 Earliest reference to reinsurance in Fire

insurance was made in 1778 – to Royal

Chartered Insurance of Copenhagen
 First fire reinsurance contract -1821
 The Cologne reinsurance company[1846]-
oldest professional reinsurer still in existence
& merged with Gen Re.
 Swiss re-1863 & Munich –Re-1880
 The Mercantile & General –first professional
reinsurer in England –estd. in 1917
 Facultative & Treaty which one older
 The introduction of excess of loss cover is
considered as one of the most significant
developments in reinsurance in the past 100
years
 1951 – India reinsurance corporation –was
formed in India
 1961 –Govt decided obligatory/statutory
cession for every insurer in country:- to two
approved Indian reinsurers[1. India
reinsurance corporation & 2. Indian
Guarantee & General Insurance Coy.]
 1966 – Reinsurance Pools in Fire & Hull –
initiated by Indian Insurance Companies
Association
 1972 – GIC was formed under GIBNA-1972
 April -2000 – IRDA Act-1999 – came into force
 Nov – 2000 –GIC was notified as Indian
reinsurers
 SWIFT[Single Window International
Facultative & treaty] @GIC –Non-reciprocal
inwards
 GIC Re – is rated “A-” by A.M. best
 GIC Re manages pools like:-
> Indian motor third party declined pool
> Indian terrorism Insurance pool
> Indian marine hull Insurance pool
 GIC Re is also designated manager for:-
> Natural catastrophe pool
> Nuclear Risks Liability Pool
 GIC Re – 5% obligatory(Statutory) cession
-general insurance companies
 For terrorism 100% goes to the pool and no
obligatory cession applicable
 Obligatory cession for Life Insurance is notified
by IRDA
 Contract of Indemnity:- Reinsurance is
always a contract of indemnity even in LIFE
& PERSONAL ACCIDENT
 Uberrima Fides/Utmost good faith:-
Automatic/Obligatory/treaty & Facultative –
comparative importance of this principle
 Both the contracts of insurance and
reinsurance are independent of each other
 Risks emanating from the insured:- Follow the
fortune Clause
 Risks emanating from the insurer/reinsurer:-
Underwriting methods/Claim
settlement/administration
 Risks beyond the control of the contractual
parties:- Exchange rate
 Risks inherent to reinsurance
 Utmost good faith
 Insolvency of the ceding insurer:- Reinsurer
shares “insurance fate” not “commercial fate”
 Insolvency of the reinsurer:-
 Increased capacity
 Financial stability
 Stabilization of claim ratio
 Accumulation of claims under different
classes
 Protection of solvency margin
 Increases risk taking ability of insurer
 Shares insurance expertise with insurers-on
Technical, Rating & Underwriting etc
 REINSURNCE

TREATY FACULTATIVE
Excess of
loss/Non- Proportional Excess of
Proportional
proportio loss
nal

Quota Share

Surplus
 INSURER: May or may not cede
 RE-insurer: May or May not accept
 Insurer obtains reinsurance coverage before
accepting to insure a client for two reasons:-
[1.] Re-insurance terms don’t exceed direct
insurance terms
[2.] To seek reinsurer’s help with its
technical knowledge
 Facultative reinsurance is older than treaty
 Treaty –agreement
 Obligatory in nature
 Insurer: Foregoes right to “not cede”- has to
cede as per treaty/agreement
 Re-insurer: Foregoes right to “Not accept”-
has to accept all business coming under the
scope of treaty
 Insurer has to cede and reinsurer has to
accept
 Formal treaty wordings describe:-
[1.] The monetary limits, mode of operation
[2.] Class of business, territorial scope,
exclusions
[3.] Calculation of Premium, claim & Period
of agreement
 Remain in force for a long time
 Treaties are renewed automatically unlessa
change in terms is required
 Treaty reinsurance demands a careful review
of:-
[1.] The underwriting philosophy
[2.] Past experiences and practices followed
by the insurer
[3.] Insurer’s attitude towards claims’
management
[4.] Managements’ general background,
expertise & objective
 Re-insurance of reinsurer -Retrocession
 Facultative+Treaty
 Insurer may cede and the reinsurer must accept
 Usually it has high exposure with low premium &
therefore has few takers
 It can be places during weak reinsurance market
 Not secure to be relied upon as primary reinsurer
 It is used to arrange automatic additional
capacity after exhausting existing automatic
arrangements
 To write high value exposure or to deal with high
accumulations
 This form of reinsurance is not common but can
be seen in life insurance
 Reinsurer shares liabilities, sum insured,
premiums & claims in the same proportion as
agreed in treaty
 Proportional reinsurance:-
[1.] Surplus reinsurance
[2.] Quota share reinsurance
 Proportional methods help in”-
[1.] Improving & stabilising net retained loss
ration
[2.] Provides opportunity for additional
earnings(ceding commission>acqtual acquisition
cost)
[3.] Improving combined ratio
 Ceding insurer’s retention:- The limit of
liability which ceding insurer whishes to
retain
 Surplus above retention can be reinsured to
reinsurers
 Line: Ceding insurer’s retention out of sum
insured is called a “Line”
 Surplus limit can be decided in two ways:-
[1.] Sum insured
[2.] PML
 Example: Sum insured is 100cr., retention is
10lacs, 90lacs is ceded.
> 10% of SI is retention & 90% is reinsured
> If PML is 25 lacs, then retention is 10lacs and
reinsured amount is 15 lacs

 NOTE:-
[1.] On PML basis more premium is retained
[2.] Reduces insurer’ need for Surplus reinsurance
protection
[3.] PML is not limit of liability
 Fixed Quota Share:Reinsurer assumes an
agreed percentage of each risk & shares
premium & losses accordingly
 Example: If 90% is reinsured then 10% is
retained
Sum insured 10,00,000

Ceding Insurer 1,00,000

Reinsurer 9,00,000

 Note: In surplus method ceded % varies with

retention on each risk
 Variable quota Share:-
[1.] % of retention varies for different limit of
SI
[2.] % of retention in inverse proportion to
the limit of sum insured
Example:-
Sum Insured 5,00,000 50,00,000 1,50,00,000
Retention 10% 7.5% 5%
Ceding 50,000 3,75,000 7,50,000
Insurer
Reinsurer 4,50,000 46,25,000 1,42,50,000
 Quota share is more profitable to a reinsurer as
both the parties participate in each risk on the
same basis
 Like Surplus reinsurance, selection against
reinsurer is not present in quota share
 Quota share treaties receive higher rate of
ceding commission
 In quota share insurer passes a large share to
reinsurer & hence ceded more premium to
reinsurer-adopted for short term requirements
Sum Insured Retention 1st Surplus 2nd Surplus
75,00,000 5,00,000 25,00,000 45,00,000
 Class of business covered
 Territorial Scope:-
> The areas where treaty applies are listed
> If treaty is on worldwide basis,it means
USA & Canada are exluded
 Underlying Basis:-
[1.] Risk attaching basis:-If the ceding
insurer underlying policies incept during the
period of reinsurance contract – reinsurer
will provide claims even if they occur after
expiry date of treaty agreement
 Loss occurring basis:- All claims occurring
during the period of treaty are covered
irrespective of when the underlying policies
incept
 It is a list which ceding insurer provides to the
reinsurer detailing the risks ceded to the treaty
 The details given in the list include:-
>Name of insured
>Class of risk
> Sum Insured
> Premium rate, ceding insurer’s retention
> Amount reinsured
> Period of insurance
 The bordereaux is submitted monthly or
quarterly as agreed between the parties
 The percentage of premium paid is the same
as that of sum insured
 Premiums for any risks excluded from the
treaty & return premiums due under
cancelled policies are not included in the
reinsurance premium
 Commission paid by the ceding insurer to
agents & brokers are not deducted from the
reinsurance premium
 Paid by reinsurer to the ceding insurer to
compensate for:-
[1.] Original commissions & brokerage
[2.] Acquisition cost
[3.] Administration expenses
 Level of ceding commission is decided by the
ceding insurer and reinsurer
 Commission under quota share treaty is more
than under surplus treaty
 The higher level of surplus like the 2nd & 3rd
would have lower ceding commission as
compared to the first treaty
 If the results of a treaty are profitable, the
reinsurer may agree a further commission
called –Profit commission- it is a percentage
of the profit of the treaty
 Profit to the treaty= Earned Premium –
Incurred claims-ceding commission
 Claim are shared in the same proportion as
sum insured
 Besides the claim share, the reinsurer is also
liable for his share of claims’ costs such as:-
[1.] Legal fees
[2.] Assessor’s fees etc.
 Recoveries by means of salvage, contribution
& subrogation must be shared in the same
proportion as sum insured
 In proportional treaty, reinsurer’s liability
commences simultaneously with that of the
ceding insurer
 If a loss occurs before the cession is made, the
reinsurer becomes liable for his share that would
have been ceded
 Underwriting year basis:- The reinsurer will
cover only those policies issued or renewed on or
after the inception date of the treaty and would
not cover policy already in force
 Portfolio entry Premium: Additional Premium
paid by ceding insurer to the reinsurer to cover
policies already in force at the time of inception
of treaty
 In another scenario when the treaty terminates
the reinsurer will still remain liable for all those
policies which are yet to expire
 Portfolio withdrawal Premium:- The reinsurer
may cut off cover completely on the date of
termination by paying to the ceding insurer a
portfolio withdrawal premium.
 The facility of portfolio entry and withdrawal
premium don’t apply to marine & aviation
reinsurance business – they are underwritten on
underwriting year basis –premium & losses are
accounted –retrospectively to the treaty year
 In case of termination or seeking a review of
treaty – usually a 3 months’ notice is given
 In such an arrangement protection is first
provided by a quota share treaty arrangement
followed by surplus treaty
 First cession is made under quota share treaty
and then remaining amount is reinsured through
surplus treaty
 The retention under surplus treaty becomes line
for surplus treaty – ceding insurer can’t keep two
retentions-that is- one for each treaty
 In practice the entire quota share treaty is
considered as the “line”-& called as Gross Line
 Net Line:- Retention under quota share treaty
 Net line vs Gross line
Quota Share treaty limit 100,000
Ceding Insurer’s retention 10,000
Surplus treaty – Net & Gross
9 net lines 90,000
9 Gross lines 900,000
 Document setting out the risk particulars,
terms & conditions for which reinsurance
protection is sought
Reassured XYZ Insurance co ltd.
Period
Business
Exclusions
Territory
Retention
Commission
Profit Commission
Reinsurer
 It is also known as Excess of loss reinsurance
 XL= Excess of loss
 Xs=Excess
 This form of reinsurance is not concerned
with any proportionate sharing of Sum
insured, premium & loss
 The ceding insurer seeks protection to
mitigate a loss beyond his retention
 Retention is a specified monetary amount
 Retention is also known as – “Deductible” or
“Excess” or “Priority” or “Underlying”
Amount of loss Reinsured Excess Loss reinsurer
5,00,000 5,00,000 0
60,00,000 5,00,000 50,00,000
 Working (Risk) –Excess:-
[1.] Covers losses arising from re-insureds day
to day operations
[2.] Losses that arise from a single event,
accident. Example- No of claims under PA
policies, accidents involving Passenger
vehicles
[3.] Effective for legal liabilities
 Risk Excess of loss:-
[1.] For excessive retention beyond capacity
–because of adverse U/W results
[2.] “Per risk” XL protection is sought for
increased retention levels
[3.] Mainly used in “Property risks”

 CatXL(Catastrophe Excess of loss):-

[1.] Protects against accumulation of losses
from events such as –earthquake, flood,
Cyclone, Riots etc.
 Stop loss or Excess of loss Ratio:-
[1.] Comes into force when accumulation of
losses exceed an agreed amount “Deductibles”
[2.] Limits the aggregate amount of loss the
reinsured would lose on a class of business
[3.] Cover is usually expressed in percentage
terms
[4.] Pays losses when net loss ratio exceeds
certain percentage
 Stop loss or excess of loss ratio- contd…
Example: Aggregate excess of loss cover
selected is 90% of excess of loss ration over
80% subject to max. loss ratio as 130%
Year Loss Ratio Retention XL 90%
2008 70% 70% Nil
2009 85% 80% + 0.5% 4.5%
2010 100% 80% + 2% 18%
2011 140% 80% + 5% + 45%
10%
 Aggregate Excess of loss Reinsurance:-
[1.] Same as excess of loss ratio
[2.] Difference is that – cover parameters are
expressed in amounts rather than in
percentage

 Whole account excess of loss cover:

[1.] A single composite cover to protect the
whole business incorporating all class of
business
[2.] Common in Miscellaneous class of
business
 Umbrella excess of loss cover:-
[1.] Covers any gap in various reinsurance
arrangement
[2.] Provides additional protection when in a
catastrophe all other reinsurance
arrangements are exhausted

 XL covers can be splitted into layers

 Retention:-
[1.] Retention Per Risk:- Helps reduce
insurer’s loss in respect of a single risk
[2.] Retention Per Event:-
[2.1]Helps reduce insurer’s loss against
accumulations from an event
[2.2] In practice a “Two risk warranty” is
included within contract to denote minimum
accumulation from two risks
 Minimum & Deposit Premium(Mindip):-
[1.] XL reinsurer doesn’t know the final
premium in advance
[2.] Therefore calculates a premium to be
paid in advance –known as -deposit premium
[3.] When deposit premium is prescribed as
minimum premium, it is know as “Mindip”

 IBNR:- Complicated legal liability claims

 Premium in XL cover:-
[1.] Larger the deductible(Underlying,
Priority) smaller the premium
[2.] Premium for XL cover is expressed as a
percentage of the gross premium income
written by insured
[3.] Catastrophe covers are unsuitable for
“Burning cost” method of rating
 Premium in XL cover:-
[4.] Main factors in rating Catastrophe cover
are:-
[4.1] Amount of retention
[4.2] Degree of exposure to natural perils

[5.] Rate on line:- Rate applied to the limit

of cover-is called rate on line
[6.] Rate on line is lower for each successive
higher layer of excess cover
 Premium in XL cover..contd..
[7.] Payback method:- Catastrophe modelling
based on:-
[7.1] Stress Scenario
[7.2] Recoupment of Catastrophe loss
through premium collected over 250
years
[8.] Historical rating(Burning Cost) method
[9.] Exposure rating(actuarial) method
 Burning Cost:-
[1.] Burning Cost:- Cost at which claims would
equal (XL reinsurance) premium
[2.] Burning cost is good for working XL but not
for CatXl- as it might be not available for it
[3.] At the beginning of the year estimated
deposit premium is collected
[4.] Rate of Premium is agreed in a range
[4.1] Minimum Rate(Payable by insured)
[4.2] Maximum rate chargeable by the
reinsurer
 Burning cost…contd..
[5.] If actual loss is lower than minimum rate
– the reinsured pays the minimum rate of
premium
[6.] If actual loss is more than the maximum
rate – the reinsurer collects the maximum
rate
 Pareto Curve:-
[1.] 80/20 rule
[2.] There are large number of small claims
and small number of large claims
[3.] Cover requirement of Rs. 50crXs30cr
=%of losses (@80cr.-@30cr)*Original
gross premium
[4.] Larger proportion of total loss cost will
occur in lower range of Sum Insured
[5.] This curve is very useful to XL
underwriter
 Reinstatement:-
[1.] Relevant for CatXL
[2.] Available to Risk XL cover for free of
cost for first two times- any further
reinstatement requires stiff additional
premium
[3.] Additional Premium may be charged on
following basis
[3.1] Pro-rata for the amount reinstated
[3.2] Pro-rata for the remaining period
[3.3] Pro-rata for a combination of both
 Inception and termination:-
[1.] Loss occurring basis:-
>All losses occurring within the contract period
are covered , irrespective of when the original
policy incepted
>Even if another treaty was in force when
original policy incepted-doesn’t relieve the
reinsurer of liability
> Reinsurer remains liable for losses that
occurred but not settled during treaty contract
> At termination, reinsurer not liable for losses
occurring after termination
> No portfolio take nor portfolio withdrawan
 Inception and termination:..contd….
[2.] Risk Attaching basis:-
> Avoids the possibility of reinsurer cancelling
contract & leaving the insurer without cover for
the remaining period of the policies
> Losses of policies issued/renewed during the
contract period are covered irrespective of when
the claim occurs
>Reinsurers liability lasts until all policies covered
by contract have expired
> Cons of this method are long run off & difficulty
in assigning a claim to the proper contract year
> Marine & aviation XL contracts use this method
 Insured- is not a party to the reinsurance
contract –no privity of contract
 Signing rules:-
> Facultative: Signed by Reinsurer
> Treaty: Signed by each party
 Subject matter of reinsurance contract:- The
reinsured’s liability in the original contract
 Operative Clause:-
> Describes the business coming within the
scope of a reinsurance contract-excludes-
retrocession of inward reinsurances
> method of cession is stated
> Maximum liability is mentioned
 Commencement and Termination:-
>Deals with the commencement and manner
& circumstances in which it can be
terminated
> “Either party shall be at liberty to
terminate it as at 31st December in any year
by giving not less than 90 days notice in
writing”
> In case of war between India and
reinsurer’s country –this agreement shall be
automatically terminated
 Commencement and Termination clause:-
>Either party has the right to terminate this
agreement immediately by giving the other party
notice:
>If the performance of the whole or part of this
agreement be prohibited or rendered impossible
>If other party has become insolvent or unable to
pay debt or has lost whole or part of its paid up
capital or authority to transact a class of
insurance withdrawn
>In case of any material change in the ownership
or control of other party
> If the other party has failed to comply with any
terms and conditions
 Commencement and Termination clause:-
>In the event of this agreement terminated by
any cause other than 90days’s notice-the insurer
shall have option of making the date of
termination effective retroactively from last day
of the previous quarter or 31st December of
either the current or previous year –as per the
circumstances
>During the term of notice of cancellation & until
the expiry the reinsurers shall accept new
cessions & renew existing cessions in the same
manner as if no such notice has been given
 Commencement and Termination clause:-
>NCAD(Notice of Cancellation as Anniversary
date)
>Sometimes reinsurers make their
acceptance subject to NCAD
>The reinsurers don’t want to observe the
notice period
> Also when the reinsurer is not sure of his
procedures for reviewing acceptance of
treaty
 Termination: Exiting an agreement
> Sometimes reinsurers send PNC
>PNC: Provisional Notice of cancellation
>It means notice of termination & also
making it provisional to enable the
reinsurer to review the arrangement &
decide
>It is necessary to follow up such notices
with a definite notice of cancellation
 In the event of certain extra ordinary
circumstances – there may be provision for
termination without notice – this is known as
“Sudden death clause” –such circumstances
can be clearly stated in the policy
 Access to record clause:-
> Reinsurer has right to inspect any book of
records of the ceding insurer
>At reinsurer’s own expenses-during office
hours
>Inspection can be restricted by appointed
representative
 Errors & omissions -a safety device:- “No
errors or inadvertent omissions on the part of
the ceding insurers shall relieve the reinsurer
of liability.”
 All correspondence and settlement of
accounts shall be through the intermediaries
specified in the schedule
 Such clauses shift all credit risks to
reinsurers by providing that:
>Ceding insurer’s payment to the
intermediary be deemed payments to the
reinsurer
>Reinsurer’s payments to the intermediaries
are not payments to the ceding insurer until
actually received by him
 Accounting Clause:-
> Rendering of accounts & settlement of
balances between parties
> The reinsurer shall confirm the accounts
within 15 days of receipt & the balances on
either side shall be paid within 15 days of
receipt of such confirmation
 Underwriting retention and limits:- If the
ceding insurer introduces any change in his
business approach during the currency of the
contract , the consent of his reinsurers is
necessary to ensure continuance of
reinsurance agreement
 Hours clause:- A precise definition of one
event is sought to be achieved by
incorporation of a time limitation known as –
hours clause – usually this time limit is 72
hours
 PML excess clause:- to safeguard the
reinsurers in case PML goes wrong- If PML
exceeds – the additional liability of reinsurer
is limited to 50% of the amount- that would
have been payable had PML not gone wrong
 Extension of reinsurance cover: To cover
losses continuing post expiration of
reinsurance
 Downgrade clause: Protecting reinsurance
security:-Allows the reinsured to cancel the
reinsurance contract(and seek a new
reinsurer) if the reinsurer is downgraded by
rating agencies
 Cut through endorsement:- insuring against
insolvency of insurer –allows insured rights
against -reinsurer
 This is first step in the reinsurance
placement process
 Serves the purpose of evidencing eventual
acceptance of a share of the risk
 Flat Rate commission: Agreed Percentage of
commission(Premium Ceded –Returns &
Cancellation)
 Sliding Scale Commission:
> Rate of commission is based on the loss
ratio of the treaty during treaty year
>Loss ratio = Incurred Losses*100/Earned
Premium
> Earned Premium = Premium Ceded+
Unexpired Premium reserve(Beginning) –
Unexpired Prem. Reserve at the end
 Sliding Scale Commission:
> Incurred losses = Losses Paid+O/s losses at
the end –O/s losses at the beginning

 Overriding Commission:- Commission paid by

the reinsurer to the ceding insurer over and
above any share of original commission
 Profit Commission:-
>Additional Percentage payable to a ceding
insurer on profitable treaties
> It is an incentive for ceding insurer to
produce profitable business
> Types of profit commission statements:
[1.] “Accounting Year” basis
[2.] “Underwriting Year” basis
 Profit Commission:-
[1.] “Accounting Year” basis:- All transactions for
the same treaty period to be included in the
same profit commission statement
[2.] “Underwriting Year” basis:- All transactions
of an underwriting year to be accounted to the
same year
> Fire & accident proportional reinsurance-
Accounts are rendered on –Accounts year basis
> Marine proportional reinsurance: Accounts are
rendered on –Underwriting year basis
 Major Rating Agencies
> Standard & Poor
> A.M Best
> Moody’s
> Duff & Phelps
 Indian credit rating agencies
>CARE: Credit Analysis & Research Limited
>CRISIL: Credit Rating Information Services
of India Limited
>DCR India: Duff & Phelps Credit Rating India
Private Ltd.
>ICRA: Investment Information and Credit
Rating Agency of India
 NAIC(National Association of Insurance
Commissioners), USA – an Insurance
Regulatory Body
 NAIC – has developed its own rating system
known as IRIS
 IRIS: Insurance Regulatory Information
System
 Financial Strength Ratings
>Very Strong
>Strong
> Poor
 Credit Rating Agencies have professional
rating committees –for all rating decisions
 Credit Watch- highlights the potential
direction of a rating
>Positive: Rating may be raised
> Negative: Rating may be lowered
> Developing: May be raised or lowered
 Minimum Rating of Reinsurers stipulated by
IRDA –BBB
 Credit Ratings are not a recommendation to
purchase or cancel any policy or contract
 A rating is not a guarantee of an insurer’s
financial strength and security
 In India credit rating agencies are required to
obtain license from SEBI
 Sovereign Rating
 An individual insurer’s rating is subordinate
to its country’s rating
 ART – Alternative Risk Transfer
 PML – Probable Maximum Loss
 SWIFT –Single Window International
Facultative & Treaty
 XL- Excess of Loss
 XS- Excess
 CatXL –Catastrophe Excess of loss over
 IBNR – Incurred but Not Reported
 Bordereau: Premium and Loss bordereau-
Details such as name of insured, location of
risk, period of insurance, reinsurance
amount, reinsurance premium, date of loss,
total loss amount
 Cash loss:-
>A provision in proportional treaty
>It helps reinsured get immediate claim
settlement for a large loss outside the usual
periodic accounting & settlement
 Cut through clause:- It ensures that in the
event of a loss the original insured have right
to recover the claim from reinsurer even
though they are not a party to the contract
 Follow the fortunes:- The reinsurer and the
ceding company are bound by the same fate
on all risks ceded to the treaty
 Fronting:-
> Insurer transfers entire risk to reinsurer
without any retention –not permitted in India
 Layer:-
> Refers to cover granted under XL

 Slip:- Document setting out risk particulars,

terms & conditions for which reinsurance
protection is sought

 Risk based capital:- Amount of capital

needed to absorb the various risks of
operating an insurance business.
 Reciprocity:- The mutual exchanging of
reinsurance.

 Gross line = Net line + Reinsurance

 Binder:- A record of reinsurance

arrangements pending issuance of a formal
reinsurance contract which replaces the
binder
 Adverse Selection:- The Submission by a
reinsured to his reinsurer of those risks, that
are less attractive for retention

Admitted Insurance or Reinsurance:- Insurance

from an insurer who is licensed to do
business in India or a given country