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WHAT IS INSURANCE

Insurance is a means of protection from financial loss. It is a form of risk

management primarily used to hedge against the risk of a contingent,

uncertain loss.

An entity which provides insurance is known as an insurer, insurance

company, or insurance carrier. A person or entity who buys insurance is

known as an insured or policyholder. The insurance transaction involves

the insured assuming a guaranteed and known relatively small loss in the

form of payment to the insurer in exchange for the insurer's promise to

compensate the insured in the event of a covered loss. The loss may or

may not be financial, but it must be reducible to financial terms, and must

involve something in which the insured has an insurable interest

established by ownership, possession, or preexisting relationship.

TYPE OF INSURANCE
TYPE OF
INSURANCE
GIC
LIC (GENERAL INSURANCE
(LIFE INSURANCE CORPORATION)
CORPORATION)

Type of general insuarance :-


1) Motorotor Insurance: Motor Insurance can be divided into two groups, two and four
wheeled vehicle insurance.
2) Health Insurance: Common types of health insurance includes: individual health
insurance, family floater health insurance, comprehensive health insurance and critical
illness insurance.
3) Travel Insurance: Travel insurance can be broadly grouped into: individual travel policy,
family travel policy, student travel insurance, and senior citizen health insurance.
4) Home Insurance: Home insurance protects a house and its contents.
5) Marine Insurance: Marine cargo insurance covers goods, freight, cargo, and other
interests against loss or damage during transit by rail, road, sea and/or air.
6) Commercial Insurance: Commercial insurance encompasses solutions for all sectors of
the industry arising out of business operations

Types of LIC Life Insurance:

Endowment Money Back Pension Term ULIP Plan Group Plan


plan policy Plan Insurance

1) Endowment plan
2) Money Back policy
3) Pension Plan
4Term Insurance
5) ULIP Plan
6) Group Plan
1. Endowment plan:

Endowment Plan is a participating non-linked plan which offers an attractive combination of


protection and maturity benefit. In case of uncertain death of the policy holder LIC offers financial
protection to the family of the insured. Moreover at the time of maturity a lump-sum amount is
paid under this plan.

In this policy declare a bonus every year. The bonus declared is not payable immediately. Bonus is
payable only when the policy matures or in case the policy holder dies.

LIC of India, endowment policies still plays a major role of the insurance policies it sells.

2. Money Back policy:

The money-back policy is a popular insurance policy. It provides life coverage during the period
of the policy and the maturity benefits are paid in installments by way of survival benefits at
regular intervals, instead of getting the lump sum amount at the end of the term. It is an
endowment plan with the benefit of liquidity.

In this policy declare a bonus every year. The bonus declared is not payable immediately. Bonus is
payable only when the policy matures or in case the policy holder dies. The bonus is also
calculated on the full sum assured.

3. Pension Plan:

LIC Pension Plan is most suited for senior citizens and those planning a secure future, so that you
never give up on the best things in life.

This pension plan help the individual to save money for future so that the life can be secured after
the retirement.

4. Term Insurance:

Term Insurance is a protection and traditional plan which provides financial protection to the
insured’s family in case of unfortunate demise with very low investment.
It is a pure life cover policy. Under this policy, against payment of regular premium, the insurer
agrees to pay your beneficiaries the sum assured in event of your premature death during policy
term. However, if you survive till the end of the policy term, nothing is payable to you.

5. ULIP Plan:

Unit Linked Insurance Plan (ULIP) is a combination of insurance as well as investment. In ULIP
returns are depends on investment performance. This ULIP plans are more costly than Term and
Endowment plan. A part of premium paid are assigned towards the life cover, while the remaining
portion is invested in various equity and debt schemes. The way ULIP is performs just like Mutual
Funds.

6. Group Plan:

The Group plan is a protection to groups of people. This scheme is ideal for employers,
associations, societies etc. and allows you to enjoy group benefits at really very low costs.

A claim may arise in three basic conditions

The Claimant should look about the following points before intimate a claim:

Whether the policy is in force?


Whether the policyholder has performed his part? - The policy status with regard to payment of
premium, age admission, outstanding loan & interest if any, legal restrictions if any.
Whether insured event has taken place?
What are the obligations assumed under the contract?
Is there any assignment done under the policy?
Whether all the premiums are paid?

Claim Settlement Process: Death Claim

Step One: Intimation of Claim

The claimant must submit the written intimation as soon as possible to enable the insurance
company to initiate the claim processing. The claim intimation should consist of basic information
such as policy number, name of the insured, date of death, cause of death, place of death, name of
the claimant etc .Claim intimation form can be availed from nearest branch of the insurance
company or/and by downloading it from the company website.

Step Two: Documentation

The claimant will be required to provide the following documents along with a claimant's
statement:

I. Certificate of Death
II. Proof of age of the life assured (if not already given)
III. Deeds of assignment / reassignments (if required)
IV. Policy document
V. Any other document as per requirement of the insurer

For early death Claim, (If the claim has accrued within three years from the beginning of the
policy), the following additional requirements may be called for:

I. Statement from the hospital if the deceased had been admitted to hospital
II. Certificate of medical attendant of the deceased giving details of his/her last illness
III. Certificate of cremation or burial to be given by a person of known character and
responsibility present at the cremation or burial of the body of the deceased
IV. Certificate by employer if the deceased was an employee

In special cases as per following the poof of death will be different from the standard specification

In case of an air crash the certificate from the airline authorities would be necessary certifying that
the assured was a passenger on the plane.
In case of ship accident a certified extract from the logbook of the ship is required.
In case of death from medical causes, the doctors’ certificate and/or treatment records may be
required.
If the life assured had a death due to accident, murder, suicide or unknown cause the police
inquest report, panchanama, post mortem report, etc would be required.

Step Three: Submission of required Documents for Claim Processing

For faster claim processing, it is essential that the claimant submits complete documentation as
early as possible.

Step Four: Settlement of Claim

As per the regulation 8 of the IRDA (Policy holder's Interest) Regulations, 2002, the insurer is
required to settle a claim within 30 days of receipt of all documents including clarification sought
by the insurer. If the claim requires further investigation, the insurer has to complete its procedures
within six months from receiving the written intimation of claim.

After receiving the required documents the company calculates the amount payable under the
policy. For this purpose, a form is filled in which the particulars of the policy, bonus, nomination,
assignment etc. should be entered by reference to the Policy Ledger Sheet. If a loan exists under
the policy, then the section dealing with loan is contacted to give the details of outstanding loan
and interest amount, which is deducted from the gross policy amount to calculate net payable
claim amount. Generally all claim payments would be made through the electronic fund transfer.

Maturity & Survival Claims:

The payment by the insurer to the insured on the date of maturity is called maturity payment. The
amount payable at the time of the maturity includes a sum assured and bonus/incentives, if any.
The insurer sends in advance them intimation to the insured with a blank discharge form for filling
various details in it. It is to be returned to the office along with Original Policy document, ID
proof, Age proof if age is not already submitted, Assignment /reassignment, if any and Copy of
claimant’s Bank Passbook & Cancelled Cheque. Settlement procedure for maturity claim is simple
after receipt of completed and stamped discharge form from the person entitled to the policy
money along with policy documents, claim amount will be paid by account payee cheque.

ROLE OF REINSURERS IN DEVELOPMENT & GROWTH

The function of insurance is to protect the insured against potential heavy losses that he might
incur from his daily activities. Almost any human endeavour carries some risks, but some are
more risky than others. The Reinsurers provides a similar protection to the insurers and
reinsurance exists because of insurance.
It is basically impossible to have a reinsurance placed without there being insurance in the first
place. Simply put, without insurance, there would be no need for reinsurance. Fundamentally,
reinsurance follows the same concept of insurance of spreading of risks both individually (one risk
at a time) and aggravated (Catastrophes), following the Insurance Risk pattern:
Risk-Insurance- Reinsurance- Retrocession. Reinsurance therefore plays a very important, if not
vital role in the insurance Industry. The Roles can be summarized under four headings; namely:-
Providing capacity
Creating stability
Strengthening of finances
Mobilization of funds for investment.
The importance of reinsurance is reflected in the costs insurers are willing to pay to acquire
reinsurance protection and the fact that without adequate protection the Insurance Companies
might not be licensed to do business. Even without legal requirements, reinsurance is important
because without it, a company would be exposed to liabilities it might not be able to meet.
Shareholders funds would be at risk as one large claim might wipe out the whole of the
shareholders investments. Risks threaten our prime objective, which is survival in the face of
accidental occurrence.

What is 'Reinsurance'
Reinsurance, also known as insurance for insurers or stop-loss insurance, is the practice of insurers
transferring portions of risk portfolios to other parties by some form of agreement to reduce the
likelihood of having to pay a large obligation resulting from an insurance claim. The party that
diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of
the potential obligation in exchange for a share of the insurance premium is known as the
reinsurer.

Objectives of Reinsurance

The following are the main objectives of reinsurance:

1. Wide distribution of risk to secure the full advantages of the law of averages;

2. Limitation of liability of an amount which is within the financial capacity of the insurers; .

3. Stability in underwriting over a period; and

4. A safeguard against serious effects of conflagrations. Apart from these, sometimes an insurer
may undertake the insurance of certain risks at a higher rate of premium and may reinsure part of
these or the whole of it with some other insurers at a lower rate with the objective of earning of
profit out of it i.e., making profits by way of retaining the difference between the two premiums.

History of reinsurance
1370 First recorded reinsurance contract covering a ship sailing from Genoa to Bruges.

c1688 Opening of Lloyd’s Coffee House in London, which became a leading reinsurance
market.

c1820 First fire reinsurance treaty in Germany.

1852 Cologne Re – the first independent reinsurance company – began writing business
following the Great Fire of Hamburg in 1842.

1863 The predecessors of UBS and Credit Suisse formed Swiss Re in Zurich following a large
fire in Glarus, which destroyed two-thirds of the town.

1880 Munich Re was established in Germany.

c1885 The first excess of loss reinsurance was sold by Cuthbert Heath at Lloyd’s.

1906 The San Francisco earthquake demonstrated the ability of the reinsurance market to fund
catastrophic losses.

1967 Berkshire Hathaway bought National Indemnity, its first reinsurance business.

1985/86 ACE and XL were established in Bermuda.

1993 Bermuda’s Class of ’93 was capitalised with over $3.5 billion following Hurricane Andrew
in August 1992. New reinsurance companies included Renaissance, Partner, and Tempest (now
part of Chubb).

1998 Piper Alpha North Sea offshore platform disaster was one of the triggers of the ‘LMX
spiral’ that almost caused the Lloyd’s market to collapse.

2001 The Class of ’01 (AWAC, Arch, Aspen, AXIS, Endurance, Montpelier and Platinum) raised
more than $8 billion following the 9/11 terrorist attacks.
2005 Following Hurricanes Katrina, Rita, and Wilma (and Charley, Francis Ivan, and Jeanne the
year before) the reinsurance industry was recapitalised with the Class of ’05. New companies
including Ariel, Lancashire and Validus raised over $5 billion. In addition to this, several London
Market companies followed Catlin in capitalising Bermuda-based entities and investors used
sidecars on a large scale to access the reinsurance market.

2011 Record losses for the reinsurance industry following a series of loss events including floods
in Thailand, tornadoes in the US and earthquakes in Japan and New Zealand. No new reinsurers
were established but the inflows to insurance-linked funds accelerated.

2012 Hurricane Sandy caused significant destruction in the US North East.


2015 A record 19% of property catastrophe limit was ‘alternative’ capital including catastrophe
bonds and collateralised reinsurance.

FEATURS

Characteristics of Reinsurance

1. Reinsurance is a contract between the two insurance companies.

2. The original insurer agrees to transfer part of his risk to other insurance

company on the same terms and conditions.

3. The fundamental principles of insurance such as insurable interest,

utmost good faith, indemnity, subrogation and proximate cause also apply

to reinsurance.

4. In the event of fire, the insured is entitled to get the amount of claim

only from the original insurer and not from reinsurer.

5. Original insurer cannot insure the risk with a re-insurer, more than the

sum assured, originally by the insured.

6. The original insurer should intimate to the reinsurer about the


alteration, if any, made in terms and conditions with the insured.

TYPES OF REINSURANCE

Proportional
Under proportional reinsurance, one or more reinsurers take a stated percentage share of each
policy that an insurer issues ("writes"). The reinsurer will then receive that stated percentage of the
premiums and will pay the stated percentage of claims. In addition, the reinsurer will allow a
"ceding commission" to the insurer to cover the costs incurred by the insurer (mainly acquisition
and administration).

The arrangement may be "quota share" or "surplus reinsurance" (also known as surplus of line or
variable quota share treaty) or a combination of the two. Under a quota share arrangement, a fixed
percentage (say 75%) of each insurance policy is reinsured. Under a surplus share arrangement,
the ceding company decides on a "retention limit" - say $100,000. The ceding company retains the
full amount of each risk, with a maximum of $100,000 per policy or per risk, and the balance of
the risk is reinsured.

The ceding company may seek a quota share arrangement for several reasons. First, it may not
have sufficient capital to prudently retain all of the business that it can sell. For example, it may
only be able to offer a total of $100 million in coverage, but by reinsuring 75% of it, it can sell
four times as much.

The ceding company may seek surplus reinsurance to limit the losses it might incur from a small
number of large claims as a result of random fluctuations in experience. 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 automatic underwriting capacity of the cedant would be $1,000,000 in this
example. Any policy larger than this would require facultative reinsurance.

Non-proportional
Under non-proportional reinsurance the reinsurer only pays out if the total claims suffered by the
insurer in a given period exceed a stated amount, which is called the "retention" or "priority". For
instance the insurer may be prepared to accept a total loss up to $1 million, and purchases a layer
of reinsurance of $4 million in excess of this $1 million. If a loss of $3 million were then to occur,
the insurer would bear $1 million of the loss and would recover $2 million from its reinsurer. In
this example, the insurer also retains any excess of loss over $5 million unless it has purchased a
further excess layer of reinsurance.

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 cedant's 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. These
contracts usually contain event limits to prevent their misuse as a substitute for Catastrophe XLs.

In catastrophe excess of loss, the cedant's retention is usually a multiple of the underlying policy
limits, and the reinsurance contract usually contains a two risk warranty (i.e. they are designed to
protect the cedant against catastrophic events that involve more than one policy, usually very
many policies). For example, an insurance company issues homeowners' 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 (e.g., hurricane, earthquake, flood).

Aggregate XL affords a frequency protection to the reinsured. For instance if the company retains
$1 million net any one vessel, $5 million annual aggregate limit in excess of $5m annual
aggregate deductible, the cover would equate to 5 total losses (or more partial 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" contracts.

Risks attaching basis


A basis under which reinsurance is provided for claims arising from policies commencing during
the period to which the reinsurance relates. The insurer knows there is coverage during the whole
policy period even if claims are only discovered or made later on.

All claims from cedant underlying policies incepting during the period of the reinsurance contract
are covered even if they occur after the expiration date of the reinsurance contract. Any claims
from cedant underlying policies incepting outside the period of the reinsurance contract are not
covered even if they occur during the period of the reinsurance contract.

Losses occurring basis


A Reinsurance treaty under which all claims occurring during the period of the contract,
irrespective of when the underlying policies incepted, are covered. Any losses occurring after the
contract expiration date are not covered.

As opposed to claims-made or risks attaching contracts. Insurance coverage is provided for losses
occurring in the defined period. This is the usual basis of cover for short tail business.

Claims-made basis
A policy which covers all claims reported to an insurer within the policy period irrespective of
when they occurred.

Contracts Ed

Most of the above examples concern reinsurance contracts that cover more than one

policy (treaty). Reinsurance can also be purchased on a per policy basis, in which case it

is known as facultative reinsurance. Facultative reinsurance can be written on either a

quota share or excess of loss basis. Facultative reinsurance contracts are commonly

memorialized in relatively brief contracts known as facultative certificates and often are

used for large or unusual risks that do not fit within standard reinsurance treaties due to

their exclusions. The term of a facultative agreement coincides with the term of the

policy. Facultative reinsurance is usually purchased by the insurance underwriter who

underwrote the original insurance policy, whereas treaty reinsurance is typically

purchased by a senior executive at the insurance company.

Reinsurance treaties can either be written on a "continuous" or "term" basis. A continuous

contract has no predetermined end date, but generally either party can give 90 days notice

to cancel or amend the treaty. A term agreement has a built-in expiration date. It is

common for insurers and reinsurers to have long term relationships that span many years.

Reinsurance treaties are typically longer documents than facultative certificates,

containing many of their own terms that are distinct from the terms of the direct insurance

policies that they reinsure. However, even most reinsurance treaties are relatively short
documents considering the number and variety of risks and lines of business that the

treaties reinsure and the dollars involved in the transactions. There are not "standard"

reinsurance contracts. However, many reinsurance contracts do include some commonly

used provisions and provisions imbued with considerable industry common and

practice.[2]

Fronting Edit

Sometimes insurance companies wish to offer insurance in jurisdictions where they are

not licensed: for example, an insurer may wish to offer an insurance programme to a

multinational company, to cover property and liability risks in many countries around the

world. In such situations, the insurance company may find a local insurance company

which is authorised in the relevant country, arrange for the local insurer to issue an

insurance policy covering the risks in that country, and enter into a reinsurance contract

with the local insurer to transfer the risks. In the event of a loss, the policyholder would

claim against the local insurer under the local insurance policy, the local insurer would

pay the claim and would claim reimbursement under the reinsurance contract. Such an

arrangement is called "fronting". Fronting is also sometimes used where an insurance

buyer requires its insurers to have a certain financial strength rating and the prospective

insurer does not satisfy that requirement: the prospective insurer may be able to persuade

another insurer, with the requisite credit rating, to provide the coverage to the insurance

buyer, and to take out reinsurance in respect of the risk. An insurer which acts as a
"fronting insurer" receives a fronting fee for this service to cover administration and the

potential default of the reinsurer. The fronting insurer is taking a risk in such transactions,

because it has an obligation to pay its insurance claims even if the reinsurer becomes

insolvent and fails to reimburse the claims.

Many reinsurance placements are not placed with a single reinsurer but are shared

between a number of reinsurers. For example, a $30,000,000 excess of $20,000,000 layer

may be shared by 30 or more reinsurers. The reinsurer who sets the terms (premium and

contract conditions) for the reinsurance contract is called the lead reinsurer; the other

companies subscribing to the contract are called following reinsurers. Alternatively, one

reinsurer can accept the whole of the reinsurance and then retrocede it (pass it on in a

further reinsurance arrangement) to other companies.

Using game-theoretic modeling, Professors Michael R. Powers (Temple University) and

Martin Shubik (Yale University) have argued that the number of active reinsurers in a

given national market should be approximately equal to the square-root of the number of

primary insurers active in the same market.[3] Econometric analysis has provided

empirical support for the Powers-Shubik rule.[4]

Ceding companies often choose their reinsurers with great care as they are exchanging

insurance risk for credit risk. Risk managers monitor reinsurers' financial ratings (S&P,

A.M. Best, etc.) and aggregated exposures regularly.


Because of the governance effect insurance/cedent companies can have on society, re

insurers can indirectly have societal impact as well, due to reinsurer underwriting and

claims philosophies imposed on those underlying carriers which affects how the cedents

offer coverage in the market. However, reinsurer governance is voluntarily accepted by

cedents via contract to allow cedents the opportunity to rent reinsurer capital to expand

cedent market share or limit their risk.[5]

functions of a reinsurance company:

1)Increases stability and security.


As we have said, the major function of reinsurance companies is to spread out risk. This is
especially in the case of an unusual or widespread loss event, such as a hurricane or tornado.
2)Increases depth and width of coverage.
Whenhen an insurance company is secure and stable, and when it is protected well for all manner
of loss events, it can afford to offer more insurance policies. Also, it can offer a wider range of
insurance policies, thus improving business.
3)Helps with analysis and decision-making.
A reinsurance company won’t simply take an insurance company on as a partner. It nee to know
that the investment is worthwhile. The reinsurance company will help the insurance company
evaluate its reinsurance needs, devise an effective reinsurance plan, and analyze risks and risk
pricing.
4)Provides an array of services.
Reinsurance companies will also help the primary insurance company understand and coordinate
its reinsurance needs. This is done by providing technology, training, organization, management,
and even accounting.
Helps with expansion.
Because reinsurance companies provide security and take on risk, they give insurance companies
the opportunity to expand their business through launching new products services

advantages or benefits of reinsurance


1. Reinsurance boosts Insurance Business
The major advantage of reinsurance is that it assists in the boom of insurance business. It enables
every insurer to accept insurance business as the total risk will be distributed among other
reinsurers.

If there is no reinsurance, the insurer may not be willing to take up risks, particularly when the risk
exceeds beyond his capacity to manage.
2. Reinsurance reduces the risks
The prime principle of insurance is to reduce risk. As the risks are spread across wider area, the
loss of the individual is minimized which gives the insurer the secured feel. The revenue of
insurance companies are stable due to reinsurance. It also helps the insurance companies to gain
knowledge about various types of risks and the basis of rating the risks in the future.
3. Reinsurance Increases Goodwill of Insurer
Reinsurance helps to boost the overall confidence and goodwill of insurer. When the insurer
develops confidence, he understands the nature of risks involved beyond his capacity.
So reinsurance increases goodwill of an insurer
4. Reinsurance Limits the Liability
Reinsurance motivates the insurers to undertake and spread the risks. Hence the liability of insurer
is limited to the maximum
5. Reinsurance Stabilizes premium Rates
The premium rates of insurance are stabilized by reinsurance. Generally, the premium rates are
calculated on the basis of the loss experienced by the insurer in the past, due to the risk concerned.
Reinsurance takes into account of all these data and fixes the premium rate according for various
types of risks under mutual agreement.
Thus reinsurance stabilizes the fluctuations in the premium rates of various types of risks.
6. Reinsurance Protects the Insurance Funds
The insurance funds of the insurer is well protected due to reinsurance. Additional security and
peace of mind is an added advantage of reinsurance for the insurer and the company that offers the
insurance.
7. Reinsurance Reduces Competition
The competitions between inter company is reduced as everyone work in a cooperative manner
and with the helping tendency in the insurance business. Thus reinsurance helps to control
competition and increase overall morale of the employees in the insurance business.
8. Reinsurance Reduces profit fluctuations
The reinsurance plans reduce, to a considerable extent the violent fluctuations in the profits of the
company. If on the other hand, heavy risks are retained by the original insurer, his profits are
greatly upset due to a heavy single loss.
9. Reinsurance Encourages new enterprises
It encourages the new underwriters, who in their early period of development, have limited
retentive capacity. In the absence of reinsurance facility, the tremendous growth of new enterprises
is doubtful.
10. Reinsurance Minimizes dealings
Due to the reinsurance scheme, the insurer is required to indulge in the minimum dealings with
only one insurer. In the absence of insurance facility, the insured will have to approach several
insurers to enter into various individual insurance agreement on the same property. This involves
considerable cost, loss of valuable time and slower down the pace of protection cover
DISADVANTEGES OF REINSURANC

1. Collaboration is limited

Working with spreadsheets in reinsurance means only one person can

access and edit the data at a time, without taking or being sent a copy of

it. In some instances, recipients even end up being sent the wrong version

which can lead to errors in data. With a system, multiple people can look

at and work on the most up-to-date data simultaneously and have

confidence the data quality.

2. Lack of controls, vulnerable to fraud

Spreadsheets do not possess any built-in, automatic audit tracking

function. For example, who accessed the data last, who did what and

when to the spreadsheet? How do you know if the calculations are

correct? How do we know results remain accurate after months, quarters,

and years of use? There is always new data entering spreadsheets and

new users managing them. What controls are established to ensure the

spreadsheet remains bug free?

3. No log of change

Along the same lines of my previous point, the spreadsheet has no log of

change. As values/calculations/source data changes, the spreadsheet does

not maintain the prior value for auditing/control. Having this function in a
system allows you to review accuracy of data over time and return to

previous values if errors are detected.

4.Not prepared for disaster

If there are no best practices put in place for proper spreadsheet storage or

back up, your reinsurance programme is at major risk when disaster

strikes. If something happens, full data recovery can be very difficult if

not impossible, and will have a major impact on your business.

5. Susceptible to costly human errors

Spreadsheets are extremely susceptible to trivial human errors. Its

estimated that 9 out of 10 spreadsheets contain human errors. Missed

negative signs and misaligned rows may sound harmless, however they

can cause a considerable loss to the bottom line. Furthermore, costly

mistakes can damage the confidence of investors or other stakeholders

involved in your business.

6. Difficult to troubleshoot or test

Spreadsheets are notoriously difficult to trouble shoot or test, simply

because they aren’t built for that. However, testing should be an integral

component of the quality controls you put in place to maintain accuracy

across reinsurance programmes. When spreadsheets are saved in different

folders, departments or even geographical locations, it becomes that

much harder to implement and conduct quality control processes.


7. Regulatory compliance challenges

Ensuring regulatory compliance for your reinsurance programmes

becomes difficult when using spreadsheets given that data can be

susceptible to fraud and errors.

Which regulations affect spreadsheet-based reinsurance systems? Over

the last two decades, we’ve seen a surge in global regulation including:

Serbanes-Oxley (SOX)

Dodd-Frank, Basel III

Solvency II

GDPR

FAS 157

Looking ahead to the future, the world will only become more regulated.

Which means finding ways to reduce operational risk and increase

compliance standards should be a huge priority.

8. Hard to mange data security

For any regulated ceding insurer or assuming reinsurer, there is a need to

keep some data restricted, and some data shareable. Controlling data

access and restrictions on spreadsheets can be difficult over time when

there are hundreds of spreadsheets to manage and scores of users

requiring access.

With a dedicated system, data security can be easily controlled by giving

users specific access rights. This gives you control over who has access to
authorised information and who does not.

9. Potential for errors and untimeliness in reporting

Management needs timely and accurate information to make robust

decisions about their reinsurance programme. Today we are living in an

‘on-demand’ society which increases expectations on getting data ‘right

now. This can be a difficult expectation to meet when using spreadsheets

because the data is often coming from multiple sources. It takes time to

coordinate and assemble and unfortunately can also be prone to errors

with multiple people managing the process.

A dedicated system makes on-demand reporting more achievable as

report production can be automated. Not to mention the amount of time it

saves from producing these reports manually. Having the process

automated also ensures more accuracy in data as human involvement is

limited.

10. Keeping up with the changing business world

Today’s world is full of major changes shaping and reshaping the

business landscape. We know first hand the insurance industry is part of

this change. Examples of this being large scale business transformation

programmes, M&A activity and Management Buyouts. In reinsurance

programmes, spreadsheets often become highly personalised per the user.

When it’s time for a new person to take over as part of a large-scale

business change, spreadsheets could be so personalised that the new


person must start from scratch. Unlike a system, there is no manual from

the spreadsheet user on how the spreadsheet functions. This causes major

productivity inefficiencies and once again the data susceptible to errors, if

a new person is left guessing what to do.

As an organisation’s reinsurance programme grows, data in spreadsheet-

based systems get more distributed; subsequently compounding all the

risks and issues outlined above.

METHODS OF REINSURANCE

1) Facultative Reinsurance

2) Treaty Reinsurance.
1. Facultative Reinsurance

This is the oldest method of reinsurance. This method is also known as “Specific reinsurance“.
Under this method, each individual risk is submitted by the ceding insurer to the reinsurer who can
accept or decline whatever sum they consider appropriate subject to the amount of their
acceptance being approved by the ceding insurer.

The reinsurer is offered a copy of proposal form which contains details of risk such as the sum
assured, salient features of the risk, perils covered, rate of premium and period of insurance etc.
The reinsurer will go through the contents of the proposal form thoroughly and decide whether to
accept or reject the risks. If he decides to accept, he should specify the amount for which he would
accept the reinsurance. In case, the risk is not fully accepted, the original insurer may again have
to approach another insurer for the balance.

For example:
‘X’ insurance company has received a proposal for Rs.1,00,00,000. The retention of the
original insurer (i.e. X co) is Rs.50,00,000 and for the balance of Rs.50,00,000, he approaches the
insurer ‘A’ who accepts for only Rs.25,00,000. The original insurer may again have to
approach insurer ‘B’ for the balance of Rs. 25,00,000.

Any alteration, in the terms and conditions made by the original insurer is to be intimated
immediately to the reinsurers. The claim is to be settled according to the ratio of risk accepted by
each insurer.

2. Treaty Reinsurance

Treaty reinsurance has been defined as

a formal, legally binding agreement or a treaty (agreement) between the principal and the reinsurer
that the reinsurer shall accept without the option of rejecting, a specified proportion of the excess
on any risk over the insurer’s limit of retention.

Thus, under this method, there is an agreement between the ceding company and the reinsurance
company that amount of every risk over and above the retention shall automatically be transferred
to the reinsurance company. As soon as the original insurer accepts the risk, the excess above the
retention is automatically reinsured.

For example, if the total sum insured on any risk is Rs.2,00,000 and the retention is Rs.20,000 the
balance of Rs.1,80,000 is reinsured. Accordingly premiums are also paid to the reinsurers in the
same proportion. In the even of loss, insurers also pay the compensation in the same proportion.
Treaty reinsurance may be

Quota share treaty;


Surplus treaty and
.
1. Quota Share Treaty

Under this method, the ceding company is bound to cede and the reinsurer is bound to accept a
fixed share of every risk coming within the scope of the treaty.

This method is especially suitable for an insurer

recently established with a small premium income; or


entering a new class of business for which it may not have the necessary experience; or
to protect a hazardous class of insurance, where selective ceding is difficult.
This method is highly beneficial to the reinsurer. The liability of the reinsurer attaches as soon as
the ceding office assumes the risk. Then, the ceding office provides the accepting office with full
details of each cession, copies of proposal papers. It does not give the insurer an option of
acceptance or rejection.

It enables the reinsurer to consider any marked divergence of underwriting standards and if
persistent to its disadvantage, it may indicate the need for revision or cancellation of the treaty in
respect of new business.

2. Surplus Treaty

Under this method, the insurers agree to accept the surplus i.e., the difference between ceding
insurers’ retention and gross acceptance. Surplus treaties are arranged on the basis of ‘lines’.
A ‘line’ is equivalent to the ceding insurer’s retention.

For example:
a treaty may be arranged on a ten line basis. Under this arrangement, the insurers will accept
automatically upto ten times the retention of ceding insurer.
forexampal f
f the gross acceptance is more than Rs.11,00,000, then the surplus treaty will absorb only Rs.10
lakhs and the balance will have to be reinsured facultatively. It is usual to arrange a second surplus
treaty to take care of such excess amount. This method is the most popular and greater part of the
reinsurance business is now done under this method, as it does not lay down any right rules.

It is of particular advantage to the ceding office as it saves a lot of time and expenses and
simultaneously provides for the reinsurance facility. However, it is not suitable for policies with
higher sums insured or where the limit of indemnity is very high.

3. Excess of Loss Treaty


This is a non-proportional method of reinsurance. The reinsurance protection arranged is not
linked with the sum insured but comes into operation when the total net loss suffered by the
insured due to one event exceeds the figure agreed in the treaty.

Thus, under this method the original insurer has to decide the maximum amount which he can
bear on any one loss and seeks reinsurance under which the reinsurer will be responsible for the
amount of any losses and above the amount retained by the direct reinsurer. Such a treaty usually
contains an upper limit so that the insurer, for instance is content to bear the first Rs.20,000 of any
loss, the treaty reinsurers will bear any loss over Rs.20,000 but not exceeding, say Rs.2,00,000

In order to cover the catastrophe risks or risks beyond that maximum limit (Rs.2,00,000 in the
above case) an additional second layer ( further excess of loss) treaty may be negotiated. In case,
the direct insurer has not made any arrangement to cover the loss over and above Rs.2,00,000,
then he will have to bear all possible claims beyond Rs.2,00,000 Sometimes, the insurer may be
required to retain part of the cost in excess of the retention.

Thus, to keep the reinsurers directly involved in the cost, the treaty may, for instance, provide that
the reinsurer will pay only a part of the excess of Rs.20,000 e.g., 95% of the claims over Rs.
20,000 maybe paid by the reinsurers and the balance of 5% is met by the insured. Generally, the
retention is fairly high. In order to get protection under this category, the insurers have to pay an
agreed percentage of the annual premium income for that class of risk to the reinsurers.

This method is employed mainly to protect large catastrophic losses such as those caused by
Special perils fire insurance i.e. storm, flood, earthquake etc. or where their is an possibility of
conflagration in large storage areas or where large marine acceptances are involved in any ship
through different sources. It is also applied to protect legal liability classes i.e., motor third party,
public liability, products liability and workmen’s compensation risks. For example, a severe
mining accident may result in hundred of fatalities to workmen, resulting in a catastrophic loss.

PROCEDUERS

DOCUMENTATION

WHAT ARE MAINE REASON OF REINSURANCE

It is probable that the reinsurer may have sufficient amounts ceded from a number of different
sources and unfortunately the cession may relate to the same risk. To relieve itself from this
undesirable accumulation, the reinsurer would itself have to resort to reinsurance companies. This
may be the principal reasons for reinsurance. There are some other reasons for reinsurance which
are given below:
i) Risk Minimization By Spreading: The basic concept of insurance is to spread the risk over as
wider an area as possible as so to decrease the burden of loss at each stage. The reasons for
reinsurance says, reinsurance facilitates a risk to be scattered over a much wider area and the
principle of insurance is taken well care of. This in fact helps in the ultimate viability of insurance
business.

ii) Risk Transfer: To an insurer, the need for reinsurance safeguard arises in the same way as the
insured needs insurance protection. But for reinsurance, the business of insurance would not have
developed to the extent of the present day growth.

iii) Flexibility : In the absence of reinsurance, insurers would have been bound to limit their
acceptance of risk only up to such an amount which they could possibly digest. In other words, the
insurers would have been unable to accept a risk beyond their financial strength or resources for
that class of business. As a result insurers’ service to the public would also have been limited.
Reinsurance gives flexibility to insurers by creating a condition which enables them to accept a
risk beyond their financial capacity or resources. The insuring community is also left care-free
with regard to various risks to which they are subjected to, irrespective of whatever may be the
value per single risk.

iv) Accumulation : Reinsurance reduces the possibility of getting involved in undesirable


additional risk-load, which is otherwise eminent from the accumulation of risks coming from
different sources. Examples of such accumulation are (a) heavy commitment on the cargoes of the
same vessel (b) heavy commitment on the cargoes lying in the same port possibly because of the
arrival of all vessels at the same time and (c) heavy commitment of an insurer on the property of a
particular hazardous locality from the view point of fire or conflagration fire. It is possible that the
various branches of an insurer, without knowing each other’s position, may commit individually
thereby giving rise to a situation of heavy unbearable commitment as mentioned in (a) (b) or (c)
above. Reinsurance reduces such worries of insurers and keeps down the pressure of accumulation
to a sustainable limit.

v) Development : The growth of an insurance company is particularly dependent on sound


financial standing, which is primarily based on the stability of profit and loss. Profit cannot be
expected if there is an untoward charge on the fund by way of claim which it cannot sustain or for
which there is no provision. Reinsurance tends to stabilize profits and losses and permits more
rapid growth of an insurance company.

vi) Prediction For Rating : An insurer needs to have large number of similar cases in his book for
the purpose of predicting an accurate rating structure. But assuming a large number of similar
risks is in itself undesirable unless some precautionary measure is taken. It may not also be
possible to get a large number of similar cases by an insurer because of the operation of numbers
of insurers in the market. Whatever it is, reinsurance takes care of such a situation in both the
ways. On the one hand it provides protection to the insurer by way of providing unsustainable
losses, and on the other creates a forum of getting large number of similar cases through
reciprocity.

vii) A New Insurer who has recently started transacting insurance business cannot certainly
develop and possibly cannot survive in the absence of reinsurance protection.

viii) Capacity Relief : Reinsurance which allows the company (reinsured) to write the bigger
amounts of insurance.

ix) Catastrophe Protection: The aim of reinsurance is to protect the company (reinsured) from a
large single, catastrophic loss or more than one big losses.

x) Stabilization :It helps to the betterment of the overall operating results of the reinsured’s from
year to year.

xi) Surplus Relief : Reinsurance heals the strain on the company’s (reinsured) /cedent’s
surplus during rapid premium growth.

xii) Market Withdrawal : Reinsurance provides a way for the reinsured company to withdraw it
from a market or business or from a geographic area.

Beyond the above 12 reasons for reinsurance, there might have some other reasons identified in
today’s reinsurance business.

DIFFERECE BETWEEN DOUBALINSURANCE VS

REINSURANCE

1. Meaning
In double insurance, the insured gets the same subject matter insured with more than one insurer
or under more than one policy with the same insurer. But the reinsurance business is entered into
by the original insurer with other insurers.
2. Filing of claims
In double insurance, claims can be filed with all insurers but restricted to actual loss in case of fire
and marine policies. But in reinsurance, the insured will claim compensation from original insurer,
who will claim compensation from reinsurer.
3. Contribution
In double insurance, contribution will be made by each insurer in proportion to the sum insured.
But in reinsurance, reinsurer is not directly required to contribute for losses.
CASE STUDY ON REINSURANCE WITH CLAIM SETTALMENT

REINSURANCE COMPANY

THE ROLE OF REINSURANCE IN THE PERFORMANCE OF INSURANCE INDUSTRY


IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Generally, Insurance plays a pivotal role in the transfer of risk across all spheres of life. The
concept of insurance refers to a contract between two parties where one party promises to
indemnify the other party for the occurrence of any risk covered under the contract in exchange
for a monetary consideration called premium (Ogwo, 2000). The party who makes this promise is
referred to as an insurer and is a limited liability company. This company also faces several risks
and this necessitates the ceding of these risks with a larger insurance company. This process is
conceptualized as reinsurance.

By definition and explanation, one can describe ‘Reinsurance’ as the practice of insurers
transferring portions of risk portfolios to other parties by some form of agreement in order to
reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The
intent of reinsurance is for an insurance company to reduce the risks associated with underwritten
policies by spreading risks across alternative institutions. Overall, the reinsurance company
receives pieces of a larger potential obligation in exchange for some of the money the original
insurer received to accept the obligation. The party that diversifies its insurance portfolio is known
as the ceding party. The party that accepts a portion of the potential obligation in exchange for a
share of the insurance premium is known as the reinsurer.

In developing and emerging economies, reinsurance companies spring up back bone to support the
insurance business. They serve as a supportive factor to establish confidence policy holding in
insurance companies, reinsurance also allow the direct insurer to free themselves from the part of
a risk that exceeds their underwriting capacity, or risks which, they do not wish to bear alone.
However, the situation in Nigeria seems different. Despite the existence of reinsurance in
insurance sector in Nigeria, the development of the sector remains poor.

1.2 STATEMENT OF THE PROBLEM


The contributions of reinsurance industry to the growth and development of Insurance across the
globe cannot be overemphasized. This is because Reinsurance is the foundation upon which
Insurance is built (Olugbemi 2016).

The business environment and lives of individuals is characterized with high risk resulting from
the dynamism associated with life as a whole. The essence of Reinsurance is to preserve value to
ensure strong and detailed protection in the event of casualties that arise unexpectedly. This extra
mile gone in the provision and assurance of safety is known as Reinsurance.

The primary objective of reinsurance is to protect the primary insurer or the ceding company from
being crippled by land losses beyond its financial capacity. Where the risk assumed by the
reinsurer from the ceding company is so large that it cannot comfortably handle alone, the
reinsurer can reinsure or retrocede part of the risk to another reinsurer. They also help to avoid
possible financial strain due to rapid growth of the portfolio and from the part of view of young
insurance companies.

Reinsurance companies have added stability to the insurance industry and to the local economies
by declining out the results of the insurance companies as they continue to absorb the impact of
large losses which would have led to very damaging results to the individual insurance companies.
In Nigeria, reinsurance was introduced in the insurance in 1977. The reinsurance companies in
playing their role in the sub sector attempts to support the effort of huge claims to restore
confidence of the policyholders in the business. In spite of the existence of reinsurance and their
effort to underwrite for the primary insurers, member of the public still double the ability of
primary underwriters. Especially in areas that require huge claims, such as aviation, oil and gas.
These areas sparingly patronized in Nigeria. Thus this study is set to determine the role of
reinsurance in the performance of insurance industry in Nigeria.

1.3 OBJECTIVE OF THE STUDY

The main objective of this study is appraising the contributions of reinsurance to the performance
of insurance companies in Nigeria. Specific objectives include:

1. To evaluate the strength of the Nigerian Reinsurance Industry.

2. To examine the relationship between Insurance and Reinsurance companies in Nigeria.

3. To appraise the contributions of reinsurance to the Nigerian insurance Industry.

4. To assess regulations and policies of reinsurance in Nigeria.


1.4 RESEARCH QUESTIONS

1. What is the strength of the Nigerian Reinsurance Industry?

2. Is there any relationship between Insurance and Reinsurance companies in Nigeria?

3. What are the contributions of reinsurance to the Nigerian insurance Industry?

4. What are the regulations and policies of reinsurance in Nigeria?

1.5 RESEARCH HYPOTHESIS

Hypothesis 1

Ho: There is no significant relationship between insurance company and the reinsurance
company in Nigeria

Hi: There is significant relationship between insurance company and the reinsurance company
in Nigeria

Hypothesis 2

Ho: There is no significant contribution of reinsurance to the Nigeria insurance industry

Hi: There is significant contribution of reinsurance to the Nigeria insurance industry.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

This study will take a critical look at the role of reinsurance in the performance of insurance
industry in Nigeria, with particular emphasis on the contribution of reinsurance in the insurance
industry, the gross premium of non-life insurance and non-life reinsurance companies. A range of
time is taken from (1987 – 2011). The study however suffered an initial and usual constraint of
time, finance and relevant data needed.

1.7 SIGNIFICANCE OF THE STUDY

This study to a great extent has potentials of harnessing the position of Nigerian economy with
regards to insurance. This is because businesses of various sorts are the main stay of any
developing economy like Nigeria. Reinsurance as an extended insurance structure for business and
life risks ensures these demands- thus the significance of this study. This work will be of
significant contribution to the body of knowledge in this area of study, and it will also be a
reference point for future researchers.

1.8 ORGANIZATION OF STUDY

This research study is arranged into five chapters, chapter one includes the general introduction,
statement of the problem, objective of the study, research hypotheses, scope and limitations of
study, significance of study as well as the definition of terms. Chapter two is the literature review,
chapter three focuses on the research design, method of data collection and method of data
analysis as well as statistical techniques used for data analysis. Chapter four centers on data
presentation, analyzes interpretation and discussion of findings.

Finally, chapter five is the summary, conclusion and recommendations.

1.9 DEFINITION OF TERMS

The following terms are duly defined;

1. REINSURANCE: The practice of insurers transferring portions of risk portfolios to other


parties by some form of agreement in order to reduce the likelihood of having to pay a large
obligation resulting from an insurance claim. The intent of reinsurance is for an insurance
company to reduce the risks associated with underwritten policies by spreading risks across
alternative institutions (Ogala 1992).

2. DEPRECIATION: The gradual conversion of the cost of a tangible capital asset or fixed asset
into an operational expense over the asset’s estimated useful life (Mishra, 2007).

3. BROKERAGE: An organization that buys and sells foreign money, shares in companies, etc.
for other people (Irukwu, 1991).

4. BROKER: A person who serve as a trusted agent or intermediary in commercial negotiation or


transactions. Brokers are usually licensed professionals in fields where specialized knowledge is
required, such as finance, insurance, and real estate (Remi 1999).

5. OUTSTANDING CLAIM: - A summary of unsettled claims at the end of the financial year
(Akpan, 2004).

6. PREMIUM: - Premium is an amount paid periodically to the insurer by the insured for
covering his risk (Isimoya, 2003).
7. UNEARNED PREMIUM: This an insurance premium that is paid by the customer in advance
and which the insurance company has not earned (Ajayi, 2000).

8. CEDING COMMISSION: A fee paid by a reinsurance company to the ceding company to


cover administrative cost and acquisition expenses.

9. INSURANCE: The act of providing against risks in business, property ownership and other life
endeavors.

Reinsurance and enterprise risk management

Insurers are in the business of aggregating risk. This makes enterprise risk management (ERM)
particularly important to insurers.

In addition, insurers have an incredibly flexible and powerful tool available for sculpting their
risks: reinsurance.

ERM is a very new approach to risk that has been embraced by insurers just in the past 15 years.
Reinsurance, on the other hand, has been around for almost as long as insurance. Do they work
together? Can the new ERM process learn from the mature reinsurance approach?

The answers are yes and yes.

An insurer’s ERM process looks very much like the process of designing a reinsurance program.
Both start with the articulation of risk appetite and tolerance – how much and what kind of risk
does the insurer want to have (retain) at the end of the process (though the reinsurance world may
not have used those particular terms until recently). The picture above shows how insurers look at
risk from a variety of perspectives and choose from a variety of reinsurance tools to achieve their
desired outcomes.

Because reinsurance purchasing is a familiar process, insurers seeking to establish an ERM


framework can draw upon this experience to inform their ERM risk appetite and tolerance.

Management choices about reinsurance protection illustrate how much insurance risk the company
is willing to retain from individual insureds, single events, lines of business, and annual
underwriting results. ERM-related risk tolerances can be developed by extending the reinsurance
thinking to other risks.

ERM thinking may also influence reinsurance decisions. For insurers with significant reinsurance
purchases and a developing ERM program, the ERM thinking often spurs an evolution of
reinsurance philosophy.

Taking an enterprise-wide view of the risk profile, companies often choose to consolidate
historically separate purchases on similar risks – thereby taking advantage of diversification
benefits and efficiencies of scale.

As they develop greater confidence in their selected risk appetites, insurers may decide to calibrate
reinsurance structures to achieve better alignment with corporate strategy. And they may adjust the
balance of retained risk among lines of business in light of temporary or longer term differences in
risk adjusted returns.

Perspective of rating agencies and regulators


At the same time, outside bodies such as rating agencies and regulators have been urging that
insurers take up ERM. They all agree that reinsurance is a crucial risk management tool, and will
want to learn how well the reinsurance program fits with ERM goals.

It is not that the goal of rating agencies and regulators is to give insurers more work to do. Their
interest lies in establishing the insurer’s resilience; and they recognize that no one can understand
an insurance company’s risks better than the company itself. By asking insurers to explain and
justify their own view of risk, these outside bodies can gain a much better understanding of how
effectively the selected risk mitigation strategies – including reinsurance – support the company’s
objectives.

Reinsurers’ perspective
The investment and insurance losses that major reinsurers experienced in 2001 served as a “wake-
up call” to the industry. Since that time, reinsurers have increasingly sought to coordinate their
risk acceptance and retrocession strategies through the lens of ERM.

For many reinsurers formed following 2001, ERM has been a fundamental part of their business
strategy. While the 2008 financial crisis was an unprecedented shock to world markets, reinsurers
have for the most part weathered that storm – and the ensuing economic challenges.

In recent years, prudent risk management is increasingly seen as a differentiator. For example,
since 2013 Partner Re has disclosed risk limits for a dozen major risks along with their actual risk
acceptance in their annual report. Other international reinsurers have followed suit.

It’s hard to know to what extent ERM drives reinsurer behavior, but as ERM has become further
ingrained over the last several years, reinsurers have shown some different behaviors, even in the
face of an extremely competitive marketplace as compared to prior decades. Catastrophic events
have not created major dislocations in the market or, in general, threatened reinsurer solvency.
Capacity has been generally available, and reinsurers are showing more discipline in avoiding
over-concentration.
And, despite competitive pressure from alternative capital and the hardship of persistently low
investment returns, analyst consensus places reinsurer return on equity expectations in 5% to 10%
range, quite respectable in the current economic environment.

MANEGING RISK IN REINSURANCE

Managing risk lies at the heart of what reinsurers do. In recent decades, the scope of risk
management has widened significantly. It is no longer confined to traditional underwriting risk,
but also encompasses risks to a company’s investments, its capital base and liquidity positions.

While it might look like reinsurers take a bet on whether an adverse event will happen or not,
decisions about risk-taking are made in a controlled way and enabled by a very sophisticated risk
management framework. It is about anticipating, identifying, assessing, modeling and controlling
risks.

Risk management has to start at the top of the organisation and it is important to clarify roles and
responsibilities and distinguish between the risk owner (board), the risk taker (business unit) and
the risk controller (independent risk manager). Senior management is the ultimate risk owner of
the company and plays an important risk management role by defining the company strategy.
Business unit managers are the actual risk takers and have the responsibility for properly assessing
and pricing risks. The specific risk management function, under the stewardship of the chief risk
officer, is responsible for risk governance, risk oversight and independent monitoring of risk-
taking activities. Each risk that the company assumes contributes to the overall risk profile and
affects capital requirements.

A reinsurer’s capacity to safely assume complex and large risks depends, not only on its capital
strength, but also on its ability to spread its risks. Reinsurers achieve a high degree of
diversification by operating internationally, across a wide range of different lines of business and
by assuming a large number of independent risks. Diversification over time is also an important
factor. The more risks meeting these criteria that are added to a reinsurer’s portfolio, the lower the
volatility of that reinsurer’s results. Lower volatility translates into reduced capital requirements,
or alternatively, allows the reinsurer to take on more risk with its existing capital base.

The core business of insurers is to take insurable risks off households’ and firms’ shoulders.
Before assuming these risks on their balance sheet, insurers examine, classify and price them. The
underwriting process in the reinsurance industry is very similar; the major difference is that the
risks are assumed from insurance companies.

An insurer seeking coverage provides the reinsurer with the relevant data. The reinsurer then
determines whether additional information about the characteristics of the insured objects or
persons is needed. In non-life reinsurance, this usually includes information about an object’s
specific location, value and particular exposure to certain risks. For individual buildings, for
example, the specific exposure can be established through flood or wind zone maps. In life
reinsurance, underwriting decisions are essentially based on information about the risk of death or
illness of the policyholder, such as age, gender, medical and lifestyle factors.

When assessing risks, any insurer or reinsurer must take into account the fundamental principles –
and limitations – of insurability. Disregarding these constraints would ultimately jeopardise the
(re)insurer’s solvency and ability to honour its obligations. But that also means that certain
exposures remain uninsurable.

The insurance business has two sides. One is taking the risks; the other is managing assets to cover
those risks. Reinsurers collect premiums and, in exchange, they provide their clients with
protection. Reinsurers are thereby obliged to indemnify their client after a claim event. Generally,
there is a time-lag between the premium payment and the claim payment during which the funds
are held on the reinsurer’s balance sheet and can be invested in different asset classes. How long
the funds are held differs significantly between lines of business and contract structure and
influences the investment decision.

This may appear a straightforward task, but assets and liabilities move: the value of invested
reserves and estimated future claims can both change significantly with fluctuations of the capital
markets. Matching and then managing the relative changes between liabilities and investments is a
core competency of any reinsurance company. This process is known as Asset-Liability
Management (ALM). The ALM process also takes into account other investment constraints, apart
from the matching of the liabilities, such as the company’s overall risk tolerance and regulatory
restrictions.

For any insurer or reinsurer, capital is the prerequisite for assuming underwriting, financial
market, counterparty credit and operational risks. Capital provides a buffer against unexpected
losses. These could come from different sources, such as when claims payments exceed premiums
and investment income, when loss reserves turn out to be insufficient or assets are impaired (for
example, during severe stock market slumps, as we witnessed in 2001-2003 and 2008-2009).
Capital management must ensure that the company is able to withstand unexpectedly high levels
of loss. Any discrepancy between a reinsurer’s risk profile and its capital base needs to be
addressed by raising additional capital, transferring risk to third parties (for example, through
retrocessions, which are cessions to other reinsurers, or Insurance-Linked Securities) or by
reducing the amount of risk assumed in underwriting and investment activities.

Liquidity management ensures that the company is able to pay claims and meet all financial
obligations when they fall due. Insurance and reinsurance companies generate liquidity in their
core business through the premiums they receive up-front when providing a (re)insurance cover.
As such, they effectively pre-fund future claims payments. Therefore, liquidity risk is limited.
Nevertheless, it is important to monitor and manage liquidity actively to have sufficient liquidity
even in extreme situations. A reinsurer’s capital and liquidity management have to respond to
various and partially conflicting stakeholder interests: Customers, that is, primary insurers, care
about the prompt payment of claims. Regulators focus on policyholder protection and – in light of
the financial crisis – overall systemic stability. Rating agencies are primarily interested in capital
being sufficiently available to honour obligations to policyholders and debt holders. And investors
seek attractive risk-adjusted returns and put pressure on companies to maximise capital efficiency.
While all stakeholders agree that a reinsurer should have an adequate capital position, there are
different views as to how capital adequacy should be measured.
These differences in perspective reflect the dynamics of the regulatory, accounting and
competitive environments and add significantly to the complexity of a reinsurer’s capital and
liquidity management processes. The convergence of these perspectives towards a consistent
economic view has gathered pace recently (partly driven by Solvency II) and is ultimately
expected to prevail.

The Reinsurance Industry: An Inside Look

The global reinsurance industry experienced shrinking margins and declining demand for
catastrophic policies during the first half of 2016. Regulators continue to exert influence on
reinsurance decision-making, and uncertainty about future rules may be a problem for 2017 and
beyond. However, relatively low catastrophic losses and increased efficiency helped offset the
impact of negative factors. Capitalization among major reinsurers remained strong.

Size and Trends


Total global reinsurance capital increased in the first quarter of 2016 to $580 billion, a 3%
increase from the end of 2015. Most growth was derived from retained earnings and unrealized
investment gains. Demand for reinsurance remained flat after Q1 and into June and July. New
catastrophic bond issuance was a record $2.2 billion in Q1, but slid to just $800 million in Q2.
Despite a general slowdown in catastrophic reinsurance policy demand, American reinsurers saw
strong renewals from insurers with large hurricane loss exposure in southern states, especially the
Florida Hurricane Catastrophic Fund (FHCF). Other direct insurance markets with strong
catastrophic demand include Australia and New Zealand.

Lower Profit Margins


Brian Schneider, senior director at Fitch Ratings, wrote that reinsurance profits "will decrease in
2016 across the global reinsurance sector." Fitch has maintained a consistently bearish outlook on
reinsurance since early 2014, thanks to an uptick in market competition and a reduction in demand
for reinsurance agreements. While this is potentially good news for direct insurers and their
customers, who might see a wider and cheaper range of reinsurance services, it is problematic for
established reinsurance firms and their shareholders.

Other ratings agencies also published negative outlooks on the reinsurance market. Some were due
to macroeconomic factors, such as the impact of potential interest rate increases on reinsurance
company investment portfolios, which often have sizable high-yield bond components. There is
also a general expectation that claims against catastrophic reinsurance will eventually return to
normal levels. Catastrophic claims in 2015 were 75% lower than the 20-year average from 1995 to
2014.
Capitalization and Regulation
Fitch does not expect soft markets to threaten the underlying safety of reinsurers. "Capitalization
is expected to remain strong," Schneider noted, "as reinsurers actively manage capital for current
market conditions." In particular, reinsurance providers used strategic mergers and acquisitions
(M&A) to realize economies of scale.

Capitalization is just as critical in the reinsurance market as in the direct insurance industry.
Reinsurers need to maintain sufficient capital reserves to meet their claim obligations, and they
must also maintain enough capital to satisfy regulators. Regulation is a prevalent issue for
reinsurance providers, and there is a lot of uncertainty about future rules. As Deloitte pointed out
in its 2016 regulatory overview, "we are seeing unprecedented levels of interaction among various
insurance regulators - with a strong push for global standards in a broad range of areas from
capital requirements to risk management."

Deloitte also noted that reinsurers have more regulators to contend with and a more aggressive
tone than ever before. Some of this is related to the turmoil from the 2008-2009 global recession,
but another part is the result of different regulators jockeying for power. Potential negative effects
of increased regulation include higher capital costs and reputational damage.

In the 2016 Willis Re Global Reinsurance and Risk Appetite Report, approximately 50% of
surveyed reinsurers said regulatory capital ratings, not the ratings provided by other ratings
agencies or feedback from direct insurers, were the "most important capital metric driving
reinsurance decisions" and the "primary driver to measure the capital efficiency of their
reinsurance." The focus on regulatory control was much stronger in Europe than North America.
Only 2% of European reinsurance companies reported valuing the influence of ratings agencies
more than regulators. Nearly one-third of North American reinsurers valued rating agencies the
most

Why do some companies in the insurance sector engage in reinsurance?

Some companies in the insurance sector engage in reinsurance because they want to reduce risk.
Reinsurance is basically insurance that insurance companies buy to protect themselves from
excess losses due to high exposure. Reinsurance is an integral component of insurance companies'
efforts to keep themselves solvent from the risk of default due to payouts, and regulators mandate
it for companies of a certain size and type.

For example, an insurance company may write too much hurricane insurance based on models that
show low chances of a hurricane inflicting a geographic area. If the inconceivable did happen with
a hurricane hitting that area, considerable losses for the insurance company could ensue. Without
reinsurance taking some of the risk off the table, insurance companies could go out of business
whenever a natural disaster hit.

However, insurance companies are systemically important; many people rely on them for their
everyday needs such as health insurance, annuities or life insurance. Therefore, the industry needs
to manage risk tightly to prevent instability. Essentially, the negative externalities of an insurance
company going bust are massive.

Regulators mandate that an insurance company must only issue policies with a cap of 10% of its
value, unless it is reinsured. Thus, reinsurance allows insurance companies to be more aggressive
in winning market share, as they can transfer risks. Additionally, reinsurance smooths out the
natural fluctuations of insurance companies, which can see significant deviations in profits and
losses, making the sector more appropriate for investors.

For many insurance companies, it is more like arbitrage. They charge a higher rate for insurance to
individual consumers, and then they get cheaper rates reinsuring these policies on a bulk scale.

1. Munich Reinsurance Company—$31,280


2. Swiss Reinsurance Company Limited—24,756
3. Hannover Rueckversicherung AG—15,147
4. Berkshire Hathaway Inc. —14,374
5. Lloyd’s—12,977
6. SCOR S.E. — 8,872
7. Reinsurance Group of America Inc. — 7,201
8. Allianz S.E. — 5,736
9. PartnerRe Ltd.— 4,881
10. Everest Re Group Ltd. —4,201
11. Transatlantic Holdings Inc. —4,133
12. Korean Reinsurance Company —4,114
13. China Reinsurance (Group) Corporation —3,796
14. London Reinsurance Group Inc. —3,266
15. MAPFRE RE, Compania de Reaseguros, S.A. —3,143
16. General Insurance Corporation of India —2,573
17. Assicurazioni Generali SpA —2,463
18. AEGON N.V. —2,391
19. QBE Insurance Group Limited —2,280
20. XL Group plc—2,255
21. MS&AD Insurance Group Holdings Inc.—2,206
22. The Toa Reinsurance Company Limited—2,021
23. Axis Capital Holdings Limited—1,834
24. Caisse Centrale de Reassurance—1,814
25. Odyssey Re Holdings Corp.—1,625
26. Tokio Marine Holdings Inc.—1,466
27. Catlin Group Limited—1,290
28. RenaissanceRe Holdings Ltd.—1,165
29. Aspen Insurance Holdings Limited—1,162
30. ACE Limited—1,146
50 largest reinsurance companos in India

31. Validus Holdings Ltd.—1,101


32. Flagstone Reinsurance aHoldings Limited—1,098
33. White Mountains Insurance Group, Ltd.—1,079
34. Amlin plc—1,004
35. Manulife Financial Corporation—972
36. American Agricultural Insurance Company—941
37. Endurance Specialty Holdings Ltd.—941
38. Alterra Capital Holdings Ltd.—892
39. Arch Capital Group Ltd.—875
40. IRB – Brasil Resseguros S.A.—780
41. Platinum Underwriters Holdings Ltd.—780
42. ACR Capital Holdings Pte, Ltd.—752
43. Montpelier Re Holdings Ltd.—720
44. NKSJ Holdings Inc.—690
45. Ariel Holdings Ltd.—644
46. Sun Life Financial Inc.—554
47. Maiden Holdings Ltd.—554
48. Allied World Assurance Company Holdings, AG—524
49. Central Reinsurance Corporation—457
50. W. R. Berkley Corporation—425

How reinsurance companies work


The idea behind reinsurance is relatively simple. Insurance companies write policies covering
their customers from potential losses. Yet those insurers have to take care to manage their risk
effectively, or else they might leave themselves open to devastating losses that would jeopardize
their business if an unlikely sequence of loss events happens. In particular, insurance companies
that primarily serve a specific geographical area might find themselves with too much exposure in
case of a localized catastrophic event, and an insurer that covers very specific types of risk could
get overwhelmed if unfortunate circumstances lead to excessive losses.

Reinsurance companies help insurers spread out their risk exposure. Insurers pay part of the
premiums that they collect from their policyholders to a reinsurance company, and in exchange,
the reinsurance company agrees to cover losses above certain high limits. That puts a cap on the
insurer's maximum possible loss, and it leaves the reinsurance company with the responsibility to
figure out how to cover what can amount to massive losses if a major disaster does strike.
Why reinsurance is profitable
Reinsurance companies make money in two ways. First, if reinsurers are smart about what they
insure, reinsurance underwriting should generate profits. Yet equally important is the fact that
reinsurance companies get to invest the premiums they receive, and earn income until they have to
pay out losses. Berkshire Hathaway has used that model to perfection with its Berkshire Hathaway
Reinsurance Group and its General Reinsurance units, and the reinsurance business gives
Berkshire the most float of any of its insurance units.

However, the dynamics of those money-making opportunities change over time, and that in turn
affects the competitive landscape in the reinsurance industry. When reinsurance companies have
gone several years without major losses, new entrants come into the space and start to write
reinsurance policies. That puts pressure on premiums, and the lower margins eat into profitability
for all reinsurance companies. When an inevitable major loss occurs, undercapitalized reinsurance
companies go out of business, and that improves the competitive picture for the survivors.
Premiums go up following catastrophic events, and the healthy remaining reinsurers enjoy a
period of larger profits until the cycle repeats.

To succeed, a reinsurance company has to adapt to changing conditions. For instance, Berkshire
Hathaway in 2015 recognized the stresses that the reinsurance market was undergoing, and it
therefore cut its stake in industry giant Munich Re by almost a fifth. Berkshire has also gotten
more careful with its own reinsurance business, sticking to risks that it's comfortable taking and
avoiding more perilous types of policies.

What to watch for


If you're looking at investing in reinsurance companies, you need to understand not just how
reinsurance works but also how the industry rises and falls over time. That way, you can weather
the inevitable storms that all insurance companies face -- and share in the profits that top
reinsurers generate in the long run.

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The Role of Reinsurance

Reinsurance serves not only as a further risk-spreading mechanism but also as an important
component of the capital structure of nearly every insurance company. Essentially, reinsurers
supply capital to an insurance company in exchange for a share of the premiums on the policies
that the insurance company issues to its policyholders. Basically, a reinsurance contract is an asset
on the books of the insurance company, which offsets the liabilities created by writing insurance
policies for policyholders to assume their risks. But this asset runs the risk of disappearing if the
losses the insurance policies generate and the reinsurer reinsures are so massive as to cause the
reinsurer to become insolvent.

Naturally, reinsurers are just as interested in emerging risks as the insurance companies that
purchase reinsurance are. Reinsurers, just like insurance companies, want to know where their
exposures will be coming from and at what loss amount.

Quite a few insurance companies with reinsurance subsidiaries and some smaller reinsurers
themselves became insolvent when they discovered that they had over-accumulated asbestos and
environmental exposures from old commercial policies written in the 1950s, 1960s, and 1970s.
This is what makes the concern about emerging risks so important.

Because reinsurance companies typically reinsure an insurance company's entire portfolio of


insurance policies (except for those insurance policies reinsured facultatively) rather than reinsure
individual insurance policies, they generally are not aware of all the potential exposure from any
one individual policyholder. Reinsurers rely on the ceding insurers to provide them with the risk
analysis for the portfolio, which should include any emerging risks that might arise.

Reinsurers, by contract, are typically required to indemnify the ceding insurers for losses that are
paid by the ceding insurers in good faith and that come within the terms of the insurance and
reinsurance contracts. Emerging risks can strain the principles of follow-the-settlements,
especially if the ceding insurer chooses to pay emerging losses that were not previously
anticipated under those policies.

Nevertheless, learning about emerging risks is critical to the reinsurers' knowledge of their overall
exposure.

What is Reciprocity?
This is a widely used term in the transaction of the business of reinsurance, indicating a situation
involving the desire for the satisfaction of mutual interest.
Normally, the direct insurers, at one time or the other, do transact reinsurance business also in
addition to the insurance business.

When they cede reinsurance business as such to another company, they also expect that at
different times that company also would cede reinsurance business to them. This understanding of
looking after each other’s interest is expressed by the term ’’Reciprocity”.
Broadly, speaking reinsurance is insurance for insurance. This means that the original insurer (who
originally accepted the risk from the original insured) gets the risk covered with another
(Reinsurer) for the same reason the original insured got protection for.

There are many risks in almost all classes of business that may be too big for an insurer to digest
or to bear on his own account.
Because the financial strength of the insurer on that account may not be potent enough to bear a
loss if it at all takes place.
Moreover, there is the question of big catastrophe losses, which might cripple down the insurer
financially and force him to disown any liability to the insured simply because of inability to
honor a claim.
Whilst this possibility is very much there, on the other hand, the insured is also most reluctant to
go from insurer to insurer and to place only that amount of business to each, as each would be able
to bear.
It is indeed amidst these two extremes that we see the development of a system wherein the
insured goes to one insurer who usually takes the whole risk and reinsures any balance beyond his
retention capacity (i. e., beyond which he cannot consume from the viewpoint of financial strength
for that class of business) with the reinsurers.
Reinsurance, like insurance in general, has the element of chance, involved. The reinsurer hopes
that his premiums will take care of his losses and that in the course of events he will obtain a
profit.
When an insurer accepts a risk for a very large amount of one event, although he may be in a
position to make a reasonable gain, yet indeed he has subjected himself to serious possible
liabilities.
Under such circumstances, he may desire to reinsure a part or all of the risk with some other
company or insurer. Reinsurance steps in as a method whereby the insurer may receive indemnity
from his reinsurer in the event of reinsured’s liability to the original insured.
Some examples may be considered at this stage.
Example #1
In life insurance, the actuary can predict with some certainty as to how many lives of a given age
will die within a certain period. What he cannot forecast is which of the named persons will
exactly die.
This ignorance or limitation of knowledge, in fact, has aggravated the necessity of reinsurance
further.

If a life company has 100000 lives all aged 20 and each insured for $10,000, and if this company
now gets a fresh proposal from a man aged 20 but for an amount of $30,000 then problem would
arise since the company shall have to run the risk of an additional amount of $20000 which will
definitely imbalance the account if simply the new entrant dies first. Therefore, this company shall
feel the necessity of getting its load ( $20000 in this case) reinsured with another company.

Example #2
A general insurance company may have the capacity to bear up to $100000 for any property
insurance or liability insurance.
If a risk is placed for $300000 by the insured then the insurer shall have to reinsure $200000.

In the case of assuming unlimited liabilities the extent of loss may be sometimes very big and,
therefore, in all fairness should have reinsurance arrangement beyond capacity.
Now after seeing the terms related to Re-Insurance and examples let us look at the various
definitions it given in following paragraphs.
By a reinsurance agreement, the reinsurer may undertake to reinsure the assured (i.e., the reinsured
or reassured), in consideration of the assured paying him a portion of the premium the assured
receives against the proportionate amount of all assured’s losses arising from insurances along a
certain line.

This arrangement could not constitute a partnership but would, in fact, be a contract of reinsurance
(English Insurance VS. National Benefit Insurance (1929), A. C. 114 ). This definition
understandably refers to a treaty agreement discussed later.
Reinsurance is an agreement to indemnify the assured (meaning reassured), partially or altogether,
against a risk assumed by it in a policy issued to a third party.
– (Friend Bros V. Seaboard Surety Co, 56 N. E. 2d 6).
A direct company may find that it has placed itself under liability to a very large number of policy-
holders. It may consider that it has undertaken more than it can safely carry.
Therefore the company, because of its outstanding contractual obligations, may desire to protect
itself. It may seek to lessen its burden by getting some other company to assume a part of its
liability in case of a loss.
The ORIGINAL OR PRIMITIVE OR DIRECT insurer, as is often called to represent the direct-
writing company, may transfer or cede the whole or part of a risk to another company.
The first insurer or cedar, in turn, enters into a contractual relation with the second company
which is called the REINSURER. The original or the primary insurer is obligated directly to his
insured or the policy-holder. The reinsurer is obligated to the ceding company.
The original insurer has to account to its original assured in case of loss under a primary policy.
The direct company, known as the reinsured, by its contract may obtain the power to collect from
the reinsurer by reason of the loss suffered by the original assured under the terms of the original
policy. From the business relationship established between the reinsurer and the reinsured, there
may arise a contract of reinsurance.
The students should appreciate that the risk assumed in reinsurance is necessary to be determined
by examining the intention of the parties to reinsurance contract itself, since it may so happen that
the risk covered by the reinsurance contract is not the same as that covered by the original, policy.

A reinsurance transaction is a relationship of utmost good faith, established between two parties,
which is based primarily on contract or understanding whereby one party, called the reinsurer, in
consideration of a premium paid by the reassured agrees to indemnify under certain terms and
conditions, another party, the reassured, against a risk previously assured by the latter, the direct
writer, in its primary insurance covering the original assured.
(Kenneth Thompson).
“Reinsurance is a contract which one insurer makes with another to protect the first insurer from
risk already assumed”.

The students should get themselves acquainted with a very common term, known as retrocession,
widely used in reinsurance transactions. This virtually means reinsurance of reinsurance.
It should be appreciated by the students that reinsurance enjoys no immunity from the operation of
the principles governing sound practice for insurers.
The reinsurer also must avoid a concentration in conflagration areas or catastrophe situations, and
must maintain a wide distribution of its risks assumed from the ceding company.
It is probable that the reinsurer may have sufficient amounts ceded from a number of different
sources and unfortunately the cession may relate to the same risk.
To relieve itself from this undesirable accumulation, the reinsurer would itself have to resort to
reinsurance. This act of reinsuring any part of a reinsurance is termed as retrocession and comes
within the same study of reinsurance.

To sum up, therefore, it may be said that:


1) In order to secure a large number of similar risks to permit the prediction of losses with a
reasonable degree of certainty, insurance companies have devised the practice of reinsurance.
2) Reinsurance is the transfer of insurance business from one insurer to another. Its purpose is to
shift risks from an insurer, whose financial security may be threatened by retaining too large an
amount of risk, to other reinsurers who will share in the risk of large losses.
3) Reinsurance tends to stabilize profits and losses and permits more rapid growth.
4) ehe entire area of reinsurance and retrocession is an example of the essential need for a spread
of risk among many risk bearers. Much of the process goes on without the policy-holder being
aware of its existence since he is not a party to the reinsurance arrangement.
5)Reinsurance enables a risk to be scattered over a much wider area, which is the primary concept
of the whole business of insurance.
6) The need for reinsurance arises in the same way as an original insured needs insurance
protection.
7) The original insured is not a party to the reinsurance contract.

FORMS OF REINSURANCE
Having completed the various types of reinsurance arrangements, discussions will now be made as
to the forms they usually take. There are two forms of reinsurance, irrespective of the type of
reinsurance discussed so far. These are;
PARTICIPATING OR PRO-RATA: Where the proportion of amounts payable by the insurer and
the reinsurers in respect of a loss is determined and agreed beforehand, i.e., before a loss. Here the
premium received by the insurer is also distributed in between himself and the reinsurers in the
same proportion.
Examples are facultative, quota share, surplus or pool.
NON-PROPORTIONAL: Where the reinsurance is on different terms and the reinsurers do not
stand to be proportionately liable for a loss.
Therefore, the premium received by the insurer is also not required to be proportionately
distributed to the reinsurers.
Examples are, an excess of loss treaty, stop loss treaty etc.

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