REINSURANCE

PRESENTATION
BY
 Definition of Reinsurance
• “Reinsurance is insurance for insurance
companies”
• “Reinsurance is the transfer of part of the
hazards or risks that a primary insurer assumes
by way of insurance contracts or legal provision
on behalf of an insured to a second insurance
carrier, the reinsurer who has no direct
contractual relationship with the insured.”
(according to M. Grossmann, Reinsurance – An
introduction.)
 NEED FOR REINSURANCE
A primary insurer needs
• To limit the impact of annual fluctuation in
the losses he must bear on his own
account;
• To be protected in case of catastrophe;
and
• To have capacity to handle larger risks
• To maintain solvency margin
Reinsurance -
Advantages to the Primary insurer
• Reduces the probability of ruin by assuming catastrophe
risks.
• Stabilizes the balance sheet by taking/ceding part of
risks of random fluctuation, risks of change and risks of
error.
• Improves the balance of the portfolios by covering large
and highly exposed risks.
• Enlarges the underwriting capacity by accepting
proportional share of risks and providing part of the
necessary reserves.
• Releases equity from tied up and make it effectively
available for his regular activity.
 Advantages to the Primary
insurer….contd
• Enhances the effectiveness by providing add on
services such as:
1. Compiling and presenting underwriting data from
sources around the world;
2. Assessing and evaluating special risks;
3. Offering consultation in loss prevention;
4. Providing loss adjustment support;
5. Performing actuarial work;
6. Training members of the cedent’s staff; and
7. Helping ceding companies to invest their capital, to
recruit managerial staff, find cooperation partners,
arrange mergers, etc.
Reinsurance -
Advantages to the Reinsures
• Better spread across the world
• Long term client relationship
• Lowering the chances of ruin by
retrocession encouraging more balanced
portfolios
• Advantage of law of large numbers
 Methods of Reinsurance

Facultative Obligatory

proportional Non proportional proportional Non proportional

 Facultative Reinsurance
• Oldest form
• Either proportional or non proportional
• For individual risk
• Ceding by selection
• Detailed examination and Optional acceptance
by the reinsurance
• Largely matching terms and condition in both the
contracts
• Most suitable for very large and innovative risks
 Obligatory Reinsurance
• Automatic reinsurance by means of treaties
• The cedent binds obligatorily to cede and
reinsurer binds obligatorily to accepts
contractually agreed share of the risks defined in
the treaty, either on proportional or on non-
proportional basis
• No selection of cessions within the defined risks
• Mostly blind treaties
• Follow the fortune
• Continuity feature with provision for annual
renewal and termination with prior notice
 Basic forms of Reinsurance

Proportional Non- Proportional

Quota share Surplus

treaty treaty

Excess of Stop Loss Top and

Loss cover cover Drop cover
 Proportional Reinsurance

• The primary insurer and the reinsurer share the premium

and losses at contractually defined ratio;
• The reinsurer’s Share of the premium is directly
proportional to his obligation to pay any losses;
• The price for the proportional cover is the commission on
the premium ceded to take care of cedent's procurement
cost and management expenses
• The important types of proportional reinsurance are:
1) Quota Share treaty
2) Surplus Treaty
 Quota share Treaty
• The reinsurer assumes risks at a
predetermined percentage of (a fixed
quota) all the insurance policies written by
the direct insurer within the defined branch
or branches of insurance.
• The premium and claims are shared at this
percentage.
• It is simple and cost effectiveness.
 Surplus Treaty
• The reinsurer does not participate in all risks; the primary
insurer, for himself retains upto certain amount called his
retention
• The retention may be defined differently for each class of
risk according to his practice
• the surplus over his retention is ceded which the
reinsurer is obliged to accept upto a defined limit
• This limit is usually defined in multiples of the cedent’s
retention known as lines.
• The ratio that results between the risk retained and the
risk ceded is the criteria for distribution of liability
• There can be more than one surplus treaty arranged with
different reinsurers
• Aims at better balancing of portfolios.
 Non-proportional Treaty
• Loss based; not on risk based
• No predetermined ratio for dividing premiums and
losses;
• Share of loss that each one pays depends on the
amount loss incurred;
• The treaty defines deductible upto which the primary
insurer pays all losses; the reinsurer takes on liability
beyond deductible upto certain limit
• The deductibles are also called “net retention”, “excess
point” and “priority”
• The important types of non-proportional reinsurance are
1) excess of loss treaty
2) stop loss treaty
Obligatory Reinsurance… Contd
• Periodical Accounts statement
– Monthly/Quarterly/ Half yearly/yearly
• Treaty share of premium in respect of risk attached
during the period
• Treaty share of claims paid during the period
• Reinsurance commission ( Fixed/ sliding)
• Cash loss
• Profit commission
• Clean cut
• Run off treaty
 What to Reinsure
• One risk
• Group of similar risk
• Individual loss
• Accumulated loss
• Annual loss.
 Operative Clause of a treaty
• “The company binds itself obligatorily to cede and the
reinsurer binds obligatorily to accept by way of
reinsurance a percentage stated in the schedule of the
first surplus over and above the amount retained by the
company for its own account on all insurances and/or
facultative reinsurances written in the Fire dept of the
company and emanating from all parts of the world
except the USA & Canada. within the scope of this
agreement, the company may cede hereunder on any
risk up to --------times of net retention and not exceeding
an amount equivalent to --------”.
 Other contents of the treaty
in-respect of proportional treaties
• Attachment of cessions
• Follow the fortunes
• Exclusions
• Accounting clause
• Commissions and profit commission
• Loss advices and accounting of losses
• Premium and loss portfolios
• Cessions running to expiry
• Valuation of portfolios
• Commencement and terminations
• Notice of cancellation (anniversary date)
• Termination
Contents of non proportional treaty
• Terms of agreement • Reinstatement
• Insuring clause • arbitration
• Definition of loss • Errors and omissions
occurrence • Alterations
• Ultimate net loss • Set-off clauses
• Net retention • Underwriting policy
• Premium clause • Intermediaries
 Other Methods

• Facultative obligatory / Open cover

• Pool
• Inter Group Transfer
• Captive companies
• Alternate Risk Transfer Mechanism
 Regulatory Requirements
• Minimum Paid up Capital Rs. 200/-crores
• Obligatory cession to National Reinsurer 10% on Quota Share basis
– 50% to be retroceded with XL protection
• Maximum retention within the country
• Preferential Cession to National Re & Indian Insurers.
• Minimum Credit Rating “BBB” by S&P or by equivalent international
Rating Agency for the past five years
• Exposure norms - not exceeding 10%BBB; 15%AA; 20% AAA in
single company or Group.
• Filing of RI programs: 45 days in advance of the commencement of
financial years
• Filing of concluded Treaties: within 30 days of commencements of
the financial year
 Regulatory Requirements Contd..

• RI Brokers – minimum capital Rs. 2 Crores; Coposit

Brokers Rs. 2.5 crore
• License Fee: 0.5% on Annual Commission receipt
Type of Brokers Minimum Maximum
Direct Rs. 25,000/- Rs.100,000/-
RI Rs. 75,000/- Rs. 300,000/-
Coposit Rs. 125,000 Rs. 500,000/-

• Professional Indemnity policy to be produced by The

Brokers: 3 times of commission receipt Subject to a
minimum of Rs. 2 crores / 2.5 Crores / 5 crores
respectively for Direct, RI and Composit Brokers
respectively.
WISH YOU ALL THE BEST