Rein Intro

8/3/2019 Rein Intro

http://slidepdf.com/reader/full/rein-intro 1/18

REINSURANCEREINSURANCE

INTRODUCTIONINTRODUCTION

8/3/2019 Rein Intro


MEANINGMEANING

ReinsuranceReinsurance is a means by which anis a means by which an insuranceinsurancecompanycompany can protect itself with other insurancecan protect itself with other insurancecompanies against the risk of losses.companies against the risk of losses.

Individuals and corporations obtain insuranceIndividuals and corporations obtain insurancepolicies to provide protection for various riskspolicies to provide protection for various risks(hurricanes, earthquakes, lawsuits, collisions,(hurricanes, earthquakes, lawsuits, collisions,sickness and death, etc.).sickness and death, etc.).

Reinsurers, in turn, provide insurance toReinsurers, in turn, provide insurance toinsurance companies.insurance companies.

8/3/2019 Rein Intro


FUNCTIONS OF REFUNCTIONS OF RE

Risk transfer Risk transfer

The main use of any insurer that might practiceThe main use of any insurer that might practicereinsurance is to allow the company to assume greater reinsurance is to allow the company to assume greater individual risks than its size would otherwise allow, andindividual risks than its size would otherwise allow, and

to protect a company against losses.to protect a company against losses. Reinsurance allows an insurance company to offer Reinsurance allows an insurance company to offer

higher limits of protection to a policyholder than its ownhigher limits of protection to a policyholder than its ownassetsassets would allow.would allow.

Reinsurance¶s highly refined uses in recent yearsReinsurance¶s highly refined uses in recent years

include applications where reinsurance was used as partinclude applications where reinsurance was used as partof a carefully plannedof a carefully planned hedgehedge strategy.strategy.Income smoothingIncome smoothing

Reinsurance can help to make an insurance company¶sReinsurance can help to make an insurance company¶sresults more predictable by absorbing larger losses andresults more predictable by absorbing larger losses andreducing the amount of reducing the amount of capitalcapital needed to provideneeded to providecoveragecoverage

8/3/2019 Rein Intro


Surplus relief Surplus relief

An insurance company's writings are limited by its An insurance company's writings are limited by itsbalance sheetbalance sheet (this test is known as the(this test is known as the solvencysolvencymargin).margin).

When that limit is reached, an insurer can do one of theWhen that limit is reached, an insurer can do one of thefollowing:following:

Stop writing new business,Stop writing new business,

Increase its capital,Increase its capital,

Buy "surplus relief" reinsurance. Buying reinsurance isBuy "surplus relief" reinsurance. Buying reinsurance isusually done on ausually done on a quota sharequota share basis and is an efficientbasis and is an efficientway of not having to turn clients away or raise additionalway of not having to turn clients away or raise additionalcapital.capital.

8/3/2019 Rein Intro


ArbitrageArbitrage

The insurance company may be motivated byThe insurance company may be motivated byarbitragearbitrage in purchasing reinsurance coverage atin purchasing reinsurance coverage at

a lower rate than what they charge the insureda lower rate than what they charge the insuredfor the underlying risk.for the underlying risk.

Reinsurer's ExpertiseReinsurer's Expertise

The insurance company may want to avail of theThe insurance company may want to avail of the

expertise of a reinsurer in regard to a specificexpertise of a reinsurer in regard to a specific(specialised) risk or want to avail of their rating(specialised) risk or want to avail of their ratingability in odd risks.ability in odd risks.

8/3/2019 Rein Intro


Creating a manageable and profitable portfolioCreating a manageable and profitable portfolioof insured risksof insured risks

By choosing a particular type of reinsuranceBy choosing a particular type of reinsurancemethod, the insurance company may be able tomethod, the insurance company may be able tocreate a more balanced and homogenouscreate a more balanced and homogenousportfolio of insured risks.portfolio of insured risks.

This would lend greater predictability to theThis would lend greater predictability to theportfolio results on net basis (after reinsurance)portfolio results on net basis (after reinsurance)

and would be reflected in income smoothing.and would be reflected in income smoothing. While income smoothing is one of the objectivesWhile income smoothing is one of the objectives

of reinsurance arrangements, the mechanism isof reinsurance arrangements, the mechanism isby way of balancing the portfolio.by way of balancing the portfolio.

8/3/2019 Rein Intro


Managing cost of capital for an insuranceManaging cost of capital for an insurancecompanycompany

By getting a suitable reinsurance, the insuranceBy getting a suitable reinsurance, the insurancecompany may be able to substitute "capitalcompany may be able to substitute "capitalneeded" as per the requirements of the regulator needed" as per the requirements of the regulator for premium written.for premium written.

It could happen that the writing of insuranceIt could happen that the writing of insurancebusiness requires x amount of capital with y% of business requires x amount of capital with y% of cost of capital and reinsurance cost is less thancost of capital and reinsurance cost is less than

x*y%.x*y%. Thus more unpredictable or less frequent theThus more unpredictable or less frequent the

likelihood of an insured loss, more profitable itlikelihood of an insured loss, more profitable itcan be for an insurance company to seekcan be for an insurance company to seek

reinsurance.reinsurance.

8/3/2019 Rein Intro


M ARKETSM ARKETS Most reinsurance placements are not placed with aMost reinsurance placements are not placed with a

single reinsurer but are shared between a number of single reinsurer but are shared between a number of reinsurers.reinsurers.

For example a $30,000,000 excess of $20,000,000 layer For example a $30,000,000 excess of $20,000,000 layer may be shared by 30 or more reinsurers.may be shared by 30 or more reinsurers.

The reinsurer who sets the terms (premium and contractThe reinsurer who sets the terms (premium and contractconditions) for the reinsurance contract is called the leadconditions) for the reinsurance contract is called the leadreinsurer; the other companies subscribing to thereinsurer; the other companies subscribing to thecontract are called following reinsurers.contract are called following reinsurers.

About half of all reinsurance is handled by reinsurance About half of all reinsurance is handled by reinsurancebrokers who then place business with reinsurancebrokers who then place business with reinsurancecompanies.companies.

The other half is with ³direct writing´ reinsurers who haveThe other half is with ³direct writing´ reinsurers who havetheir own production staff and thus reinsure insurancetheir own production staff and thus reinsure insurancecompanies directly.companies directly.

In Europe reinsurers write both direct and brokeredIn Europe reinsurers write both direct and brokered

accounts.accounts.

8/3/2019 Rein Intro


PLAYERS IN REINSURANCEPLAYERS IN REINSURANCE

MARKETMARKET

1.1.Insurers (Reinsured)Insurers (Reinsured)

2.2.Reinsurance BrokersReinsurance Brokers

3.3.ReinsurersReinsurers ± ± Reinsurance Reinsurer Reinsurance Reinsurer (Retrocedant),(Retrocedant),

4.4.Reinsurer of Reinsurer Reinsurer of Reinsurer

(R

etrocessoionaire)(R

etrocessoionaire) --R

etrocessionR

etrocession

8/3/2019 Rein Intro


INDIAN REINSURANCE MARKETINDIAN REINSURANCE MARKET

In India prior to nationalization, there were only 44In India prior to nationalization, there were only 44foreign insurers and 63 domestic companies operating.foreign insurers and 63 domestic companies operating.

As there was no reinsurance market in India they used to As there was no reinsurance market in India they used toaccess the international reinsurance industry for their access the international reinsurance industry for their

reinsurance needs.reinsurance needs. After nationalization of the insurance industry, five After nationalization of the insurance industry, five

companies started taking care of the general insurancecompanies started taking care of the general insuranceneeds. They are:needs. They are:

1.1. General Insurance Corporation of India.General Insurance Corporation of India.

2.2. National Insurance Company Limited.National Insurance Company Limited.3.3. The New India Assurance Company Limited.The New India Assurance Company Limited.4.4. Oriental Insurance Company Limited.Oriental Insurance Company Limited.5.5. United India insurance company Limited.United India insurance company Limited.

8/3/2019 Rein Intro


G I CG I C GIC undertakes both domestic reinsurance andGIC undertakes both domestic reinsurance and

international reinsurance.international reinsurance. Domestic reinsurance is provided to the direct generalDomestic reinsurance is provided to the direct general

insurance companies in the domestic market.insurance companies in the domestic market. GIC, as per IRDA statute, receives cession of 20% onGIC, as per IRDA statute, receives cession of 20% on

each policy subject to certain limits and it retrocedes ateach policy subject to certain limits and it retrocedes at

least 50% of the obligatory cessions received to theleast 50% of the obligatory cessions received to theceding insurers after protecting the portfolio by suitableceding insurers after protecting the portfolio by suitableexcess of loss covers.excess of loss covers.

Such retrocession will be at original terms plus anSuch retrocession will be at original terms plus anoverriding commission to National Re not exceedingoverriding commission to National Re not exceeding2.5%.2.5%.

The retrocession to each ceding insurer will be inThe retrocession to each ceding insurer will be inproportion to his cessions to National Re.proportion to his cessions to National Re.

GIC is also emerging as an international player in theGIC is also emerging as an international player in thereinsurance market by providing reinsurance facilities toreinsurance market by providing reinsurance facilities tocompanies in Afrocompanies in Afro-- Asian region Asian region ± ± SAARC countries,SAARC countries,

South East Asia, Middle East and Africa.South East Asia, Middle East and Africa.

8/3/2019 Rein Intro


Reinsurance Market is spread all over the world withReinsurance Market is spread all over the world withmajor reinsurers being concentrated in Europe andmajor reinsurers being concentrated in Europe andWest.West.

Reinsurance Brokers are intermediaries betweenReinsurance Brokers are intermediaries between

insurers and reinsurers and they operate on a largeinsurers and reinsurers and they operate on a largescale and present in all developing markets.scale and present in all developing markets. Players like Munich Re, Swiss Re and BerkshirePlayers like Munich Re, Swiss Re and Berkshire

HathawayHathaway ± ± the leading players in the world, dominatethe leading players in the world, dominateglobal Reinsurance Markets.global Reinsurance Markets.

Market is a place where buyers and sellers interact withMarket is a place where buyers and sellers interact witheach other to do the business, which includes exchangeeach other to do the business, which includes exchangeof goods and services for money.of goods and services for money.

A strong insurance and reinsurance market is essential A strong insurance and reinsurance market is essentialelement of economic progress s industry can takeelement of economic progress s industry can takecalculated risks with a backup support of insurance.calculated risks with a backup support of insurance.

8/3/2019 Rein Intro


8/3/2019 Rein Intro


The world¶s 20 largestThe world¶s 20 largest

reinsurers.reinsurers.Company Company Country of DomicileCountry of Domicile

Munich ReMunich Re GermanyGermany Swiss ReSwiss Re SwitzerlandSwitzerland Employers ReEmployers Re United StatesUnited States General re/Cologne Re Group United StatesGeneral re/Cologne Re Group United States Assicurazioni Assicurazioni GeneraliGenerali S.p. AS.p. A. Italy. Italy

Hanover Re GroupHanover Re Group GermanyGermany LincolnNational ReLincolnNational Re United StatesUnited States GerlingGerling Global Re GroupGlobal Re Group GermanyGermany SCOR GroupSCOR Group FranceFrance TokioTokio Marine & Fire Ins. GroupMarine & Fire Ins. Group JapanJapan Mercantile & General ReMercantile & General Re EnglandEngland American Re American Re United StatesUnited States

AXA Re AXA Re FranceFrance Toa Fire & Marine JapanToa Fire & Marine Japan Transatlantic ReTransatlantic Re United StatesUnited States Everest ReEverest Re United StatesUnited States Winterthur Winterthur SwitzerlandSwitzerland Yasuda Fire and MarineYasuda Fire and Marine Ins.CoIns.Co JapanJapan Berkshire Hathaway United StatesBerkshire Hathaway United States

Centre ReCentre Re BermudaBermuda

8/3/2019 Rein Intro


RETROCESSIONRETROCESSION

Reinsurance companies themselves alsoReinsurance companies themselves alsopurchase reinsurance and this is known as apurchase reinsurance and this is known as aretrocessionretrocession..

They purchase this reinsurance from other They purchase this reinsurance from other reinsurance companies.reinsurance companies.

The reinsurance company who sells theThe reinsurance company who sells thereinsurance in this scenario are known asreinsurance in this scenario are known as

³retrocessionaires.´³retrocessionaires.´ The reinsurance company that purchases theThe reinsurance company that purchases the

reinsurance is known as the ³retrocedent.´reinsurance is known as the ³retrocedent.´

8/3/2019 Rein Intro


It is not unusual for a reinsurer to buyIt is not unusual for a reinsurer to buy

reinsurance protection from other reinsurers.reinsurance protection from other reinsurers. For example, a reinsurer that providesFor example, a reinsurer that provides

proportional, or proportional, or pro rata pro rata, reinsurance capacity to, reinsurance capacity toinsurance companies may wish to protect itsinsurance companies may wish to protect itsown exposure to catastrophes by buying excessown exposure to catastrophes by buying excess

of loss protection.of loss protection. Another situation would be that a reinsurer Another situation would be that a reinsurer

which provides excess of loss reinsurancewhich provides excess of loss reinsuranceprotection may wish to protect itself against anprotection may wish to protect itself against an

accumulation of losses in different branches of accumulation of losses in different branches of business which may all become affected by thebusiness which may all become affected by thesame catastrophe.same catastrophe.

This may happen when a windstorm causesThis may happen when a windstorm causesdamage to property, automobiles, boats, aircraftdamage to property, automobiles, boats, aircraft

and loss of life, for example.and loss of life, for example.

8/3/2019 Rein Intro


8/3/2019 Rein Intro


It is important to note that the insuranceIt is important to note that the insurancecompany is obliged to indemnify its policyholder company is obliged to indemnify its policyholder for the loss under the insurance policy whether for the loss under the insurance policy whether or not the reinsurer reimburses the insurer.or not the reinsurer reimburses the insurer.

Many insurance companies have experiencedMany insurance companies have experienceddifficulties by purchasing reinsurance fromdifficulties by purchasing reinsurance fromcompanies that did not or could not pay their companies that did not or could not pay their share of the loss (these unpaid claims areshare of the loss (these unpaid claims areknown as uncollectibles).known as uncollectibles).

This is particularly important on longThis is particularly important on long--tail lines of tail lines of business where the claims may arise manybusiness where the claims may arise manyyears after the premium is paid.years after the premium is paid.

Rein Intro

Documents

Transcript of Rein Intro