Reinsurance by mikesanye



            Size of



• “Reinsurance is a contract of insurance
  whereby one insurer (called the reinsurer
  or assuming company) agrees, for a
  portion of the premium, to indemnify
  another insurer (called the reinsured or
  ceding company) for losses paid by the
  latter under insurance policies issued to its


   COMPANIES                BROKER


                                           Company       Broker, Direct.

                                  Broker, Direct.

          Broker, Agent, Phone,
          Online, In person.

                       2006 INDEXED VALUES

•   WTC                                US$      21bn
•   Katrina                            US$      66bn
•   Wilma                              US$      12bn
•   Rita                               US$      10bn
•   Australia Storm (last week) expected
    to be largest natural catastrophe in
    Australian history.                  AUS$   2-3bn
•   Hurricane Andrew                   US$      23bn
•   Northridge                         US$      19bn
                                                                         …and why
                                                                           do we
                                                                         measure it
                            How much of this                            by premium?
                             is reinsurance?

            Global Premiums in 2007                                            Company

                            US$       Growth    Growth
                           billion    in 2007   in 2006
 Life                         2,393    5.4%      4.1%

 Non-life                     1,668    0.7%      3.9%     Insurance   Broker, Direct.
 Total                        4,061

Source: Swiss Re, Sigma 3/2008.
         Destination & Source of Reinsurance Premium (US$ million)
                                               Reinsurance                Risk        Net “Risk”
                                                Premium               “Located” In:
 Europe                                                 88,989             (64,653)        24,336
 North America                                          81,946             (90,306)        (8,360)
 Asia & Australasia                                      1,989             (11,219)        (9230)

 Africa, Near & Middle East                                                 (2,614)        (2,614)
 Latin America                                                              (4,132)        (4,132)
 Total                                                172,924             (172,924)           NIL

Data Source:- 59 Reinsurers: Bermuda 8; Europe 21; Japan 2; USA 28.
Source: IAIS Global Reinsurance Market Report, December 2007

Most risks, both natural and man-made, are insured and yet the
   likely losses are often beyond the capacity of any single
         insurance company or even insurance market.

     Reinsurance is therefore the means by which Insurance
          Companies obtain the necessary protection.

An Insurance Company would therefore buy Reinsurance :
•   To protect its Capital and its Shareholders
•   To Stabilise its results from year to year by leveling claims
•   To increase its Capacity to handle larger and more
    complex risks of various classes
•   To maintain any statutory minimum Solvency
    requirements and provide Security
•   To Spread risks throughout world markets, not just
    locally, to lessen financial impact on any single
•   Limit concentration of risk
•   Take advantage of risk expertise of reinsurers who have
    grater experience of business (territory class)
Reinsurance Transactions
Reinsurance is a contractual agreement under which the primary
insurer transfers some or all of its loss exposures to a reinsurer.

                                  Reinsurer                    Retrocessionaire

• Reinsurance is a form of Insurance.
• There are only two parties to the
  reinsurance contract - the Reinsurer and
  the Reinsured - both of whom are
  empowered to insure.
• The subject matter of a reinsurance contract
  is the insurance liability the Reinsured has
  assumed under insurance policies issued to
  its own policyholders.
• A reinsurance contract is an indemnity
  contract even in life and personal accident
  insurance, caused by insurance policy
    What Reinsurance Does
• It redistributes the risk of loss
  which a reinsured incurs under the
  policies it issues according to its
  own needs.
• It redistributes the premiums
  received by the reinsured according
  to its own needs.
What Reinsurance Does Not Do!

        What Reinsurance Does Not Do!

• Convert an uninsurable risk into an
  insurable one.
• Make loss either more or less likely to
• Make loss either greater or lesser in
• Convert “bad” business into “good
             Reinsurance in india
• After nationalisation in 1972, General Insuarance
  Corporation became the Indian reinsurer.
• The main objective was to maximise aggregate
  domestic retention of premium
• To secure best terms consistent with the quality
  of business ceded
• To minimise the drain of foreign exchange
• However, Oil, satellites and financial risks have
  always been reinsured in the range of 90% or
         Reinsurance in india………
• Until GIC was notified as a National
• it was operating as a holding / parent
  company of the 4 public sector companies,
  controlling their reinsurance programmes.
• GIC would receive 20% obligatory cession
  of each policy written in India.
              Reinsurance in india……

• Since deregulation, GIC has assumed the role of
  the market’s 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
      General insurance corporation

• As a sole reinsurer in the domestic reinsurance
  market, GIC provides reinsurance to the direct
  general insurance companies in the Indian
• GIC receives statutory cession of 10% on each and
  every policy subject to certain limits. It leads
  many of domestic companies’ treaty programmes
  and facultative placements.
           General insurance corporation……

• A GIC is spreading its wings to emerge as an
  effective reinsurance solutions partner for the
  Afro-Asian region and has started leading the
  reinsurance programmes of several insurance
  companies in SAARC countries, South East Asia,
  Middle East and Africa.
• To offer its international clientele an easy
  accessibility, efficient service and tailor made
  reinsurance solutions; GIC has opened
  liaison/representative/branch offices in London
  and Moscow.
             Reinsurance market
• A feature of reinsurance market is that because of
  the way in which insurers and reinsurers operates
  a company may be trading simultaneously as both
  a buyer and a seller of reinsurance.
• So the organization of reinsurance markets range
  from a group of local insurers placing all of their
  reinsurance with a local monopoly reinsurance
  corporation to something as complex as london
            London market
Buyers :
• British and foreign direct writing companies
• Lloyd’s underwriting syndicates (group of
• British and foreign reinsurance companies
 Reinsurance brokers and all above
               Lloyd’s market
Lloyd's is the world's best known - but probably least
 understood - insurance brand. This is because Lloyd's is
 not an insurance company but a society of members, both
 corporate and individual, who underwrite in syndicates on
 whose behalf professional underwriters accept risk.
 Supporting capital is provided by investment institutions,
 specialist investors, international insurance companies
 and individuals.

Lloyd's brokers bring business to the market. The risks
placed with underwriters originate from clients and other
brokers and intermediaries all over the world. Together,
the syndicates underwriting at Lloyd's form one of the
world's largest commercial insurers and a leading
                          Lloyd’s market……..
• Syndicates

Lloyd's members conduct their insurance business in syndicates, each of
   which is run by a managing agent.
The syndicates operating within the market cover many speciality areas
• Marine
• Aviation
• Catastrophe
• Professional indemnity
• Motor

Syndicates tailor solutions to respond to the specific risks of the client
Syndicates compete for business, thus offering choice, flexibility and
   continuing innovation. Syndicates cover either all or a portion of the
   risk and are staffed by underwriters, the insurance professionals on
   whose expertise and judgement the market depends.
Reinsurance Market-US
• Suppliers include both domestic U.S. reinsurers and
  non-U.S. reinsurers; roughly split the U.S. market for
• Some firms solely provide reinsurance; others provide
  both primary and reinsurance.
• Reinsurance market subject to cycles & fluctuations in
  supply or capacity and underwriting/pricing.
• Historically, long-term relationships between primary
  insurers and reinsurers provided stability.
• As relationships have eroded, market has become
  more volatile.
           Buyers of reinsurance
•   Direct writing companies
•   Captive insurance companies
•   Reinsurers
•   State owned insurance corporations
•   State reinsurance corporation
•   Underwriting pools
•   Regional reinsurer pools and corporations
       Sellers of reinsurance
• Professional reinsurance companies
• Lloyd’s of London
• Direct insurance companies
• Underwriting agencies
• State insurance and reinsurance
• Insurance and reinsurance pools
• Regional reinsurance corporation
         Reinsurance brokers
The role of the reinsurance broker
Advise clients:
• Proper retenton and adequate capacity
• Market knowledge
• Prepration of reinsurance contract
• Collection of premium
• Claim negotitation and collection
• Provision of informtion
• Code of conduct
             BASIC RULE


Functions of Reinsurance
 • Stabilization of loss experience (net income protection)
    – i.e., hedging ( the risk of insurer is spread to re-insurer)
    – Otherwise adverse claim ratio shall lead to increase in
      premium rates and so shall affect business in the market
 • Large-line capacity
    – full retention of large exposures not feasible
    – Can undertake more business of different nature
 • Financing- large losses can endanger the financial stability if
   not reinsured
    – keep leverage reasonable, offset                   serious
      or series of losses
    – Timely availability of finance
 • Catastrophe protection
 • Underwriting assistance
 • Withdrawal
    – portfolio transfers
Stabilization of Loss Experience
                Function: Finance
• Reinsurance enables an insurer

   – to continue to write polices without draining capital
     and surplus
   – reduces written premium
   – Increases surplus by recouping acquisition expenses
     through RI commission

   However :
   – Acquisition cost is paid upfront
   – Drain on surplus if volume is expanding rapidly
               Function: Capacity
• Insurers require greater capacity than their own
• Reinsuring risks brings in additional capacities

• An insurer with a policy limit of Rs. 10 crore

   – Builds capacity of Rs. 20 crore
   – Cedes 50 % to surplus share reinsurance treaty
   – Alternatively, arranges an Excess of Loss
     cover of Rs. 10 crore
         Function: Stabilization

• Stable underwriting results vs. wide

• Through XoL enables insurer to
  – Determine loss limits per risk or in aggregate
  – Reinsurer pay above the loss limits
     Stabilisation of Catastrophe

• Balance sheets protection against severity of
  major catastrophe e.g., hurricanes, floods,
  earthquakes etc.

• Catastrophe XoL (Excess of Loss) specifically
  addresses accumulation of small losses and
  single major loss
Relationships & Insolvencies
• Typically, there is no contractual relationship between
  primary insured and reinsurer.
   – recourse only through receiver of insolvent insurer
• Exception: cut-through endorsements-A cut-through provision allows
  a party not in privity with the reinsurer to have rights against the reinsurer
  under the reinsurance agreement
• Offsets
   – Typically, a reinsurer can offset any receivables from
     insolvent insurer against reinsurer’s obligation to insolvent
• If reinsurer goes insolvent, Primary insurer still obliged
  to insured even if reinsurer fails to meet obligations.
• Management of a Ceding Insurer sets the
  retention limit for different risks or class of
  risk depending its capacity to retain/bear
  the risks based upon the financial position,
  underwriting experience, etc.
• The insurers therefore have set limits and
  approved method for a decision for ceding
  business through an approved form of
                   A LINE

1. A line of business such as Fire, Multi-
   Peril, General Liability, etc.

2. An amount retained by the insurer on a
  risk equivalent to its bearing capacity

3. To fix a retention line is a subjective
  decision made with the help of computer
  simulation of data
• Retentions are expressed in terms of S.I.
• But loss exposures - PML are also taken into
  account- past claim experience & probability law
• Decision on Retention limit is standardized based
  on risk factors (similar loss exposer per risk):
   – Location
   – Separation
   – Process carried on
   – Class of construction and fire protection
• In case of large risks- inspection of risk and PML
  shall determine the retention limit individually
                 Measure -Retention   ……
 (Traditional approach - “As if”)
• -To estimate MPL based on the past records.
• -Applying past losses to the insured values that exist
   now. Good to know simple as well as complex losses.
 (Current approach – “Probabilistic”)
• -The computer simulation of all the possible losses
   that could happen within a long period of time.
• -This type of model also makes it possible to
   understand the relationship between loss potential
   and occurrence frequency.
• Insurers are increasingly using these models. Some
   have in-house models. Some depend on professional
                  Fixing Retention Level
• The Factors in the decision

      Risk Profile    Impact on PL
                                           Overall Decision

          Cost of

• Management is fully involved in the decision process,
  because how much they can/should retain those largest
  risks is one of the most significant issues.
• Some insurers have their own model for the simulation
  of their optimum retention.
              Life Insurer’s retention Limit
• This study examines the relationship between ceding life insurers'
  retention limits on an insured life basis and certain operational and
  financial characteristics of the companies.
• Analysis is performed using 97 major U.S. insurers with 1987 assets
  ranging from $108 million to $32 billion. Retention limits for these
  insurers vary from $25,000 to $20,000,000 per insured life.
• Five factors are shown to have the greatest impact on life
  insurer retention limits. These factors are
• (1) firm size is found to be the most important factor,
• (2) form of insurer organization (i.e., mutual or stock),
• (3) the firm's emphasis on new business,
• (4) average policy size, and
• (5) the company's emphasis on term insurance.
• Collectively, the principal components regression model
  explains nearly 90 percent of the total variation in
  retention limits for the sample insurers.
Types of Reinsurance
Types of Reinsurance
• Facultative Reinsurance
  – Primary insurer and reinsurer negotiate a specific
    agreement for a particular risk/exposure.
  – Best suited for unique, large exposures.
  – High transaction costs.
  Facultative Obligatory Treaty (Facultative +Treaty)
  – The insurer cede risks of any agreed class which
    Reinsurer must accept if ceded
Types of Reinsurance ……..
• Treaty Reinsurance (agreement)
  – Reinsurer is obligated to accept all business that falls
    within the terms of the treaty.
  – Lower transactions costs but greater potential for
    adverse selection.
  – Best suited for numerous, smaller exposures that are
    more similar.
  1. Quota Share Treaty
  2. Surplus Treaty
Quota Share Treaties- Proportional
• Primary insurer cedes a fixed, predetermined % of premium
  & losses on every risk it insurers within class(es) subject to
• Simple to rate & administer.
• Does not stabilize underwriting results.      $150,000 Policy
• Can help reduce reported expenses.
• Can cede profitable business.
                              $100,000 Policy

             $50,000 Policy                      25%         75%

                               25%        75%
             25%        75%
             Quota share treaty…….

• Every risk or policy is shared in the percentage
  agreed in terms of sum insured subject to a
  maximum limit and also the premium
• Profitable to reinsurer as he participate in every
  risk or policy
• It is costly to ceding insurer and so a short term
  arrangement or for new class of business
• Good for new Insurer with less capital in relation
  to underwriting of insurance business
Surplus Share Treaties- Proportional
– Minimum limit of           Example:
  retention stated in $ or   $25,000 retention
  INR; % of premiums &
  losses ceded varies by
  policy.                                      $150,000 Policy
– Avoids cessions on
  small policies.
                             $100,000 Policy
– Better at providing
  large-line capacity.
                                                17%        83%
– More costly to
  administer.                25%         75%

– Used on property risks,
  rarely liability.

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