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Reinsurance
Submitted by:
Arushi Agrawal
BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER VI
MITHIBAI COLLEGE
VILE PARLE (W)
SUBMITTED TO
UNIVERSITY OF MUMBAI
ACADEMIC YEAR
2013 - 2014
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CERTIFICATE
I, Prof. NARESH SUKHANI, hereby certify that Arushi Agrawal of
MITHIBAI COLLEGE OF TYBBI [Semester VI] has completed the
projected Reinsurance in the academic year 2013 - 14. The
information submitted is true and original to my knowledge.
_______________________
Signature of Principal
_____________________
Project Guide
(Prof. Naresh Sukhani)
_________________________
External Examiner
College Seal
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DECLARATION
DATE:
PLACE:
Signature of student
(Arushi Agrawal)
Roll No. -
01
TYBBI
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ACKNOWLEDGEMENT
I would like to thank Mithibai College & the faculty members of
BBI for giving me an opportunity to prepare a project on
"Reinsurance". It has truly been an invaluable learning experience.
Completing a task is never one man's effort. It is often the result of
invaluable contribution of number of individuals in direct or indirect
way in shaping success and achieving it.
I would like to thank principal of the college Dr. KIRAN
MANGAOKAR, the vice principal Dr. ANJU KAPOOR and Cocoordinator Prof. NARESH SUKHANI for granting permission for this
project. I would like to extend my sincere gratitude and appreciation to
Prof. NARESH SUKHANI who guided me in the study of this project. It
has indeed been a great learning, experiencing and working under
him during the course of the project.
I would like to appreciate all my colleagues and family members who
gave me support and backing and always came forward whenever a
helping hand was needed. I would like to express my gratitude to all
those who gave me the possibility to complete this thesis.
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EXECUTIVE SUMMARY
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RESEARCH METHODOLOGY
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TABLE OF CONTENT
SR.NO
PARTICULARS
PAGE NO.
Introduction to Introduction
10
13
Types of Insurance
10
History of Reinsurance
16
What is Reinsurance
18
Functions
20
23
Types of Reinsurance
27
10
Reinsurance Regulations
36
11
Reinsurance Treaty
45
12
47
13
Reinsurance Contracts
53
14
55
15
56
16
57
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17
61
18
19
Case Study II
70
20
75
21
Annexure A
84
22
Annexure B
85
23
Annexure C
87
24
Annexure D
89
25
Bibliography
91
64
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INSURANCE
Introduction
People seek security. A sense of security may be the next basic goal after food, clothing, and shelter.
An individual with economic security is fairly certain that he can satisfy his needs (food, shelter,
medical care, and so on) in the present and in the future. Economic risk (which we will refer to simply
as risk) is the possibility of losing economic security. Most economic risk derives from variation from
the expected outcome.
Historically, economic risk was managed through informal agreements within a defined community. If
someones barn burned down and a herd of milking cows was destroyed, the community would pitch in
to rebuild the barn and to provide the farmer with enough cows to replenish the milking stock. This
cooperative (pooling) concept became formalized in the insurance industry. Under a formal insurance
arrangement, each insurance policy purchaser (policyholder) still implicitly pools his risk with all other
policyholders. However, it is no longer necessary for any individual policyholder to know or have any
direct connection with any other policyholder.
Under the formal arrangement, the party agreeing to make the claim payments is the insurance company
or the insurer. The pool participant is the policyholder. The payments that the policyholder makes to
the insurer are premiums. The insurance contract is the policy. The risk of any unanticipated losses is
transferred from the policyholder to the insurer who has the right to specify the rules and conditions for
participating in the insurance pool.
The insurer may restrict the particular kinds of losses covered. For example, a peril is a potential cause
of a loss. Perils may include fires, hurricanes, theft, and heart attack. The insurance policy may define
specific perils that are covered, or it may cover all perils with certain named exclusions (for example,
loss as a result of war or loss of life due to suicide).
In summary, an insurance contract covers a policyholder for economic loss caused by a peril named in
the policy. The policyholder pays a known premium to have the insurer guarantee payment for the
unknown loss. In this manner, the policyholder transfers the economic risk to the insurance company.
Risk, as discussed in Section I, is the variation in potential economic outcomes. It is measured by the
variation between possible outcomes and the expected outcome: the greater the standard deviation, the
greater the risk.
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Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly
against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia contribution
ship for the insurance of houses from loss by fire. Franklin's company was the first to make
contributions toward fire prevention. Not only did his company warn against certain fire hazards,
it refused to insure certain buildings where the risk of fire was too great, such as all wooden
houses. Nominee of the assured could get the policy value either at maturity or by installments
and an agreed bonus.
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Types of Insurance
2. Property Insurance
If you own your building or have business personal property, including office equipment,
computers, inventory or tools you should consider purchasing a policy that will protect you if
you have a fire, vandalism, theft, smoke damage etc. You may also want to consider business
interruption/loss of earning insurance as part of the policy to protect your earnings if the business
is unable to operate.
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5. Workers Compensation
Workers compensation provides insurance to employees who are injured on the job. This type
of insurance provides wage replacement and medical benefits to those who are injured while
working. In exchange for these benefits, the employee gives up his rights to sue his employer for
the incident. As a business owner, it is very important to have workers compensation insurance
because it protects yourself and your company from legal complications. State laws will vary,
but all require you to have workers compensation if you have W2 employees. Penalties for noncompliance can be very stiff.
8. Data Breach
If the business stores sensitive or non-public information about employees or clients on their
computers, servers or in paper files they are responsible for protecting that information. If a
breach occurs either electronically or from a paper file a Data Breach policy will provide
protection against the loss.
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9. Homeowners Insurance
Homeowners insurance is one of the most important kinds of insurance you need. This type of
insurance can protect against damage to the home and against damage to items inside the home.
Additionally, this type of insurance may protect you from accidents that happen at home or may
have occurred due to actions of your own.
History of Reinsurance
The development of a reinsurance market took a rockier road. Reinsurance of marine risks is
thought to be is old as commercial insurance, but it was not until 1864 that the practice in the UK
was legalized and the ban on marine reinsurance was removed. Previously, reinsurance had been
considered as a form of gambling.
As reinsurance of fire business appeared unattractive to UK insurers, co-insurance remained a
more common way of spreading the risk. Insurers wishing to spread their risks then had to turn to
the continental merchant banks for their reinsurance protection.
It was in continental Europe, in the early 1 SOPs, that automatic treaty reinsurance was first
developed and there are numerous examples on record of facultative and treaty reinsurance
arrangements at that time.
However, it took until 1852 for the first independent reinsurance company to be established, and
that company was the Ruchversicherrungs Gesellschaft of Cologne. Several German companies,
including the Aachener Ruck, followed suit, proving themselves to he as productive as their
forerunner. Unfortunately, British reinsurers who decided to enter the field found that their
initial experiences were not so fortuitous.
In the 1 870s, quite soon after setting up, a number of UK reinsurance companies went into
liquidation. Ike reasons for heir lack of success are not altogether clear, but the UK retained its
role as a modest reinsurance market for some time, with its European counterparts continuing to
hold the stronger market position.
It is in 1880 that we find the earliest trace of excess of loss reinsurance, as established by Mr
Cuthbert Heath of Lloyds, and nor until 1907 do we find the establishment of Britains oldest
and longest operating reinsurance company, the Mercantile and General.
Then came the First World War, which brought with it a curtailment in trading relationships
between the UK and its primary reinsurance markets. This forced companies to look within their
own national boundary for cover and Lloyds, a late entrant to the reinsurance market, began to
take a more active role, attracting a large volume of business from the United States of America.
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By the end of the Second World War London had successfully established itself at the heart of
the international reinsurance market. The City of London had become the center for reinsurance
capacity and expertise, with capital provided by British and overseas companies and also those
many individuals who were members at Lloyds.
Other reinsurance markets overseas, particularly in Germany and the United States, continued to
develop their major domestic reinsurance markets
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What is Reinsurance?
Reinsurance is a means by which an insurance company can protect itself against the risk of
losses with other insurance companies. Individuals and corporations obtain insurance policies to
provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and
death, etc.). Reinsurers, in turn, provide insurance to insurance companies
Reinsurance helps primary insurers to reduce their capital costs and raise their underwriting
capacity since major risks are transferred to reinsurers; the primary insurer no longer needs to
retain capital on its balance sheet to cover them. Reinsurance thus serves the primary insurer as
an equity substitute and provides additional underwriting capacity. This indirect capital is
cheaper for the primary insurer than borrowing equity, since reinsurers can offer to assume
risks at more favorable rates thanks to their superior risk diversification. The additional
underwriting capacity permits the primary insurers to assume additional risks which without
reinsurance they would either have to refuse or which would compel them to provide a lot more
of their own capital. In a globalized world, in which potential financial claims are steadily rising
and in which the limits of insurability are being constantly extended, reinsurance thus assumes a
major significance for the whole economy.
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Functions
Almost all insurance companies have a reinsurance program. The ultimate goal of that program
is to reduce their exposure to loss by passing part of the risk of loss to a reinsurer or a group of
reinsurers. In the United States, insurance is regulated at the state level, which only allows
insurers to issue policies with a maximum limit of 10% of their surplus (net worth), unless those
policies are reinsured. In other jurisdictions allowance is typically made for reinsurance when
determining statutory required solvency margins.
1. Risk transfer
With reinsurance, the insurer can issue policies with higher limits than would otherwise be
allowed, thus being able to take on more risk because some of that risk is now transferred to the
reinsurer. The reason for this is the number of insurers that have suffered significant losses and
become financially impaired. Over the years there has been a tendency for reinsurance to become
a science rather than an art: thus reinsurers have become much more reliant on actuarial models
and on tight review of the companies they are willing to reinsure. They review their financials
closely, examine the experience of the proposed business to be reinsured, review the
underwriters that will write that business, review their rates, and much more.
2. Income smoothing
Reinsurance can make an insurance company's results more predictable by absorbing larger
losses and reducing the amount of capital needed to provide coverage. The risks are diversified,
with the reinsurer bearing some of the loss incurred by the insurance company. The income
smoothing comes forward as the losses of the cedant are essentially limited. This fosters stability
in claim payouts and caps indemnification costs.
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3. Surplus relief
An insurance company's writings are limited by its balance sheet (this test is known as
the solvency margin). When that limit is reached, an insurer can do one of the following: stop
writing new business, increase its capital, or (in the United States) buy "surplus relief".
4. Arbitrage
The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a
lower rate than they charge the insured for the underlying risk, whatever the class of insurance.
In general, the reinsurer may be able to cover the risk at a lower premium than the insurer
because:
The reinsurer may have some intrinsic cost advantage due to economies of scale or some
other efficiency.
Reinsurers may operate under weaker regulation than their clients. This enables them to
use less capital to cover any risk, and to make less prudent assumptions when valuing the
risk.
Reinsurers may operate under a more favorable tax regime than their clients.
Reinsurers will often have better access to underwriting expertise and to claims
experience data, enabling them to assess the risk more accurately and reduce the need for
contingency margins in pricing the risk
Even if the regulatory standards are the same, the reinsurer may be able to hold
smaller actuarial reserves than the cedant if it thinks the premiums charged by the cedant
are excessively prudent.
The reinsurer may have a more diverse portfolio of assets and especially liabilities than
the cedant. This may create opportunities for hedging that the cedant could not exploit
alone. Depending on the regulations imposed on the reinsurer, this may mean they can
hold fewer assets to cover the risk.
The reinsurer may have a greater risk appetite than the insurer.
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5. Reinsurer's expertise
The insurance company may want to avail itself of the expertise of a reinsurer, or the reinsurer's
ability to set an appropriate premium, in regard to a specific (specialized) risk. The reinsurer will
also wish to apply this expertise to the underwriting in order to protect their own interests.
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60
company of its subsidiaries. Their ownership were vested with Government of India.General Insurance
Corporation of India (GIC Re) is the only reinsurance company in India in the domestic reinsurance
market. The headquarter and registered office of the GIC is based in Mumbai.
As Indian government had restricted the direct entry of foreign reinsurers some of the companies are
working by having joint venture like Munich Re, Swiss Re, Insurance group of America and according
to latest news Buffet Berkshier is also coming as an agent with Bajaj Allize to India. GIC Res is
providing
Reinsurance
in
the
following
areas:
Property
Reinsurance-
Fire,
Engineering,
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maximum business to the GIC. Following table describes earned premium from different classes of
business. (In Rs Cr)
Year
Fire
Engineering Marine
Life
Aviation
Misc.
Other
2005 - 06
681.51
173.19
207.61
1.26
34.68
2174.19
2006 - 07
771.55
250.70
158.56
0.48
37.74
1026.16
2007 - 08
817.01
382.51
238.06
9.50
52.00
1606.77
2008 - 09
660.71
394.50
393.61
5.53
48.19
1673.81
2009 - 10
633.57
373.48
278.58
5.50
43.17
1619.40
Total
3564.35
1574.38
1276.42
22.27
215.78
8100.33
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Types of reinsurance
1. Treaty and Facultative Reinsurance
The two basic types of reinsurance arrangements are treaty and facultative reinsurance.
In treaty reinsurance, the ceding company is contractually bound to cede and the reinsurer is
bound to assume a specified portion of a type or category of risks insured by the ceding
company. Treaty reinsurers, including the SCOR Group, do not separately evaluate each of the
individual risks assumed under their treaties and, consequently, after a review of the ceding
company's underwriting practices, are dependent on the original risk underwriting decisions
made
by
the
ceding
primary
policy
writers.
Such dependence subjects reinsurers in general, including SCOR, to the possibility that the
ceding companies have not adequately evaluated the risks to be reinsured and, therefore, that the
premiums ceded in connection therewith may not adequately compensate the reinsurer for the
risk
assumed.
The reinsurer's evaluation of the ceding company's risk management and underwriting practices
as well as claims settlement practices and procedures, therefore, will usually impact the pricing
of
the
treaty.
In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of
the risk assumed by a particular specified insurance policy. Facultative reinsurance is negotiated
separately for each insurance contract that is reinsured. Facultative reinsurance normally is
purchased by ceding companies for individual risks not covered by their reinsurance treaties, for
amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks.
Underwriting expenses and, in particular, personnel costs, are higher relative to premiums
written on facultative business because each risk is individually underwritten and administered.
The ability to separately evaluate each risk reinsured, however, increases the probability that the
underwriter can price the contract to more accurately reflect the risks involved.
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reinsurer
o
risk
Adapts
to
ceding
period of time
selection process
o
risks
2.
Proportional
and
Non-Proportional
Reinsurance
Both treaty and facultative reinsurance can be written on a proportional, or pro rata, basis or a
non-proportional,
or
excess
of
loss
or
stop
loss,
basis.
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Proportional
Proportional reinsurance (the types of which are quota share & surplus reinsurance) involves one
or more reinsurers taking a stated percent share of each policy that an insurer produces
("writes"). This means that the reinsurer will receive that stated percentage of each dollar of
premiums and will pay that percentage of each dollar of losses. In addition, the reinsurer will
allow a "ceding commission" to the insurer to compensate the insurer for the costs of writing and
administering the business (agents' commissions, modeling, paperwork, etc.).
The insurer may seek such coverage for several reasons. First, the insurer may not have
sufficient capital to prudently retain all of the exposure that it is capable of producing. For
example, it may only be able to offer $1 million in coverage, but by purchasing proportional
reinsurance it might double or triple that limit. Premiums and losses are then shared on a pro rata
basis. For example, an insurance company might purchase a 50% quota share treaty; in this case
they would share half of all premium and losses with the reinsurer. In a 75% quota share, they
would share (cede) 3/4 of all premiums and losses.
The other form of proportional reinsurance is surplus share or surplus of line treaty. In this case,
a retained line is defined as the ceding company's retention - say $100,000. In a 9 line surplus
treaty the reinsurer would then accept up to $900,000 (9 lines). So if the insurance company
issues a policy for $100,000, they would keep all of the premiums and losses from that policy. If
they issue a $200,000 policy, they would give (cede) half of the premiums and losses to the
reinsurer (1 line each). The maximum underwriting capacity of the cedant would be $ 1,000,000
in this example. Surplus treaties are also known as variable quota shares.
Non-proportional
Non-proportional reinsurance only responds if the loss suffered by the insurer exceeds a certain
amount, called the retention or priority. An example of this form of reinsurance is where the
insurer is prepared to accept a loss of $1 million for any loss which may occur and purchases a
layer of reinsurance of $4m in excess of $1 million - if a loss of $3 million occurs the insurer
pays the $3 million to the insured(s), and then recovers $2 million from its reinsurer(s). In this
example, the reinsured will retain any loss exceeding $5 million unless they have purchased a
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further excess layer (second layer) of say $10 million excess of $5 million. The main forms of
non-proportional reinsurance are excess of loss and stop loss. Excess of loss reinsurance can
have three forms - "Per Risk XL" (Working XL), "Per Occurrence or Per Event XL"
(Catastrophe or Cat XL), and "Aggregate XL". In per risk, the cedants insurance policy limits
are greater than the reinsurance retention. For example, an insurance company might insure
commercial property risks with policy limits up to $10 million and then buy per risk reinsurance
of $5 million in excess of $5 million. In this case a loss of $6 million on that policy will result in
the recovery of $1 million from the reinsurer. In catastrophe excess of loss, the cedants per risk
retention is usually less than the cat reinsurance retention (this is not important as these contracts
usually contain a 2 risk warranty i.e. they are designed to protect the reinsured against
catastrophic events that involve more than 1 policy). For example, an insurance company issues
homeowner's policies with limits of up to $500,000 and then buys catastrophe reinsurance of
$22,000,000 in excess of $3,000,000. In that case, the insurance company would only recover
from reinsurers in the event of multiple policy losses in one event (i.e., hurricane, earthquake,
flood, etc.). Aggregate XL afford a frequency protection to the reinsured. For instance if the
company retains $1m net any one vessel, the cover $10m in the aggregate excess $5m in the
aggregate would equate to 10 total losses in excess of 5 total losses (or more partial losses).
Aggregate covers can also be linked to the cedant's gross premium income during a 12 month
period, with limit and deductible expressed as percentages and amounts. Such covers are then
known as "Stop Loss" or annual aggregate XL
3. Retrocession
Reinsurance companies themselves also purchase reinsurance and this is known as a
retrocession. They purchase this reinsurance from other reinsurance companies. The reinsurance
company who sells the reinsurance in this scenario are known as retrocessionaires. The
reinsurance company that purchases the reinsurance is known as the retrocedent.
It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. For example,
a reinsurer that provides proportional, or pro rata, reinsurance capacity to insurance companies
may wish to protect its own exposure to catastrophes by buying excess of loss protection.
Another situation would be that a reinsurer which provides excess of loss reinsurance protection
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may wish to protect itself against an accumulation of losses in different branches of business
which may all become affected by the same catastrophe. This may happen when a windstorm
causes damage to property, automobiles, boats, aircraft and loss of life, for example.
This process can sometimes continue until the original reinsurance company unknowingly gets
some of its own business (and therefore its own liabilities) back. This is known as a spiral and
was common in some specialty lines of business such as marine and aviation. Sophisticated
reinsurance companies are aware of this danger and through careful underwriting attempt to
avoid it.
Well-written software can either detect reinsurance spirals, or poor software will ignore it, with
the latter amplifying the effect of spiraling.
In the 1980s, the London market was badly affected by the creation of reinsurance spirals. This
resulted in the same loss going around the market thereby artificially inflating market loss figures
of big claims (such as the Piper Alpha oil rig). The LMX spiral (as it was called) has been
stopped by excluding retrocessional business from reinsurance covers protecting direct insurance
accounts.
It is important to note that the insurance company is obliged to indemnify its policyholder for the
loss under the insurance policy whether or not the reinsurer reimburses the insurer. Many
insurance companies have experienced difficulties by purchasing reinsurance from companies
that did not or could not pay their share of the loss (these unpaid claims are known as
uncollectible). This is particularly important on long-tail lines of business where the claims may
arise many years after the premium is paid.
4. Treaty
To overcome the high administration costs and uncertainty of reinsuring large numbers of
individual risks on a facultative basis, the reinsurance treaty came into being
Proportional treaties include quota shares, various levels of surpluses and facultative obligatory
treaties. Non proportional treaties include risk excess of losses, catastrophe excess of losses, stop
losses and aggregate excesses.
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A proportional treaty may he referred to as a pro-rata or surplus lines or excess lines treaty. A
non-proportional treaty may be referred to as an excess of loss, excess or X/L treaty or emit ram.
The party passing on liability may be termed the cedant, insured, reinsured or retrocedant and the
party accepting the liability may be termed the reinsurer or retrocessionaire. Apart from the term
cedant, which can be applied to all parties passing on liability, the terminology used depends on
where the party is in the chain of reinsurance buying and selling.
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5. Financial reinsurance
Financial Reinsurance, also known as 'fin re', is a form of reinsurance which is focused more
on capital management than on risk transfer. In the non-life segment of the insurance industry
this class of transactions is often referred to as finite reinsurance.
One of the particular difficulties of running an insurance company is that its financial results and hence its profitability - tend to be uneven from one year to the next. Since insurance
companies generally want to produce consistent results, they may be attracted to ways of
hoarding this year's profit to pay for next year's possible losses (within the constraints of the
applicable standards for financial reporting). Financial reinsurance is one means by which
insurance companies can "smooth" their results.
A pure 'fin re' contract for a non-life insurer tends to cover a multi-year period, during which the
premium is held and invested by the reinsurer. It is returned to the ceding company - minus a
pre-determined profit-margin for the reinsurer - either when the period has elapsed, or when the
ceding company suffers a loss. 'Fin re' therefore differs from conventional reinsurance because
most of the premium is returned whether there is a loss or not: little or no risk-transfer has taken
place.
In the life insurance segment, fin re is more usually used as a way for the reinsurer to provide
financing to a life company, much like a loan except that the reinsurer accepts some risk on the
portfolio of business reinsured under the fin re contract. Repayment of the fin re is usually linked
to the profit profile of the business reinsured and therefore typically takes a number of years. Fin
re is used in preference to a plain loan because repayment is conditional on the future profitable
performance of the business reinsured such that, in some regimes, it does not need to be
recognized as a liability for published solvency reporting.
'Fin re' has been around since at least the 1960s, when Lloyd's syndicates started sending money
overseas as reinsurance premium for what were then called 'roll-overs' - multi-year contracts
with specially-established vehicles in tax-light jurisdictions such as the Cayman Islands. These
deals were legal and approved by the UK tax-authorities. However they fell into disrepute after
Page | 34
some years, partly because their tax-avoiding motivation became obvious, and partly because of
a few cases where the overseas funds were siphoned-off or simply stolen.
More recently, the high-profile bankruptcy of the HIH group of insurance companies in Australia
revealed that highly questionable transactions had been propping-up the balance-sheet for some
years prior to failure. To be clear, although fin re contracts were involved, it was the fraudulent
accounting for those contracts - and not the actual use of fin re - which was the problem. As of
June 2006, General Re and others are being sued by the HIH liquidator in connection with the
fraudulent practices.
Reinsurers
Reinsurer
Munich Re
$37,251
Swiss Re
$31,723
Hannover Re
$18,208
Lloyd's of London
$15,785
$15,059
SCOR
$12,576
$8,233
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$6,708
$5,113
PartnerRe
$4,712
Everest Re
$4,311
Transatlantic Re
$3,577
$3,319
Page | 36
Reinsurance regulation
This section describes the current status of reinsurance regulation in the region. The findings of a
postal survey of regulatory views gathered in early 1996 for this survey are reported in section
IV, B.
require from direct insurers a single authorization for both direct and reinsurance business. On
the other hand Belgium, Finland, France and Greece do not require any authorization to do
reinsurance business. In New Zealand the only requirement for writing reinsurance is to place a
deposit of $500 000.
B. Survey response
In order to gain a better insight to the current practice and attitudes of regulators to reinsurance in
the region, a questionnaire was sent to 11 countries and this section summarizes the eight replies
(from Estonia, Latvia, Lithuania, Moldova, Romania, Slovakia, Slovenia and Ukraine). It should
be stressed that in view of the missing or incomplete responses the findings cannot be regarded
as comprehensive. However, further information from the press and market sources has also
been included here to present an up-to-date picture since the original survey.
1. Reinsurance regulation
There were very few references from respondents to reinsurance regulation/legislation beyond
the requirement of preparing a business plan on authorization which normally demands the
setting out an outline of the reinsurance arrangements. Reinsurance is not a separate line of
business in most markets (with the exception of Estonia) where separate authorization is needed
to write this class as a line of business.
Three countries authorized a specialist reinsurance company: two have been authorized in
Ukraine and one each in Bulgaria and Estonia (although it is understood that this is dormant). In
two of the successor republics of the former Yugoslavia (Croatia and Slovenia) there are
specialist reinsurance companies and there are numerous insurers in Russia which write more
reinsurance than direct business.
2. Data collection
The majority of the supervisors responding collected data on reinsurance transactions within
their markets. In some instances this is done by insurance company associations. Some
supervisors collect this data but do not publish it. Several do not distinguish between reinsurance
placed in the home market and placed abroad.
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3. Control powers
Respondents were equally divided between those that have powers to control reinsurance activity
at the company level and ask about the nature of reinsurance contracts in force and those that do
not. However, it is not clear what powers they have in this regard. Estonia, Latvia and Moldova
have powers to specify limits on net retention levels (see Appendix A)
All but one of the respondents indicated that they collect data from companies regarding their
solvency status (which takes into account the impact of reinsurance). Two of these do so
annually, the rest quarterly. All but one (with the exception of Ukraine) have looked at the
ownership relationships of insurers in the solvency context.
4. Reinsurance security
Several supervisors were uncertain if they have adequate technical knowledge to monitor
complex reinsurance transactions. An equal number answered yes and no to the question
about having adequate expertise. Only one respondent (Estonia) associated potential problems
of insolvency and suspensions associated with inappropriate/inadequate reinsurance. Most
supervisors monitor domestic companies reinsurance programmes and prepare an analysis of
insurance company reserves. However, the only country to report the preparation of a list of
approved reinsurers was Ukraine
The majority of respondents also said that they lack adequate powers to issue cease and desist
orders in the reinsurance context. Ukraine is the only country which reports powers which
enables it to refuse placement overseas if the reinsurance purchased is not in line with local
regulations. The majority of respondents have kept in touch with supervisors in other countries
with regard to the solvency/capital adequacy of foreign domiciled reinsurers, although it is not
known if this is done on a regular basis.
Several people consulted referred to the complexity of monitoring reinsurer security and the
expertise needed to form correct judgment about their soundness. It became evident that few
supervisors in the region have the necessary expertise. One appropriate response to these
difficulties could be to make use of the insurance rating services (e.g. AM Best, Standard &
Poor). However, the main obstacles to their use are firstly, that few of the domestic reinsurance
Page | 39
companies in the region publish adequate information to enable analysis to be undertaken and
secondly, that the cost of these services may be higher than some regulators in the region would
be prepared to meet.
5. Minimum Capital
Only one country (Lithuania) referred to adjustment to minimum capitalization to respond to
inflation and exchange rate changes, although the fact that solvency minima were or intended to
be specified in terms of US dollars or ECU (Russia and Ukraine) goes some way to meet this
desideratum.
6. Deposits
In some countries supervisors require that reinsurance treaties concluded domestically contain
clauses providing that technical reserves must be left at the disposal of ceding companies. This
provides the ceding company with additional security in the event of problems with the reinsurer.
However, reinsurers draw attention to the fact that the rates of return on deposits held by ceding
companies are often far lower than the rates that could be earned by them. This practice may
increase the cost of reinsurance. The survey has not identified any countries in the region
demanding deposits
7. Pools
Five countries - Latvia, Lithuania, Romania Slovenia and Ukraine -referred to the existence of
insurance pools, all on a voluntary basis. These usually are concerned with the insurance of
nuclear facilities within their region. However, there may be several others, not identified due to
non-response.
Page | 40
company, although there is no information about the suggested ownership, or the current status
of this proposal.
10. Brokers
The activities of insurance/reinsurance brokers were on the whole lightly controlled. However,
Estonia and Ukraine are about to introduce broker legislation and Belarus also intends to make
foreign reinsurance brokers a subject of regulation/legislation.
However, it is evident that many companies prefer to place domestic reinsurance transactions
without the use of brokers. Ukraine noted that they rely on international brokers only when
dealing with foreign reinsurers.
Page | 41
V. Privatization
The transfer of insurance activity from state ownership to the private sector has made significant
progress in most countries, although the rate of progress varies widely.
Privatization has taken various routes. Almost every country has completed the conversion of
insurance departments responsible to the state into joint stock companies. Some have sold the
majority of these shares as part of the voucher privatization process (Slovakia) or transferred part
of the shares to other state owned entities such as banks or holding companies. Albania has also
announced that it intends to follow this route with its monopoly company INSIG.
Other routes to full privatization include the splitting up of the original monopoly supplier and
selling shares to domestic investors, usually banks, with Romania as an example.
Page | 42
In several republics of the former Soviet Union as well as in Bulgaria and Romania the state selloff has not gone far due to the absence of local investors.
There are several countries where there is reluctance to allow foreign investors to take a
significant stake in these previously state owned units as some governments regard them as
strategic assets. Similar situations exist in some of the Baltic republics.
Page | 43
Page | 44
Reinsurance Treaty
The Reinsurance Treaty of June 18, 1887 was an attempt by German Chancellor Otto von
Bismarck to continue to ally with Russia after the League of the Three Emperors had broken
down in the aftermath of the 1885 Serbo-Bulgarian War.
Facing the competition between Russia and AustriaHungary on the Balkans, Bismarck felt that
this agreement was essential to prevent a Russian convergence toward France and to continue the
diplomatic isolation of the French so ensuring German security against a threatening two-front
war. He thereby hazarded the expansion of the Russian sphere of influence toward
the Mediterranean and diplomatic tensions with Vienna.
The secret treaty signed by Bismarck and the Russian Foreign Minister Nikolay Girs was split in
two parts:
1. Germany and Russia both agreed to observe neutrality should the other be involved in a
war with a third country. Neutrality would not apply should Germany attack France or
Russia attack Austria-Hungary.
2. In the most secret completion protocol Germany declared herself neutral in the event of a
Russian intervention in the Bosphorus and the Dardanelles.
As part of Bismarck's system of "periphery diversion" the treaty was highly dependent on his
personal reputation. After the dismissal of Bismarck, his successor Leo von Caprivi felt unable to
obtain success in keeping this policy, while the German Foreign Office under Friedrich von
Holstein had already prepared a renunciation toward the Dual Alliance with AustriaHungary.
When in 1890 Russia asked for a renewal of the treaty, Germany refused persistently. Kaiser
Wilhelm II believed his own personal relationship with Tsar Alexander III would be sufficient to
ensure further genial diplomatic ties and felt that maintaining a close bond with Russia would act
to the detriment of his aims to attract Britain into the German sphere. Like the ongoing AustroRussian conflict, the Anglo-Russian relations too were strained at this point due to the gaining
influence of Russia in the Balkans and their aims to open up the Straits of the Dardanelles which
would threaten British colonial interests in the Middle East. However, having become alarmed at
its growing isolation, Saint Petersburg, as Bismarck had feared, entered into the Franco-Russian
Alliance in 1892 thus bringing to an end the French isolation. According to professor Bury, the
dismissal of chancellor Bismarck, the erratic temper of emperor William II, and the uncertain
policy of the men who succeeded Bismarck (partly out of consideration for England they failed
to renew the Reinsurance Treaty with Russia but did renew the Triple Alliance), were joint
causes of the inauguration of a period of fundamental change.
Page | 46
In 1896 the treaty was exposed by a German newspaper, the Hamburger Nachrichten, which
caused an outcry in Germany and Austria-Hungary.
The failure of this treaty is seen as one of the factors contributing to World War I, due to
Germany's increasing sense of diplomatic isolation.
Page | 47
Page | 48
Many major continental companies have also set up UK registered companies, which accept
business in the London market.
Reinsurers receive offers of reinsurance direct from cedants and from domestic and international
brokers. In addition, risk placement via electronic networks should also be available to
continental based underwriters when URZvIAs European market strategy comes to fruition. An
increasing number of reinsurers and brokers are members of the l3russels based network, RINET
(Reinsurance and Insurance Network).
Page | 50
Business throughout the US can be conducted direct with reinsurance professionals, through
reciprocal exchanges or through domestic and international brokers. Over the years a number of
American brokers have developed into large international organisations, mainly through
company mergers and acquisitions.
The two main associations representing the American reinsurance market are BRM.A (Brokers
& Reinsurers Market Association), and RAA (Reinsurance Association of America). BRMA is
made up of leading US reinsurance brokers and broker orientated reinsurers, and the RAA
represents all the major US reinsurance companies.
Page | 51
Reinsurance brokers feature heavily in servicing the Japanese market. The main market
association to which all Japanese property/casualty insurance companies belong is the Marine
and Fire Insurance Association of Japan.
Hong Kong has established itself as a regional insurance center for the Asia Pacific Rim and in
1993 there were 224 authorized insurers. There are approximately 10 reinsurance companies
based in Hong Kong, which have traditionally serviced northern Asia, China, Korea, Taiwan, the
Philippines and Thailand.
Offshore markets
A large and growing number of governments around the world have set up international financial
centers or havens, with the purpose of encouraging, through tax incentives and other financial
benefits, captive insurance companies and reinsurance operations into their country.
A captive insurance company is owned by a company, or companies, not primarily engaged in
the business of insurance, and all, or a major portion of the risks accepted by the captive relate to
the risks of its parent and affiliated companies.
The rapid growth of the captive insurance industry is relatively recent and in 1996 there were
approximately 3,600 captives worldwide. The rise in popularity of establishing captives in
offshore domiciles can be attributable to the less restrictive insurance regulations, freedom from
exchange control, and the absence or low rates of taxation which apply.
The major offshore centers are situated in:
Bermuda
The Cayman Islands
Guernsey
Isle of Man.
Page | 52
Bermuda is the largest of the offshore markets, housing over 1200 captives. It is heavily
supported by the US and it is estimated that two-thirds of all US foreign reinsurance flows
through the island.
The island has also become a major reinsurance market and has attracted a number of highly
capitalized reinsurance companies with high levels of international reinsurance capacity.
The 1994 net premium income written by international insurance and reinsurance companies was
just over $18.8 billion. The Bermuda based Centre Re is included in Standard and Poors top 30
reinsurers in the world.
Other financial centers, which may be included in the ever-lengthening list of offshore domiciles,
are situated in:
Dublin
Luxembourg.
Page | 53
Reinsurance Contracts
The relationship between the insurer and reinsurer rests upon the wordings of the contracts,
which consist of important ingredients such as premium, commission, retention and limit. The
key lies in clarity while drafting the contract, the absence of which, results in a dispute later on.
The negotiating process plays an important role while drafting the contract. Therefore, senior
executives of both the parties should take a lead role in the process and identify the loopholes in
the contract and leave no communication gap.
Reinsurance generally operates under the same legal principles as insurance, and reinsurance
agreements, as with any legally binding contract, must satisfy fundamental criteria to ensure that
a valid contract is formed.
In order to decide whether a contract has been entered into, it is necessary to establish that the
basic elements of offer, acceptance and an intention to form a legal relationship are present.
A further essential element in establishing a contract is consideration, which in insurance and
reinsurance contracts equates to the premium. This is the missing ingredient in the formation of
proportional reinsurance agreements such as quota share and surplus treaties and, therefore, these
treaties are termed contracts for reinsurance. Whereas other contracts, such as facultative and
excess of loss agreements, are termed contracts of reinsurance. A contract for reinsurance
becomes a contract of reinsurance as each individual cession is ceded to the treaty and premium
becomes due.
A valid insurance contract must additionally satisfy the following criteria:
A breach of the principle of utmost good faith or, to give it its Latin name, uberrimae fidei, has
been the grounds for many a legal battle between contracting parties. The principle of uberrimae
Page | 54
fidei is probably a more onerous one in reinsurance negotiations than insurance, due to the way
in which reinsurance business is transacted. In order that the principle may be satisfied, all
material facts relating to the risk must be disclosed to underwriters; it is not a requirement that
underwriters must ask the right questions to uncover the facts.
Indeed, silence can amount to misrepresentation, in the sense that nondisclosure of some material
fact by one of the parties to the contract will give rise to a remedy for the injured party.
Where a broker is involved in negotiating terms, potential reinsurers must be informed of all
material facts which the cedant has disclosed to the broker. Whether a non-disclosed fact is
material or not is often decided by the legal courts.
Page | 55
29%
Bermuda
France
Others
UK
Ireland
8%
Switzerland
9%
4%
3%
9%
Germany
6%
Page | 56
Swiss Re Group
$27,680,199,200
Munich Re Group
$23,760,161,400
Hannover Re Group
$9,661,392,406
$9,491,000,000
Lloyd's of London
$6,948,466,800
XL Re
$5,012,910,000
$3,972,041,000
PartnerRe Ltd.
$3,615,878,000
$3,466,353,000
10
$2,848,758,000
Page | 57
Reinsurance in India
GIC RE
General Insurance Corporation of India (GIC) has assumed the role of National Reinsurer for the
market.
It
provides
treaty
and
facultative
capacity
to
the
insurance
company.
It continues to manage Hull Pool on behalf of the market (mainly public sector Insurance
companies).
The Pool received cession on fixed percentage basis from direct companies and after protection;
the
business
is
retro-ceded
back
to
member
companies.
Large risks opt for Package Policies, insurance terms for which are obtained from International
Market.
Each direct writing company arranges surplus treaties and excess of loss protection. GIC
arranges market surplus treaty for Property, Cargo, and Miscellaneous accident business and
direct company can utilize the market surplus treaties after utilization of their own treaties.
Public sector Insurance companies are adopting inter-company cession to utilize other
companies net retention. GIC arranges excess of loss protection from International market.
REINSURANCE REGULATION
The placement of reinsurance business from the Indian market is now governed by Reinsurance
Regulations formed by the IRDA. The objective of the regulation is to maximize the retention of
premiums within the country
Placement of 20% of each policy with National Re subject to a monetary limit for each
risk for some classes
The treaty and balance risk after automatic capacity are to be first offered to other
insurance companies in the market before offering it to international re-insurers.
Not more than 10% of reinsurance premium to be placed with one re-insurer
Every insurer shall cede such percentage of the sum assured on each policy for different
classes of insurance written in India to the Indian insurer as may be specified by the
Authority in accordance with the provisions of Part lV-A of the Insurance Act, 1938.
The reinsurance program of every insurer shall commence from the beginning of every
financial year and every insurer shall submit to the Authority, his reinsurance programs
for the forthcoming year, 45 days before the commencement of the financial year.
Within 30 days of the commencement of the financial year, every in surer shall file with
the Authority a photocopy of every reinsurance treaty slip and excess of loss cover note
in respect of that year together with the list of reinsurers and their shares in the
reinsurance arrangement.
The Authority may call for further information or explanations in respect of the
reinsurance program of an insurer and may issue such direction, as it considers necessary.
Insurers shall place their reinsurance business outside India with only those reinsurers
who have over a period of the past five years counting from the year preceding for which
the business has to be placed enjoyed a rating of at least BBB (with Standard & Poor) or
Page | 59
equivalent rating of any other international rating agency. Placements with other
reinsurers shall require the approval of the Authority. Insurers may also place
reinsurances with Lloyds syndicates taking care to limit placements with individual
syndicates to such shares as are commensurate with the capacity of the syndicate.
The Indian Reinsurer shall organize domestic pools for reinsurance surpluses in fire.
marine hull and other classes in consultation with all insurers on basis, limits and terms
which arc fair to all insurers and assist in maintaining the retention of business within
India as close to the level achieved for the year 1999-2000 as possible. The arrangements
so made shall be submitted to the Authority within three months of these regulations
coming into force, for approval.
Surplus over and above the domestic reinsurance arrangements class wise can be placed
by the insurer independently with any of the reinsurers complying with sub-regulation (7)
subject to a limit of 10 percent of the total reinsurance premium ceded outside India
being placed with any one reinsurer. Where it is necessary in respect of specialized
insurance to cede a share exceeding such limit to any particular reinsurer, the insurer may
seek the specific approval of the Authority giving reasons for such cession.
Placement of 20% of each policy with National Re subject to a monetary limit for each
risk for some classes
The treaty and balance risk after automatic capacity are to be first offered to other
insurance companies in the market before offering it to international re-insurers.
Every insurer shall offer an opportunity to other Indian insurers including the Indian
Reinsurer to participate in its facultative and treaty surpluses before placement of such
cessions outside India
The Indian Reinsurer shall retrocede at least 50 percent of the obligatory cessions
received by it to the ceding insurers after protecting the portfolio by suitable excess of
loss covers. Such retrocession shall be at original terms plus an over-riding commission
to the Indian Reinsurer not exceeding 2.5 percent. The retrocession to each ceding insurer
shall be in proportion to its cessions to the Indian Reinsurer.
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Every insurer shall be required to submit to the Authority statistics relating to its reinsurance
transactions in such forms as the Authority may specify, together with its annual accounts.
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Aviation liability,
$3,500
Event Cancellation,
$1,000
Aviation, $500
WC, $1,800
Property Other,
$6,000
Page | 62
Total claims paid by all reinsurance companies in 2005 reached 15.951.878 million
GEL, which was 25,9 % of total income. The dynamic of loss according to the
years has the following structure:
Page | 63
On the chart you can see claims paid by insurance companies by years:
Page | 64
Case Study 1
Munich Re - in a Whirlpool?
Munich Re, the largest reinsurer in the world is facing a threat of getting trapped into a
vicious circle. Recently there has a downgrade in ratings by S&P that might lead to another
downgrade if the company resorts to inferior quality of business or less premium rates. The
business has been
Tough for the company due to the ripple effects of 9/11 attacks coupled by dismal investment
performance. Von Bombard has recently assumed the position of CEO and has a daunting
task of sailing the company out of this storm.
Munich Re, the worlds largest reinsurer has reported losses of $680 million in e first-half of
2003 and its rating is downgraded by SAP from AA- to A+ resulting Munich Re the lowest
rated reinsurance company in the European region. The ratings downgrade was on account of
bad equity investments and its stakes in Allianz, HVB and Commerzbank, whose
performances were unsatisfactory. The company is facing a threat that this ratings cut may be
a trigger to get trapped in a vortex. Since the ability to attract new business is reduced, a
compromize either on quality of business or premium levels may lead to fall in profits which
may further lead to ratings downgrade. How will the new CEO Von Bomhard, take stock of
this situation?
Page | 65
industry has been handling various catastrophes such of Hurricane Andrew and successfully
paying the claims.
September 11, 2001 attacks at the World Trade Center had a big blow to insurance industry
including the reinsurers. The attacks resulted in insurance industry paying $40 billion as claims,
two-thirds of which was paid by reinsurance industry. This setback was coupled with the stock
market losses trend following the attacks has forced many reinsurers across the globe to revise
their core business of reinsurance and withdraw from businesses such as management,
investment banking and also the lines business in which they specialize. With the changed
scenario the reinsurers cannot depend on investment income in their toughtimes. Days when
reinsurers could rely on cushion of investment income, or seek new markets to make-up for the
stage in their own are long gone Reinsurers now need to focus on delivering better more
consistent underwriting results in their core markets.
40%
13%
Page | 67
business, since ratings have a large role to play in the business of insurance and reinsurance
Secondly, this would force Munich Re to lessen the premium in order to retain clients. A London
insurance broker rightly commented, The big worry is that ratings cut can be the start of a
vicious circle, you have to pay more for business as a result, which means profits fall and your
rating can get cut again.
2001
2000
1999
1998
25.4
16.6
-0.2
40
22.2
15.7
-1.8
36.1
18.3
14.4
-1.6
31.1
15.4
13.5
-1.5
27.4
14.1
12.7
-1.3
25.5
2002
14.6
5.6
10.8
2001
21.1
9.0
16.1
2000
19.2
6.8
13.5
1999
8.6
6.5
7.5
Page | 69
Future Outlook
On July 10, 2003 Munich Re became the first nationwide reinsurer in China after receiving the
country-wide operating license from China Insurance Regulatory Commission. This was an
important move for Munich Re to enter into high growth- oriented Asian market in testing times.
Though the company had business relationships with China through offices in Beijing, Shanghai
and Hong Kong since 1956, this license opens the door to an opportunity of an industry that has
a double-digit growth rate.
With this backdrop the new CEO has the challenge to bring the company out from the vicious
circle and continue its image of the largest reinsurer in the world. At the time of succession of
CEO the issues confronting the new CEO are, how to come out of the loss-making investments
of Munich Re at Allianz, HVB and Commerzbank? How to retain the existing customers without
straining profits? How to attract new business despite the ratings cut? And finally, how to win
the AAA rating by S&P, which it used to enjoy?
Page | 70
Case Study II
Swiss Re was founded in 1863 at Zurich, It is one c f the leading reinsurers of the world.
Currently, it does business from over 70 offices in more than 30 countries and has on its rolls
around 8,100 employees. The company provides risk transfer, risk management, alternative risk
transfer (ART) and asset management services to its global clients through its three business
groups property and casualty; life and health; and financial services. The gross premiums
written by the company in the financial year 2002 amounted to CHF 32.7 billion. The rating of
Swiss Re from Standard & Poors is AA, Moodys is Aal, and AM Best is A+ (superior). It is a
public listed company and the shares are being traded in the Swiss exchange.
Brief History
Swiss Res incorporation was triggered by a major fire on 10-11 May 1861 when 500 houses got
burnt and 3000 people became homeless. The inade insurance cover among the households was
highlighted at that point of time provide more effective means of coping with the risks posed by
such developed the Helvetia General Insurance Company in St. Gall, the Schweizt Kreditanstalt
(Credit Suisse) in Zurich and the Basler Handeisbank founded the Swiss Reinsurance Company
in Zurich with a capital of six Swiss Francs. The fire also happened to be the motivation behind
the companys fast growth in the initial years after its formation. Initially Swiss Re offered fire,
marine reinsurance and later on added life insurance after two years business in 1880.
In 1906, the company suffered one of its biggest losses after the earthquake San Francisco. Swiss
Re opened its overseas branch in the United States in its first step to overseas business. The
Page | 71
company was also affected by the Titanic on 14/15 April 1912. It acquired major shareholding in
Mercantile General in 1916 and acquired Bavarian Re in 1923. After the World War II was a
season of economic boom. During the period, lot of developments took with regard to Swiss Re.
In the same period Swiss Res business presence increased in the United States, Canada, South
Africa and Australia. An advisory committee called, Swiss Re Advisers Limited was found in
Hong Kong. In 1959, the corn premium income crossed one billion mark with 1,043 million
Swiss Francs.
In 1977, Swiss Re acquired 94% shares of Switzerland General Insurance Company Ltd, Zurich.
Swiss Re started selling its majority shareholdings in insurance companies from 1994. It merged
with Union Re in 1998 of which it acquired majority stake holding in 1988. In 2001, Bavarian
Re was made as Swiss Re Germany and Swiss Re restructured itself in making three business
groups at the corporate center.
Swiss Re and the Impact of September 11
Swiss Re resulted in loss for the first time in its history of 138 years of profitability in 2001. This
was mainly due to the impact of huge payouts of September attacks. Where the firm reported
profit of 2.97 billion CHF in 2000, it reported loss of 165 million CHF in 2001 and 9l million in
2002. The payouts arising from September 11 attacks amounted to CHF 2.95 billion. Chief
executive Walter Kielholz said in an interview, Despite the worst year ever for insured losses,
Swiss Re strengthened its position during 2001 and is now well placed to capitalize on
improving markets and achieve superior results in the coming years. At the end of 2001, Swiss
Res shareholders equity amounted to CHF 22.6 billion (USD 13.6 billion) and the total balance
sheet stood at CHF 170 billion (USD 02.4 billion).
In the first-half of 2002, Swiss Re profits came down to 50.91 million from 582 million
corresponding to the previous year. On this Mr. Kielholz said, However, in tough times
experience tells us the opportunities are greatest for the strongest players. I believe these remains
so now for Swiss Re.
Page | 72
China
Swiss Re opened its representative offices in Beijing and Shanghai in 1996 and 1997
respectively. In August 2002, Swiss Re received an authorization from China Insurance
Regulatory Commission (CIRC) for operating a branch for both property! casualty as well as life
reinsurance. According to Swiss Re officials, this is a step towards obtaining a full license and
will enable them to establish local services within China in order to support and contribute to the
growth of countrys insurance and reinsurance industry and economy per Se. Insurance market in
China steadily growing and the growth in premium income has been 23.6% over the 10 years.
Foreign insurance companies have increased from two in 1992 to date.
Commenting on this important approval, Mr. Pierre Ozendo, chief executive Swiss Res Asia
Division, said Swiss Res close relationship to the China insurance industry is an excellent
foundation upon which to build as China to meet the growing needs of its economy and its
people in protecting live property as well as business and asset growth.
Swiss Re also believes in tile social growth of the Chinese economy and mat. of fact it has set
up a research center on natural catastrophe exposure insurance risks together with the Beijing
Normal University in Beijing in 1999. The research center is dedicated to collecting and
Page | 73
interpreting NatCat data, developing risk measures and maintaining close ties to other research
Institutions and state organizations of interest. The main objective lies in developments of
models for assessing risks and respective economic and insurance. models
On December 19, 2003, Swiss Re officially opened the branch office in Beijing The Chinese
insurance market today is demonstrating exciting growth. I delighted that Swiss Re has received
authorization to open this branch and now participate directly in tile development of the market,
said Swiss Re CEO John Coomber, on the occasion.
Japan
December 2003, Swiss Re received a branch license to provide reinsurance service in Japan for
both property/casualty as well as life and health domains. Swiss happens to be the first leading
global reinsurance player to obtain a full license to run a branch in Japan. We are delighted to
receive approval for our branch license Japan which will strengthen our ability to service our
portfolio of valued clients Japan, stated Swiss Re CEO, John Coomber on this occasion.
Companys relationship with Japan dates back to 1913 according to Swiss Re officials. The
company runs a services company in Japan since 1999 in order to provide global business
expertise to local players. Apart from this, the company was holding a representative office in
Japan since 1972. Swiss Re though received non-life insurance license intends to extend services
limited to reinsurance only.
India
Swiss Re has presence in India from over 70 years. Swiss Re through Swiss Re Services India
Private Limited offers clients exclusive and specialized risk management services, international
technical expertise and other support services. It also has a wholly-owned subsidiary in India,
Swiss Re Shared Services (India) Private Limited incorporated in 2000 for providing back office
administration support. The center will handle contract administration, claims administration and
reinsurance accounting support for all Swiss Re offices in Asia.
Indian regulations allow foreign reinsurers to set up a reinsurance company with an Indian
partner and minimum capital of Rs. 200 crore where foreign participation is restricted to 26%.
Swiss Re has been urging Indian regulator for de-linking reinsurance from direct insurance
Page | 74
regulations and allowing reinsurance branching. Calling for an end to the joint venture
requirements currently imposed on foreign reinsurers. Mr. Davinder Rajpal, Swiss Re Head of
India, Turkey and Middle-East, pointed out the key benefits available from allowing whollyowned reinsurance branches:
A full range of technology know-how and services, available locally to serve Indias
increasingly complex risk landscape;
Local insurers can access reinsurers global balance sheet;
Increased security and reduced credit risk due to the regulators direct supervision of
reinsurance branches; and
Encourages more foreign direct investment to India.
Swiss Re expects Asian market to grow substantially in the coming years and says, In Asia,
sound economic fundamentals will continue to support robust insurance business growth in
2004. Life insurance will in particular benefit from increasing affluence and rising risk
awareness. Compared to more mature markets, emerging Asia, in particular China and India, will
remain highly attractive international insurers.
Future Outlook
Swiss Re has been the first entrant in all the three emerging markets of Asia. The company is
backed by strong fundamentals, financials and global expertise. It possesses all the prerequisites
to be a market leader in these countries. The presence of Swiss Re has been long in these nations
and the representative offices had been opened at the right time. The major challenge for Swiss
Re as of now especially in India is the regulatory barrier. So far Swiss Re is the first and only
global player involved in reinsurance services in all the three markets. The company has already
proven its expertise for long in the global market and the presence has to be increased in these
liberalized markets only by the passage of time.
Page | 75
and employees at branch, divisional and regional Offices in various parts of the country. The
total workforce of GIC and its subsidiaries was around 85,000. GIC has made a huge
contribution to the overall development of the nation, through investments in the sociallyoriented sectors. The Government of India had entrusted to, GIC, the administration of various
social welfare schemes, such as personal accident insurance and hut insurance schemes operated
all over the country.
in addition to this, its joint ventures in the form of GIC mutual fund and GIC housing finance
have contributed not only to the development of the nation but also to the income growth of the
corporation. GICs net premium and investments stood at Rs.1,710.26 crore and Rs.4,556.5 crore
as of March 31, 1999. During the same period, the capital and funds of the Corporation stood at
Rs.2,914.64 cror.
indicated that both the LIC and GIC were overstaffed and faced no competition at all. Thus,
consumers were deprived of wider range of products efficient service and lower-priced insurance
products.
The report indicated that net premium income in general insurance hush had grown from Rs.222
crore in 1973 to Rs.3,863 crore in 1992-93. In addition this, investments also increased from
Rs.355 crore to Rs.7,328 crore over the said period. GIC also acquired high reputation in the
international reinsurance market But there was the other side of the coin. Excessive control
coupled with absence competition led to stagnation of both the public sector units hampering the
improvement and operational efficiency.
Insurance industrys funds were mainly invested in government-mandated investments with low
yield, which affected the financial performance of the insurance c This led to high rates of
insurance premia but low returns on savings invested in insurance. In addition to that, due to
absence of competition, there was laxity among the insurers to perform well and improve
customer satisfaction.
Thus, Malhotra Committee made a number of recommendations for the well-being of the Indian
insurance industry. The committee recommended proper training of insurance agents, adequate
pricing of insurance products and periodic review of premium rates. Malhotra Committee
recommended for establishing a strong and effective authority for the insurance sector similar to
the Securities and Exchange Board of India (SEBI). In addition to this, the committee also
recommended that all the four subsidiaries of GIC should function as independent companies
and GIC should cease to be the holding company.
Malhotra Committee Report submitted in 1994 gave various recommendations for the insurance
sector, such as capital investment in the insurer company should be increased to 100 crore for
life insurance business or general insurance and Rs.200 crore for the reinsurance business. It also
recommended that the share of the foreign investment to the total investment should not be more
than 26% of the share capital in the insurance joint venture company.
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IRDA Act
The Insurance Regulatory and Development Authority Act, 1999, is the product of a Bill
submitted to the Parliament in December 1999. Insurance Regulatory and Development
Authority Bill was passed on December 2, 1999. The IRDA Bill opened the Indian insurance
sector to the rest of the world, through the entry of competitive players in the insurance sector
and the inflow of long-term capital. The IRDA Bill provided for the establishment of Insurance
Regulatory and Development Authority, as an authority to protect the interests of the holders of
insurance policies and for the regulation and promotion of Indian insurance industry. The IRDA
Act provides statutory status to the regulator. The IRDA Bill has amended the Insurance Act,
1938, the Life Insurance Act, 1956, and the General Insurance Business (Nationalization) Act,
1972. The Bill allowed foreign participation in the insurance sector. The foreign companies
could have an equity stake up to 26% of the total paid-up capital.
IRDA Act also fixed minimum capital requirement for life and general insurance at Rs.100 crore
and for reinsurance firms at Rs.200 crore. The minimum solvency margin for private insurers is
Rs.500 million for life insurance companies, Rs.500 million or a sum equivalent to 20 percent of
net premium income for general insurance and Rs.1 billion for reinsurance companies. The
Authority is a ten member team consisting of a chairman, a five whole-time members and four
part-time members.
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Breaking Up of GIC
The delinking of the four national subsidiaries of GIC was recommended by the Poddar
committee. The committee also recommended transforming GIC as a national re On August 7,
2002, the President of India later gave his assent to the General Insurance Business
(Nationalization) Amendment Bill, 2002 and the Insurance (Amendment) Bill 2002. The General
Insurance Business (Nationalization) Amendment Act, 2002, amended the General Insurance
Business (Nationalization) Amendment Act, 1972, and delinked the General insurance
Corporation (GIC) from its four subsidiaries the National Insurance Company Ltd, the New
India Assurance Company Ltd, the Oriental Insurance Company Ltd and the United India
Insurance Company Ltd. Thus, as per the amendment, General Insurance Corporation was
required to carry on reinsurance business, as the national reinsurer of the Indian insurance
industry.
The subsidiaries were asked to increase their equity base to Rs.100 crore, to comply with the
regulations of IRDA. All these public sector companies had an equity base of Rs.40 crore
previously. The shares of these companies previously held by the DC, were transferred to the
government. According to officials, hiking capital base is a part of an overall effort to restructure
the entire nationalized general insurance industry. The restructuring was aimed at providing
autonomy to public sector companies.
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insurer to cede 20% in Fire and Marine Cargo, 10 % in Marine hull and miscellaneous insurance,
and five percent in credit solvency business.
Prior to nationalization, there were 55 non-life domestic insurers and each company had its own
reinsurance arrangement. After nationalization, all these companies were brought under the
aegnts of General Insurance Corporation and four subsidies were formed, with GIC as the
holding company. With this backdrop, it has been a quantum jump for the Indian reinsurance
market, with GIC being established as the national reinsurer. Earlier insurance companies had
to depend on foreign markets, but now after the IRDA Act has been passed, GIC has focused on
competing with the best in the world.
GICs reinsurance business can be divided into two categories; domestic reinsurance and
international reinsurance. On the domestic front, GIC provides reinsurance to the direct general
insurance companies in the Indian market. GIC receives statutory cession of 20% on each and
every policy subject to certain according to the current statute It leads many of domestic
companies programs and facultative placements.
GIC is also emerging as an international player in the global reinsurance evolving itself as an
effective reinsurance solutions partner for the African region. In addition to that, it has also
started leading reinsurance programs several insurance companies in SAARC countries, South
East Asia, Mid Africa. GIC provides the following capacities for treaty and facultative the
international market on risk emanating from international market 1 merits of the business.
General Insurance Corporation, as the Indian Reinsurer, completed year on March 31, 2002.
Although, there has been an increasing presence in international markets, the focus of the
Corporations operations continue domestic market, as it constitutes around 94% of its total
portfolio. The Corporation increased to Rs.10,378.84 crore from Rs.7,773.67 cr March 31,
2002. Similarly the total investments of the Corporation stood Rs.7135.83 crores as against
Rs.6,345.33 in the previous year. The total investment income of the corporation was Rs.961.80
crore as against Rs.873.40 crore in the previous year and gross direct premium income of GIC
for the year amounted Rs.311.57 crore. According to industry sources, General Insurance
Corporation (GIC) is targeting significant growth for its inward foreign reinsurance business.
The reinsurer is planning to open its branch in Dubai in the near future. The reinsurance business
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the Middle East region targeted by GIC ranges between Rs.3-5 million. Around 23% of the total
inward business for GIC comes from the Middle East countries. In addition to that GIC is
planning to establish its presence in London, Moscow, China, Korea, and Malaysia. In 2002,
GIC floated Tarizlndia in Tanzania through Kenlndia, which is a joint venture with Life
Insurance Corporation. At present it is also looking
a strategic partnership with African reinsurance major, East Africa Re.
On the domestic front, the Indian Reinsurer, plays the role of reinsurance facilitator for the
Indian insurance companies. The Corporation continues to act as Manager of the Marine Hull
Pool on behalf of the insurance industry. The Corporations reinsurance program is designed to
fulfill the objectives maximizing retention within the country, developing adequate capacity,
security the best possible protection for the reinsurance costs incurred and simplifying ti
administration of business.
global insurance market. General Insurance Corporation has formulated plans to capitalize its
strengths and capabilities in the international market and consolidate its operations in India to
provide requisite expertise and technical skills to the domestic players. Thus, we can conclude
that our National Reinsurer has the requisite and inherent capability of meeting the future
challenges and is ready to make strenuous efforts to achieve its corporate vision of becoming
leading international reinsurer in the years to come.
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ANNEXURE A
RESTRICTIONS ON PLACEMENT OF REINSURANCE
The present appendix list some of the regulation relating to reinsurance transaction which have
been mentioned during the survey. It should be noted that this is a fast changing field with
rapidly changing regulation and practice and readers should not rely on the statements made here
alone.
Belarus Placement of reinsurance abroad subject to approval policy by policy. Remmittances
abroad to insurers without permanent representation in Belarus are subject to 15 per cent tax.
Romania The following is a provision of article 6 of Law no 136 of Romania: The ceding of
reinsurance on the international market will be done only when the subject risk cannot be placed
on the domestic market.
Source: Correspondence with Romanian Ministry of Finance, Supervisory office of insurance
and reinsurance activity, Bucharest.
Moldova According to section 6, Paragraph 17 of the Insurance Act of Moldova of June 1993:
Assignment of risks to foreign reinsurers bearing no special licenses by the Insurance
Supervision Administration shall be allowed solely when coverage of these risks in the domestic
reinsurance market is not feasible.
Estonia and Latvia Insurance law specifies a 10 per cent limit of statutory capital on maximum
retention per risk.
Slovenia Local reinsurance capacity must be exhausted before business can be ceded abroad
Ukraine The insurance supervisor is considering to oversee the annual reinsurance business plan
of each company. Information to be provided include the structure of the programme, choice of
conditions and reinsurers. Supervisor may also demand additional information and may refuse
consent if not in line with regulations. Approval will be needed where over 50 per cent is placed
abroad and for excess of loss treaties are placed with foreign reinsurers. Supervisor is also
considering the establishment of a list of approved reinsurers
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ANNEXURE B
ARTICLES ABOUT REINSURANCE
Big investments are being lined up by global reinsurance giants looking to gain a foothold in
India. Even as the Insurance (Laws) Amendment Bill, 2008, to allow foreign reinsurers to set up
branch operations is getting delayed in Parliament, bullish global reinsurers are getting ready to
enter the Indian market, with many of them slowly in the early stages of developing business
through their offshore branches.
Most global reinsurers are now developing their insurance business offshore. India is an
exciting market to be present in. We are encouraged to learn about the possibility of the
Insurance Bill being cleared in the Parliament with regard to the opening of branches by foreign
reinsurers, said Victor Peignet, CEO, SCOR Global P&C, the sixth largest global reinsurer.
We hope to have a branch office in India conducting reinsurance business as soon as it is
permissible to do so. Such a perspective suits the multi-domestic business model based upon
which the SCOR Group operates, Peignet said. SCOR is currently conducting business with its
Indian clients offshore from Singapore. Currently, public sector GIC Re is the only reinsurance
company in India.
More than euro 1 trillion ($1.382 trillion) in additional premiums will be generated in the Asian
region by 2020 with growth markets such as China and India contributing almost 70 per cent,
said a top official of Munich Re. Ludger Arnoldussen, management board member, Munich Re,
worlds largest reinsurer, said as a reliable partner of Indias non-life insurance industry for more
than five decades, Munich Re sees India as an important emerging market with high potential
and is ready to participate in its growth, offering professional expertise, global knowledge and
unmatched financial strength.
At the moment our reinsurance premiums from India are about euro 30 million ($41.5 million),
while we have roughly euro 1 billion ($1.382 billion) in China. Regulation in India is still too
spontaneous and some protectionist tendencies still exist, Arnoldussen said. Michel M Lis,
Group CEO, Swiss Re, the second largest global reinsurer said in the long term, Swiss Re sees
India is an important market. If I analyse our Indian reinsurance portfolio, the opportunities on
life side have been real and we have taken advantage of them. We would like to increase our
business by participating in government schemes that we have been talking but nothing much has
happened till now, he said.
Swiss Re which is keen to set up a health insurance company is currently negotiating with L&T
for a joint venture. Hannover, the third largest global reinsurer, has a collaboration with
Hannover Re for developing life reinsurance business. Ulrich Wallin, CEO, Hannover said the
company already has a portfolio of around euro 60-70 million.
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India is an interesting market. We have grown our business in certain pockets. The premiums
are sufficient enough to cover the losses. We will be seriously considering to set up a branch if
we allowed to do so. Like China, if we are allowed to open a branch India, we will look at that
possibility,
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ANNEXURE C
SWOT Analysis of Group of America
Parent Company
Category
Diversified Insurance
Sector
Tagline/ Slogan
need with the best of the best people working to deliver to you
STP
Target Group
Insurance companies
SWOT Analysis
1. The company has been witnessing high growth sales rate contributing
to the companys success.
2. The company has extensive reach in the world, with operations being
present in 25 countries.
3. The company boasts of the best of best people, with an employee
count of 1700+
4. Its services include individual life reinsurance, individual living benefits
reinsurance, health reinsurance, long-term care reinsurance, group
Strength
reinsurance
2. The company has poor debt rating which poses a problem for the
Page | 88
Competition
1. AEGON N.V.
2. Munich Re
Competitors
3. Swiss Re
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ANNEXURE D
SWOT Analysis of SWIS RE
Swiss Re
Parent Company
Swiss Re Group
Category
Diversified Insurance
Sector
Tagline/ Slogan
expertise
STP
Segment
clients
outside
SWOT Analysis
1. The group has been showing a weak trend in its life and health
Weakness
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2. The group has been witnessing erosion in the investment income which
is likely to affect the group financially.
Competition
1.Munich Re
2.Swiss Life Insurance and Pension Company
3.Everest Re
Competitors
4.General Re
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Bibliography
Newspapers, Magazines & Journals
The Economic Times
Mint
The Times of India
Business Standard
Business Today
Business line
Websites
http://en.wikipedia.org/wiki/Reinsurance
http://www.scor.com/www/index.php?id=16&L=2
http://www.swissre.com/pws/research%20publications/sigma%20ins.%20research/sigma%20archive/sig
ma%20archive%20%28english%29.html
http://www.zurich.com/main/productsandsolutions/industryinsight/2003/september2003/industryinsight2
0030826_001.htm
http://www.allbusiness.com/management/193921-1.html
www.irdaindia.org
www.insuranceinstituteofindia.com
www.google.com
www.indiainfoline.com
http://www.generalinsurancecouncil.org.in/
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http://www2.standardandpoors.com/portal/site/sp/en/us/page.siteselection/site_selection/0,0,0,0,0,0,0,0,0,
0,0,0,0,0,0,0.html
http://www.businessinsurance.com/
http://www.ficci.com/media-room/speeches-presentations/2003
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