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uncertain loss.
the insured assuming a guaranteed and known relatively small loss in the
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
TYPE OF
INSURANCE LIC (LIFE INSURANCE CORPORATION)
GIC (GENERAL INSURANCE CORPORATION)
1) Endowment plan
2) Money Back policy
3) Pension Plan
4Term Insurance
5) ULIP Plan
6) Group Plan
1. Endowment 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.
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:
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.
The Claimant should look about the following points before intimate a claim:
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.
For faster claim processing, it is essential that the claimant submits complete
documentation as early as possible.
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.
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
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; .
History of reinsurance
1370 : First recorded reinsurance contract covering a ship sailing from Genoa to
Bruges.
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.
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.
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.
2015 A record 19% of property catastrophe limit was ‘alternative’ capital including
catastrophe bonds and collateralised reinsurance.
FEATURS
Characteristics of Reinsurance
2. The original insurer agrees to transfer part of his risk to other insurance
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
TYPES OF
alteration, if any, made in terms and
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 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.
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.
Claims-made basis
A policy which covers all claims reported to an insurer within the policy period
irrespective of when they occurred.
CONTRACT
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
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
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.
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"
used provisions and provisions imbued with considerable industry common and practice.
FRONTING
they are not licensed: for example, an insurer may wish to offer an insurance
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
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
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
Many reinsurance placements are not placed with a single reinsurer but are
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
University) and Martin Shubik (Yale University) have argued that the number
the square-root of the number of primary insurers active in the same market.[3]
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.
society, re insurers can indirectly have societal impact as well, due to reinsurer
which affects how the cedents offer coverage in the market. However, reinsurer
opportunity to rent reinsurer capital to expand cedent market share or limit their
risk.[5]
functions of a reinsurance company:
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
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
function. For example, who accessed the data last, who did what and
and years of use? There is always new data entering spreadsheets and
new users managing them. What controls are established to ensure the
3. No log of change
Along the same lines of my previous point, the spreadsheet has no log of
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
If there are no best practices put in place for proper spreadsheet storage or
negative signs and misaligned rows may sound harmless, however they
because they aren’t built for that. However, testing should be an integral
the last two decades, we’ve seen a surge in global regulation including:
Serbanes-Oxley (SOX)
Solvency II
GDPR
FAS 157
Looking ahead to the future, the world will only become more regulated.
keep some data restricted, and some data shareable. Controlling data
requiring access.
users specific access rights. This gives you control over who has access to
limited.
When it’s time for a new person to take over as part of a large-scale
person must start from scratch. Unlike a system, there is no manual from
the spreadsheet user on how the spreadsheet functions. This causes major
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
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.
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.
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.
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
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:
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.
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.
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.
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.
REINSURANCE COMPANY
INTRODUCTION
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.
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.
The main objective of this study is appraising the contributions of reinsurance to the
performance of insurance companies in Nigeria. Specific objectives include:
Hypothesis 1
Hypothesis 2
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.
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.
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?
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
REINSURANCE COMPANYS :-
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
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.
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.
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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.
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.
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.
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.