REINSURANCE IN INDIA

By: Akash Bhardwaj Kriti Jain Kanika Gupta Nitin Dokania Rahul Jain Rohit Kothari

Re-insurance- Overview
Insurance is a contract between two parties whereby one party

called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.
Reinsurance is understood to be that practice where an original

insurer, for a definite premium, contracts with another insurer (or insurers) to carry a part or the whole of a risk assumed by the original insurer. In short : Transfer of a certain portion of risk exposure to another company.

Holborns Model

Historical Perspective

Capacity

Product Development

Mortality Guidance

Capital Management

Tax Planning

Risk Management

Underwriting Guidance

History as a whole

History cont.

Inspired by the Hamburg fire of 1842

December 22, 1842 -Invitation to deliberate on the founding of a

reinsurance company in Cologne Cologne Re Statutes drafted in 1843 April 8, 1846 -Cologne Re founded Cologne Re first treaty -Oct./Nov. 1852 The earliest reinsurances first appeared in transport, especially marine insurance.

Reinsurance Pre-1900s
1846 Cologne Re founded 1863 Swiss Re founded 1880 Munich Re founded 1886 Frankona Re founded

IRDA Regulations on Investment

According to the IRDA regulations, the insurer under the

General Insurance Corporation should invest his money in the following way:

20% of the investments should get diverted to Central Government Securities.

30% of the investments should be in state government and other guaranteed securities.
5% investment should be made in the housing sector and state government loans. 10% of the investment should be done in the infrastructure and the social sector.

GIC Re General Insurance Company

GIC Re

Vision
To be a leading Reinsurance and risk solution provider.

Mission
1.Building long term mutually beneficial relationship with business partners. 2.Practicing fair business ethics and practices. 3. Applying state of art technology. 4. Enhancing profitability & financial strength.

CMD Mr. Yogesh Lohiya

HISTORY
Nationalization of Insurance Business

Later 4 fully owned Co. formed by GIC National Insurance Co. Ltd. The New India Assurance Co. Ltd. The Oriental Insurance Co. Ltd. United India insurance Co. Ltd.

Formation of IRDA in 2000 GIC re-notified as Reinsurer and its supervisory role ended over subsidies. General Insurance Buss. (Nationalization) Amendment act 2002

Salient Features
Receiving Obligatory Cessions from all non-life insurance companies. Organize and manage Market Pools and arrange for their excess of loss protection. Accept treaty and facultative business from Indian companies. Collect, Analyze and Present Indian and International Insurance Data and Trend Analysis. Develop automatic capacity for products and lines of business, including new ones to be introduced.

Reinsurance Arrangements
Maximize retention within the country;

Develop adequate capacity; Secure the best possible protection for the reinsurance costs incurred; Simplify the administration of business.

Net Premium Earned 2007-08

Domestic International

Net Premium Earned 2008-09

Domestic International

27% 73%

38% 62%

Net Premium Indian Business (2008-09)

Liability 2% P.A Engg. 3% 8% Health 16% Misc 9% Fire 14%

Premium Earned in %

Motor 42%

Cargo 4% Hull Life 2% 0%

Segment wise claim experience

2007-08 National (Cr.) Earned premium Fire Engineer. Marine 817.01 382.51 238.06 Incurred claim 914.33 253.27 339.81 Incu.claim ratio 112% 66% 143% Foreign (Cr.) Earned premium 936.69 111.44 163.56 Incurred claim 729.78 65.24 198.91 Incu.clai m ratio 78% 59% 122%

Misc. & Others

Life Aviation Motor

1606.77
-1.06 52.00 2489.39

1379.41
1.04 56.48 1758.65

86%
-98% 109% 71%

130.90
10.56 262.87 28.25

99.04
0.73 193.69 21.11

76%
7% 74% 75%

Future Outlook of GIC

Obligatory cession reduced.

Takaful Islamic way of insurance.

Afro- Asian Market New London office- UK, European, Caribbean & worldwide Aviation Business.

REINSURANCE PRICING
G E N E R A L C O N S I D E R AT I O N S Difficult and sometime impossible to get credible loss experience low claim frequency and high severity nature of many reinsurance coverage, Length time delays between the occurrence, reporting & settlement of many covered loss events Leveraged effect of inflation upon excess claim

Cost of Reinsurance to the Cedant

The Reinsurers Margin Brokerage Fee Loss investment Income Additional Cedant expenses

Reciprocity

Reinsurance Pricing Method

The pricing formula a reinsurance actuary would use depends upon the

reinsurers pricing philosophy, information availability, and complexity of the coverage. A flat rate reinsurance pricing model.

PVRELC RP (1 RCB RCF ) x(1 RIXL ) x(1 RTER ) Where

RP = Reinsurance premium PVRELC = PV of RELC (Reinsurance estimate of the reinsurance expected loss cost) RL = Reinsurance Loss RCR = Reinsurance ceding commission rate ( as a % of RP) RBF = Reinsurance Brokerage Fee (as a % of RP) RIXL= Reinsurance internal exp. loading (as a % of RP net of RCR & RCF) RTER = Reinsurances target economic return (as a % of reinsurance pure premium)

Reinsurance Distribution
Direct Writer - The reinsurer sells directly to the buyers of

reinsurance. Ceding company is in direct contact with the reinsurer. Reinsurers account executive manages relationship between the ceding company & the reinsurer.
Reinsurance Brokers - The reinsurer accepts business offered

through reinsurance brokers or intermediaries. Reinsurers pay commission in return, which usually represent a specified percentage of the reinsurance premium. Ceding company is in direct contact with the reinsurance broker.

COMPARISON
DIRECT WRITING
Offers ceding company a

BROKERAGE MARKET
Brokers know the market

close, personal relationship with the reinsurer. Ceding companies places business with fewer reinsurers, simplifying accounting procedures Payment of large losses may be handled more quickly

place and have access to appropriate facilities. Can furnish in-depth information and advise about policy forms, capacity and financial conditions. Maintain own staff so ceding company may be able to do with less staff.

Current Developments
Minimum capitalization of Rs5000 Cr required to set up branches FDI cap is 26% Minimum capitalization for Joint Venture is only Rs 200 Cr Swiss Re and Munich Re have set branches in India London-based global reinsurance giant Lloyds returns New entrants, including Asia Capital Re, Slovenian Re, Best Re,

Malaysia Re and Kuwait Re The New Insurance Bill was on track and would be placed before the Upper House in December :Seeks to pursue FDI limit from 26% to 49%

Cont

compulsory reinsurance from 20 % to 10% from April 2007. General Insurance Corporation (GIC Re), the state-owned

national reinsurance company, has acquired the distinction of being the only reinsurer among significant players worldwide to report profits in `08-09. Global presence of GIC

Scenario 2009-10

Firming of rates by Regular players Entry of new players capturing about 30-35% of market share

Average reinsurance rates increased to 5-10%

Indian market facing difficulties in renewing treaties specially

proportional ones
Decline in business by 50%.

CHALLENGES FOR REINSURANCE IN INDIA

The financial man said, "The biggest challenge confronting reinsurers today is the ability to price the product properly." The economist said, "The Internet, growth, and profitability are the three challenges keeping reinsurance people awake nights." The broker said, "The industry must face up to investor demands for higher returns, the changing needs of clients, and changes in the competitive marketplace

CHALLENGES
Difference between price charged by international reinsurer

& domestic ones leading to price affordability issue Absence of competition Tight regulations regarding reinsurance Lack of large capital base required Limited insurance penetration Quasi monopolistic condition Operational challenges Socio economic challenges

WHAT INDIA NEED TO DO?

Domestic companies increase their capacity More disciplinary watch on insurance sector More information gathering is needed Pooling of financial & technical resources Joint ventures, alliances & partnerships Developing standard accounting system Creating investment opportunities Research & development

THANKING YOU