessions to remain in the statute book (or alternatively in subordinate
legislationslikesinsurancesregulations).
In medium size and mega value risks, it is inevitable that certain cessions are
placed on an optional (what we in insurance business parlance refer to as
facultative) basis. Facultative reinsurance arrangements always carry a lower
rate of reinsurance commission. For example, in the fire businesses an insurer
gets 30 per cent reinsurance commission through obligatory cessions, whereas
on high-value risks the optional portion fetches anywhere between 17 per cent
and 25 per cent depending on market conditions. Thus, the insurer stands to gain
substantially on direct cessions.
Obligatory cessions apply to all policies across the board. Motor insurance,
particularly, in India is a bleeding portfolio. An insurer, therefore, has the
advantage of minimising his losses in motor insurance by at least 20 per cent,
thanks to the obligatory cessions. For the national reinsurer, the loss in the motor
portfolio due to the obligatory cessions is so high, that it often wipes out the profit
earned in other classes of business.
In case of perils like earthquake and terrorism, among others, foreign reinsurers
are usually unwilling to provide full cover. This has paved way for market pools to
provide the capacity / cover. Market pools are also a form of obligatory cession,
normally managed by the national reinsurer.
The concept of obligatory cession may seem restrictive to insurers, who feel that
they should be given the freedom to choose their own reinsurer. Even so,
regulators must ensure that even if risks were to be reinsured abroad in the
absence of obligatory cessions, the premium loss on account of such cessions
should be replaced by corresponding 'inward acceptances'. Through this, they
achieve:
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.
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 either
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
(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 the insurer 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 and losses with the reinsurer. In a 75% quota
share, they would share (cede) 3/4 of all premiums and losses.
(2) NON-PROPORTIONAL
The main forms of non-proportional reinsurance are excess of loss and stop
loss.
Excess of loss reinsurance can have three forms - "Per Risk XL" (Working XL),
"Per Occurrence or Per Even XL" (Catastrophe or Cat XL), and "Aggregate
XL". In per risk, the cedant’s insurance policy limits are greater than the
reinsurance retention. For example, an insurance company might insure
commercial property risks with policy limits up to $10 million, and then buy per
risk reinsurance of $5 million in excess of $5 million. In this case a loss of $6
million on that policy will result in the recovery of $1 million from the reinsurer.
In catastrophe excess of loss, the cedant’s per risk retention is usually less than
the cat reinsurance retention (this is not important as these contracts usually
contain a 2 risk warranty i.e. they are designed to protect the reinsured against
catastrophic events that involve more than 1 policy). For example, an insurance
company issues homeowner's policies with limits of up to $500,000 and then
buys catastrophe reinsurance of $22,000,000 in excess of $3,000,000. In that
case, the insurance company would only recover from reinsurers in the event of
multiple policy losses in one event (i.e., hurricane, earthquake, flood, etc.).
A basis under which reinsurance is provided for claims 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.
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.
A policy which covers all claims reported to an insurer within the policy period
irrespective of when they occurred.
CONTRACTS
There are two important goals of contract wording which we need to keep in
mind:
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
RETROCESSION
This process can sometimes continue until the original reinsurance company
unknowingly gets some of its own business (and therefore its own liabilities)
back. This is known as a “spiral” and was common in some specialty lines of
business such as marine and aviation. Sophisticated reinsurance companies are
aware of this danger and through careful underwriting attempt to avoid it.
In the 1980s, the London market was badly affected by the creation of
reinsurance spirals. This resulted in the same loss going around the market
thereby artificially inflating market loss figures of big claims (such as the Piper
Alpha oil rig). The LMX spiral (as it was called) has been stopped by excluding
retrocessional business from reinsurance covers protecting direct insurance
accounts.
The question of what to reinsure has to be considered from both the insurer's and
reinsurer's perspectives.
Reinsurance replaces the risk of an uncertain large payout, with a certain low
payout. The insurer must decide how much of that certain payout to accept in
return for avoiding the risk of large payouts. That is, the decision to reinsure is a
question of how much risk to cede/retain based on financial management of the
trade-off between reinsurance cost and the risk of pay out fluctuations.
In deciding how much cover to offer, the reinsurer faces the same issues that
determine whether an insurer's risk is reinsurable as the insurer faced in the
original contract with the individual. Quite simply, if a risk is insurable it is
reinsurable.
WAYS TO REINSURE
- Pooled reinsurance — MIUs join together in a relationship that links them only
through the pool. There is typically some form of standardization across the pool
to ensure transparency and avoid one scheme profiting at the expense of
another. The more heterogeneous the MIUs the better the pool advantage, and
the more regionally dispersed, the lesser risk of fluctuation due to epidemic or
natural disaster. Pooling enables better use of reserves.
- Reciprocity also enables a better use of reserves, but in this case the MIUs are
known to one another and probably have other ties and commonalities.
- Subsidies from government or donors — this may sustain the MIU, but may
also send inappropriate signals to the key players. The lessons from previous
insurance experience indicates that subsidies can worsen or alleviate market
failure depending on where into the system they are paid, that there may not be a
perfect method to subsidise, and no matter how well run an MIU subsidy may be
essential in the long run due to the gap.
REINSURANCE INDUSTRY
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 participating companies.
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)
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 dacades, 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 since adequately
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 india also has
another representative office in Moscow. GIC has developed necessary skills and
has qualified manpower to take care of growing needs of the expanding Indian
industry.
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 than
156% 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 income for GIC Re went up from Rs. 200 toRs.270 cr. It is learnt
that its international reinsurance business amounted to 22% of its total turnover
for the year.
3rd Asian Reinsurers’ Summit was organised 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 and furthering business co-operation
CHALLENGES FOR REINSURANCE MARKET
Prior to nationalization in 1973, the reinsurance market in India had a much
diluted presence in the industry. The foreign companies operating in India were
managing their risk portfolio with their parent companies overseas. To safeguard
the identified and limited risk of insurance companies, local companies created
India Insurance Pool.
Some of the major issues in accounting have been undertaken considering the
recent developments in the business. The return from foreign companies are to
be incorporated when received upto 31st march and returns from indian
companies and state insurance funds received as of different dates are accepted
upto the date of finalization of accounts.
Arising out of the occurrence of disastrous like terrorist attack on world trade
center etc. which brought about unprecendented loss of life and property and
thereby unbearable liability and operational crisis onto the reinsurance industry
world over.
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 capacity and stability.
Since, some of the products are losing the importance (like proportional 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.
Reinsurance mean 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 to
diversify and distribute risks of an insurer. Reinsurance even provide technical
assistance and rating assistance to the original insurers. Reinsurance is also a
contract of indemnity. The object of underwriting is to make a reasonable profit, it
is equally essential that the business ceded to reinsurers should also give them a
margin. For profit, therefore, the overall quality of business accepted by direct
insurers should be good.
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.
BIBLIOGRAPHY
BOOKS :
WEBSITES :
WWW.IRDA.com
WWW.OUTLOOKMONEY.com
WWW.INSURANCETRANSLATION.com