reinsurance

Introduction to Reinsurance

Risk is the starting point of insurance.

Insurance acts as an one of the risk management
techniques.
Reinsurance is a mechanism which insurance
companies use to spread the risks assumed.
Assesment is made on the reinsurance by the
insurance company. Credit rating is such an
assesment.
Reinsurance is insurance for insurance companies.
DEFINITION OF REINSURANCE

“The practice of insurers transferring portion of a risk

portfolios to other parties by some form of agreement
in order to reduce the likelihood of having to pay a
large obligation resulting from an insurance claim. The
intent of reinsurance is for an insurance company to
reduce the risks associated with underwritten policies
by spreading risks across alternative instituted”
Types of reinsurance
Proportional reinsurance

Non-proportional reinsurance

Facultative reinsurance

Treaty reinsurance
Functions of reinsurance
To increase capacity.

To minimize effects of catastrophe.

For stability of performance.

Market intelligence.

Advice.
Rating of reinsurance
Regulation of reinsurance
To establish proper incentives.

Protection of the policy holder.

Economic Stability.

Solvency.

Collectability .
Why do insurance company purchase
reinsurance?
Capacity.

Stability.

Catastrophe protection.
Working of reinsurance
reinsurance

agents

Insurance
Insurance Reinsurance
policyholders
companies companies

brokers
Reinsurance
intermediaries

Risk takers Transfer of risk

Middle person
Principles of reinsurance
Utmost good faith.

Indemnity.
Basics of valid reinsurance contract
There must be a transfer of risk from one party to
another,
Re insurance must be between two insurance entities,
The parties must be licensed to be fully recognized by
insurance regulators,
The principle of indemnity should be observed and
All the transactions between a ceding company and a
reinsurer must be conducted on the principle of ‘ut
most good faith’.
Need of reinsurance
Important terms
Admitted reinsurance
Arbitration clause
Burning cost
Catastrophe reinsurance
Cede
Ceding company
Ex gratia payment
Facultative
Reinsurance Arrangement
Quota-share reinsurance

Pro-rata reinsurance

Excess-of-loss reinsurance

Loss ratio reinsurance

Concepts…
Ceding insurer Re-insurer
Cession Reinsurance policy
Direct insurer Retention or holding
Faculative reinsurance Retrocession
Line Insurance commission
Profit commission Under writer
Top Global Reinsurance Companies
1. Munich Reinsurance
2. Swiss Reinsurance
3. Berkshire Hathaway Reinsurance
4. Hannover Reinsurance
5. Lloyd's of London Reinsurance
6. SCOR Reinsurance
7. Everest Re Group Reinsurance
8. Partner Reinsurance
9. Transatlantic Holdings Reinsurance
10. ACE Tempest Reinsurance
Conclusion
Elements of Reinsurance
Reinsurance is a form of insurance.
There are only two parties to the reinsurance contract -
the Reinsurer and the Reinsured - both of whom are
insurers, i.e. entities empowered to insure.
The subject matter of a reinsurance contract is the
insurance liability of the Reinsured undertaken by it
under insurance policies issued to its own
policyholders.
A reinsurance contract is an indemnity contract.
What Reinsurance Does
1. It converts the risk of loss of an insurer incurred by the
reinsured under its policies according to its own needs.

2. It redistributes the premiums received by the reinsured,

which now belong to the reinsured, according to its own
business needs.
What Reinsurance Does Not Do
 Reinsurance is not coinsurance.
 Reinsurance is not banking – it is not the lending of money but it can have
the same effect.
 Reinsurance is not a security.
Reinsurance does not:
 Convert an uninsurable risk into an insurable risk.
 Make loss either more or less likely to happen.
 Make loss either greater or lesser in magnitude.
 Convert bad business into good business
Financing
 is growing and needs additional surplus to maintain
acceptable premium to surplus ratios.
Unearned premium demands reduce surplus.
In a down cycle, underwriting results are bad and reduce
surplus.
Investment valuation negatively impacts surplus.
Marketing considerations dictate that an insurer enter new
lines of business or new territories.
Stabilization
Marketing Consideration
Policyholders and stockholders like to be identified with a
stable and well managed company.
Management Consideration
Planning for long term growth and development requires a
more stable environment than an insurance company’s book
of business is apt to provide.
Capacity
Refers to an insurer’s ability to provide a high limit of
insurance for a single risk, often a requirement in today’s
market.
Reinsurance can help limit an insurer’s loss from one risk
to a level with which management and shareholders are
comfortable.
Most states require that the maximum “net retention” from
one risk must be less than 10% of policyholders’ surplus.
Catastrophe Protection
Objective is to limit adverse effects on P&L and surplus
from a catastrophic event to a predetermined amount.

Covers multiple smaller losses from numerous policies

issued by one primary insurer arising from one event.
Reinsurance Security
Evaluation of Cedants, Retrocessionaires and
Intermediaries
Financial Condition

Underwriting Policies and Procedures

Claims Policy and Administration

Management Stability and Expertise