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Reinsurance Basics,

Methods & Types


Ramaswamy N.,
AGM , GIC Re

GIC Re

Risk Management

Avoidance
Prevention
Control
Acceptance
Transfer
Spread

GIC Re

Coinsurance Relationship
Risk

Insurer1

Insurer2

Insurer3

Relationships are between insured and each insurer


If one insurer is unable to honor his share of claim, other
insurers are not liable for making good his share

GIC Re

Reinsurance Relationship
Insured

Insurer

Reinsurer1

Reinsurer2
GIC Re

Reinsurer3

Reinsurance Relationship
Insured has relationship only with insurer
Insured is not party to the reinsurance
contract
If any of the reinsurers do not pay their
share of the claim, insurer must still
indemnify the insured

GIC Re

Reinsurance - Definition
Mr. Robert Kiln
insuring insurers

Dr. F. L. Tuma
Mechanism used by an insurance company to
reduce possible losses from risks accepted
Reinsurance does not reduce losses, but
gives insurance companies the strength to
withstand losses
GIC Re

What is Reinsurance
Insurance of Insurance
Risk transfer from Insurance Company to
Reinsurance Company
Spreading of risk
Smoothening Peaks & Troughs
Acts like a shock absorber in cars

GIC Re

Effect of claims
Large individual claims
Frequent sizable claims
Unexpected accumulation of claims /
Aggregations over a period

GIC Re

Reinsurance - Functions

Protection
Increase in capacity
Financial stability
Stabilizing claims ratio
Spread of risks
Protection of solvency margins
Improve profitability
Expertise
GIC Re

Reinsurance - Advantages

Increased capacity
Ability to accept larger shares
Spread of risk to other markets
Stabilizing operating results
Improves the insurance market

GIC Re

Historical Developments
Originally associated with ships & cargoes
300 BC loans on maritime venture
916 BC law passed in Rhodes, defining
general average
1347 earliest marine policy
1370 Earliest record of marine
reinsurance
GIC Re

Historical Developments
1666 Great Fire of London led to the
emergence of many insurance companies
1601 Act concerning matters of
assurance passed in England
1650 initial formation of Lloyds

GIC Re

Reinsurance Market
Buyers of Reinsurance
Direct Insurance Companies
State Insurance Corporations
Lloyds Syndicates
Reinsurance Companies
Insurance Pools

GIC Re

Reinsurance Market
Sellers of Reinsurance
Professional Reinsurance Companies
Lloyds Syndicates
Direct Insurance Companies
National Reinsurance Companies
Regional Reinsurance Corporation
Reinsurance Pools
GIC Re

World Markets
Top 15 Global Reinsurance Groups (NWP)
Rank
1.
2.
3.
4.
5.
6.

Company
Munich Re
Swiss Re
Hannover Re
Berkshire Hathaway Re
Lloyds
SCOR
GIC Re

Country
Germany
Switzerland
Germany
USA
UK
France

World Markets
Top 15 Global Reinsurance Groups (contd.)

Rank
7.
8.
9.
10.
11.
12.
12.

Company
Reinsurance Group of America
China Re
Partner Re
Korean Re
Everest Re
Transatlantic Holdings Inc.
Tokio Marine
GIC Re

Country
USA
China
Bermuda
Korea
Bermuda
USA
Japan

Retention
Risk Retention : Amount a company is
willing to put at stake for its own account
when underwriting risks
Loss Retention : Maximum amount a
company is prepared to pay on any loss
affecting a policy, risk or group of risks.

GIC Re

Types & Methods


Reinsurance

Treaty

Proportional

NonProportional

Facultative

Proportional

GIC Re

NonProportional

Treaty

Automatic no choice for either party


Multiple Risks Portfolio protection
Blind acceptance risk details not given
Convenient and efficient
Placed for each class separately
Terminable on annual basis
Accounts rendering by way of periodic
documents called bordereaux
GIC Re

Facultative

Simplest and oldest method


Single risk method
Full disclosure of facts
Better exposure control
Option to accept or reject
Element of uncertainty
Cumbersome & expensive administration
GIC Re

Fac when used


Hazardous, unusual & large risks
Expertise of reinsurer is required
When capacity required is larger than
automatic capacity
For businesses excluded under treaty

GIC Re

Facultative Slip

Name of Cedant
Name of Assured
Risk Details location, occupancy, age
Period of cover
Perils covered
Basis of UnderwritingPML/TSI/Loss Limit
Sum Insured with break up
Rate charged for all sections
GIC Re

Facultative Slip
Deductibles
Total Premium
Total Deductions commission, brokerage
& taxes
Past experience
Cedants retention
FAC order available
Survey report
GIC Re

Proportional Treaties

Automatic no choice for either party


Equal sharing of premium & claims
Risks shared on pro-rata basis
Reinsured is compensated acquisition
costs by way of commission
Two main types
Quota Share & Surplus
GIC Re

Quota Share Treaty

Operates on Fixed Percentage basis


Every risk has to be compulsorily ceded
Full spread of business for reinsurers
Inflexible method for reinsured
Retention & Quota Share percentage to
be optimal & meaningful

GIC Re

Quota Share
50% QS with a gross limit of Rs. 100 crore
Net retention will be Rs. 50 crores
QS treaty will be Rs. 50 crores
If QS percentage is 80%, then ?
If 40% QS with limit of 200 crores, then ?

GIC Re

Quota Share - Advantages

Easy to operate and administer


Works like a partnership
No anti-selection against reinsurer
Normally well-balanced treaties
Gives wide spread to reinsurers
Provides capacity to new companies or
new class where results are unpredictable
GIC Re

Quota Share - Disadvantages


Inflexible method of reinsurance
Huge premium outflow
Insurer cannot vary his retention based on
risk perception or soft market conditions
Sometimes capacity is not available,
especially when results are unpredictable
Prevents ability to develop own capacity
GIC Re

Surplus Treaty
Amount surplus after gross retention (net +
quota share) is ceded
Placed in terms of lines
Reinsured decides table of retentions
Maximum gross limit need not always be
taken for each risk
Used to add automatic capacity
Normally one, but sometimes two or three
GIC Re

Surplus Treaty
Gross Retention is Rs. 10 crores
Surplus Treaty with 15 lines
Surplus Treaty limit = ?
Net retention 15 crores, QS is 40%
Cedant wants automatic capacity to cover
risks upto 150 crores, so how many lines?
GIC Re

Auto FAC / FAC Obligatory


Combination of Facultative & Treaty
Methods of Reinsurance
Cedant has option to cede
Reinsurer has no option to refuse
Operates like a surplus treaty
Normally used in Marine or Engineering
where abnormally large policies are issued
GIC Re

Prop Treaties (Accounting)


Run-off basis / Underwriting Year basis
Treaty continues till everything is settled
premium / claims are accounted back to the
respective treaty year

Clean-cut / Accounting Year basis


Treaty terminated at the end of the year
losses and premium outstanding at the end
of the period, is transferred to the new treaty
GIC Re

Proportional Treaty Slip

Ceding Co.
Treaty Type
Period
Scope of Business
Territorial Scope
Retention
No. of Lines
Treaty Limit
GIC Re

Proportional Treaty slip

Commission
Profit Commission
Accounts Settlement
Premium Reserves
Loss Reserves
Premium Portfolio Transfer
Loss Portfolio Transfer
Exclusions
GIC Re

Proportional Treaty slip

Cash Loss Limit


EPI
Brokerage
Statistics
Table of Retention

GIC Re

Example

500 crores risk


Insurer has a 10 crore net retention
50% QS Treaty
20 line surplus treaty
Balance to be ceded to FAC
Rate charged is 1.20%o
Risk suffers a loss of 120 crores
Work out the premium & loss cession
GIC Re

Example solved
Underwriting (Total premium 60,00,000)
Arrangement

Amount

share premium

Net retention

10 crores

2%

1,20,000

QS Treaty

10 crores

2%

1,20,000

Surplus Treaty

400 crores

80%

48,00,000

FAC

80 crores

16%

9,60,000

Total

500 crores

100%

60,00,000

GIC Re

Example solved
Loss (120 crores)
Arrangement
Net retention

share
2%

Loss
2.4 crores

QS Treaty
Surplus Treaty
FAC
Total

2%
80%
16%
100%

2.4 crores
96 crores
19.2 crores
120 crores

GIC Re

Non-Proportional Treaty
Distribution of Loss Liability
Cedant agrees to retain a loss upto a
certain amount called as deductible,
underlying or priority
Reinsurer agrees to pay the excess loss,
upto a specified amount
Normally split into various layers
GIC Re

XL Treaties
The Excess of Loss contract provides a cap
or ceiling to the loss ratio, provided that
adequate levels of cover have been
bought.
Naturally, there is always a risk from the
reinsureds perspective that the deductible
may be set too high, or that the cover
proves to be inadequate in the event of a
worse than expected catastrophic year.

GIC Re

Setting the Deductible


The setting of the deductible is a key issue and
needs to be done rationally
Too high a deductible may threaten its solvency,
too low a deductible might result in it giving away
unnecessary levels of premium (that might
eventually have become profit).
The key is to find a comfortable balance
between the reinsureds capital base and the
underlying risk of the portfolio.
GIC Re

Setting the Upper Limit


Assessing how much cover to buy is just as
important as establishing the level of the
deductible.
Any loss exceeding the limits of the XL treaty
cover will fall back to the net retained account of
the cedant and will have to be borne by him.
Historical losses are a major influence
Some models are available to to determine
probable loss scenarios on current exposures in
case of catastrophic events

GIC Re

Layering
In XL treaties, it is desirable to arrange the
programme in two or more layers; the first
or lower ones being the working layers,
with the subsequent ones regarded as
catastrophe layers / upper layers.
This will ensure better pricing from the
reinsurers, especially for the higher layers
and also ensure better participation from
reinsurers, depending on risk appetite

GIC Re

Non-Proportional Treaty
Two main types
Risk Excess of Loss
Event Excess of Loss

Other types
stop loss
umbrella xl

GIC Re

Types of Non-prop treaties


Risk XL protects individual risk
CAT XL protects multiple risks against a
catastrophic event
Stop Loss Aims to prevent wide
fluctuations of net claims ratio
Umbrella XL protects aggregations
between different classes

GIC Re

Risk / CAT XL
The XL treaty limits and deductible will be
expressed in amount as under :
10 crores each and every risk / event
In excess of
5 crores each and every risk / event

GIC Re

Stop Loss
E.g. 20% loss ratio in excess of 110% loss
ratio
or, 20% GNPI xs 110% GNPI
This is usually in conjunction with actual
monetary limits, to ensure that exposures do not
go up unchecked
Alternatively, the same limits could be given as:
To pay all losses in excess of a loss ratio of
110% up to a further 20% loss ratio

GIC Re

Non-Prop Treaties
Risk Attaching basis
Reinsurers assume liability in respect of
original policies issued or renewed during
the period of treaty
Loss Occurring during
Reinsurer assumes liability for claims
arising where date of loss falls within the
treaty period, irrespective of the date of
the underlying policies
GIC Re

Previous example solved


Loss (120 crores)

Net retention 2%
50% QS Treaty 2%
Surplus Treaty 80%
FAC 16%

GIC Re

- 2.4 crores
- 2.4 crores
- 96 crores
- 19.2 crores

Example solved
Underwriting (Total premium 60,00,000)
Arrangement

Amount

share premium

Net retention

10 crores

2%

1,20,000

QS Treaty

10 crores

2%

1,20,000

Surplus Treaty

400 crores

80%

48,00,000

FAC

80 crores

16%

9,60,000

Total

500 crores

100%

60,00,000

GIC Re

Example solved
Risk XL (to protect net retention)
9 crores XS 1 crore

Loss (120 crores)


Arrangement
Net retention
QS Treaty
Surplus Treaty
FAC
Total

share
2%
2%
80%
16%
100%

Loss
2.4 crores
2.4 crores
96 crores
19.2 crores
120 crores
GIC Re

Event XL layers

Net retention 10 crores


Protected as under :
5 crores XS 5 crores
10 crores XS 10 crores
30 crores XS 20 crores

Each layer can have a different set of


reinsurers
GIC Re

Hard and soft Market


Availability of the R/I capacity is a function of the
profitability, this is eminently cyclical in nature
SOFT MARKET: In absence of big losses, if
reinsurers make profits, then more reinsurers enter
the market with capacity or existing reinsurers
increase their capacity. This leads to a situation of
more capacity less business and leads to fall in the
rates and reinsurance becomes cheaper
HARD MARKET: Losses suffered could affect
reinsurers adversely and lead to exit of some of the
reinsurers and capacity. This will harden the market
and leads to increase in rates.

Non-Proportional Slip

Ceding Company
Period
Type of Contract
Class of Business
Territorial Scope
Cover Limit
Deductible
Reinstatements
GIC Re

Non-Proportional Slip

Rate of Adjustment
Minimum & Deposit Premium
General Conditions
Exclusions
GNPI
Brokerage
Other Information
GIC Re

GIC Re

Non-Prop Treaty terms


Minimum & Deposit Premium (MDP)
Normally at 85-90% of XL premium. If GNPI
achieved is less than the MDP percentage,
the MDP premium is taken as the 100%
premium. If it exceeds, then the premium is
calculated by multiplying the GNPI by the
premium rate.

GIC Re

MDP working
GNPI is 1 crore; MDP 85%
Layer

Ded

Rate Premium

3 crore

2 crore

10% 10,00,000 8,50,000

5 crore

5 crore

5%

GIC Re

5,00,000

MDP

4,25,000

Non-Prop Treaty terms


Two-Risk Warranty
Cat Reinsurers will pay claims only if two or
more risks are affected in the same event

Reinstatement
Pro-rata as to amount reinstated
Pro-rata as to time
The number of reinstatements and the amount
at which it is to be reinstated is also
mentioned in the slips
GIC Re