INWARD REINSURANCE

Madhulika Bhaskar, Asst. General Manager, GIC Re

INTRODUCTION

Direct business
Insurance
Company

Reinsurance
outward

Reinsurance Inward

Why is inward reinsurance said to be An Art?

Why is it not as simple as Direct Insurance?

WHY INWARD REINSURANCE IS SAID TO BE AN ART

Blind acceptances
Underwriter far away from risk
Little transparency
Values involved are large
Results can be volatile
Profit margins low or negative
Face International competition
Purchaser has knowledge and bargaining power
Chances of reinsurer going wrong higher than Insurer
Consequences of misjudgment can be severe

ESTABLISHING STRATEGY & DEFINING PARAMETERS

Capital Available Reinsurance business is capital

intensive and cyclical thus profits can be earned
over a long period. Direct Insurers writing inward
reinsurance as a side activity must specify part of
the capital that will be committed for this
operation.
Administrative Set-up Adequate administrative
set up needed like man power with reinsurance
know-how, statistical expertise, facilities of fast
communication and travel, state of the art IT
support etc.

ESTABLISHING STRATEGY & DEFINING PARAMETERS..

Business Plan

Business targets for minimum 3 years one year is too

small to gauge the impact of the plan
Identifying Countries for inward acceptances one may
want to avoid markets known to fluctuate like USA
Identifying Classes to be written or avoided eg. liability
Identifying forms of Reinsurance Proportional, NonProportional, Facultative
Controlling accumulations
Acceptance Limits specified as a % of the net worth. It can
be different for different classes, forms etc.

In short aim at achieving a good spread and balance!!!

What exactly is your cos underwriting appetite?

UNDERWRITING CONSIDERATIONS
1.

Underwriting Environment

Background of the offer

Routine

renewal
Renewal with a change
Existing reinsurer ceasing to participate
Reinsured seeking improvement in terms
New cover being sought

The Market and the Reinsured

Who

is the reinsured his reputation

His overall profitability
Claims management practices adopted

UNDERWRITING CONSIDERATIONS
Acceptance

capacity of the Reinsurer

Depends

on business plan
Past experience of the class and the country
Business written to date leading to accumulation
The

Broker

Play

a vital role in bringing together two parties slowly

changing a placements are being made through
electronic modes
Value addition by broker
Brokers repuutation
Volumes and profitability of the business shwon by him

UNDERWRITING CONSIDERATIONS..
2.

Analysis of Statistics
Currency Movement
Analysis of claims information
Inflation
Scrutiny of statistics
Various As ifs

3.

Underwriting Information

Must be trustworthy and transparent

Must be exhaustive to include in the minimum:

Gross and net premium for the past minimum 5 years

Estimated premium for the next 2 years

UNDERWRITING CONSIDERATIONS..

Geographical distribution of business

Composition of the portfolio (residential, commercial,
industrial)
Details of top target risks and large losses
Perils covered in std. cover and those covered on request
Zonewise aggregates
Measures proposed to improve UWg
Risk and Loss profile
Rating structure followed by the Company
Etc. etc.

CASH FLOW UNDERWRITING

Reinsurer like any other commercial organisation depends

upon revenue. Many Reinsurers survive on investment
income from the reserves
Key to success is keeping track of the inflow of cash and
balancing it with outflow
Cashflow Uwg : Business is often written at terms below
technically justifiable levels with the hope that deficiency in
terms will be made up through investment income on
premium as losses will take time to materialise and also
some profits can be earned on exchange rate fluctuations. It
is an attempt to maximise operating surplus by accepting
business with focus on generating cash inflow and earning
investment income.

CASHFLOW UNDERWRITING.
Cash flow underwriting can fail if:
Reinsurer has adopted an overoptimistic approach
Losses build up faster & higher than expected
Investment income not realised as visualised
Anticipated exchange gain does not materialise
Careless underwritten business can give losses
which are heavier than interest earnings

PLACEMENT PRACTICES
Acceptance expressed in monetary terms
Line to stand
Signing Down
Acceptance open only upto _____
Warranted most favoured terms

ACCEPTANCE LIMITS
Shareholders fund: 20 Mln
Max exposure : Any one risk - 600,000
i.e 3% of shareholders fund

Surplus Treaty:
Retention : 1 Mln
Treaty Capacity : 10 lines, 10 Mln
Acceptance Limit: 6% of treaty or 0.6 lines

Risk XL:
3mln xs 1 mln each and every loss
Acceptance Limit: 20%
What will be the acceptance limit if there were no Event
Limits or if there were unlimited reinstatements?