RE-INSURANCE,

CO-INSURANCE AND
RE-INSURANCE REGULATIONS

H.ANSARI

H.ANSARI
 “Reinsurance is the insurance of the
risk assumed by the insurer”
 -Article 779 of German Commercial
Law

8/3/2019 H.ANSARI 2
 With the continuing advancement in
science and technology,insurers today
are faced with risks more complex in
nature.With substantial high values at
single locations,the demand for
special type of covers has also
increased resulting in heavy demand
for insurance .
 Further,increasing court awards and
additional potential liabilities, have all
resulted in effecting the bottom lines
of insurance companies .

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 As his own protection therefore ,an
original insurer arranges reinsurance
with the re-insurer who accepts part of
the risk of loss.
 The re-insurer may be another insurer
who either accepts reinsurances in
addition to his direct insurance
underwriting or he may be a specialist
company who only transacts Reinsurance
business as is the case with Indian Re-
insurer-GIC
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 The insurer may effect reinsurance
either “direct” with the Reinsurance
company or though an
intermediately – Reinsurance Broker.
 Practically all classes of insurances
can be reinsured .Each insurer
world wide reinsures a part of the
buisness underwritten by him.
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Nature OF Reinsurance

INSURED INSURER REINSURER

Insurance Reinsurance
Contract
contract

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 The idea of Reinsurance is rooted in
the same human instinct that
brought insurance into being I.e. the
desire that the loss of one shall be
shared by many.Just as a common
man would insure his belongings
with an insurer, so the insurer in
turn reinsures part of his risk with a
REINSURER.

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 The oldest known Reinsurance Contract
concluded was in Genoa in 1370
 First Royal concession in Fire Insurance
business was granted to Royal Chartered
Insurance Company in 1778 in
Copenhagen.
 First Reinsurance Contract in Fire
Insurance was Concluded in 1821

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 Oldest Professional Reinsurance Company
established and in existence even today
is Cologne Reinsurance Company which
was founded in 1846 and become
operational in 1852.
 Swiss Reinsurance company started its
operations in 1863 from ZURICH
 Munich Reinsurance –1880 in Germany

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 Because of the unique position of
Lloyd’s, England was slow in founding
professional Reinsurance Companies.
 The mercantile & General –First
Professional Reinsurance in England
was established in1917.
 The Restrictive legislation of 1746
delayed Lloyds entry into the
Reinsurance field.The Lloyds market
developed from mid 1880 as
Reinsurance market mainly by
introduction of Excess of loss Insurance
 Today, Reinsurance represents a
significant proportion of the total
business
8/3/2019 written at Lloyd’s.
H.ANSARI 10
 Initially Reinsurance business was
confined to Facultative transactions.
 However with the increasing commercial
and industrial progress,there was wide
ranging demand for newer and effective
forms of the cover.This gave rise to
automatic forms of Reinsurance Known as
TREATIES ,which have become an
indispensable part of the company’s
operations today.

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 The Reinsurance absorbs the impact
of particularly hard blows to
Insurance Companies and is so
doing protects :-
 The Insured against sudden
fluctuations in the cost of cover (I.e.
premium rate) In this way variations
can be spread over several years.
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 The Shareholders of the Insurance
company against a considerable
reduction or even loss of the
registered capital.
 The tax payees when the reinsured
company is state owned.
 State finance by guaranteeing
certain stability in the payment of
taxes by Insurance Companies
 The staff of Insurance companies
against losing their jobs.

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 Reinsurance is also a means of
communication between markets
and frequently acts as a catalyst –
 By propagating new forms of
Insurance
 By communicating experiences of
other markets
 By suggesting technical restrictions.

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 After liberalization,each insurer in
India is free to structure his annual
reinsurance Program in compliance
with regulations notified by IRDA
and is subject to monitoring.The
key goal continues to be
maximization of Premium within the
country prior to Reinsuring abroad.

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 GIC has been designated as the “Indian
Re-insurer” as per sub section 101-A of
insurance Act 1938.It receives 20 %
statutory session from all insurers on all
classes of buisness underwritten by them.
 This has since been reduced to 15%from
01-4-2007 and 10% from 01-4-2008.
 GIC has been given the added
responsibility to handle life
reinsurances.At present the life insurers
are not required to cede statutorily any
percentage of theirH.ANSARI
8/3/2019 direct buisness to 16
 The Indian Re-insurer --GIC
provides Capacity and Reinsurance
support to world markets and also
helps in regional cooperation to
reduce drain on foreign exchange
and promote local expertise in Asian
and African Markets

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 Structuring reinsurance programmes is
crucial to the Balance Sheet of the
Direct Insurers.
 Net retention levels have a co-
relationship with the net worth. Thumb
rule to retain risk is generally upto 5%
of net worth and 10% of the Premium
for the respective class of business. It
is important for a direct insurer that the
terms of reinsurance are appropriate
and reasonable.

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 The Reinsurance programme of an
Insurer should be so devised so as
to maximise retentions within the
country. Ultimately the Indian
market can become a hub in the
whole of south Asia and South East
Asia.

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 Compulsory Cession and voluntary
arrangements amongst the Insurers
will be the main stay of Reinsurance
placement.

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 As Reinsurance is primarily concerned
with peak and catastrophic risks,
reinsurance portfolios are more exposed
and less predictable than a direct
insurer. As a consequence, reinsurer is
obliged to write business internationally
in order to achieve a sound balance for
its whole business. This is a necessity
derived from the nature of reinsurance
functions. Hence the need for higher
capital requirement for a reinsurance
company.

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The objective of Reinsurance Programme
for the market is thus guided by the
following :
 Maximise retention within the country
 Develop adequate capacity
 Secure the best possible protection for
the reinsurance costs incurred
 Simplify the administration of business.

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Nature OF Reinsurance
 Reinsurance is a contact of
Indemnity.Even in life and personal
Accident Insurance ,because it protects
the insurer from diminution of his
property,caused by Insurance policy
obligations
 Whereas, Insurance is a contract between
Insurer and Insured,Reinsurance is a
separate contract between the Insurer
and the Re-insurer.Each of these
contracts are independent of the other.
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Methods of Reinsurance
 Facultative Reinsurance –This is the oldest
form of Reinsurance.It is still used today
in all branches mainly when
 The automatic covers have been used up
 The risk is excluded from the obligating treaty
 The insurer does not want his reinsurance
contracts “Overburdened”with particularly
heavy risks.
 The Insurer has no automatic cover at his
disposal in a particular branch where he only
rarely issues policies.

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 The insurer has to offer the risk to the re-
insurer with enough information for the
latter to be in a position to form an
opinion on its quality.The offer can be
made by telephone ,telex or letter.
 In Facultative business each risk is
accepted I.e. each transaction is an
individual reinsurance Contract.The
acceptance,unless otherwise indicated is
valid for the duration of the policy ,
normally for a maximum of one year,and
is automatically renewable.
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 The formal cession of facultative offer -
after receipt of Re-insurers agreement is
done through use of Bordereaux,usually
two copies,one of which is signed and
returned to cedant company.
 The facultative Reinsurance Commission
is fixed from case to case by Re-
insurer,who takes into account the quality
of business,the level of premium and
ceding company’s cost.

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 The advantages of this type of
Reinsurance is that the Re-insurer can
examine each risk individually and can
insist on adequate premium rate and
improvement of the particular risk.
 The Disadvantage is the delay in issuance
of policy as also the administrative costs
which are higher.In addition,the terms
cannot be altered unless the Re-insurer
agrees.

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Treaty Reinsurance or Obligatory
Reinsurance
 In this method the cedant is bound to
cede a fixed amount of his business in
one Branch which the Re-insurer is
obliged to accept.
 If the participation of the cedant and the
re-insurer in a contract is calculated as a
function of sum insured,one talks of
Proportional Reinsurance
 On the other hand,if the distribution of
business is dependent on the loss, one
has Non-Proportional Insurance or an
Excess of Loss
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 In Obligatory Contract,the Re-insurer
binds himself to accept all the
business that the cedent underwrites
in one branch up to an agreed and
fixed limit.This implies that the
insurance company is free in
Underwriting of business.
 The Ceding company can select,rate
and also settle its claims as it wishes
.The Re-insurer cannot intervene
except in the case of grave negligence.
 The Re-insurer on other hand has the
advantage of obtaining a continuous
flow of business and thus a more
balanced portfolio.
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 Under Proportional Treaties,the Original
Insurer (ceding company) decides what
part of the original Insurance he wishes
to retain for his own account and
Reinsures(cedes) the balance with a Re-
insurer.
 Premium and losses are shared in
proportion that the ceding company’s
retention and the re-insurer’s share bear
to the sum insured of the original
insurance.
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Common Forms of Proportional
Treaties are :-

1) Quota Share – Here the cedant binds

himself to retain and cede fixed
proportion of all the business he
underwrites up to a fixed amount.
For example ,the ceding company shall
retain for own account 40 % of all plate
glass business,with an underwriting limit
of Rs 50,000 per risk.The cedant shall
reinsure with re-insurer,who agrees to
accept a 60 % share of all plate glass
business.
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 Premium and loss bordereaux are
usually not necessary in a quota
share treaty.They are replaced by
Quarterly summary statement of
account.

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 2) Surplus:In the surplus Reinsurance
systems,the company only cedes those
amounts which it cannot or does not want
to retain for own account.
 For example, a ceding company has a
retention limit of 20 Lacs on a risk.It
agrees to cede and Re-insurer agrees to
obligatory accept a fixed share of the
business say up to 10 times of his
maximum retention but not exceeding Rs
5 Crores.This is 10 Line surplus Treaty.
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 The Re-insurer thus receives an amount
of Premium proportionate to the risk he
runs and pays any losses which occur in
the same proportion.
 In Fire and Engineering Department,
Reinsurance under this lead is also done
on the basics of P.M.L.
 When choosing the surplus system of Re-
insurance,the company should do an in-
depth analysis of its business to find the
most appropriate structure.
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3)Facultative –Obligatory Cover
Here the ceding company is not bound
automatically to feed the treaty,but retain
the right to decide what business will be
reinsured ,and if so to what extent .For
his part the Re-insurer undertakes to
accept all cessions within the limits of
certain number of lines and maximum
amount.

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4)The open cover Here there is a Slight
variation as it is an open cover without
any precise limitations.The cedant has the
liberty to reinsure and the re-insurer is
obliged to accept all business ceded to
the contract up to a certain amount
without the maximum sum insured being
expressed as a number of lines.

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5)The combined Quota Share /Surplus
Where the Quota share by itself cannot
absorb the whole of the portfolio it can be
complemented by a surplus.The quota
share limit can either be fixed or variable
amount depending upon the quality of
risk.This method is very often used when
a company starts a Branch.The cedent
can calculate exactly the effect of an
increase in the net retention I.e. the
Quota Share Retention.
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Non Proportional Treaties
They are characterized by a
distribution of liability between the
cedent and the Re-insurer on the
basis of losses rather than sum
insured as is the case in proportional
Reinsurance.

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 As compensation for the cover
granted,the re-insurer receives part of
the original premium and not part of
premium corresponding to the sum
insured as in Proportional Reinsurance.
-Therefore only loss bordereaux are
prepared and accounting operations are
reduced to a minimum but are more
elaborate.
-Administrative costs are substantially
reduced
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-The Reinsurance Premium is pre--
determined which allows the cedant
to allow for the cost in his budget.
-There is usually no profit
commission

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Types of Non-Proportional treaties
a)Working Excess of loss (WXL) or cover
per risk
This cover relieves the insurer of losses
which surpass the amount he has decided
to retain for own account.
eg 60,000 xs 40,000
Textile Mill –Retention 1 LAC.

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B) Cover per event (Catastrophic xl)
It offers protection against the
accumulations resulting from numerous
losses caused by same event.
eg Cyclone, storm, Earthquake.
eg 20,00,000 xs 5,00,000
Reinsurance cover cedants loss
retention.

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C)Stop Loss cover
It’s role is to protect the annual result of
the company in one branch against a
negative deviation.
eg Hail damage –Annual loss ratio –80%
-Cover taken 50 %
-Actual loss ratio 110%
Re-insurer shall pay for the balance 30 %.

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 THE GAZETTE OF INDIA :
EXTRAORDINARY (PART III-
SEC.4)

INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY,
NEW DELHI
NOTIFICATION
New Delhi, the 14th July, 2000
General Insurance - Reinsurance
Regulations 2000
8/3/2019 H.ANSARI 44
F.No.
IRDA/Reg./7/2000.-
 In the exercise of the powers,
conferred by section 114A of the
Insurance Act, 1938, sections 14
and 26 of the Insurance Regulatory
and Development Authority Act.
1999, the Authority, in consultation
with the Insurance Advisory
Committee, hereby makes the
following regulations, namely :

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1. Short Title and commencement :

 These regulations may be called the

Insurance Regulatory and Development
Authority (General Insurance -
Reinsurance) Regulations, 2000
 They shall come into force on the date
of their notification in the Official
Gazette.

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2. Definitions :
In these regulations, unless the
context otherwise requires :
 ‘Act’ means the Insurance
Regulatory and Development
Authority Act 1999 (4 of 1999).
 ‘Authority’ means the Insurance
Regulatory and Development
Authority established under sub-
section (1) of Section 3 of the Act
:

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 ‘Cession’ means the unit of
insurance passed to a reinsurer by
the insurer which issued a policy to
the original insured and,
accordingly, a cession may be the
whole or a portion of single risks,
defined policies or defined
divisions of business, as agreed in
the reinsurance contract.

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 ‘Facultative’ means the
reinsurance of a part or all of a
single policy in which cession is
negotiated separately and that the
reinsurer and the insurer have the
option of accepting or declining
each individual submission.
 Indian re-insurer’ means an
insurer who carries on exclusively
reinsurance business and is
approved in this behalf by the
Central Government

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 Pool means any joint underwriting
operation of insurance or reinsurance in
which the participants assume a
predetermined and fixed interest in all
business written.
 ‘Retrocession’ means the transaction
whereby a reinsurer cedes to another
insurer or reinsurer all or part of the
reinsurance it has previously assumed.

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 ‘Treaty’ means a reinsurance
arrangement between the insurer
and the reinsurer, usually for one
year or longer, which stipulates the
technical particulars and financial
terms applicable to the reinsurance
of some class or classes of
business.

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 Words and expressions used and
not defined in these regulations
but defined in the Insurance Act
1972 (57 of 1972) or Insurance
Regulatory and Development
Authority Act, 1999 (41 of 1999),
rules made thereunder shall have
the meaning respectively assigned
to them in those Acts or rules as
the case may be.

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3. Procedure to be followed for
Reinsurance Arrangements
1. The Reinsurance Programme shall
continue to be guided by the following
objectives to :
 maximise retention within the country
 develop adequate capacity
 secure the best possible protection for
the reinsurance costs incurred.
 Simplify the administration of business

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2. Every insurer shall maintain the
maximum possible retention
commensurate with its financial
strength and volume of business.
The Authority may require an
insurer to justify its retention
policy and may give such
directions as considered necessary
in order to ensure that the Indian
insurer is not merely fronting for a
foreign insurer.

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3. Every insurer shall cede such
percentage of the sum assured on
each policy for different classes of
insurance written in India to the
Indian reinsurer as may be
specified by the Authority in
accordance with the provisions of
Part IVA of the Insurance Act,
1938.

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4. The reinsurance programme of
every insurer shall commence from
the beginning of every financial
year and every insurer shall
submit to the Authority, his
reinsurance programmes for the
forthcoming year, 45 days before
the commencement of the financial
year.

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5. Within 30 days of the financial year,
every insurer shall file with the
Authority a photocopy of every
reinsurance treaty slip and excess of
loss cover cover-note in respect of that
year together with the list of reinsurers
and their shares in the reinsurance
arrangement.
6. The Authority may call for further
information or explanations in respect
of the reinsurance programme of an
insurer and may issue such direction,
as it considers necessary.
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7. Insurer shall place their
reinsurance business outside India
with only those reinsurers who
have a period of the past five
years counting from the year
preceding for which the business
has to be placed, enjoyed a rating
of at least BBB (with Standard &
Poor) or equivalent rating of any
other international rating agency.

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 Placements with other reinsurers
shall require the approval of the
Authority. Insurers may also place
reinsurances with Lloyd’s syndicates
taking care to limit placements with
individual syndicates to such shares
as are commensurate with the
capacity of the syndicate.

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8. The Indian reinsurer shall organise
domestic pools for reinsurance
surpluses in fire, marine hull and other
classes in consultation with all insurers
on basis, limits and terms which are
fair to all insurers and assist in
maintaining the retention of business
within India as close to the level
achieved for the year 1999-2000 as
possible. The arrangements so made
shall be submitted to the Authority
within three months of these
regulations coming into force, for
approval.
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9. Surplus over and above the domestic
reinsurance arrangements class wise
can be placed by the insurer
independently with any of the
reinsurers complying with sub-
regulation (7) subject to a limit of
10% of the total reinsurance premium
ceded outside India being placed with
any one reinsurer. Where it is
necessary in respect of specialised
insurance to cede a share exceeding
such limit to any particular reinsurer,
the insurer may seek the specific
approval of the Authority giving
reasons
8/3/2019 for such cession
H.ANSARI 61
10. Every insurer shall offer an
opportunity to other Indian
insurers including the Indian
Reinsurer to participate in its
facultative and treaty surpluses
before placement of such cessions
outside India.

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11. The Indian Reinsurer shall retrocede
at least 50% of the obligatory cessions
received by it to the ceding insurers
after protecting the portfolio by suitable
excess of loss covers. Such
retrocession shall be at original terms
plus an over-riding commission to the
Indian Reinsurer not exceeding 2.5%.
The retrocession to each ceding insurer
shall be in proportion to its cessions to
the Indian Reinsurer.

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12. Every insurer shall be required to
submit to the Authority statistics
relating to its reinsurance
transactions in such forms as the
Authority may specify, together with
its annual accounts.

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4. Inward Reinsurance Business

 Every insurer wanting to write

inward reinsurance business shall
have a well-defined underwriting
policy for underwriting inward
reinsurance business. The insurer
shall ensure that decisions on
acceptance of reinsurance business
are made by persons with necessary
knowledge and experience

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 The insurer shall file with the
Authority a note on its underwriting
policy stating the classes of
business, geographical scope,
underwriting limits and profit
objective. The insurer shall also file
any changes to the note as and
when a change in underwriting
policy is made.

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5. Outstanding Loss Provisioning

 Every insurer shall make

outstanding claims provisions for
every reinsurance arrangement
accepted on the basis of loss
information advices received from
Brokers / cedants and where such
advices are not received on an
actuarial estimation basis.

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 In addition, every insurer shall make
an appropriate provision for incurred
but not reported (IBNR) claims on
its reinsurance accepted portfolio on
actuarial estimation basis.

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 “The purpose of Reinsurance is purely
technical .It is a means which an
Insurance company uses to reduce ,
from the point of view of possible
material losses, the perils it has
accepted.When a carriage fitted by a
shock absorber passes over a rough
street ,the road becomes no smoother
but the passenger will feel the jerks less
as these are absorbed by the
contrivance carried as a special addition
to the vehicle. So it is with Reinsurance
; it does not reduce losses but makes it
easier for insurance to carry the
material consequences “
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Co-insurance
 Co-insurance is a system were by
one insurer shares direct
responsibility for a risk with one or
more insurance companies.
 The companies responsibility is
limited to the amount it underwrites
on the orignal policy

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 This system is used specially for
covering big industrial risks and
certainly has many advantages.
 To apply it however,to the
underwriting of thousands of
medium and small risks would only
mean high administration
cost.Hence,the need to use this
facility judiciously.
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