DEPARTMENT OF MANAGEMENT

TERM PAPER REPORT

TITLE
Emergence and relevance of Re-Insurance business keeping in mind the
large scale of devastations worldwide.

Submitted To:
Mr. BHAVDEEP SINGH Submitted By:
JITENDER SINGH
A-19
10905479

DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY
PHAGWARA(2010)
 CONTENTS

ACKNOWLEDGMENT

INTRODUCTION

WHY IS REINSURANCE NEEDED?

FUNCTIONS OF REINSURANCE

TYPES OF REINSURANCE

REINSURANCE INDUSTRY

CHALLENGES FOR REINSURANCE MARKET

WHAT INDIA NEED TO DO?

GLOBAL POSITION

CONCLUSION

BIBLIOGRAPHY
 Acknowledgement

I sincerely feel that the credit of this term paper could not be narrowed to only one
individual as the whole work is outcome of integrated efforts of all those
concerned with it through whose cooperation and effective guidance I could
achieve its completion.

I wish to place my profound indebtness and deep sense of obligation to MR

BHAVDEEP KOCHER Senior lecturer Lovely Professional University for
providing me with the opportunity to work on such an interesting topic. I also want
to pay my gratitude and sincere thanks to my esteemed sir for being supportive and
lenient during the entire tenure of this term paper.

When emotions are involved words fail to mean. My heart full sincere gratitude to
my parents, who have supported, encouraged and helped me throughout my life
and academic career.

Jitender singh
 INTRODUCTION
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 supplement 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 huge devastation thereby threatening the solvency of the insurance company
 WHY IS REINSURANCE NEEDED?
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.
As mentioned earlier, in the Indian market, which has a combination of new, small and existing
insurers underwriting new businesses, the 20 per cent obligatory cessions has always been a
matter of comfort. It is a source of reassurance to the insured as well.
Therefore, obligatory cessions create an automatic capacity to the extent of
the amount ceded, so that the direct insurers do not become vulnerable to
the vagaries and whims of the foreign reinsurance market and brokers.
Obligatory cessions ensure that a minimum of 20 per cent (subject to certain
quantum restrictions in fire and engineering) premiums are retained within
India provided, of course, the reinsurer again does not cede them on
proportionate basis.

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.

However, it must be conceded that this concept of obligatory cession should be progressively
phased out as the market grows and gets integrated with world markets.

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:

• good spread of risks geographically and class-wise

• foreign exchange cost is restored
• insurers also learn and get experience in the foreign reinsurance business
 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 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

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.

(5) REINSURER’S EXPERTISE

The insurance company may want to avail of the expertise of a reinsurer in regard to a specific
(specialised) 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 balancing the portfolio.

(7) MANAGING THE COST OF CAPITAL FOR AN INSURANCE COMPANY

By getting a suitable reinsurance, the insurance company may be able to substitute "capital
needed" as per the requirements of the regulator for premium written. It could happen that the
writing of insurance business requires x amount of capital with y% of cost of capital and
reinsurance cost is less than x*y%. Thus more unpredictable or less frequent the likelihood of an
insured loss, more profitable it can be for an insurance company to seek reinsurance.
 TYPES OF REINSURANCE
(1) PROPORTIONAL
Proportional reinsurance (the types of which are quota share &surpl us 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.

The other form of proportional reinsurance is surplus share or surplus of line treaty. In this case,
a retained “line” is defined as the ceding company's retention - say $100,000. In a 9 line surplus
treaty the 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). The maximum 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 $3 million
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 andstop 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.

Incatastro phe 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.).

Aggregate XL afford a frequency protection to the reinsured. For instance if the company retains
$1 million net any one vessel, the cover $10 million in the aggregate excess $5 million in the
aggregate would equate to 10 total losses in excess of 5 total losses (or more partial losses).
Aggregate covers can also be linked to the cedant's gross premium income during a 12 month
period, with limit and deductible expressed as percentages and amounts. Such covers are then
known as "Stop Loss" or annual aggregate XL.
(3) RISK ATTACHING BASIS
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.

(4) 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

(5) 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 coincides with 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 “continuous” or “term” basis. A continuous

contract continues indefinitely, but generally has a “notice” period whereby 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 for insurers and reinsurers to have long term relationships that
span many years.
There are two important goals of contract wording which we need to keep in mind:
1. A contract should be short, concise and easy to understand;
2. The contract should contain terms and provisions that lend themselves to ready and uniform

REINSURANCE INDUSTRY
As one of the business market research paper has put it “Reinsurance is an international , multi
billion dollar industry that is vital to the financial stability of all types of insurance companies.”
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 a dynamic 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 millions of 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 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.
The developments after nationalizations insurance industry created a new body with the merger
of India Reinsurance and Indian Guarantee for its reinsurance business to support the technology
and engineering mega projects.

Some of the major issues in accounting have been undertaken considering 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.

There is a wide difference between the rates required by the international reinsurers and those
charged by the domestic insurers leading to the price affordability as an issue. Where there are
tarrifs, like a case of India, the customers cushioned from the rate of increase in the international
market. Such impositions are required to be self – absorbed.

The Indian market is in absence of the competitive environment of the international reinsurers at
the local level, and has depended mainly on the domestic market understanding and basing
probability of business ceded rather than on underwriting and risk information criteria.

A regular interaction for regional co-operation has to be developed to set up a framework of the
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 NEED 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 capacity and 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 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.

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 like Hurricance,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 huge amount of
losses incurred, in the aforesaid events, forced the reisurers to hike the rates 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.

TOP 20 GLOBAL P & C REINURERS

 2009 2008 Group GPW US $ mm Market share(%)
1 1 Munich Re 17400 12
2 2 Swiss Re 16046 11
3 3 Berkshire 8039 5

Heathway
4 5 Lloyd’s 7943 5
5 4 Hannover Re 6569 4
6 6 Ge insurance 4469 3
solution
7 8 Transatlantic 4141 3

Holdings
8 11 Partner RE 3471 2

9 10 XI Capital 3421 2

9 Everest Re 4311 2
10
11 7 Converium 3395 2
12 12 Ace 2960 2
13 13 SCOR 2060 1
14 15 Odyssey Re 1954 1
15 14 White Mountain 1933 1
 Re
16 17 Korean Re 1907 1
17 23 Platinum 1660 1
Underwriters
18 18 Arch 1657 1
19 16 AXA Re 1571 1
20 19 QBE Re 1480 1

CONCLUSION
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 :
 Principal of insurance management, 1st Edition, Author – Neelam C.
Gulati, chapter 17, Reinsurance, Pg No. 227 to 248
 Insurance Theory and Practice, 3rd Edition, Author – Nalini Prava Tripathy
& Prabir Pal, chapter 9, Reinsurance – Global Environment and Indian
challenges, Pg No. 89 - 103
WEBSITES :

WWW.IRDA.com
WWW.OUTLOOKMONEY.com
WWW.INSURANCETRANSLATIO