RE-INSURANCE

• Reinsurance is the insurance of insurance.

• Reinsurance is always a contract of indemnity, even in life and

personal accident insurance, because it protects the insurer from a
diminution of his property, caused by insurance policy obligations.

• Retrocession
 NEED FOR/ BENEFITS OF RE-INSURANCE
Additional underwriting capacity :
to expand the volume of business at a faster rate than otherwise would be possible
without a corresponding increase in its capital base.
(Solvency Margin => Net Premium => Retention)
Access to capital (of the reinsurer) which otherwise would not be possible to attain
Spread the risks
Internationally thereby reducing the exposure to catastrophic perils in the particular
location where the insurer is situated.
Stability
Reduced volatility of underwriting results.

Expertise and Services

Access to reinsurers’ expertise and services especially in the areas of product
development, pricing, underwriting and claims management
 Retention
Retention means the amount which an insurer assumesfor his own account. In proportionate contracts, the
retention may be a % of the policy. In excess of loss contracts, the retention is an amount of loss.

There are two types of retention:

Risk retention (called Net capacity)

The part of a risk (sum insured) that is kept for own account by the cedant is known
as risk retention.

Loss retention (Underlying of excess of loss cover).

The amount of loss retained in the ceding company’s account for arranging excess of loss
protection is known as loss retention.

PML Computation
Expectation of Indian Regulator from a reinsurance
programme
The Indian Regulator has instructed all insurance companies to draw their reinsurance programme
with the following uniform objectives:-

a)maximize retention within country;

b)develop adequate capacity;
c)secure best possible protection for the reinsurance costs incurred;
d)simplify the administration of business.

Insurance companies should create the most effective reinsurance program according to the
prevailing circumstances and regulation of the market.
However, in order to achieve this objective, the company must first establish a reinsurance strategy
generally based on company’s risk management philosophy.
 Reinsurance Regulatory Framework
Obligatory Cession: 5% to GIC RE
Finalise Insurance Programme 45 days before commencement of the FY and submit to Authority i.e. 15 Feb every
year
Shall submit all treaties, agreement & slips within 30 days from the commencement of the FY 30 April.
Indian Reinsurer shall organise domestic pool for reinsurance surplus.
Every insurer shall offer an opportunity to other Indian Insurers including the Indian Reinsurer to participate in its
facultative and treaty surplus before placement of such cessions outside India.
The Indian reinsurer shall retrocede at least 50% of obligatory cession received to the ceding insurers after
protecting the portfolio by suitable excessbof loss covers at original terms plus an over riding commission to the
Indian Reinsurer not exeeding 2.5% in same proportion.
Surplus over and above the domestic reinsurance arrangements class wise can be placed by the insurer
indepemdently with any of the reinsurers.
Inward Reinsurance Business: Insurer wanting to write inward reinsurance shall have a well defined UW policy. To
file with Authority.
Outstanding Loss provisioning: IBNR
 REINSURANCE PROCESS
PROCESS:
•Reinsurance Philosophy and Strategies
•Board Approved Reinsurance Programme
•Actual Premium of Previous year and Estimated Premium for coming year
•Fixing of segment wise Net Retentions.
•Deciding the method of reinsurance for each segment/ product- risks
•Selecting of Reinsurer
•Designing Proportional Treaties for various classes.
•Bringing Quotations from Leading Reinsurers for Treaties.
•Negotiating Commission and Profit Commission terms of Treaties.
•Arranging Excess of Loss Treaty Programme to protect Net Account of the Ceding o Company.
•Placement of Reinsurance and documentation.
 METHOD OF REINSURANCE
Proportional:

Proportional method of reinsurance is a method in which the reinsurer shares a proportional part
of the ceded insurance liability, premiums, and losses of the ceding company. Also known as
Participating Reinsurance and Pro-rata Reinsurance.

Non Proportional:

Non Proportional Method of Reinsurance is one in which the reinsurer's response to a loss depends
on the size of the loss, so named because the premium in non-proportional reinsurance is not
proportional to limits of coverage.
 Proportional Reinsurance
Attributes:
Sum Insured : Rs. 1,00,00,000/-
Premium : Rs. 10,000/-
Loss: Rs.50000/-
Reinsurance : Net Retention : 20%; Reinsurance : 80%

Premium Apportionment as per R/I arrangement :

Net Retention --- Rs. 2,000 (20%), Reinsurance - Rs. 8,000 (80%)

Loss apportionment as per R/I arrangement :

Net : Rs. 10,000 (20%) Reinsurance : Rs. 40,000 (80%).

Any loss, irrespective of amount, will be recovered to the extent of 80%.

 Sub Types of Proportional Reinsurance
Facultative:
The word "facultative" connotes that both the primary insurer and the reinsurer have the faculty or option of
offering, accepting or rejecting the individual risk which is the subject matter of reinsurance.

Treaty:
A treaty is an agreement invariably (though not necessarily) in writing between a ceding company and one or more
reinsurers, whereby the ceding company agrees to cede and reinsuer agrees to accept all the risks written by the
ceding company which fall within the terms of the treaty, subject to the limits specified therein.

A treaty means a reinsurance arrangement, usually for one year or longer, which stipulates the technical particulars
and financial terms applicable to the reinsurance of some class or classes of business.

Quota Share Treaty: A quota share treaty is an agreement by which the ceding company agrees to cede and the reinsurer
agrees to accept a fixed percentage of all risks in the particular class or portfolio which is the subject matter of such agreement.

Surplus Treaty: A surplus treaty is a reinsurance agreement where the ceding company is bound to cede and the reinsurer is bound
to accept the surplus liability over the ceding company’s retention or any other cession that may come before such surplus cession, as per
agreement. Lines
Facultative Obligatory Treaty:
 Reinsurance Arrangement
First Surplus Second Surplus
Sum Insureed Statutory Net Quota Share Treaty 10 Lines Treaty 8Lines
(in Crores) Cession 5% Retention Treaty subject to Max subject to Max Facultative
10 Cr. 20% Rs. 20 Cr. Rs. 16 Cr.

100 5 10 20 20 16 29

80 4 10 16 20 16 14

60 3 10 12 20 15 NIL

40 2 10 8 20 NIL Nil

20 1 10 4 5 Nil Nil
 Non - Proportional Reinsurance
Responds in terms of Loss:
Example :
Sum insured of Rs. 1,00,000 is reinsured by way of non- proportional
method expressed as Rs. 80,000 excess of Rs. 20,000.

Reinsurer bears loss only if the loss exceeds the threshhold limit which is
lying below (i.e. Rs. 20,000) but upto an amount of Rs. 80,000

Reinsured recovers loss only if the loss exceeds this threshhold limit which
is Rs. 20,000
 Non - Proportional Reinsurance
Facultative :
It carries the same characteristics of a proportional facultative reinsurance inthere is
option on the part of the ceding company and the reinsurer to accept or decline the risk.
Complete risk profiling is to be done by the reinsurer before acceptance and all terms and
conditions of coverage are same as original policy. The difference lies in the way the reinsurer
responds to a loss.

Treaties:
Excess of Loss treaties, are usually effected to protect the net retention of an insurer
against an exceptionally large loss affecting a single risk (called Risk Excess of Loss covers) or
against a catastrophic event (called Catastrophe Excess of Loss covers) which affect a large
number of risks which are retained in full or in part to the company’s net account.

Risk Excess of Loss

Catastrophe Excess of Loss Cover
Stop Loss Covers (Ratio/ Aggregate) -- Layers
 Reinsurance Commission
Commission under a reinsurance contract is not a remuneration but a way to cover
the costs incurred by the ceding company to acquire the business .

Commission is expressed in terms of percentage of the premium and is entirely a

matter of negotiation between the ceding company and reinsurer.

Flat Rate of Commission

Sliding Scale Commission
Profit Commission (PC)
Overriding Commission
Profit Commission on Renewal (PCOR)
 REINSURER
Indian Re-insurer: GIC RE & ITI Re
Insurance Companies
Branch of Foreign Reinsurance Co.
Munich Re
Swiss Re
SCOR SE India
Hanovar
RGA
LLyod's India Re
Cross Border Reinsurer
Composite Brokers & Reinsurance Brokers
 Foreign Reinsurance Branch
Foreign Reinsurance Branch
Net worth - Rs.5000 Cr.
Investment In India - Rs.100 Cr.
10 Year Operation
Regulated by Home Country
Solvency Margin regulated by Home country Regulator
Domicile of country having DTAA with India
Approval of home regulator for operation in India
Registered in India
 Cross Border Reinsurer
Not registered in India

•BBB + rating by S & P or equilent rating agency

•10 Years of Operation
•Past performance - satisfactory

Reinsurance Limit segment wise

BBB+ 10% of class of total premium ceded

BBB+ => A+ 15% of class of total premium ceded
Greater than A+ 20% of class of total premium ceded
GLOSSARY
Bordereau
Cedant/reinsured
Cession
Ceding Commission
Cover note
Cut Through Clause
Follow the fortunes
Fronting
Layer
Line
PML
Retrocession
Slip
Pool