5 Reinsurance

Insuring the Insurer
Reinsurance
Reinsurance:
• Insurance for Insurance companies
• Means of risk protection for Insurance
company
• “Reinsurance is the transfer of part of
the risks that a direct insurer assumed to
the reinsurer.”
Reinsurance
PREMIUM
CEDING REINSURER
COMPANY (Reinsurance
(Insurance Co.) Co.)
CLAIM SETTLEMENT
• Insurance Company transfers the risk to Reinsurer
• Reinsurer indemnifies the Insurance company against a

potential liability
Top 10 Global Reinsurers 2020
Ranking Life and non-life GWP
2017-2018
Company
2018 2017 2018 * 2017 evolution
1 1 Munich Reinsurance 37 859 37 821 4.69%

2 2 Swiss Re 36 014 34 775 -5.31%
3 4 Hannover Rück 25 306 21 314 2.99%
4 5 SCOR 18 300 17 718 -1.42%
5 3 Berkshire Hathaway 16 952 22 740 -32.38%
6 6 Lloyd's 14 976 14 250 -1.31%

7 8 China Re 14 053 10 435 10.82%
8 9 Great West Lifeco 13 657 7 924 5.95%
Reinsurance Group of
9 7 12 438 10 704 -2.36%
America
10 10 Korean Re 6 917 6 775 0.41%

Reinsurance: Functions
Protection
Capacity
Catastrophe
Stabilization
Financing
Reinsurance: Benefits
Transfer of large risks.
• Protects insurance company against catastrophes.
Ensures Income Smoothing and Solvency.

• Absorbing larger losses.
• Increased solvency margin.
• Reduced cost of capital
Increases the risk appetite.
Expert advisory services.
Supports growth of insurance business.

Reinsurance: Types
1. Facultative Reinsurance
2. Treaty Reinsurance
• Each type of reinsurance can be

structured as Proportional Or Non
Proportional
Facultative Reinsurance
Facultative reinsurance:
• When reinsurance is taken for an individual risks.
• E.g., one particular policy (fire policy) or only one
location.
Generally used to reinsure…

• Extra-hazardous or unusual risks .
• High valued risks.
Treaty Reinsurance
Treaty Reinsurance:
• When reinsurance is taken for entire portfolios.
• E.g., all commercial fire polices, all automobile
policies, all homeowners policies, or, any
combination of these.
Generally taken to…

• Address solvency issues.
• To stabilise financial losses in general.
Proportional Reinsurance
Reinsurer assumes pro rata responsibility.
With the proportional insurance the direct insurer and the

reinsurer divide premiums and losses between them at a
contractually defined ratio (quota shares and surplus).
Sum Insured by Direct Insurer 10 mn

Direct Insurer retains 70% of the exposure 7 mn
Reinsurance taken for 30% exposure 3 mn

Loss Claimed 6 mn
Direct Insurer pays 70% of 6 mn 4.2 mn
Rensurer pays 30% of 6 mn 1.8 mn
Non-proportional Reinsurance:
With non-proportional reinsurance the reinsurer assumes
a defined tranche of the risk (excess of loss or stop loss).
Reinsurer compensates the loss suffered by the insurer

exceeding a certain amount.
Sum Insured by Direct Insurer 12 mn

Direct Insurer retains 8 mn
Reinsurance taken for Exposure exceeding 8 mn 4 mn

Loss Claimed 10 mn
Direct Insurer Pays 8 mn
Reinsurer Pays (10-8) 2 mn
Reinsurance in India
Post deregulations GIC became the domestic

market's only professional re-insurer for general
insurance companies.
The primary objective of GIC is…

• to focus on reinsurance, both in India and abroad.
• to maximise aggregate domestic retention of
premium
• To minimise the drain of foreign exchange
Quiz 4.1
• In case of reinsurance who pays the premium?
– Policyholder Insurer Reinsurer
• Reinsurance is a contract of ______.
– Good faith Indemnity Bailment Primary enforceability
• Who is known as ceding company?
– Insurance Company Reinsurer
– Broker GIC
• Which of the following is not a benefit of reinsurance?
– It increases the risk appetite of insurance company.
– It ensures income smoothing and solvency of insurance company.
– It helps in boosting growth of insurance business in an economy.
– It helps to control the inflationary risk.
• ____________reinsurance is taken for entire portfolios.
– Facultative Treaty ProportionalNon-proportional
• ____________reinsurance is taken for an individual risks.
– Facultative TreatyProportionalNon-proportional
• What would be the compensation amount payable by the reinsurance company if a proportional
reinsurance taken for 40% coverage and the loss is $100 mn.
– $40 mn $100 mn $60 mn
• _________________reinsurance the reinsurer assumes a defined tranche of the risk
– Facultative TreatyProportionalNon-proportional

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What are the main types of reinsurance?

What are the main types of reinsurance?

What are the main benefits of reinsurance for insurance companies?

What are the main benefits of reinsurance for insurance companies?

Insuring the Insurer

• Insurance Company transfers the risk to Reinsurer

• Reinsurer indemnifies the Insurance company against a

1 1 Munich Reinsurance 37 859 37 821 4.69%

5 3 Berkshire Hathaway 16 952 22 740 -32.38%

6 6 Lloyd's 14 976 14 250 -1.31%

10 10 Korean Re 6 917 6 775 0.41%

Ensures Income Smoothing and Solvency.

Increases the risk appetite.

Expert advisory services.

Supports growth of insurance business.

• Each type of reinsurance can be

Generally used to reinsure…

Generally taken to…

With the proportional insurance the direct insurer and the

Sum Insured by Direct Insurer 10 mn

Reinsurer compensates the loss suffered by the insurer

Sum Insured by Direct Insurer 12 mn

Post deregulations GIC became the domestic

The primary objective of GIC is…

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