Article Big investments are being lined up by global reinsurance giants looking to gain a foothold in India. Even as the Insurance (Laws) Amendment Bill !""# to allow foreign reinsurers to set up branch operations is getting delayed in $arliament bullish global reinsurers are getting ready to enter the Indian market with many of them slowly in the early stages of developing business through their offshore branches. %ost global reinsurers are now developing their insurance business offshore. &India is an e'citing market to be present in. e are encouraged to learn about the possibility of the Insurance Bill being cleared in the $arliament with regard to the opening of branches by foreign reinsurers said *ictor $eignet +E, -+, /lobal $0+ the si'th largest global reinsurer. &e hope to have a branch office in India conducting reinsurance business as soon as it is permissible to do so. -uch a perspective suits the &multi1domestic business model based upon which the -+, /roup operates $eignet said. -+, is currently conducting business with its Indian clients offshore from -ingapore. +urrently public sector /I+ e is the only reinsurance company in India. %ore than euro 2 trillion (32.4#! trillion) in additional premiums will be generated in the Asian region by !"!" with growth markets such as +hina and India contributing almost 5" per cent said a top official of %unich e. Ludger Arnoldussen management board member %unich e world6s largest reinsurer said as a reliable partner of India6s non1life insurance industry for more than five decades %unich e sees India as an important emerging market with high potential and is ready to participate in its growth offering professional e'pertise global knowledge and unmatched financial strength. &At the moment our reinsurance premiums from India are about euro 4" million (372.8 million) while we have roughly euro 2 billion (32.4#! billion) in +hina. egulation in India is still too spontaneous and some protectionist tendencies still e'ist Arnoldussen said. %ichel % Li9s /roup +E, -wiss e the second largest global reinsurer said in the long term -wiss e sees India is an important market. &If I analyse our Indian reinsurance portfolio the opportunities on life side have been real and we have taken advantage of them. e would like to increase our business by participating in government schemes that we have been talking but nothing much has happened till now he said. -wiss e which is keen to set up a health insurance company is currently negotiating with L0: for a ;oint venture.
allin +E, "1 5" million. &India is an interesting market. e have grown our business in certain pockets. :he premiums are sufficient enough to cover the losses. e will be seriously considering to set up a branch if we allowed to do so. Like +hina if we are allowed to open a branch India we will look at that possibility allin said. &It will help us doing Reinsurance is insurance that is purchased by an insurance company (the ?ceding company? or
?cedant? or ?cedent? under the arrangement) from one or more other insurance companies (the ?reinsurer?) as a means of risk management sometimes in practice including ta' mitigation and other reasons described below. :he ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. :he reinsurer is paid a ?reinsurance premium? by the ceding company which issues insurance policies to its own policyholders. :he reinsurer may be either a specialist reinsurance company which only undertakes reinsurance business or another insurance company. @or e'ample assume an insurer sells 2""" policies each with a 32 million policy limit. :heoretically the insurer could lose 32 million on each policy totaling up to 3 2 billion. It may be better to pass some risk to a reinsurer as this will reduce the ceding companys e'posure to risk. :here are two basic methods of reinsuranceC 2. Facultative Reinsurance which is negotiated separately for each insurance policy that is reinsured. @acultative reinsurance is normally purchased by ceding companies for individual risks not covered or insufficiently covered by their reinsurance treaties for amounts in e'cess of the monetary limits of their reinsurance treaties and for unusual risks. =nderwriting e'penses and in particular personnel costs are higher for such business because each risk is individually underwritten and administered.
:here are two main types of treaty reinsurance proportional and non1proportional which are detailed below. =nder proportional reinsurance the reinsurers share of the risk is defined for each separate policy while under non1proportional reinsurance the reinsurers liability is based on the aggregate claims incurred by the ceding office. In the past 4" years there has been a ma;or shift from proportional to non1proportional reinsurance in the property and casualty fields.
Functions [edit] Almost all insurance companies have a reinsurance program. :he ultimate goal of that program is to reduce their e'posure to loss by passing part of the risk of loss to a reinsurer or a group of reinsurers. In the =nited -tates insurance is regulated at the state level which only allows insurers to issue policies with a ma'imum limit of 2"D of their surplus (net worth) unless those policies are reinsured. In other ;urisdictions allowance is typically made for reinsurance when determining statutory reuired solvency margins.
Risk transfer [edit] ith reinsurance the insurer can issue policies with higher limits than would otherwise be allowed thus being able to take on more risk because some of that risk is now transferred to the reinsurer. :he reason for this is the number of insurers that have suffered significant losses and become financially impaired. ,ver the years there has been a tendency for reinsurance to become a science rather than an artC thus reinsurers have become much more reliant on actuarial models and on tight review of the companies they are willing to reinsure. :hey review their financials closely e'amine the e'perience of the proposed business to be reinsured review the underwriters that will write that business review their rates and much more.
Income smoothing [edit] einsurance can make an insurance companys results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage. :he risks are diversified with the reinsurer bearing some of the loss incurred by the insurance company. :he income smoothing comes forward as the losses of the cedant are essentially limited. :his fosters stability in claim payouts and caps indemnification costs.
Surplus relief [edit] An insurance companys writings are limited by its balance sheet (this test is known as the solvency margin). hen that limit is reached an insurer can do one of the followingC stop writing new business increase its capital or (in the =nited -tates) buy ?surplus relief?.
Arbitrage[edit] :he insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than they charge the insured for the underlying risk whatever the class of insurance. In general the reinsurer may be able to cover the risk at a lower premium than the insurer becauseC •
:he reinsurer may have some intrinsic cost advantage due to economies of scale or some other efficiency.
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einsurers may operate under weaker regulation than their clients. :his enables them to
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use less capital to cover any risk and to make less prudent assumptions when valuing the risk. einsurers may operate under a more favourable ta' regime than their clients. einsurers will often have better access to underwriting e'pertise and to claims
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e'perience data enabling them to assess the risk more accurately and reduce the need for contingency margins in pricing the risk Even if the regulatory standards are the same the reinsurer may be able to hold
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smaller actuarial reserves than the cedant if it thinks the premiums charged by the cedant are e'cessively prudent. :he reinsurer may have a more diverse portfolio of assets and especially liabilities than
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the cedant. :his may create opportunities for hedging that the cedant could not e'ploit alone. Fepending on the regulations imposed on the reinsurer this may mean they can hold fewer assets to cover the risk. :he reinsurer may have a greater risk appetite than the insurer.
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Reinsurer's epertise[edit] :he insurance company may want to avail itself of the e'pertise of a reinsurer or the reinsurers ability to set an appropriate premium in regard to a specific (specialised) risk. :he reinsurer will also wish to apply this e'pertise to the underwriting in order to protect their own interests.
!reating a manageable and profitable portfolio of insured risks [edit] By choosing a particular type of reinsurance method the insurance company may be able to create a more balanced and homogeneous portfolio of insured risks. :his would lend greater predictability to the portfolio results on net basis (after reinsurance) and would be reflected in income smoothing. hile income smoothing is one of the ob;ectives of reinsurance arrangements the mechanism is by way of balancing the portfolio.
Types [edit] "roportional[edit] =nder proportional reinsurance one or more reinsurers take a stated percentage share of each policy that an insurer produces (?writes?). :his means that the reinsurer will receive that stated percentage of the premiums and will pay the same percentage of claims. In addition the reinsurer will allow a ?ceding commission? to the insurer to cover the costs incurred by the insurer (marketing underwriting claims etc.). :he arrangement may be ?uota share? or ?surplus reinsurance? (also known as surplus of line or variable uota share treaty) or a combination of the two. =nder a uota share arrangement a fi'ed percentage (say 58D) of each insurance policy is reinsured. =nder a surplus share arrangement the ceding company decides on a ?retention limit? 1 say 32""""". :he ceding company retains the full amount of each risk with a ma'imum of 32""""" per policy or per risk and the balance of the risk is reinsured. :he ceding company may seek a uota share arrangement for several reasons. @irst they may not have sufficient capital to prudently retain all of the business that it can sell. @or e'ample it
may only be able to offer a total of 32"" million in coverage but by reinsuring 58D of it it can sell four times as much. :he ceding company may seek surplus reinsurance simply to limit the losses it might incur from a small number of large claims as a result of random fluctuations in e'perience. In a G line surplus treaty the reinsurer would then accept up to 3G""""" (G lines). -o if the insurance company issues a policy for 32""""" they would keep all of the premiums and losses from that policy. If they issue a 3!""""" policy they would give (cede) half of the premiums and losses to the reinsurer (2 line each). :he ma'imum automatic underwriting capacity of the cedant would be 32"""""" in this e'ample. (Any policy larger than this would reuire facultative reinsurance.)
#on$proportional[edit] =nder non$proportional reinsurance the reinsurer only pays out if the total claims suffered by the insurer in a given period e'ceed a stated amount which is called the ?retention? or ?priority?. @or instance the insurer may be prepared to accept a total loss up to 32 million and purchases a layer of reinsurance of 37 million in e'cess of this 32 million. If a loss of 34 million were then to occur the insurer would bear 32 million of the loss and would recover 3! million from its reinsurer. In this e'ample the insured also retains any e'cess of loss over 38 million unless it has purchased a further e'cess layer of reinsurance. :he main forms of non1proportional reinsurance are ecess of loss and stop loss. %cess of loss reinsurance can have three forms 1 ?"er Risk HL? (orking HL) ?$er
,ccurrence or $er Event HL? (!atastrophe or +at HL) and ? Aggregate HL?. In per risk the cedants insurance policy limits are greater than the reinsurance retention. @or e'ample an insurance company might insure commercial property risks with policy limits up to 32" million and then buy per risk reinsurance of 38 million in e'cess of 38 million. In this case a loss of 3> million on that policy will result in the recovery of 32 million from the reinsurer. :hese contracts usually contain event limits to prevent their misuse as a substitute for +atastrophe HLs. In catastrophe e'cess of loss the cedants 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). @or e'ample an insurance company issues homeowners policies with limits of up to 38""""" and then buys catastrophe reinsurance of 3!!"""""" in e'cess of 34"""""". In that case the insurance company would only recover from reinsurers in the event of multiple policy losses in one event (e.g. hurricane earthuake flood). Aggregate HL affords a freuency protection to the reinsured. @or instance if the company
retains 32 million net any one vessel 38 million annual aggregate limit in e'cess of 38m annual aggregate deductible the cover would euate to 8 total losses (or more partial losses) in e'cess of 8 total losses (or more partial losses). Aggregate covers can also be linked to the cedants gross premium income during a 2!1month period with limit and deductible e'pressed as percentages and amounts. -uch covers are then known as &Stop oss& contracts.
Risks attaching basis [edit]
A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates. :he 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 e'piration 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.
osses occurring basis [edit] A einsurance 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 e'piration date are not covered. As opposed to claims1made or risks attaching contracts. Insurance coverage is provided for losses occurring in the defined period. :his is the usual basis of cover for short tail business.
!laims$made basis [edit] A policy which covers all claims reported to an insurer within the policy period irrespective of when they occurred.
!ontracts [edit] %ost of the above e'amples concern reinsurance contracts that cover more than one policy (treaty). einsurance can also be purchased on a per policy basis in which case it is known asfacultative reinsurance. @acultative reinsurance can be written on either a uota share or e'cess of loss basis. @acultative reinsurance is commonly used for large or unusual risks that do not fit within standard reinsurance treaties due to their e'clusions. :he term of a facultative agreement coincides with the term of the policy. @acultative reinsurance is usually purchased by the insurance underwriter who underwrote the original insurance policy whereas treaty reinsurance is typically purchased by a senior e'ecutive at the insurance company. einsurance 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 G" days notice to cancel or amend the treaty. A term agreement has a built1in e'piration date. It is common for insurers and reinsurers to have long term relationships that span many years.
Fronting [edit] -ometimes insurance companies wish to offer insurance in ;urisdictions where they are not licensedC for e'ample 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. -uch an arrangement is called ?fronting?. @ronting is also sometimes used
where an insurance buyer reuires its insurers to have a certain financial strength rating and the prospective insurer does not satisfy that reuirementC the prospective insurer may be able to persuade another insurer with the reuisite 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 p otential default of the reinsurer. :he 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.
(arkets [edit] %any reinsurance placements are not placed with a single reinsurer but are shared between a number of reinsurers. @or e'ample a 34""""""" e'cess of 3!""""""" layer may be shared by 4" or more reinsurers. :he 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 About half of all reinsurance is handled by reinsurance brokers who then place business with reinsurance companies. :he other half is with ?direct writing? reinsurers who have their own sales staff and deal with the ceding companies directly. In Europe reinsurers write both direct and brokered accounts. =sing game1theoretic modeling $rofessors %ichael . $owers (:emple =niversity) and %artin -hubik (Jale =niversity) have argued that the number of active reinsurers in a given national market should be appro'imately eual to the suare1root of the number of primary insurers active in the same market.K2 Econometric analysis has provided empirical support for the $owers1-hubik rule.K! +eding companies often choose their reinsurers with great care as they are e'changing insurance risk for credit risk. isk managers monitor reinsurers financial ratings (-0$ A.%. Best etc.) and aggregated e'posures regularly.
Reinsurers [edit] Reinsurer
)*+) ,ross -ritten "remiums .,-"/ .0S millions/ K4
%unich e
345!82
-wiss e
3425!4
32#!"#
Lloyds of London
3285#8
Berkshire
328"8G
-+,
32!85>
einsurance /roup of America
3#!44
+hina einsurance /roup
3>5"#
Norean einsurance +ompany
38224
$artnere
3752!
Everest e
37422
:ransatlantic e
34855
London einsurance /roup
3442G
/eneral Insurance +orporation of India 3>!8K7 %a;or reinsurance brokers includeC • • • • •
Aon +orporation illis e /uy +arpenter OL: :owers e +ooper /ay -wett 0 +rawford
Retrocession [edit] einsurance companies often also purchase reinsurance a practice known as retrocession. :hey typically purchase this reinsurance from other reinsurance companies but may also retrocede to other insurance companies to spread the risk more widely. A company that accepts such retrocession business is a ?retrocessionaire?. :he reinsurance company that buys reinsurance is the ?retrocedant?. :he flow of business and premium is as followsC client 11P insurer 11P reinsurer 11P retrocessionaire. ,ther terms used for each of these entities in this flow of business would beC client 11P cedant 11P retrocedant 11P retrocessionaire. It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. @or e'ample a reinsurer that provides proportional or pro rata reinsurance capacity to insurance companies may wish to protect its own e'posure to catastrophes by buying e'cess of loss protection. Another situation would be that a reinsurer which provides e'cess of loss reinsurance protection may wish to protect itself against an accumulation of losses in different branches of business which may all become affected by the same catastrophe. etrocession insurance is common in areas prone to natural disasters like earthuakes and hurricanes where damage to property automobiles boats aircraft and loss of life are more likely to occur. :his process can sometimes continue until the original reinsurance company unknowingly gets some of its own business (and therefore its own liabilities) back. :his is known as a ?spiral? and was common in some specialty lines of business such as marine and aviation. -ophisticated reinsurance companies are aware of this danger and through careful underwriting attempt to avoid it. In the 2G#"s the London market was badly affected by the creation of reinsurance spirals. :his resulted in the same loss going around the market thereby artificially inflating market loss figures of big claims (such as the $iper Alpha oil rig). :he L%H spiral (as it was called) has been stopped by e'cluding retrocessional business from reinsurance covers protecting direct insurance accounts. It is important to note that the original insurance company is obliged to pay due claims whether or not the reinsurer reimburses the insurer. %any insurance companies have e'perienced difficulties by purchasing reinsurance from companies that did not or could not pay their share of the loss. (:hese unpaid claims are known as uncollectibles.) :his is particularly important on long1tail lines of business where the claims may arise many years after the premium is paid.