Reinsurance 100marks

L.N. COLLEGE OF MANAGEMENT & TECHNOLOGY MALAD (WEST) MUMBAI 64.
ACADEMIC YEAR (2007-200 ) SEMESTER II
!RO"ECT ON
R#$%&'()%*#+ I%&'()%*# ,- I%&'(#(&. (B'&$%#&& E%/$(-%0#%,)

!RO"ECT GUIDE !(-1. M(&. S'*2#,) !)3)( SUBMITTED BY Piyush Goyal MBA Full Time Roll NO - 11
Reinsurance: Insurance to Insurers
DECLARATION
WE students of MBA {full time} LN COLLEGE OF MANAGEMENT & TECHNOLOG !"emeste# II$ %e#e&' de(l)#e t%)t *e %)+e (om,leted t%is ,#o-e(t on .Reinsu#)n(e/ Insu#)n(e to Insu#e#s0 1 in t%e )()demi( 'e)# 2334523367 T%e info#m)tion su&mitted is t#ue )nd o#i8in)l to t%e &est of ou# 9no*led8e7
"T:DENT OF LN COLLEGE MBA !F:LL TIME$
CERTIFICATE
I; <ROF
M#s7 "u(%et) <)*)#
%e#e&' (e#tif' t%)t HORLIC=" GRO:< of
MBA {Full Time} student of LN COLLEGE OF MANAGEMENT & TECHNOLOG !"emeste# II$ %)s (om,leted ,#o-e(t in t%e )()demi( 'e)# 2334523367 T%e info#m)tion su&mitted is t#ue )nd o#i8in)l to t%e &est of m' 9no*led8e7
"IGNAT:RE OF <RO>ECT G:IDE
AC=NOWLEDGEMENT It gi es me !leasure to !resent this !ro"ect on 4R#$%&'()%*#+ I%&'()%*# T- I%&'(#(&. 5 to the stu#ent o$ MBA %$ull time&' The su("ect matter is ma#e more com!act an# logical' I grate$ully ac)no*le#ging the alua(le e$$orts+ suggestion an# clari$ications !ro i#e# (y many (y ma)ing this !ro"ect !ractical' It *oul# (e rather un$air on our !art $or not than)ing our college LN C-66#7# M)%)7#0#%, & T#*2%-6-78 $or ha ing sho*n their continuous $aith in us' I ta)e this o!!ortunity to e,!ress my sincere a!!reciation an# gratitu#e to our college a#ministrati e sta$$ that hel!e# us' I e,!ress my grate$ul than)s to e ery one *ho ha e contri(ute# e en in a small *ay to*ar#s success$ul com!letion o$ this !ro"ect' -ast (ut not least+ I *oul# li)e to than) my !arents $or !ro i#ing me *ith such goo# e#ucation an# our !ro$essors in the com!letion o$ this !ro"ect'
Index
Intro#uction /istory o$ Reinsurance -iterature Re ie* Ty!es o$ Reinsurance Reinsurance Mar)ets Mar)et 3hare o$ Reinsurers Reinsurance in In#ia Terrorism- A 3et(ac) to the in#ustry Ne*s on Reinsurance In#ustry 3ome 7ase 3tu#ies Bi(liogra!hy . 0 11 12 20 45 61 6. 60 .. 06
4M)% -3#& 2$& &'**#&& ,- 2$& *(#),$/$,8. N- -%# 9-':,& ,2# %##9 1-( $,. I, $& 0-(# '&#1'6 $% 7--9 ,$0#& )%9 #&&#%,$)6 $% :)95.
INTRODUCTION
Insurance+ in la* an# economics+ is a $orm o$ ris) management !rimarily use# to he#ge against the ris) o$ a contingent loss' Insurance is #e$ine# as the e8uita(le trans$er o$ the ris) o$ a !otential loss+ $rom one entity to another+ in e,change $or a !remium an# #uty o$ care' Insurer+ in economics+ is the com!any that sells the insurance' Insurance rate is a $actor use# to #etermine the amount+ calle# the !remium+ to (e charge# $or a certain amount o$ insurance co erage'
HISTORY OF INSURANCE INDUSTRY

The insurance tra#ition *as !er$orme# each year in Norou9 %(eginning o$ the Iranian Ne* :ear&; the hea#s o$ #i$$erent ethnic grou!s as *ell as others *illing to ta)e !art+ !resente# gi$ts to the monarch' The most im!ortant gi$t *as !resente# #uring a s!ecial ceremony' <hen a gi$t *as *orth more than 11+111 #erri) %Achaemenian gol# coin *eighing 0'4.-0'62& the issue *as registere# in a s!ecial o$$ice' This *as a# antageous to those *ho !resente# such s!ecial gi$ts' For others+ the !resents *ere $airly assesse# (y the con$i#ants o$ the court' Then the assessment *as registere#' Achaemenian monarchs *ere the $irst to insure their !eo!le an# ma#e it o$$icial (y in s!ecial o$$ices'The !ur!ose o$ registering *as that *hene er the !erson *ho !resente# the gi$t registere# (y the court *as in trou(le+ the monarch an# the
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court *oul# hel! him' =ahe9+ a historian an# *riter+ *rites in one o$ his (oo)s on ancient Iran: ><hene er the o*ner o$ the !resent is in trou(le or *ants to construct a (uil#ing+ set u! a $east+ ha e his chil#ren marrie#+ etc' the one in charge o$ this in the court *oul# chec) the registration' I$ the registere# amount e,cee#e# 11+111 #erri)+ he or she *oul# recei e an amount o$ t*ice as much'> A thousan# years later+ the inha(itants o$ Rho#es in ente# the conce!t o$ the ?general a erage?' Merchants *hose goo#s *ere (eing shi!!e# together *oul# !ay a !ro!ortionally #i i#e# !remium *hich *oul# (e use# to reim(urse any merchant *hose goo#s *ere "ettisone# #uring storm or sin)age'The Gree)s an# Romans intro#uce# the origins o$ health an# li$e insurance c' @11 AA *hen they organi9e# guil#s calle# >(ene olent societies> *hich care# $or the $amilies an# !ai# $uneral e,!enses o$ mem(ers u!on #eath' Guil#s in the mi##le ages ser e# a similar !ur!ose' 3e!arate insurance contracts *ere in ente# in Genoa in the 16th century+ as *ere insurance !ools (ac)e# (y !le#ges o$ lan#e# estates' These ne* insurance contracts allo*e# insurance to (e se!arate# $rom in estment+ a se!aration o$ roles that $irst !ro e# use$ul in marine insurance' Insurance (ecame $ar more so!histicate# in !ost-renaissance Buro!e+ an# s!eciali9e# arieties #e elo!e#' The $irst insurance com!any in the Cnite# 3tates un#er*rote $ire insurance an# *as $orme# in 7harles to*n %mo#ern-#ay 7harleston&+ 3outh 7arolina+ in 1542' Ben"amin Fran)lin hel!e# to !o!ulari9e an# ma)e stan#ar# the !ractice o$ insurance+ !articularly against $ire in the $orm o$ !er!etual insurance' In
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15.2+ he $oun#e# the Phila#el!hia contri(ution shi! $or the insurance o$ houses $rom loss (y $ire' Fran)lin?s com!any *as the $irst to ma)e contri(utions to*ar# $ire !re ention' Not only #i# his com!any *arn against certain $ire ha9ar#s+ it re$use# to insure certain (uil#ings *here the ris) o$ $ire *as too great+ such as all *oo#en houses' Nominee o$ the assure# coul# get the !olicy alue either at maturity or (y installments an# an agree# (onus'
HISTORY OF RE-INSURANCE
The #e elo!ment o$ a reinsurance mar)et too) a roc)ier roa#' Reinsurance o$ marine ris)s is thought to (e is ol# as commercial insurance+ (ut it *as not until 10@6 that the !ractice in the CD *as legalise# an# the (an on marine reinsurance *as remo e#' Pre iously+ reinsurance ha# (een consi#ere# as a $orm o$ gam(ling' As reinsurance o$ $ire (usiness a!!eare# unattracti e to CD insurers+ coinsurance remaine# a more common *ay o$ s!rea#ing the ris)' Insurers *ishing to s!rea# their ris)s then ha# to turn to the continental merchant (an)s $or their reinsurance !rotection' It *as in continental Buro!e+ in the early 1 3OPs+ that automatic treaty reinsurance *as $irst #e elo!e# an# there are numerous e,am!les on recor# o$ $acultati e an# treaty reinsurance arrangements at that time' /o*e er+ it too) until 10.2 $or the $irst in#e!en#ent reinsurance com!any to (e esta(lishe#+ an# that com!any *as the Ruch ersicherrungs Gesellscha$t o$ 7ologne' 3e eral German com!anies+ inclu#ing the Aachener Ruc)+ $ollo*e# suit+ !ro ing themsel es to he as !ro#ucti e as their $orerunner' Cn$ortunately+ British reinsurers *ho #eci#e# to enter the $iel# $oun# that their initial e,!eriences *ere not so $ortuitous' In the 1 051s+ 8uite soon a$ter setting u!+ a num(er o$ CD reinsurance com!anies *ent into li8ui#ation' I)e reasons $or heir lac) o$ success are not altogether clear+ (ut the CD retaine# its role as a mo#est reinsurance mar)et
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$or some time+ *ith its Buro!ean counter!arts continuing to hol# the stronger mar)et !osition' It is in 1001 that *e $in# the earliest trace o$ e,cess o$ loss reinsurance+ as esta(lishe# (y Mr 7uth(ert /eath o$ -loy#s+ an# nor until 1E15 #o *e $in# the esta(lishment o$ Britains ol#est an# longest o!erating reinsurance com!any+ the Mercantile an# General' Then came the First <orl# <ar+ *hich (rought *ith it a curtailment in tra#ing relationshi!s (et*een the CD an# its !rimary reinsurance mar)ets' This $orce# com!anies to loo) *ithin their o*n national (oun#ary $or co er an# -loy#s+ a late entrant to the reinsurance mar)et+ (egan to ta)e a more acti e role+ attracting a large olume o$ (usiness $rom the Cnite# 3tates o$ America' By the en# o$ the 3econ# <orl# <ar -on#on ha# success$ully esta(lishe# itsel$ at the heart o$ the international reinsurance mar)et' The 7ity o$ -on#on ha# (ecome the centre $or reinsurance ca!acity an# e,!ertise+ *ith ca!ital !ro i#e# (y British an# o erseas com!anies an# also those many in#i i#uals *ho *ere mem(ers at -loy#s' Other reinsurance mar)ets o erseas+ !articularly in Germany an# the Cnite# 3tates+ continue# to #e elo! their ma"or #omestic reinsurance mar)ets
LITERATURE RE;IEW
WHAT IS REINSURANCE<
R#$%&'()%*# is a means (y *hich an insurance com!any can !rotect itsel$ against the ris) o$ losses *ith other insurance com!anies' In#i i#uals an# cor!orations o(tain insurance !olicies to !ro i#e !rotection $or arious ris)s %hurricanes+ earth8ua)es+ la*suits+ collisions+ sic)ness an# #eath+ etc'&' Reinsurers+ in turn+ !ro i#e insurance to insurance com!anies Reinsurance hel!s !rimary insurers to re#uce their ca!ital costs an# raise their un#er*riting ca!acity since ma"or ris)s are trans$erre# to reinsurers; the !rimary insurer no longer nee#s to retain ca!ital on its (alance sheet to co er them' Reinsurance thus ser es the !rimary insurer as an e8uity su(stitute an# !ro i#es a##itional un#er*riting ca!acity' This in#irect ca!ital is chea!er $or the !rimary insurer than (orro*ing e8uity+ since reinsurers can o$$er to assume ris)s at more $a ora(le rates than)s to their su!erior ris) #i ersi$ication' The a##itional un#er*riting ca!acity !ermits the !rimary insurers to assume a##itional ris)s *hich *ithout reinsurance they *oul# either ha e to re$use or *hich *oul# com!el them to !ro i#e a lot more o$ their o*n ca!ital' In a glo(ali9e# *orl#+ in *hich !otential $inancial claims are stea#ily rising an# in *hich the limits o$ insura(ility are (eing constantly e,ten#e#+ reinsurance thus assumes a ma"or signi$icance $or the *hole economy'
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T8=#& -1 (#$%&'()%*#
F T(#),8 )%9 F)*'6,),$/# R#$%&'()%*# The t*o (asic ty!es o$ reinsurance arrangements are ,(#),8 an# 1)*'6,),$/# (#$%&'()%*#'
I% ,(#),8 (#$%&'()%*#+ the ce#ing com!any is contractually (oun# to ce#e

an# the reinsurer is (oun# to assume a s!eci$ie# !ortion o$ a ty!e or category o$ ris)s insure# (y the ce#ing com!any' Treaty reinsurers+ inclu#ing the 37OR Grou!+ #o not se!arately e aluate each o$ the in#i i#ual ris)s assume# un#er their treaties an#+ conse8uently+ a$ter a re ie* o$ the ce#ing com!any?s un#er*riting !ractices+ are #e!en#ent on the original ris) un#er*riting #ecisions ma#e (y the ce#ing !rimary !olicy *riters' 3uch #e!en#ence su("ects reinsurers in general+ inclu#ing 37OR+ to the !ossi(ility that the ce#ing com!anies ha e not a#e8uately e aluate# the ris)s to (e reinsure# an#+ there$ore+ that the !remiums ce#e# in connection there*ith may not a#e8uately com!ensate the reinsurer $or the ris) assume#' The reinsurer?s e aluation o$ the ce#ing com!any?s ris) management an# un#er*riting !ractices as *ell as claims settlement !ractices an# !roce#ures+ there$ore+ *ill usually im!act the !ricing o$ the treaty'
I% 1)*'6,),$/# (#$%&'()%*#+ the ce#ing com!any ce#es an# the reinsurer

assumes all or !art o$ the ris) assume# (y a !articular s!eci$ie# insurance !olicy' Facultati e reinsurance is negotiate# se!arately $or each insurance contract that is reinsure#' Facultati e reinsurance normally is !urchase# (y
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ce#ing com!anies $or in#i i#ual ris)s not co ere# (y their reinsurance treaties+ $or amounts in e,cess o$ the monetary limits o$ their reinsurance treaties an# $or unusual ris)s' Cn#er*riting e,!enses an#+ in !articular+ !ersonnel costs+ are higher relati e to !remiums *ritten on $acultati e (usiness (ecause each ris) is in#i i#ually un#er*ritten an# a#ministere#' The a(ility to se!arately e aluate each ris) reinsure#+ ho*e er+ increases the !ro(a(ility that the un#er*riter can !rice the contract to more accurately re$lect the ris)s in ol e#'
In#i i#ual ris) re ie* Right to acce!t or re"ect each ris) on its o*n merit
No in#i i#ual ris) scrutiny (y the reinsurer O(ligatory acce!tance (y the reinsurer o$ co ere# (usiness A long-term relationshi! in *hich the reinsurers !ro$ita(ility is e,!ecte#+ (ut measure# an# a#"uste# o er an e,ten#e# !erio# o$ time -ess costly than G!er ris)H
A !ro$it is e,!ecte# (y the reinsurer in the short an# long term+ an# #e!en#s !rimarily on the reinsurers ris) selection !rocess A#a!ts to short-term ce#ing !hiloso!hy o$ the insurer

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A contract or certi$icate is *ritten to con$irm each transaction 7an reinsure a ris) that is other*ise e,clu#e# $rom a treaty 7an !rotect a treaty $rom a# erse un#er*riting results
reinsurance One contract encom!asses all su("ect ris)s
> !(-=(-,$-%)6 A%9 N-%-!(-=-#(,$-%)6 R#$%&'()%*# Both treaty an# $acultati e reinsurance can (e *ritten on a !ro!ortional+ or !ro rata+ (asis or a non-!ro!ortional+ or e,cess o$ loss or sto! loss+ (asis'
!(-=-(,$-%)6 Pro!ortional reinsurance %the ty!es o$ *hich are 8uota share I sur!lus reinsurance& in ol es one or more reinsurers ta)ing a state# !ercent share o$ each !olicy that an insurer !ro#uces %>*rites>&' This means that the reinsurer *ill recei e that state# !ercentage o$ each #ollar o$ !remiums an# *ill !ay that !ercentage o$ each #ollar o$ losses' In a##ition+ the reinsurer *ill allo* a >ce#ing commission> to the insurer to com!ensate the insurer $or the costs o$ *riting an# a#ministering the (usiness %agents? commissions+ mo#eling+ !a!er*or)+ etc'&' The insurer may see) such co erage $or se eral reasons' First+ the insurer may not ha e su$$icient ca!ital to !ru#ently retain all o$ the e,!osure that it is ca!a(le o$ !ro#ucing' For e,am!le+ it may only (e a(le to o$$er J1 million in co erage+ (ut (y !urchasing !ro!ortional reinsurance it might #ou(le or
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tri!le that limit' Premiums an# losses are then share# on a pro rata (asis' For e,am!le+ an insurance com!any might !urchase a .1K 8uota share treaty; in this case they *oul# share hal$ o$ all !remium an# losses *ith the reinsurer' In a 5.K 8uota share+ they *oul# share %ce#e& 4L6 o$ all !remiums an# losses' The other $orm o$ !ro!ortional reinsurance is sur!lus share or sur!lus o$ line treaty' In this case+ a retaine# GlineH is #e$ine# as the ce#ing com!any?s retention - say J111+111' In a E line sur!lus treaty the reinsurer *oul# then acce!t u! to JE11+111 %E lines&' 3o i$ the insurance com!any issues a !olicy $or J111+111+ they *oul# )ee! all o$ the !remiums an# losses $rom that !olicy' I$ they issue a J211+111 !olicy+ they *oul# gi e %ce#e& hal$ o$ the !remiums an# losses to the reinsurer %1 line each&' The ma,imum un#er*riting ca!acity o$ the ce#ant *oul# (e J 1+111+111 in this e,am!le' 3ur!lus treaties are also )no*n as aria(le 8uota shares' N-%-=(-=-(,$-%)6 Non-!ro!ortional reinsurance only res!on#s i$ the loss su$$ere# (y the insurer e,cee#s a certain amount+ calle# the retention or !riority' An e,am!le o$ this $orm o$ reinsurance is *here the insurer is !re!are# to acce!t a loss o$ J1 million $or any loss *hich may occur an# !urchases a layer o$ reinsurance o$ J6m in e,cess o$ J1 million - i$ a loss o$ J4 million occurs the insurer !ays the J4 million to the insure#%s&+ an# then reco ers J2 million $rom its reinsurer%s&' In this e,am!le+ the reinsure# *ill retain any loss e,cee#ing J. million unless they ha e !urchase# a $urther e,cess layer %secon# layer& o$ say J11 million e,cess o$ J. million' The main $orms o$ non-!ro!ortional reinsurance are e,cess o$ loss an# sto! loss' B,cess o$ loss reinsurance can ha e three $orms - >Per Ris) M-> %<or)ing M-&+ >Per
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Occurrence or Per B ent M-> %7atastro!he or 7at M-&+ an# >Aggregate M->' In !er ris)+ the ce#ants insurance !olicy limits are greater than the reinsurance retention' For e,am!le+ an insurance com!any might insure commercial !ro!erty ris)s *ith !olicy limits u! to J11 million an# then (uy !er ris) reinsurance o$ J. million in e,cess o$ J. million' In this case a loss o$ J@ million on that !olicy *ill result in the reco ery o$ J1 million $rom the reinsurer' In catastro!he e,cess o$ loss+ the ce#ants !er ris) retention is usually less than the cat reinsurance retention %this is not im!ortant as these contracts usually contain a 2 ris) *arranty i'e' they are #esigne# to !rotect the reinsure# against catastro!hic e ents that in ol e more than 1 !olicy&' For e,am!le+ an insurance com!any issues homeo*ner?s !olicies *ith limits o$ u! to J.11+111 an# then (uys catastro!he reinsurance o$ J22+111+111 in e,cess o$ J4+111+111' In that case+ the insurance com!any *oul# only reco er $rom reinsurers in the e ent o$ multi!le !olicy losses in one e ent %i'e'+ hurricane+ earth8ua)e+ $loo#+ etc'&' Aggregate M- a$$or# a $re8uency !rotection to the reinsure#' For instance i$ the com!any retains J1m net any one essel+ the co er J11m in the aggregate e,cess J.m in the aggregate *oul# e8uate to 11 total losses in e,cess o$ . total losses %or more !artial losses&' Aggregate co ers can also (e lin)e# to the ce#ant?s gross !remium income #uring a 12 month !erio#+ *ith limit an# #e#ucti(le e,!resse# as !ercentages an# amounts' 3uch co ers are then )no*n as >3to! -oss> or annual aggregate M-
R#,(-*#&&$-%
Reinsurance com!anies themsel es also !urchase reinsurance an# this is )no*n as a retrocession' They !urchase this reinsurance $rom other reinsurance com!anies' The reinsurance com!any *ho sells the reinsurance
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in this scenario are )no*n as Gretrocessionaires'H The reinsurance com!any that !urchases the reinsurance is )no*n as the Gretroce#ent'H It is not unusual $or a reinsurer to (uy reinsurance !rotection $rom other reinsurers' For e,am!le+ a reinsurer that !ro i#es !ro!ortional+ or pro rata+ reinsurance ca!acity to insurance com!anies may *ish to !rotect its o*n e,!osure to catastro!hes (y (uying e,cess o$ loss !rotection' Another situation *oul# (e that a reinsurer *hich !ro i#es e,cess o$ loss reinsurance !rotection may *ish to !rotect itsel$ against an accumulation o$ losses in #i$$erent (ranches o$ (usiness *hich may all (ecome a$$ecte# (y the same catastro!he' This may ha!!en *hen a *in#storm causes #amage to !ro!erty+ automo(iles+ (oats+ aircra$t an# loss o$ li$e+ $or e,am!le' This !rocess can sometimes continue until the original reinsurance com!any un)no*ingly gets some o$ its o*n (usiness %an# there$ore its o*n lia(ilities& (ac)' This is )no*n as a Gs!iralH an# *as common in some s!ecialty lines o$ (usiness such as marine an# a iation' 3o!histicate# reinsurance com!anies are a*are o$ this #anger an# through care$ul un#er*riting attem!t to a oi# it' <ell-*ritten so$t*are can either #etect reinsurance s!irals+ or !oor so$t*are *ill ignore it+ *ith the latter am!li$ying the e$$ect o$ s!iraling' In the 1E01s+ the -on#on mar)et *as (a#ly a$$ecte# (y the creation o$ reinsurance s!irals' This resulte# in the same loss going aroun# the mar)et there(y arti$icially in$lating mar)et loss $igures o$ (ig claims %such as the Pi!er Al!ha oil rig&' The -MM s!iral %as it *as calle#& has (een sto!!e# (y e,clu#ing retrocessional (usiness $rom reinsurance co ers !rotecting #irect insurance accounts'
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It is im!ortant to note that the insurance com!any is o(lige# to in#emni$y its !olicyhol#er $or the loss un#er the insurance !olicy *hether or not the reinsurer reim(urses the insurer' Many insurance com!anies ha e e,!erience# #i$$iculties (y !urchasing reinsurance $rom com!anies that #i# not or coul# not !ay their share o$ the loss %these un!ai# claims are )no*n as uncollecti(les&' This is !articularly im!ortant on long-tail lines o$ (usiness *here the claims may arise many years a$ter the !remium is !ai#' T(#),8 To o ercome the high a#ministration costs an# uncertainty o$ reinsuring large num(ers o$ in#i i#ual ris)s on a $acultati e (asis+ the reinsurance treaty came into (eing Pro!ortional treaties inclu#e 8uota shares+ arious le els o$ sur!luses an# $acultati e o(ligatory treaties' Non !ro!ortional treaties inclu#e ris) e,cess o$ losses+ catastro!he e,cess o$ losses+ sto! losses an# aggregate e,cesses' A !ro!ortional treaty may he re$erre# to as a !ro-rata or sur!lus lines or e,cess lines treaty' A nonN!ro!ortional treaty may (e re$erre# to as an e,cess o$ loss+ e,cess or ML- treaty or emit ram' The !arty !assing on lia(ility may (e terme# the ce#ant+ insure#+ reinsure# or retroce#ant an# the !arty acce!ting the lia(ility may (e terme# the reinsurer or retrocessionaire' A!art $rom the term ce#ant+ *hich can (e a!!lie# to all !arties !assing on lia(ility+ the terminology use# #e!en#s on *here the !arty is in the chain o$ reinsurance (uying an# selling'
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F$%)%*$)6 (#$%&'()%*#
F$%)%*$)6 R#$%&'()%*#+ also )no*n as ?$in re?+ is a $orm o$ reinsurance *hich is $ocuse# more on ca!ital management than on ris) trans$er' In the non-li$e segment o$ the insurance in#ustry this class o$ transactions is o$ten re$erre# to as $inite reinsurance' One o$ the !articular #i$$iculties o$ running an insurance com!any is that its $inancial results - an# hence its !ro$ita(ility - ten# to (e une en $rom one year to the ne,t' 3ince insurance com!anies generally *ant to !ro#uce consistent results+ they may (e attracte# to *ays o$ hoar#ing this year?s !ro$it to !ay $or ne,t year?s !ossi(le losses %*ithin the constraints o$ the a!!lica(le stan#ar#s $or $inancial re!orting&' Financial reinsurance is one means (y *hich insurance com!anies can >smooth> their results' A !ure ?$in re? contract $or a non-li$e insurer ten#s to co er a multi-year !erio#+ #uring *hich the !remium is hel# an# in este# (y the reinsurer' It is returne# to the ce#ing com!any - minus a !re-#etermine# !ro$it-margin $or the reinsurer - either *hen the !erio# has ela!se#+ or *hen the ce#ing com!any su$$ers a loss' ?Fin re? there$ore #i$$ers $rom con entional reinsurance (ecause most o$ the !remium is returne# *hether there is a loss or not: little or no ris)-trans$er has ta)en !lace' In the li$e insurance segment+ $in re is more usually use# as a *ay $or the reinsurer to !ro i#e $inancing to a li$e com!any+ much li)e a loan e,ce!t that the reinsurer acce!ts some ris) on the !ort$olio o$ (usiness reinsure# un#er the $in re contract' Re!ayment o$ the $in re is usually lin)e# to the !ro$it !ro$ile o$ the (usiness reinsure# an# there$ore ty!ically ta)es a num(er o$ years' Fin re is use# in !re$erence to a !lain loan (ecause
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re!ayment is con#itional on the $uture !ro$ita(le !er$ormance o$ the (usiness reinsure# such that+ in some regimes+ it #oes not nee# to (e recognise# as a lia(ility $or !u(lishe# sol ency re!orting' ?Fin re? has (een aroun# since at least the 1E@1s+ *hen -loy#?s syn#icates starte# sen#ing money o erseas as reinsurance !remium $or *hat *ere then calle# ?roll-o ers? - multi-year contracts *ith s!ecially-esta(lishe# ehicles in ta,-light "uris#ictions such as the 7ayman Islan#s' These #eals *ere legal an# a!!ro e# (y the CD ta,-authorities' /o*e er they $ell into #isre!ute a$ter some years+ !artly (ecause their ta,-a oi#ing moti ation (ecame o( ious+ an# !artly (ecause o$ a $e* cases *here the o erseas $un#s *ere si!hone#-o$$ or sim!ly stolen' More recently+ the high-!ro$ile (an)ru!tcy o$ the /I/ grou! o$ insurance com!anies in Australia re eale# that highly 8uestiona(le transactions ha# (een !ro!!ing-u! the (alance-sheet $or some years !rior to $ailure' To (e clear+ although fin re contracts *ere in ol e#+ it *as the 1()'9'6#%, )**-'%,$%7 $or those contracts - an# %-, the actual use o$ fin re - *hich *as the !ro(lem' As o$ =une 211@+ General Re an# others are (eing sue# (y the /I/ li8ui#ator in connection *ith the $rau#ulent !ractices'
21
A REINSURANCE !ROGRAMME
22
23
B)&$& -1 I%&'()%*# )%9 N##9 1-( R#$%&'()%*#

General insurance (usiness is still largely untouche# (y the #isci!line o$ a mathematical (ase' It is o( ious that insurance o!erates on the la* o$ !ro(a(ility' The ris) !remium shoul# re!resent the sum total e,!ecte# alue o$ loss #uring a year using the !ro(a(ility o$ occurrence o$ losses o$ #i$$erent magnitu#es a$$ecting the ris)' In !ractice+ this estimation is #eri e# $rom the o(ser e# inci#ence o$ losses on the insure# !ort$olio' B en i$ an accurate mathematical #etermination o$ the e,!ecte# alue o$ loss (e !ossi(le+ the actual o(ser e# losses *ill (e #i$$erent $rom this $igure' The e,tent o$ ariation *ill #e!en# on the si9e o$ the insure# !ort$olio' The $inancial im!act o$ such ariation must (e )e!t *ithin the sustaining reason $or limiting e,!osure to loss on one ris) accor#ing to a sche#ule o$ retentions' 3ince a large num(er o$ ris)s o$$ere# insurance in !ractice e,cee# the retention ca!acity o$ a com!any+ reinsurance (ecomes essential $or any com!anys o!eration'
G--9 R#$%&'()%*# M)%)7#0#%,

O!timi9ation o$ a com!anys !ro$its an# gro*th !ros!ects in ol e o!timi9ation o$ its retention an# #esigning o$ its reinsurance !rogram to (est a# antage' Reinsurance shoul# not (e limite# to getting ri# o$ the !ortion o$ ris) that cannot (e retaine#' It shoul# contri(ute more !ositi ely to the com!anys !ros!erity' 3ince the nature o$ a com!anys !ort$olio is generally not static+ the reinsurance arrangements ha e to (e )e!t un#er re ie* continuously' /ence+ the conce!t o$ #ynamic reinsurance management is im!ortant'
24
The o("ecti es o$ a goo# reinsurance !rogram are as $ollo*s: %a& Pro i#e a#e8uate reinsurance ca!acity to ena(le the (usiness o$ #i$$erent (ranches to o!erate *ithout any han#ica!s' %(& Pro i#e ma,imum !ossi(le $ree#om in rating an# claims settlement' %c& Facilitate #e elo!ment o$ )no*le#ge an# s)ills $or the un#er*riting sta$$' %#& /el! the com!any to o!timi9e its retention (oth in terms o$ !remium as *ell as !ro$its' Progressi e increase in retention *ithout #isru!tion o$ arrangements shoul# (e !ossi(le' %e& Bnsure sta(le reinsurance arrangements (oth *ith regar# to a aila(ility o$ co er as *ell as terms' %$& /el! minimi9e !ro$it ce#e# on reinsurances !lace#' 3uch minimi9ation shoul# (e e8uita(le an# shoul# not (e entirely su("ect to $orces' %g& Bsta(lish (usiness relationshi!s *ith reinsurers o$ the highest stan#ing' Reinsurers *ho *ill *illingly an# rea#ily honour their o(ligations+ *ho *ill ta)e a long-term ie* an# stan# (y the com!any' %h& Generate a $lo* o$ satis$actory in*ar# reinsurance (usiness' 3uch (usiness *ill hel! to im!ro e the s!rea# an# (alance the net retaine# account an# shoul# hel! to increase net !remium an# !ro$its' i& Dee! a#ministration o$ reinsurance sim!le an# economic'
25
!(-=#( R#,#%,$-% !-6$*8

Reinsurance is not the means to get-ri#-o$ (a# (usiness' Automatic reinsurance arrangements are li)e !ro#ucts manu$acture# (y an in#ustrial com!any' 3imilar attention to 8uality o$ !ro#uct an# the re!utation o$ the com!any is necessary' <hen there *as easy a aila(ility o$ reinsurance %*hich may not continue $or e er& some com!anies ha e (een a(le to e,!an# !remium olume *ithout attention to 8uality an# ha e !ro#uce# goo# net results (y )ee!ing ery lo* retentions an# reinsuring out' /o*e er+ this is a #angerous management !olicy an# e,!oses the entire $uture o$ the com!any to the o!eration o$ mar)et $orces' The reinsurance !rogram shoul# (e (ase# on a soun# retention !olicy' The sche#ule o$ retentions is (ase# on the $ollo*ing $actors: %a& 7a!ital an# sur!lus $un#s %h& 7om!le,ion o$ the !ort$olio i'e'+ num(er o$ ris)s+ ty!es o$ ris)s+ !remium olume+ a#e8uacy o$ terms+ catastro!he e,!osures+ etc' %c& Management !olicy in ris)-ta)ing' Retaining much lo*er than "usti$ie# (y these $actors can insulate the com!any $rom the e$$ects o$ (a# un#er*riting an# encourage a rec)less #e elo!ment !olicy' /igh !ro$ita(ility cannot "usti$y retaining much more than technically $easi(le' /o*e er+ in res!ect o$ a O!ort$olio o$ !ro$ita(le (usiness *ith normal e,!osure o$ losses+ it is !ossi(le to increase the net retention to a higher $igure (ase# on the s!rea# o 2r a !erio# o$ $i e years *ith a suita(le *or)ing e,cess o$ loss !rotection' <or)ing e,cess o$ loss reinsurance is also the more a!!ro!riate metho# o$ )ee!ing a reasona(le
26
retention in classes such as marine cargo or motor insurance' /o*e er+ it can cause re#uction o$ net retaine# !ro$its in some circumstances $or (usiness such as marine hull' -in)e# *ith #etermination o$ the si9e o$ retention is the #ecision !attern o$ reinsurance !rotection' It coul# either (e the normal metho# o$ !ro!ortional reinsurance *ith only catastro!he !rotection $or the net account or it coul# (e an enlarge# retention *ith e,cess o$ loss !rotection an# !ro!ortional reinsurance (eyon# the retention or it coul# (e !rimarily e,cess o$ loss !rotection *ith some control on e,!osure through !ro!ortional reinsurance' 3election o$ the most a!!ro!riate system o$ reinsurance #e!en#s on the nature o$ the !ort$olio+ its !attern o$ e,!osure an# losses'
27
THE REINSURANCE MAR?ETS

The e,istence o$ a mar)et #oes not re8uire the !resence o$ (uyers an# sellers in one !articular (uil#ing or area; the main criterion $or its success$ul o!eration is that tra#ers can communicate to transact (usiness' It coul# (e sai# that there is really only one reinsurance mar)et that is the *orl#*i#e mar)et' Accor#ing to a 3*iss Reinsurance stu#y+ the *orl#*i#e #eman# $or reinsurance in 1EE2 *as some Jl.O(n %-lOO(n&+ *ith the to! 11 mar)ets accounting $or three 8uarters o$ the total' The C3 remains (y $ar the (iggest !urchaser at J64'4(n+ $ollo*e# (y Germany at 24'0(n an# the CD at J1@'6(n'The reinsurance mar)et%s& o!erate in a constantly changing en ironment' <hat ma)es a ris) attracti e to reinsurers to#ay+ may ma)e it unattracti e tomorro* an# ta, regulations+ accounting an# legal !rocesses all ha e an e$$ect on reinsurers attitu#e to ris)' As one mar)et contracts+ another e,!an#s+ ta)ing u! the sur!lus ca!acity *hich o er-s!ills an#+ *ith the current harmonising o$ BC insurance an# reinsurance regulations+ this may also (ring a(out $urther changes *hich *ill in$luence reinsurers $uture (usiness strategies' The $i e main international tra#ing areas or mar)ets o$ Reinsurance F The Cnite# Ding#om F The 7ontinent o$ Buro!e F The Cnite# 3tates o$ America F The Far Bast F O$$shore'
28
T2# U%$,#9 ?$%79-0 -on#on is an international centre $or the !lacing o$ !rotections $or insurance an# reinsurance com!anies throughout the *orl#' It has a re!utation $or the strength o$ its security an# its inno ati e style o$ un#er*riting+ lea#ing the *ay in electronic ris) !lacement an# electronic claim a# ice an# settlement systems' The -on#on Mar)ets un#er*riting resources are !ro#uce# (y -loy#s an# the com!any mar)et+ an# in 1EE2 the total mar)et generate# a gross !remium income o$ a!!ro,imately -11'0(n %3*iss Re 3tu#y&; .2 !er cent *as *ritten (y com!anies an# PII clu(s an# 60 !er cent (y -loy#s' The uni8ueness o$ the -loy#s o!eration an# the !osition o$ the surroun#ing reinsurance com!anies is consi#ere# to ha e ma#e -on#on the ma"or reinsurance centre it is to#ay'
T2# C-%,$%#%, -1 E'(-=# There is a ast amount o$ reinsurance ca!acity a aila(le $rom the large num(er o$ insurance an# reinsurance com!anies o!erating on the 7ontinent' In Germany the mar)et is #ominate# (y the largest reinsurance com!any in the *orl#+ the Munich Re' The 7ologne Re+ /anno er Re I Bisen I 3tahl an# Gerling Glohale Re ran) among the to! 11 in the *orl# league ta(le o$ reinsurance com!anies In 3*it9erlan# the mar)et is #ominate# (y the 3*iss Re+ *hich ran)s secon# in the *orl# an# *rites a!!ro,imately @. !er cent o$ 3*it9erlan#s reinsurance !remiums' The <interthur Grou! is (ase# there too'
29
France+ Italy an# /ollan# also !ro i#e su(stantial amounts o$ international ca!acity through com!anies such as 3cor 3A Grou!+ Generali an# NRG' Many continental com!anies+ !articularly in Germany+ ha e #e elo!e# their reinsurance accounts through strong #omestic insurance !ort$olios' 3ome o$ the #irect accounts *ere (uilt u! through lin)s *ith !articular sections o$ in#ustry an# commerce+ e'g' tra#e unions an# tra#e associations' 7om!anies (ase# in countries such as 3*it9erlan#+ *ith a relati ely small #omestic mar)et+ #e elo!e# *ith the hel! o$ a *i#ely s!rea# international net*or) o$ o$$ices' Many ma"or continental com!anies ha e also set u! CD registere# com!anies+ *hich acce!t (usiness in the -on#on mar)et' Reinsurers recei e o$$ers o$ reinsurance #irect $rom ce#ants an# $rom #omestic an# international (ro)ers' In a##ition+ ris) !lacement ia electronic net*or)s shoul# also (e a aila(le to continental (ase# un#er*riters *hen CRP IAs Buro!ean mar)et strategy comes to $ruition' An increasing num(er o$ reinsurers an# (ro)ers are mem(ers o$ the l4russels (ase# net*or)+ RINBT %Reinsurance an# Insurance Net*or)&'
T2# U%$,#9 S,),#& -1 A0#($*)

The Cnite# 3tates is mainly a #omestic reinsurance mar)et an# the largest mar)et o$ its )in# in the *orl#' The high olume o$ #omestic (usiness an# the continental s!rea# o$ ris) has encourage# this #e elo!ment+ an# the amount *hich is reinsure# internationally+ es!ecially *ith -loy#s an# -on#on com!anies+ is su(stantial'
30
The com!arati ely small olume o$ (usiness *hich it acce!ts $rom outsi#e its (oun#aries is continuing to gro*' Its to! t*o reinsurers+ Bm!loyers Re an# General Re+ are among the to! 11 largest glo(al reinsurance com!anies in the *orl#' Insurance legislation is mainly a matter $or the in#i i#ual state+ *ith the Fe#eral go ernment ta)ing a role in (roa#er constitutional matters' Reinsurance o!erations can (e #i i#e# into a#mitte# an# non-a#mitte# reinsurers' A#mitte# reinsurers are license# in at least one state an# inclu#e GalienH+ or non-C3+ com!anies an# -loy#s un#er*riters' Non-a#mitte# reinsurers are not license# in any state+ (ut o!erate su("ect to com!liance *ith arious re8uirements im!ose# (y the insurance #e!artments *ithin each state' All states are mem(ers o$ the National Association o$ Insurance 7ommission *hich is a $orum $or #iscussing as!ects o$ insurance regulations+ inclu#ing securities aluation an# accounting !ractices' Its stan#ar#s $orm the (asis $or many state regulations' Business throughout the C3 can (e con#ucte# #irect *ith reinsurance !ro$essionals+ through reci!rocal e,changes or through #omestic an# international (ro)ers' O er the years a num(er o$ American (ro)ers ha e #e elo!e# into large international organisations+ mainly through com!any mergers an# ac8uisitions' The t*o main associations re!resenting the American reinsurance mar)et are BRM'A %Bro)ers I Reinsurers Mar)et Association&+ an# RAA %Reinsurance Association o$ America&' BRMA is ma#e u! o$ lea#ing C3 reinsurance
31
(ro)ers an# (ro)er orientate# reinsurers+ an# the RAA re!resents all the ma"or C3 reinsurance com!anies'
T2# F)( E)&,

The main insurance centres in the Far Bast are situate# in =a!an an# /ong Dong an#+ although their international reinsurance mar)ets are still relati ely small+ they are consi#ere# to ha e consi#era(le gro*th !otential' =a!an is one o$ the most highly regulate# insurance mar)ets in the *orl# an# all its #omestic insurers acce!t (oth insurance an# reinsurance (usiness' Quota shares o$ mar)et*i#e !ools an# reci!rocal e,changes o$ (usiness ha e ensure# a *ell-s!rea# #omestic account $or insurers' Base# on net *ritten !remium income in 1EE6+ the To)io Marine an# Fire+ Toa Fire I Marine an# :asu#a Fire I Marine are three o$ its to! reinsurance *riters+ the To)io an# Toa (eing among the to! 1. largest reinsurance com!anies in the *orl#' There are only t*o !ro$essional reinsurance com!anies+ the Toa an# =a!an Barth8ua)e Re+ the latter acce!ting only #omestic earth8ua)e (usiness' It *as through reci!rocal e,changes on their !ro!ortional treaty (usiness that =a!an $irst entere# the international mar)ets' Non-reci!rocal (usiness+ !articularly catastro!he e,cess o$ loss !rotection+ is no* $reely !lace# an# although there is consi#era(le reinsurance ca!acity in To)yo+ international reinsurance has not !ro e# to (e !articularly attracti e to =a!anese com!anies'
32
Reinsurance (ro)ers $eature hea ily in ser icing the =a!anese mar)et' The main mar)et association to *hich all =a!anese !ro!ertyLcasualty insurance com!anies (elong is the Marine an# Fire Insurance Association o$ =a!an' /ong Dong has esta(lishe# itsel$ as a regional insurance centre $or the Asia Paci$ic Rim an# in 1EE4 there *ere 226 authorise# insurers' There are a!!ro,imately 11 reinsurance com!anies (ase# in /ong Dong+ *hich ha e tra#itionally ser ice# northern Asia+ 7hina+ Dorea+ Tai*an+ the Phili!!ines an# Thailan#'
O11&2-(# 0)(@#,&
A large+ an# gro*ing num(er o$ go ernments aroun# the *orl# ha e set u! international $inancial centres or Gha ensH+ *ith the !ur!ose o$ encouraging+ through ta, incenti es an# other $inancial (ene$its+ ca!ti e insurance com!anies an# reinsurance o!erations into their country' A ca!ti e insurance com!any is o*ne# (y a com!any+ or com!anies+ not !rimarily engage# in the (usiness o$ insurance+ an# all+ or a ma"or !ortion o$ the ris)s acce!te# (y the ca!ti e relate to the ris)s o$ its !arent an# a$$iliate# com!anies' The ra!i# gro*th o$ the ca!ti e insurance in#ustry is relati ely recent an# in 1EE@ there *ere a!!ro,imately 4+@11 ca!ti es *orl#*i#e' The rise in !o!ularity o$ esta(lishing ca!ti es in o$$shore #omiciles can (e attri(uta(le to the less restricti e insurance regulations+ $ree#om $rom e,change control+ an# the a(sence or lo* rates o$ ta,ation *hich a!!ly' The ma"or o$$shore centres arc situate# in:
33
N Bermu#a N The 7ayman Islan#s N Guernsey N Isle o$ Man' Bermu#a is the largest o$ the o$$shore mar)ets+ housing o er 1211 ca!ti es' It is hea ily su!!orte# (y the C3 an# it is estimate# that t*o-thir#s o$ all C3 $oreign reinsurance $lo*s through the islan#' The islan# has also (ecome a ma"or reinsurance mar)et an# has attracte# a num(er o$ highly ca!italise# reinsurance com!anies *ith high le els o$ international reinsurance ca!acity' The 1EE6 net !remium income *ritten (y international insurance an# reinsurance com!anies *as "ust o er J10'0 (illion' The Bermu#a (ase# 7entre Re is inclu#e# in 3tan#ar# an# Poors to! 41 reinsurers in the *orl#' Other $inancial centres+ *hich may (e inclu#e# in the e er-lengthening list o$ o$$shore #omiciles+ are situate# in:
R R
Au(lin -u,em(ourg'
34
R#$%&'()%*# C-%,()*,&
The relationshi! (et*een the insurer an# reinsurer rests u!on the *or#ings o$ the contracts+ *hich consist o$ im!ortant ingre#ients such as !remium+ commission+ retention an# limit' The )ey lies in clarity *hile #ra$ting the contract+ the a(sence o$ *hich+ results in a #is!ute later on' The negotiating !rocess !lays an im!ortant role *hile #ra$ting the contract' There$ore+ senior e,ecuti es o$ (oth the !arties shoul# ta)e a lea# role in the !rocess an# i#enti$y the loo!holes in the contract an# lea e no communication ga!' Reinsurance generally o!erates un#er the same legal !rinci!les as insurance+ an# reinsurance agreements+ as *ith any legally (in#ing contract+ must satis$y $un#amental criteria to ensure that a ali# contract is $orme#' In or#er to #eci#e *hether a contract has (een entere# into+ it is necessary to esta(lish that the (asic elements o$ o$$er+ acce!tance an# an intention to $orm a legal relationshi! are !resent' A $urther essential element in esta(lishing a contract is Gconsi#erationH+ *hich in insurance an# reinsurance contracts e8uates to the !remium' This is the missing ingre#ient in the $ormation o$ !ro!ortional reinsurance agreements such as 8uota share an# sur!lus treaties an#+ there$ore+ these treaties are terme# contracts $or reinsurance' <hereas other contracts+ such as $acultati e an# e,cess o$ loss agreements+ are terme# contracts o$ reinsurance' A contract $or reinsurance (ecomes a contract o$ reinsurance as each in#i i#ual cession is ce#e# to the treaty an# !remium (ecomes #ue' A ali# insurance contract must a##itionally satis$y the $ollo*ing criteria:
35
There must (e an insura(le interest in the ris)' The !rinci!les o$ in#emnity must (e o(ser e#' The !rinci!le o$ utmost goo# $aith must (e o(ser e#'
A (reach o$ the !rinci!le o$ utmost goo# $aith or+ to gi e it its -atin name+ u(errimae $i#ei+ has (een the groun#s $or many a legal (attle (et*een contracting !arties' The !rinci!le o$ u(errimae $i#ei is !ro(a(ly a more onerous one in reinsurance negotiations than insurance+ #ue to the *ay in *hich reinsurance (usiness is transacte#' In or#er that the !rinci!le may (e satis$ie#+ all material $acts relating to the ris) must (e #isclose# to un#er*riters; it is not a re8uirement that un#er*riters must as) the right 8uestions to unco er the $acts' In#ee#+ silence can amount to misre!resentation+ in the sense that non#isclosure o$ some material $act (y one o$ the !arties to the contract *ill gi e rise to a reme#y $or the in"ure# !arty' O<here a (ro)er is in ol e# in negotiating terms+ !otential reinsurers must (e in$orme# o$ all material $acts *hich the ce#ant has #isclose# to the (ro)er' <hether a non-#isclose# $act is material or not is o$ten #eci#e# (y the legal courts'
36
MAR?ET SHARE OF REINSURERS
37
W-(69.& T-= A0 R#$%&'(#(&

Ran) 7om!any 1 2 4 6 . @ 5 0 E 11 3*iss Re Grou! Munich Re Grou! /anno er Re Grou! Ber)shire /atha*ayLGen Re Grou! -loy#?s o$ -on#on M- Re B erest Re Grou! -t#' PartnerRe -t#' Transatlantic /ol#ings Inc' A7B Tem!est Reinsurance -t#' Net !remiums *ritten J25+@01+1EE+211 J24+5@1+1@1+611 JE+@@1+4E2+61@ JE+6E1+111+111 J@+E60+6@@+011 J.+112+E11+111 J4+E52+161+111 J4+@1.+050+111 J4+6@@+4.4+111 J2+060+5.0+111
38
The gro*th o$ insurance !remium (y years is sho*n on the $ollo*ing chart:
39
R#$%&'()%*# I% I%9$)
GIC RE
General Insurance 7or!oration o$ In#ia %GI7& has assume# the role o$ National Reinsurer $or the mar)et' It !ro i#es treaty an# $acultati e ca!acity to the insurance com!any' It continues to manage /ull Pool on (ehal$ o$ the mar)et %mainly !u(lic sector Insurance com!anies&' The Pool recei e# cession on $i,e# !ercentage (asis $rom #irect com!anies an# a$ter !rotection; the (usiness is retro-ce#e# (ac) to mem(er com!anies' -arge ris)s o!t $or Pac)age Policies+ insurance terms $or *hich are o(taine# $rom International Mar)et' Bach #irect *riting com!any arranges sur!lus treaties an# e,cess o$ loss !rotection'GI7 arranges mar)et sur!lus treaty $or Pro!erty+ 7argo+ an# Miscellaneous acci#ent (usiness an# #irect com!any can utili9e the mar)et sur!lus utili9e treaties other a$ter utili9ation com!anies o$ their net o*n treaties' retention' Pu(lic sector Insurance com!anies are a#o!ting inter-com!any cession to GI7 arrange e,cess o$ loss !rotection $rom International mar)et'
REINSURANCE REGULATION
40
The !lacement o$ reinsurance (usiness $rom the In#ian mar)et is no* go erne# (y Reinsurance Regulations $orme# (y the IRAA' The o("ecti e o$ the regulation is to ma,imi9e the retention o$ !remiums *ithin the country
Placement o$ 21K o$ each !olicy *ith National Re su("ect to a monetary limit $or each ris) $or some classes Inter-com!any cession (et*een $our !u(lic sector com!anies' In#ian Pool $or /ull manage# (y GI7' The treaty an# (alance ris) a$ter automatic ca!acity are to (e $irst o$$ere# to other insurance com!anies in the mar)et (e$ore o$$ering it to international re-insurers' Not more than 11K o$ reinsurance !remium to (e !lace# *ith one reinsurer
!(-*#9'(# ,- :# F-66-3#9 1-( R#$%&'()%*# A(()%7#0#%,& )& =#( IRDA

The Reinsurance Program shall continue to (e gui#e# (y a& Ma,imi9e retention *ithin the country; (& Ae elo! a#e8uate ca!acity; c& 3ecure the (est !ossi(le !rotection $or the reinsurance costs incurre#; #& 3im!li$y the a#ministration o$ (usiness B ery insurer shall maintain the ma,imum !ossi(le retention commensurate *ith its $inancial strength an# olume o$ (usiness' The Authority may re8uire an insurer to "usti$y its retention !olicy an# may
41
gi e such #irections as consi#ere# necessary in or#er to ensure that the In#ian insurer is not merely $ronting $or a $oreign insurer'
B ery insurer shall ce#e such !ercentage o$ the sum assure# on each !olicy $or #i$$erent classes o$ insurance *ritten in In#ia to the In#ian insurer as may (e s!eci$ie# (y the Authority in accor#ance *ith the !ro isions o$ Part lS-A o$ the Insurance Act+ 1E40' The reinsurance !rogram o$ e ery insurer shall commence $rom the (eginning o$ e ery $inancial year an# e ery insurer shall su(mit to the Authority+ his reinsurance !rograms $or the $orthcoming year+ 6. #ays (e$ore the commencement o$ the $inancial year' <ithin 41 #ays o$ the commencement o$ the $inancial year+ e ery in surer shall $ile *ith the Authority a !hotoco!y o$ e ery reinsurance treaty sli! an# e,cess o$ loss co er co ernote in res!ect o$ that year together *ith the list o$ reinsurers an# their shares in the reinsurance arrangement' The Authority may call $or $urther in$ormation or e,!lanations in res!ect o$ the reinsurance !rogram o$ an insurer an# may issue such #irection+ as it consi#ers necessary' Insurers shall !lace their reinsurance (usiness outsi#e In#ia *ith only those reinsurers *ho ha e o er a !erio# o$ the !ast $i e years counting $rom the year !rece#ing $or *hich the (usiness has to (e !lace# en"oye# a rating o$ at least BBB %*ith 3tan#ar# I Poor& or e8ui alent rating o$ any other international rating agency' Placements *ith other reinsurers shall re8uire the a!!ro al o$ the Authority' Insurers may also !lace reinsurances *ith -loy#s syn#icates ta)ing care to limit !lacements *ith in#i i#ual syn#icates to such shares as are commensurate *ith the ca!acity o$ the syn#icate'
42
The In#ian Reinsurer shall organi9e #omestic !ools $or rcinsurancc sur!luses in $ire' marine hull an# other classes in consultation *ith all insurers on (asis+ limits an# terms *hich arc $air to all insurers an# assist in maintaining the retention o$ (usiness *ithin In#ia as close to the le el achie e# $or the year 1EEE-2111 as !ossi(le' The arrangements so ma#e shall (e su(mitte# to the Authority *ithin three months o$ these regulations coming into $orce+ $or a!!ro al' 3ur!lus o er an# a(o e the #omestic reinsurance arrangements class *ise can (e !lace# (y the insurer in#e!en#ently *ith any o$ the reinsurers com!lying *ith su(-regulation %5& su("ect to a limit o$ 11 !ercent o$ the total reinsurance !remium ce#e# outsi#e In#ia (eing !lace# *ith any one reinsurer' <here it is necessary in res!ect o$ s!eciali9e# insurance to ce#e a share e,cee#ing such limit to any !articular reinsurer+ the insurer may see) the s!eci$ic a!!ro al o$ the Authority gi ing reasons $or such cession' Placement o$ 21K o$ each !olicy *ith National Re su("ect to a monetary limit $or each ris) $or some classes Inter-com!any cession (et*een $our !u(lic sector com!anies' In#ian Pool $or /ull manage# (y GI7' The treaty an# (alance ris) a$ter automatic ca!acity are to (e $irst o$$ere# to other insurance com!anies in the mar)et (e$ore o$$ering it to international re-insurers' B ery insurer shall o$$er an o!!ortunity to other In#ian insurers inclu#ing the In#ian Reinsurer to !artici!ate in its $acultati e an# treaty sur!luses (e$ore !lacement o$ such cessions outsi#e In#ia The In#ian Reinsurer shall retroce#e at least .1 !ercent o$ the o(ligatory cessions recei e# (y it to the ce#ing insurers a$ter
43
!rotecting the !ort$olio (y suita(le e,cess o$ loss co ers' 3uch retrocession shall (e at original terms !lus an o er-ri#ing commission to the In#ian Reinsurer not e,cee#ing 2'. !ercent' The retrocession to each ce#ing insurer shall (e in !ro!ortion to its cessions to the In#ian Reinsurer'
B ery insurer shall (e re8uire# to su(mit to the Authority statistics relating to its reinsurance transactions in such $orms as the Authority may s!eci$y+ together *ith its annual accounts'
44
T#((-($&0 & N),'()6 C)6)0),$#& A S#,:)*@ ,- ,2# R#$%&'()%*# I%9'&,(8

Throughout the insurance in#ustry+ it is not (usiness as usual' The attac)s on the <orl# Tra#e 7enter on 3e!tem(er 11+ 2111+ sent shoc) *a es through society an# the (usiness community that *ill signi$icantly im!act the a aila(ility an# cost o$ insurance $or years to come. The #e astating $loo#s+ earth8ua)es+ /urricanes an# other natural calamities ha e a##e# !ain on e ery insurer an# reinsurer
45
46
Total claims !ai# (y all reinsurance com!anies in 211. reache# 1.'E.1'050 million GB-+ *hich *as 2.+E K o$ total income' The #ynamic o$ loss accor#ing to the years has the $ollo*ing structure:
47
On the chart you can see claims !ai# (y insurance com!anies (y years:
48
S-0# I0=-(,)%, N#3& -% ,2# R#$%&'()%*# I%9'&,(8

Foreign reinsurers may get In#ia access
Go ernment May Allo* 7os To O!en -ocal Branches; No Mo e :et To Allo* P3C Insurers To Go Pu(lic The Bconomic Times 26L1.L211. T/B go ernment may allo* $oreign reinsurance com!anies to set u! (ranch o$$ices in the country *ith certain regulatory restrictions+ accor#ing to a senior $inance ministry o$$icial' GThis is one o$ the areas+ *here there is a (roa#er !olitical consensus *ith res!ect to $oreign in estment in the insurance sector+H sai# "oint secretary %(an)ing I insurance& G7 7hatur e#i a$ter a seminar here on <e#nes#ay' At !resent+ $oreign reinsurers are alrea#y allo*e# to set u! re!resentati e o$$ices in the country' /o*e er+ these out$its cannot un#er*rite (usiness+ *hich (ranches *oul# (e in a !osition to #o' The !ro!osal to allo* $oreign reinsurers is one o$ the 114 amen#ments !ro!ose# in the IRAA Act an# the grou! o$ ministers %GoM& loo)ing into this has alrea#y met thrice' The GoM is e,!ecte# to meet again soon+ he sai#' Mr 7hatur e#i also clari$ie# that there is no mo e to allo* !u(lic sector insurance com!anies to ta! the ca!ital mar)et to meet the $un# re8uirement $or their o erseas e,!ansion !lans' GThe general insurance com!anies ha e reser es o$ o er Rs 1+ 111 crore+ *hich *as a#e8uate to meet their o erseas e,!ansions !lan+H he sai#' As $or -i$e Insurance
49
7or!oration %-I7&+ the go ernment has gi en the cor!oration Rs 1@1 crore e,clusi ely $or its $oreign (usiness' /o*e er+ there coul# (e some re isions to the norms $or stan#alone health insurance com!anies' There coul# (e #i$$erential ca!ital (ases an# the o erall e8uity ca! coul# (e (rought #o*n $rom Rs 111 crore to Rs .1 crore' Barlier+ s!ea)ing on the tren#s in the sector+ P7 =ames+ mem(er o$ IRAA+ sai# that as the economy is mo ing $rom an in#ustrial economy to ser ice economy+ the nee# $or ris) co er on arious ser ices is increasing+ *hich+ in turn+ ma)es a strong case $or more lia(ility !ro#ucts' Alrea#y in F:15+ lia(ility !ro#ucts ha e recor#e# the $astest gro*th+ he sai#' Ne* In#ia !lans mortgage insurance =S NB< In#ia Assurance %NIA&+ the country?s largest general insurer (y !remium income+ !lans to team u! *ith General Insurance 7or!oration %GI7& an# National /ousing Ban) %N/B& to $loat In#ia?s $irst mortgage insurance com!any+ re!ort Atma#i! Ray I Ae("oy 3engu!ta in Dol)ata' NIA is in tal)s *ith !otential !artners in the mortgage insurance =S' <hen contacte#+ NIA chairman an# managing B 7ha)ra(arti con$irme# his com!any is in #iscussions *ith other !romoters on !ic)ing u! sta)es in the !ro!ose# =S' /o*e er+ it is un#eci#e# ho* much NIA *ill hol# in the com!any' >A $inal #ecision is yet to (e ta)en as there are regulatory issues in ol ing (oth Reser e Ban) o$ In#ia an# Insurance Regulatory I Ae elo!ment Authority+H he sai#' GI7 /ousing Finance+ a su(si#iary o$ the countrys only reinsurer GI7+ is also slate# to (uy a tiny sta)e in the !ro!ose# mortgage insurance com!any'
50
G6-:)6 (#$%&'(#(&. *)=$,)6$&),$-% 16--( &#, ), R& BC000 *(-(#

1EL11L2115 The Bconomic Times INTBRNATIONA- reinsurers+ loo)ing to start o!erations in In#ia+ may soon (e a(le to set u! (ranches *ith a minimum ca!italisation o$ Rs .+111 crore' This $orms !art o$ a set o$ amen#ments to the Insurance Act+ 1E40' The minimum ca!italisation amount has (een lin)e# to the e,isting ca!italisation o$ In#ias only reinsurer+ General Insurance 7or!oration %GI7&' The amen#ments to the Act is !en#ing (e$ore Parliament' Once the amen#ments are a!!ro e#+ international reinsurers *ill ha e legal an# regulatory clearance to o!en (ranches o$ their !arent com!any to transact (usiness in the country' The Insurance Act only !ermits com!anies ha ing a "oint enture to sell !ro#ucts in In#ia' 7urrently+ only 2@K FAI is allo*e# in reinsurance sector' A "oint enture com!any shoul# ha e a minimum ca!italisation o$ only Rs 211 crore' Reinsurance ena(les insurance com!anies to o$$loa# their ris)s (y !lacing !art o$ the co er *ith reinsurers' Glo(al reinsurance com!anies+ inclu#ing 3*iss Re an# Munich Re+ are )een on setting u! (ranches in In#ia+ instea# o$ coming through "oint entures' GInternational reinsurers ha ing (ranches in In#ia *ill ensure that the lia(ilities o$ the (ranches *ill (e accounta(le to the !arent com!any+H 3*iss Re In#ia managing #irector Ahanan"ay Aate tol# BT' GMost reinsurers are large enough to !ro i#e $or claims arising $rom the mega insurance co ers !ro i#e# (y the general insurance com!anies' 3ti$$ ca!italisation
51
re8uirements o$ Rs .+111 crore *ill ensure that only serious *ell-ca!italise# international insurers *ill (e a(le to enter the mar)et+H he a##e#' GOn the other han#+ a "oint enture *ith Rs 211 crore *oul# ha e (een un#er ca!italise# an# *oul# not (e a(le a(sor( huge claim !ayouts+H Mr Aate sai#' The amen#ments to the Act also has !ro isions to recognise a Osociety $or reinsurance' This *ill $acilitate CDs -loy# an entry into In#ia' -loy#s is a society an# not a com!any that un#er*rites reinsurance ris)s' Cn#er $ree-!ricing+ international reinsurers are cautious a(out un#er*riting !ractices a#o!te# (y #omestic insurance com!anies' /o*e er+ *ith insurance com!anies in In#ia (eing *ell-ca!italise#+ it is increasing their ca!acity to retain some o$ the smaller ris)s' As the sole reinsurer in the #omestic mar)et+ GI7 recei es a 21K statutory cession %21K o$ the !remium& on each !olicy su("ect to certain limits' /itherto+ the !olicy $or international reinsurers *as #etermine# (y concerns a(out retaining ca!ital *ithin the country' The omni(us insurance legislation is !en#ing in Parliament since last year' The -e$t !arties ha e raise# o("ections to se eral amen#ments+ !rimarily the !ro!ose# hi)e in FAI in the sector $rom 2@K to 6EK'
52
G-/, 0)8 *', (#$%&'()%*# *)= ,- A0D

12L11L2115 The Bconomic Times
AFTBR getting their $ree#om in !ricing+ non-li$e insurers are set to e,!erience $ree#om in reinsurance N the !rocess *here an insurance com!any (uys co er to trans$er some ris)s out o$ its (oo)s' Cntil no*+ insurance com!anies ha e to man#atorily trans$er 21K o$ their ris)s an# conse8uently 21K o$ their !remium income to the General Insurance 7or!oration %GI7&+ *hich has (een #esignate# (y the go ernment as the national reinsurer' Mo es are a$oot to (ring #o*n this com!ulsory reinsurance to 11K $rom A!ril 2115' For insurers+ this *oul# gi e them the a(ility to sho! $or (est #eals $rom international reinsurers' /o*e er+ $or GI7+ this *oul# mean a loss o$ hal$ o$ its ca!ti e (usiness' In#ustry o$$icials say that !u(lic sector com!anies are li)ely to reinsure less since they are *ell ca!italise# an# in a !osition to retain ris)s' Pri ate com!anies+ *ith a smaller ca!ital (ase+ are li)ely to continue to reinsure' /o*e er+ they no* ha e the choice o$ (uying co er $rom international reinsurers' GI7+ on its !art+ *ill ha e to (e more !roacti e in mar)eting its reinsurance ser ices to com!anies' The 7or!oration has alrea#y (ecome more !roacti e in trying to get reinsurance (usiness $rom #e elo!ing countries an# has o!ene# o$$ices o erseas+ inclu#ing the Mi##le Bast' It has also sought !ermission $rom the F3A in -on#on' Inci#entally+ no !ri ate !layer has come $or*ar# to set u! a reinsurance com!any in In#ia e en a$ter li(eralisation' This is (ecause the
53
economics o$ reinsurance su!!orts ha ing a giant cor!oration in $inancial centre rather than #istri(uting ca!ital across countries' The conce!t o$ com!ulsorily !assing on ris)s %or ce#ing ris)s& to a national reinsurer *as common in most countries in the !ast' <ith li(eralisation+ most countries ha e *ith#ra*n the re8uirement $or com!ulsory cessions' The o("ection to the remo al o$ com!ulsory cession has (een that this *oul# result in $light o$ $oreign e,change as com!anies reinsure o erseas+ an# secon#ly+ !olicyma)ers $elt that there *as a nee# to increase insurance ca!acity in In#ia' To ensure that there is no $light o$ ca!ital; legislation has $ocusse# on increasing retention o$ ris)s in the country' <hile intro#ucing the IRAA Act+ the go ernment ha# assure# Parliament that the le el o$ retention o$ ris)s in the country *oul# not go #o*n u!on li(eralisation' /o*e er+ *ith the economy *itnessing large in$lo*s (y *ay o$ in estment+ ca!ital out$lo*s are not a ma"or concern' The conce!t o$ a national reinsurer *as there in most countries' <ith li(eralisation+ most countries ha e #one a*ay *ith the national reinsurer tag an# allo*e# $ree com!etition in the mar)et'
54
55
C)&#+ I M'%$*2 R# E I% ) W2$(6=--6<

Munich Re+ the largest reinsurer in the *orl# is $acing a threat o$ getting tra!!e# into a icious circle' Recently there has a #o*ngra#e in ratings (y 3IP that might lea# to another #o*ngra#e i$ the com!any resorts to in$erior 8uality o$ (usiness or less !remium rates' The (usiness has (een Tough $or the com!any #ue to the ri!!le e$$ects o$ EL11 attac)s cou!le# (y #ismal in estment !er$ormance' Son Bom(ar# has recently assume# the !osition o$ 7BO an# has a #aunting tas) o$ sailing the com!any out o$ this storm'
Munich Re+ the *orl#s largest reinsurer has re!orte# losses o$ J@01 million in e $irst-hal$ o$ 2114 an# its rating is #o*ngra#e# (y 3AP $rom AA- to AT resulting Munich Re the lo*est rate# reinsurance com!any in the Buro!ean region' The ratings #o*ngra#e *as on account o$ (a# e8uity in estments an# its sta)es in Allian9+ /SB an# 7ommer9(an)+ *hose !er$ormances *ere unsatis$actory' The com!any is $acing a threat that this ratings cut may (e a trigger to get tra!!e# in a orte,' 3ince the a(ility to attract ne* (usiness is re#uce#+ a com!romi9e either on 8uality o$ (usiness or !remium le els may lea# to $all in !ro$its *hich may $urther lea# to ratings #o*ngra#e' /o* *ill the ne* 7BO Son Bomhar#+ ta)e stoc) o$ this situationU
56
M'%$*2 R# - T2# H$&,-(8

The insurance in#ustry *as initially triggere# (y the ra!i# commercial acti ity in Germany' 7arl Thieme starte# Munich Re in 1001 at a time *hen there *as a sense o$ #isa!!ointment $or insurance an# reinsurance com!anies in the country' The com!any *as starte# in t*o rente# rooms *ith $i e em!loyees an# a share ca!ital o$ three million mar)s' A$ter eight years o$ its commencement it *as 8uote# in the stoc) e,change an# its share ca!ital *as increase# to 6'0 million mar)s' The num(er o$ sta$$ also )e!t rising' It em!loye# .. !eo!le (y 10E1+ 460 in 1E11+ 6.1 in 1E16+ @16 in 1E2O The com!any $ace# its $irst tough time in A!ril 1E1@ *hen an earth8ua)e occurre# in 7ali$ornia #e astating the city o$ 3an Francisco' Aroun# 4+111 !eo!le #ie# an# there *as a !ro!erty #amage to the tune o$ .11 million #ollars o$ *hich+ 11 million Gol#mar) ha!!ene# to (e o$ Munich Re The !rom!t settlement o$ claims $etche# 7arl Thieme the com!lement+ GThieme is moneyH instea# o$ Gtime is moneyH $rom the clients This e ent triggere# the i#ea o$ reinsurance es!ecially in' the C3' It *as the $irst com!any to !re!are set o$ terms an# con#itions $or machinery insurance in 1E11' In the 1E41s+ the com!anys me#ical sta$$ #e elo!e# li$e insurance manuals (y the hel! o$ *hich it *as !ossi(le to insure chronically ill *ho *ere consi#ere# uninsura(le until then' In 1E51+ it create# a geo-sciences research grou! to analy9e natural ha9ar#s co ers $rom a technical !oint o$ ie*' As o$ 2114+ the com!any em!loys engineers an# scientists $rom 01 #i$$erent #isci!lines meteorologists+ geologists+ geogra!hers #octors+ shi!s masters an# e,!erts *ith a *i#e range o$ 8uali$ications' 7urrently the com!any is the largest
57
!layer in the reinsurance segment *ith com!etitors such as 3*iss Re an# Ber)shire /atha*ay'
T2# R#$%&'()%*# M)(@#,

The origin o$ reinsurance can (e trace# to 16th or 1.th century in marine insurance The conce!t o$ reinsurance e ol e# *hen a single !arty $oun# it #i$$icult to insure high ris)s in ol ing large !ayouts' In other *or#s insurance $or the !rimary insure is reinsurance' It is mainly a tool to increase ca!acity enhance sta(ility+ !rotection against catastro!hes+ o(tain sur!lus relie$ to ena(le gro*th+ gain un#er*riting a(ility an# *ith#ra* $rom territory or line o$ (usiness' Reinsurance is mainly classi$ie# un#er t*o categories; $acultati e an# treaty' A $acultati e contract is $or a single ris) an# treaty is $or multi!le ris)s o$ certain ty!e' 1 er years+ reinsurance in#ustry has (een han#ling arious catastro!hes such o$ /urricane An#re* an# success$ully !aying the claims' 3e!tem(er 11+ 2111 attac)s at the <orl# Tra#e 7enter ha# a (ig (lo* to insurance in#ustry inclu#ing the reinsurers' The attac)s resulte# in insurance in#ustry !aying J61 (illion as claims+ t*o-thir#s o$ *hich *as !ai# (y reinsurance in#ustry' This set(ac) *as cou!le# *ith the stoc) mar)et losses tren# $ollo*ing the attac)s has $orce# many reinsurers across the glo(e to re ise their core (usiness o$ reinsurance an# *ith#ra* $rom (usinesses such as management+ in estment (an)ing an# also the lines (usiness in *hich they s!eciali9e' <ith the change# scenario the reinsurers cannot #e!en# on in estment income in their toughtimes' Aays *hen reinsurers coul# rely on cushion o$ in estment income+ or see) ne* mar)ets to ma)e-u! $or the stage
58
in their o*n are long gone Reinsurers no* nee# to $ocus on #eli ering (etter more consistent un#er*riting results in their core mar)ets'
A Business<ee) article mentione# that+ GThe !ricing !ressure is starting at to!' Reinsurers+ the large entities such as 3*iss Re an# Munich Re that !rimary insurance carriers (uy co erage $rom to re#uce ris)+ ha e u!!e# their rates to reco er ca!ital reser es #e!lete# (y large 3e!tem(er 11 claims an# stoc) mar)et losses'H Another AON sur ey re!ort $or the year 2114 mentione# the ie*s o$ reinsurance (uyers+ *ho e,!ect that the so$tening tren#s+ *hich emerge# o er the course o$ 2114+ *ill continue' In the same re!ort+ un#er*riters $elt that slight so$tening *ill continue in some lines o$ (usiness (ut rates in others *ill (e #ri en higher (y contracting su!!ly'
T2# C'((#%, !(-:6#0 -1 M'%$*2 R#

The com!any is $acing trou(les on arious $ronts' Firstly+ the in estment losses ha e (een e,cessi e' As 8uote# (y The Bconomist + GAt the en# o$
59
2111 Munich Re ha# 44K o$ its assets in e8uities; ne*+ it has less than 11K+ Besi#es its sta)e in /y!oSereins(an) %/SB&+ Munich Re o*ns one-$i$th o$ Allian9+ the com!any situate# at its neigh(or in Doniginstrasse' Both hol#ings ha e lost more than 5.K o$ their alue in the !ast three years'H In March 2114+ the com!any announce# re#uction o$ its cross sharehol#ing *ith Allian9 to a(out 1.K' This *as a ste! ta)en to strengthen the ca!ital (ase o$ Munich Re+ since the !er$ormance o$ Allian9 *as not u! to the mar)' The !ress release $rom the com!any sai#+ GThe e$$ect o$ re#ucing sharehol#ings on (oth si#es *ill (e that the res!ecti e !artici!ations are no longer alue# at e8uity; conse8uently+ Munich Re *ill in $uture (oo) the #i i#en# o$ Allian9 instea# o$ the !ro!ortional result $or the year in its income statement' Furthermore+ the grou!s $ree $loats an# thus the *eightage o$ their shares in stoc) mar)et in#ices *ill increase'H The ne*s o$ Mr' /ans-=urgen 3chin9lers retirement on A!ril 20+ 2114 *as #elicate consi#ering the tur(ulent times o$ the com!any' Mr' 3chin9ler *ho is @2 has to retire as !er cor!orate Germany stan#ar#s' The com!any ma#e !ro$its in the year 2112 only (ecause it sol# V6'5 (illion-*orth o$ shares to Allian9' Cn Mr' 3ch"n9ler the com!any initiate# a #i ersi$ication strategy' It shares 2. o*nershi! in /SB+ the countrys secon# (iggest (an)' It also O*ns 11K o$ 7ommer9(an)+ One o$ its su(si#iaries BRGO is Germanys (iggest !rimary insurer ho*e er it incurre# a loss o$ V1'1 (illion last year mainly #ue to in estments these circumstances *hen Mr' Bernhar# has to ta)eo er the charge+ there *as #aunting tas) ahea# o$ him' Follo*ing that the (iggest (lo* came *ith the ratings #o*ngra#e (y 3IP on account o$ *ea) !ro$its an# re#uce# ca!ital (ase' The com!any in !ress
60
release ne,t #ay claime# the #o*ngra#e to (e un"usti$ie#' The com!any (ragge# o$ its AAA rating' A Business <ee) article commente# GAll the more so in the cloistere# *orl# o$ reinsurance+ *here (illions o$ #ollars on cor!orate an# !ri ate-ris) co erage are guarantee# (y a $e* lo! $irms' The slightest sli! in cre#it*orthiness is a (ig (lo*+ since it raises 8uestions a(out the un#er*riters a(ility to ma)e goo# on claims *hen #isaster This ha# !ut the com!any into a icious circle *here the com!etitors ha# an e#ge o er com!any #ue to ratings an# hence it *as tough to o(tain ne* (usiness+ since ratings ha e a large role to !lay in the (usiness o$ insurance an# reinsurance 3econ#ly+ this *oul# $orce Munich Re to lessen the !remium in or#er to retain clients' A -on#on insurance (ro)er rightly commente#+ GThe (ig *orry is that ratings cut can (e the start o$ a icious circle+ you ha e to !ay more $or (usiness as a result+ *hich means !ro$its $all an# your rating can get cut again'H
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F','(# O',6--@
On =uly 11+ 2114 Munich Re (ecame the $irst nation*i#e reinsurer in 7hina a$ter recei ing the country-*i#e o!erating license $rom 7hina Insurance Regulatory 7ommission' This *as an im!ortant mo e $or Munich Re to enter into high gro*th- oriente# Asian mar)et in testing times' Though the com!any ha# (usiness relationshi!s *ith 7hina through o$$ices in Bei"ing+ 3hanghai an# /ong Dong since 1E.@+ this license o!ens the #oor to an o!!ortunity o$ an in#ustry that has a #ou(le-#igit gro*th rate' <ith this (ac)#ro! the ne* 7BO has the challenge to (ring the com!any out $rom the icious circle an# continue its image o$ the largest reinsurer in the *orl#' At the time o$ succession o$ 7BO the issues con$ronting the ne* 7BO are+ ho* to come out o$ the loss-ma)ing in estments o$ Munich Re at Allian9+ /SB an# 7ommer9(an)U /o* to retain the e,isting customers *ithout straining !ro$itsU /o* to attract ne* (usiness #es!ite the ratings cutU An# $inally+ ho* to *in the AAA rating (y 3IP+ *hich it use# to
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en"oyU
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C)&#+ I I
S3$&& R#+ EF=)%&$-% $% A&$)

3*iss Re is one o$ the lea#ing glo(al !layers in the mar)et' The com!any has a strong history o$ !ro$ita(ility that *as only a$$ecte# (y the claims relate# to EL1l' The com!any is in the e,!ansion s!ree in Asia !articularly in 7hina+ In#ia an# =a!an' It has a liaison o$$ice in all these countries an# has got a (ranch license in china an# =a!an' 3*iss Re is currently lo((ying $or o(taining a (ranch license in In#ia as *ell' A$ter starting o$ (usiness+ the countries *ill get access to the glo(al ca!ital an# $or 3*iss Re its a ne* mar)et a##e# *ith #i ersi$ication o$ ris)s'
3*iss Re *as $oun#e# in 10@4 at Purich+ It is one c $ the lea#ing reinsurers o$ the *orl#' 7urrently+ it #oes (usiness $rom o er 51 o$$ices in more than 41 countries an# has on its rolls aroun# 0+111 em!loyees' The com!any !ro i#es ris) trans$er+ ris) management+ alternati e ris) trans$er %ART& an# asset management ser ices to its glo(al clients through its three (usiness grou!s N !ro!erty an# casualty; li$e an# health; an# $inancial ser ices' The gross !remiums *ritten (y the com!any in the $inancial year 2112 amounte# to 7/F 42'5 (illion' The rating o$ 3*iss Re $rom 3tan#ar# I Poors is AA+ Moo#ys is Aal+ an# AM Best is AT %su!erior&' It is a !u(lic liste# com!any an# the shares are (eing tra#e# in the 3*iss e,change' B($#1 H$&,-(8 3*iss Res incor!oration *as triggere# (y a ma"or $ire on 11-11 May 10@1 *hen .11 houses got (urnt an# 4111 !eo!le (ecame homeless' The ina#e
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insurance co er among the househol#s *as highlighte# at that !oint o$ time !ro i#e more e$$ecti e means o$ co!ing *ith the ris)s !ose# (y such #e elo!e# the /el etia General Insurance 7om!any in 3t' Gall+ the 3ch*ei9t Dre#itanstalt %7re#it 3uisse& in Purich an# the Basler /an#eis(an) $oun#e# the 3*iss Reinsurance 7om!any in Purich *ith a ca!ital o$ si, 3*iss Francs' The $ire also ha!!ene# to (e the moti ation (ehin# the com!any Os $ast gro*th in the initial years a$ter its $ormation' Initially 3*iss Re o$$ere# $ire+ marine reinsurance an# later on a##e# li$e insurance a$ter t*o years (usiness in 1001' In 1E1@+ the com!any su$$ere# one o$ its (iggest losses a$ter the earth8ua)e 3an Francisco' 3*iss Re o!ene# its o erseas (ranch in the Cnite# 3tates in its $irst ste! to o erseas (usiness' The com!any *as also a$$ecte# (y the Titanic on 16L1. A!ril 1E12' It ac8uire# ma"or sharehol#ing in Mercantile General in 1E1@ an# ac8uire# Ba arian Re in 1E24' A$ter the <orl# <ar II *as a season o$ economic (oom' Auring the !erio#+ lot o$ #e elo!ments too) *ith regar# to 3*iss Re' In the same !erio# 3*iss Res (usiness !resence increase# in the Cnite# 3tates+ 7ana#a+ 3outh A$rica an# Australia' An a# isory committee calle#+ 3*iss Re A# isers -imite# *as $oun# in /ong Dong' In 1E.E+ the corn !remium income crosse# one (illion mar) *ith 1+164 million 3*iss Francs' In 1E55+ 3*iss Re ac8uire# E6K shares o$ 3*it9erlan# General Insurance 7om!any -t#+ Purich' 3*iss Re starte# selling its ma"ority sharehol#ings in insurance com!anies $rom 1EE6' It merge# *ith Cnion Re in 1EE0 o$ *hich it ac8uire# ma"ority sta)e hol#ing in 1E00' In 2111+ Ba arian Re *as ma#e as 3*iss Re Germany an# 3*iss Re restructure# itsel$ in ma)ing three (usiness grou!s at the cor!orate center'
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3*iss Re an# the Im!act o$ 3e!tem(er 11 3*iss Re resulte# in loss $or the $irst time in its history o$ 140 years o$ !ro$ita(ility in 2111' This *as mainly #ue to the im!act o$ huge !ayouts o$ 3e!tem(er attac)s' <here the $irm re!orte# !ro$it o$ 2'E5 (illion 7/F in 2111+ it re!orte# loss o$ 1@. million 7/F in 2111 an# El million in 2112' The !ayouts arising $rom 3e!tem(er 11 attac)s amounte# to 7/F 2'E. (illion' 7hie$ e,ecuti e <alter Dielhol9 sai# in an inter ie*+ GAes!ite the *orst year e er $or insure# losses+ 3*iss Re strengthene# its !osition #uring 2111 an# is no* *ell !lace# to ca!itali9e on im!ro ing mar)ets an# achie e su!erior results in the coming years'H At the en# o$ 2111+ 3*iss Res sharehol#ers e8uity amounte# to 7/F 22'@ (illion %C3A 14'@ (illion& an# the total (alance sheet stoo# at 7/F 151 (illion %C3A 12'6 (illion&' In the $irst-hal$ o$ 2112+ 3*iss Re !ro$its came #o*n to W.1'E1 million $rom W.02 million corres!on#ing to the !re ious year' On this Mr' Dielhol9 sai#+ Gho*e er+ in tough times e,!erience tells us the o!!ortunities are greatest $or the strongest !layers' I (elie e this remains so no* $or 3*iss Re'H EF=)%&$-% $% A&$)% C-'%,($#& 3*iss Re has (een eying Asian mar)et $or long+ s!eci$ically =a!an+ 7hina an# In#ia an# has ta)en signi$icant ste!s to !ursue the same' It has got entry into 7hinese an# =a!anese mar)et an# is lo((ying $or an entry through (ranch net*or) in In#ia' In early 2112+ 3*iss Re relocate# its Asian hea# 8uarters $rom Purich to /ong Dong' This mo e *as strategic an# ma#e in or#er to o ersee an# manage 16 o$$ices in Asia' The chie$ e,ecuti e o$ 3*iss Res Asia #i ision+ Mr' Pierre Oaen#o+ sai# GThe mo e to /ong Dong is #esigne# to e,!an# 3*iss Res mar)et lea#ershi! an# to meet the current
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an# $uture re8uirements o$ the Asian insurance in#ustry' <e chose /ong Dong as our Asian huh (ecause it+ has a strong in$rastructure+ is the gate*ay to 7hina+ is locate# centrally *ithin Asia+ an# is alrea#y home to a num(er o$ other 3*iss Re o!erations' There is also the a aila(ility o$ insurance an# other $inancial !ro$essionals here+H he a##e#' C2$%) 3*iss Re o!ene# its re!resentati e o$$ices in Bei"ing an# 3hanghai in 1EE@ an# 1EE5 res!ecti ely' In August 2112+ 3*iss Re recei e# an authori9ation $rom 7hina Insurance Regulatory 7ommission %7IR7& $or o!erating a (ranch $or (oth !ro!ertyX casualty as *ell as li$e reinsurance' Accor#ing to 3*iss Re o$$icials+ this is a ste! to*ar#s o(taining a $ull license an# *ill ena(le them to esta(lish local ser ices *ithin 7hina in or#er to su!!ort an# contri(ute to the gro*th o$ countrys insurance an# reinsurance in#ustry an# economy !er 3e' Insurance mar)et in 7hina stea#ily gro*ing an# the gro*th in !remium income has (een 24'@K o er the 11 years' Foreign insurance com!anies ha e increase# $rom t*o in 1EE2 to #ate' 7ommenting on this im!ortant a!!ro al+ Mr' Pierre O9en#o+ chie$ e,ecuti e 3*iss Res Asia Ai ision+ sai# G3*iss Res close relationshi! to the 7hina insurance in#ustry is an e,cellent $oun#ation u!on *hich to (uil# as 7hina to meet the gro*ing nee#s o$ its economy an# its !eo!le in !rotecting li e !ro!erty as *ell as (usiness an# asset gro*th'H 3*iss Re also (elie es in tile social gro*th o$ the 7hinese economy an# mat' o$ $act it has set u! a research center on natural catastro!he e,!osure insurance ris)s together *ith the Bei"ing Normal Cni ersity in Bei"ing in 1EEE' The research center is #e#icate# to collecting an# inter!reting Nat7at
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#ata+ #e elo!ing ris) measures an# maintaining close ties to other research Institutions an# state organi9ations o$ interest' The main o("ecti e lies in #e elo!ments o$ mo#els $or assessing ris)s an# res!ecti e economic an# insurance' mo#els On Aecem(er 1E+ 2114+ 3*iss Re o$$icially o!ene# the (ranch o$$ice in Bei"ing GThe 7hinese insurance mar)et to#ay is #emonstrating e,citing gro*th' I #elighte# that 3*iss Re has recei e# authori9ation to o!en this (ranch an# no* !artici!ate #irectly in tile #e elo!ment o$ the mar)et+H sai# 3*iss Re 7BO=ohn 7oom(er+ on the occasion' ")=)% Aecem(er 2114+ 3*iss Re recei e# a (ranch license to !ro i#e reinsurance ser ice in =a!an $or (oth !ro!ertyLcasualty as *ell as li$e an# health #omains' 3*iss ha!!ens to (e the $irst lea#ing glo(al reinsurance !layer to o(tain a $ull license to run a (ranch in =a!an' G<e are #elighte# to recei e a!!ro al $or our (ranch license =a!an *hich *ill strengthen our a(ility to ser ice our !ort$olio o$ alue# clients =a!an+H state# 3*iss Re 7BO+ =ohn 7oom(er on this occasion'7om!anys relationshi! *ith =a!an #ates (ac) to 1E14 accor#ing to 3*iss Re o$$icials' The com!any runs a ser ices com!any in =a!an since 1EEE in or#er to !ro i#e glo(al (usiness e,!ertise to local !layers' A!art $rom this+ the com!any *as hol#ing a re!resentati e o$$ice in =a!an since 1E52' 3*iss Re though recei e# non-li$e insurance license inten#s to e,ten# ser ices limite# to reinsurance only' I%9$) 3*iss Re has !resence in In#ia $rom o er 51 years' 3*iss Re through 3*iss Re 3er ices In#ia Pri ate -imite# o$$ers clients e,clusi e an# s!eciali9e#
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ris) management ser ices+ international technical e,!ertise an# other su!!ort ser ices' It also has a *holly-o*ne# su(si#iary in In#ia+ 3*iss Re 3hare# 3er ices %In#ia& Pri ate -imite# incor!orate# in 2111 $or !ro i#ing (ac) o$$ice a#ministration su!!ort' The center *ill han#le contract a#ministration+ claims a#ministration an# reinsurance accounting su!!ort $or all 3*iss Re o$$ices in Asia' In#ian regulations allo* $oreign reinsurers to set u! a reinsurance com!any *ith an In#ian !artner an# minimum ca!ital o$ Rs' 211 crore *here $oreign !artici!ation is restricte# to 2@K' 3*iss Re has (een urging In#ian regulator $or #e-lin)ing reinsurance $rom #irect insurance regulations an# allo*ing reinsurance (ranching' 7alling $or an en# to the "oint enture re8uirements currently im!ose# on $oreign reinsurers' Mr' Aa in#er Ra"!al+ 3*iss Re /ea# o$ In#ia+ Tur)ey an# Mi##le-Bast+ !ointe# out the )ey (ene$its a aila(le $rom allo*ing *holly-o*ne# reinsurance (ranches: F A $ull range o$ technology )no*-ho* an# ser ices+ a aila(le locally to ser e In#ias increasingly com!le, ris) lan#sca!e; F -ocal insurers can access reinsurers glo(al (alance sheet; F Increase# security an# re#uce# cre#it ris) #ue to the regulators #irect su!er ision o$ reinsurance (ranches; an# F Bncourages more $oreign #irect in estment to In#ia' 3*iss Re e,!ects Asian mar)et to gro* su(stantially in the coming years an# says+ GIn Asia+ soun# economic $un#amentals *ill continue to su!!ort ro(ust insurance (usiness gro*th in 2116' -i$e insurance *ill in !articular (ene$it $rom increasing a$$luence an# rising ris) a*areness' 7om!are# to
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more mature mar)ets+ emerging Asia+ in !articular 7hina an# In#ia+ *ill remain highly attracti e international insurers'H
F','(# O',6--@
3*iss Re has (een the $irst entrant in all the three emerging mar)ets o$ Asia' The com!any is (ac)e# (y strong $un#amentals+ $inancials an# glo(al e,!ertise' It !ossesses all the !rere8uisites to (e a mar)et lea#er in these countries' The !resence o$ 3*iss Re has (een long in these nations an# the re!resentati e o$$ices ha# (een o!ene# at the right time' The ma"or challenge $or 3*iss Re as o$ no* es!ecially in In#ia is the regulatory (arrier' 3o $ar 3*iss Re is the $irst an# only glo(al !layer in ol e# in reinsurance ser ices in all the three mar)ets' The com!any has alrea#y !ro en its e,!ertise $or long in the glo(al mar)et an# the !resence has to (e increase# in these li(erali9e# mar)ets only (y the !assage o$ time'
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C)&#+ I I I G#%#()6 I%&'()%*# C-(=-(),$-% -1 I%9$)

This case !ro i#es the history o$ General Insurance cor!oration o$ In#ia %GI7 since nationali9ation' GI73 role has (een signi$icant in the in#ian insurance in#ustry an# it is currently the sole national reinsurer' GI7 is also as!iring to (e a glo(al !layer in reinsurance' It is e ol ing itsel$ as an e$$ecti e reinsurance solutions !artner $or the A$ro- Asian region' In a##ition to that+ it has also starte# lea#ing reinsurance !rogrammes $or se eral insurance com!anies in 3AAR7 countries+ 3outh BastAsia+ Mi##le Bast an# A$rica'
Insurance has al*ays (een a gro*th-oriente# in#ustry glo(ally' On the In#ian scene too+ the insurance in#ustry has al*ays recor#e# noticea(le gro*th is-a- is other In#ian in#ustries' In 10.1+ the $irst general insurance com!any+ Triton Insurance 7o' -t#'+ *as esta(lishe# in In#ia an# the shares o$ the com!any *ere mainly hel# (y the British' The $irst In#ian general insurance com!any+ ln#ias Mercantile Insurance 7o' -t#'+ *as set u! in 1E15' A$ter in#e!en#ence+ General Insurance 7ouncil+ a *ing o$ Insurance Association o$ In#ia+ $rame# a co#e c con#uct $or ensuring $air con#uct an# soun# (usiness !ractices in the area ct general insurance' The Insurance Act *as amen#e# an# tari$$ a# isory committee *as set u! in 1E@0' In 1E52+ general insurance in#ustry *as nationali9e# through the !romulgation o$ General Insurance Business %Nationalisation& Act' Aroun# .. insurers *ere amalgamate# an# general insurance (usiness un#erta)en (y the General Insurance 7or!oration o$ In#ia %G=7& an# it su(s Oriental Insurance
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7om!any -imite#+ Ne* In#ia Assurance 7om!any -imite#+ National Insurance 7om!any -imite# an# Cnite# Insurance 7om!any -imite#' The In#ian insurance in#ustry sa* a ne* sun *hen the Insurance Regulatory' An# Ae elo!ment Authority %=RAA& in ite# the a!!lication $or registration $or insurers in August+ 2111' General Insurance 7or!oration o$ in#ia an# su(si#iaries ha e (een the erst*hile monarch o$ non-li$e insurance $or almost three #eca#es' A$ter #onning the role o$ Othe national reinsurer+ (y GI7+ #elin) o$ its su(si#iaries an# entry o$ $oreign !layers through "oint entures ha e change# the outloo) o$ the *hole general insurance in#ustry an# $orce# GI7 to enter arena o$ com!etition' GI7 an# its $our su(si#iaries $unctione# through a huge net*or) o$ 6+1@5 o$$ices s!rea# cross the country' The main customer inter$ace $or these units *ere in agents+ #e elo!ment o$$icers an# em!loyees at (ranch+ #i isional an# region' o$$ices in arious !arts o$ the country' The total *or)$orce o$ GI7 an# its su(si#iaries *as aroun# 0.+111' GI7 has ma#e a huge contri(ution to the o erall #e elo!ment o$ the nation+ through in estments in the socially-oriente# sectors' The Go ernment o$ In#ia ha# entruste# to+ GI7+ the a#ministration o$ arious social *el$are schemes+ such as !ersonal acci#ent insurance an# hut insurance schemes o!erate# all o er the country' in a##ition to this+ its "oint entures in the $orm o$ GI7 mutual $un# an# GI7 housing $inance ha e contri(ute# not only to the #e elo!ment o$ the nation (ut also to the income gro*th o$ the cor!oration' GI7s net !remium an# in estments stoo# at Rs'1+511'2@ crore an# Rs'6+..@'. crore as o$ March 41+ 1EEE' Auring the same !erio#+ the ca!ital an# $un#s o$ the 7or!oration stoo# at Rs'2+E16'@6 crorY'
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/istory N /o* *as it Forme#U The general insurance in#ustry *as nationali9e# through General Insurance Business %Nationali9ation& Act+ 1E52 %GIBNA&' The Go ernment o$ In#ia too) o er the shares o$ .. In#ian insurance com!anies an# .2 insurance com!anies carrying on general insurance (usiness' GI7 *as $orme# in !ursuance o$ 3ection E%1& o$ GIBNA' Incor!orate# on No em(er 22+ 1E52+ un#er the 7om!anies Act+ 1E.@+ GI7 *as $orme# $or the !ur!ose o$ su!erinten#ing+ controlling an# carrying on the (usiness o$ general insurance' A$ter the $ormation o$ GI7+ the central go ernment trans$erre# all the shares hel# (y it o$ arious general insurance com!anies to GI7+ Thus+ a$ter the *hole !rocess o$ mergers an# ac8uisitions in the insurance in#ustry+ the *hole (usiness *as trans$erre# to General Insurance 7or!oration an# its $our su(si#iaries' Among its $our su(si#iaries+ National Insurance 7om!any *as incor!orate# in the year 1E1@' As a su(si#iary o$ the GI7+ it o!erates general insurance (usiness in In#ia *ith its hea# o$$ice locate# at Dol)ata' Ne* In#ia Assurance 7om!any *as $orme# in the year 1E1E an# o!erates general insurance (usiness in In#ia *ith its hea# o$$ice at Mum(ai' Ne* In#ia Assurance com!any is consi#ere# as the most success$ul com!any in the $iel# o$ general insurance' Oriental Insurance 7om!any *as esta(lishe# in the year 1E65 an# its hea# o$$ice is locate# in Ne* Aelhi' Cnite# In#ia Insurance 7om!any o!erating its general insurance (usiness *ith its hea# o$$ice at 7hennai'
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W2), W#%, W(-%7< General Insurance 7or!oration recor#e# a net !remium o$ J1'4 (illion in the year 1EE.-E@' Its claim settlement ratio *as 56K higher than the glo(al a erage o$ 11K' 3o+ *hat *ent *rong $or this !u(lic sector monolithU GI7 an# its su(si#iaries $altere#+ *hen it came to customer satis$action' -arge scale o$ o!erations+ !u(lic sector (ureaucracies an# cum(ersome !roce#ures ham!ere# the !rogress o$ not only GI7+ (ut also -I7 %-i$e Insurance 7or!oration o$ In#ia&' The huge sta$$ o$ agents o$ GI7 an# its $our su(si#iary com!anies $aile# to !enetrate into the rural hinterlan# to sell general insurance *hether it *as cro! insurance or any other $orm o$ !ersonal line insurance' As e i#ent $rom the con#ition o$ $armers in the country+ GI7 has $aile# in its o("ect to !ro i#e insurance co er to the nee#y+ *hich really re8uire# the much-nee#e# $inancial security' The nationali9e# insurers+ (oth GI7 an# -I7 em!loy almost hal$-a-million em!loyees' They are the highest !ai# (ut still the (oth organi9ations su$$er $rom lo* !ro#ucti ity+ corru!tion+ in#isci!line an# total ignorance o$ the (asic !rinci!les o$ the insurance (usiness' GI7 su$$ere# #ue to corru!tion *ithin its o*n s!eci$ic (usiness #i isions motor insurance an# me#iclaim !olicy' 7ollusion (et*een the sur eyors an# customers also (le# GI7+ lea#ing to lo* morale among the em!loyees an# !u(lic #iscontentment The main reason $or such a !athetic con#ition lies *ithin the management o$ these !u(lic sector com!anies' The management o$ these units is strongly #ominate# (y em!loyee unions+ *hich trans$orme# the insurance sector to a class (usiness $rom a alue-(ase# com!any' The #omestic insurance com!anies+ meeting their social o("ecti es o$ going into the #ee!est interiors
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o$ the country lagge# (ehin# in meeting customer e,!ectations in !ro#ucts an# ser ices' M)62-,() C-00$,,## As the !rocess o$ li(erali9ation starte# $rom the year 1EE1+ re$orms *ere targete# arious sectors o$ the economy' In the same league+ insurance sector ha# to *ait almost nine years (e$ore+ re$orms *ere im!lemente#' The *hole !rocess starts *ith the setting u! o$ the Malhotra 7ommittee in 1EE4+ hea#e# (y R N Malhotra $ormer go ernor o$ Reser e Ban) o$ In#ia' Although the achie ement o$ -I7 7I7 in s!rea#ing insurance a*areness an# mo(ili9ing sa ings $or national #e elo!ment an# $inancing core social sectors *as ac)no*le#ge#+ the committee ga e a concise re!ort on the In#ian insurance in#ustry #ominate# (y the !u(lic sector' l re!ort in#icate# that (oth the -I7 an# GI7 *ere o ersta$$e# an# $ace# no com!etition at all' Thus+ consumers *ere #e!ri e# o$ *i#er range o$ !ro#ucts e$$icient ser ice an# lo*er-!rice# insurance !ro#ucts' The re!ort in#icate# that net !remium income in general insurance hush ha# gro*n $rom Rs'222 crore in 1E54 to Rs'4+0@4 crore in 1EE2-E4' In a##ition this+ in estments also increase# $rom Rs'4.. crore to Rs'5+420 crore o er the sai# !erio#' GI7 also ac8uire# high re!utation in the international reinsurance mar)et But there *as the other si#e o$ the coin' B,cessi e control cou!le# *ith a(sence com!etition le# to stagnation o$ (oth the !u(lic sector units ham!ering the im!ro ement an# o!erational e$$iciency' Insurance in#ustrys $un#s *ere mainly in este# in go ernment-man#ate# in estments *ith lo* yiel#+ *hich a$$ecte# the $inancial !er$ormance o$ the insurance c This le# to high rates o$ insurance !remia (ut lo* returns on
75
sa ings in este# in insurance' In a##ition to that+ #ue to a(sence o$ com!etition+ there *as la,ity among the insurers to !er$orm *ell an# im!ro e customer satis$action' Thus+ Malhotra 7ommittee ma#e a num(er o$ recommen#ations $or the *ell-(eing o$ the In#ian insurance in#ustry' The committee recommen#e# !ro!er training o$ insurance agents+ a#e8uate !ricing o$ insurance !ro#ucts an# !erio#ic re ie* o$ !remium rates' Malhotra 7ommittee recommen#e# $or esta(lishing a strong an# e$$ecti e authority $or the insurance sector similar to the 3ecurities an# B,change Boar# o$ In#ia %3BBI&' In a##ition to this+ the committee also recommen#e# that all the $our su(si#iaries o$ GI7 shoul# $unction as in#e!en#ent com!anies an# GI7 shoul# cease to (e the hol#ing com!any' Malhotra 7ommittee Re!ort su(mitte# in 1EE6 ga e arious recommen#ations $or the insurance sector+ such as ca!ital in estment in the insurer com!any shoul# (e increase# to 111 crore $or li$e insurance (usiness or general insurance an# Rs'211 crore $or the reinsurance (usiness' It also recommen#e# that the share o$ the $oreign in estment to the total in estment shoul# not (e more than 2@K o$ the share ca!ital in the insurance "oint enture com!any' Recommen#ations 3!eci$ic to GI7: F The go ernment shoul# ta)eo er the hol#ings o$ GI7 an# su(si#iaries+ so that they can act as in#e!en#ent cor!orations' F GI7 an# su(si#iaries are not to hol# more to an .K in any com!any' The current hol#ings o$ the com!anies shoul# (e (rought #o*n to the s!eci$ie# le el o er a !erio# o$ time'
76
7onsi#ering the a(o e recommen#ations+ the central go ernment enacte#+ GThe Insurance Regulatory an# Ae elo!ment Authority Act+ 1EEEH' The Act is a!!lica(le to all states e,ce!t =ammu an# Dashmir+ $or *hich this Act is a!!lica(le *ith mo#i$ications ma#e (y the go ernment' IRAA Act The Insurance Regulatory an# Ae elo!ment Authority Act+ 1EEE+ is the !ro#uct o$ a Bill su(mitte# to the Parliament in Aecem(er 1EEE' Insurance Regulatory an# Ae elo!ment Authority Bill *as !asse# on Aecem(er 2+ 1EEE' The IRAA Bill o!ene# the In#ian insurance sector to the rest o$ the *orl#+ through the entry o$ com!etiti e !layers in the insurance sector an# the in$lo* o$ long-term ca!ital' The IRAA Bill !ro i#e# $or the esta(lishment o$ Insurance Regulatory an# Ae elo!ment Authority+ as an authority to !rotect the interests o$ the hol#ers o$ insurance !olicies an# $or the regulation an# !romotion o$ In#ian insurance in#ustry' The IRAA Act !ro i#es statutory status to the regulator' The IRAA Bill has amen#e# the Insurance Act+ 1E40+ the -i$e Insurance Act+ 1E.@+ an# the General Insurance Business %Nationali9ation& Act+ 1E52' The Bill allo*e# $oreign !artici!ation in the insurance sector' The $oreign com!anies coul# ha e an e8uitysta)e u! to 2@K o$ the total !ai#-u! ca!ital' IRAA Act also $i,e# minimum ca!ital re8uirement $or li$e an# general insurance at Rs'111 crore an# $or reinsurance $irms at Rs'211 crore' The minimum sol ency margin $or !ri ate insurers is Rs'.11 million $or li$e insurance com!anies+ Rs'.11 million or a sum e8ui alent to 21 !ercent o$ net !remium income $or general insurance an# Rs'1 (illion $or reinsurance
77
com!anies' The Authority is a ten mem(er team consisting o$ a chairman+ a $i e *hole-time mem(ers an# $our !art-time mem(ers' B(#)@$%7 U= -1 GIC The #elin)ing o$ the $our national su(si#iaries o$ GI7 *as recommen#e# (y the Po##ar committee' The committee also recommen#e# trans$orming OGI7 as a national re On August 5+ 2112+ the Presi#ent o$ ln#ia later ga e his assent to the Geural Insurance Business %Nationali9ation& Amen#ment Bill+ 2112 an# the Insu+ nce %Amen#ment& Bill 2112' The General Insurance Business %Nationali9ation& Amen#ment Act+ 2112+ amen#e# the General Insurance Business %Nationali9ation& Amen#ment Act+ 1E52+ an# #elin)e# the General insurance 7or!oration %GI7& $rom its $our su(si#iaries N the National Insurance 7om!any -t#+ the Ne* In#ia Assurance 7om!any -t#+ the Oriental Insurance 7om!any -t# an# the Cnite# In#ia Insurance 7om!any -t#' Thus+ as !er the amen#ment+ General Insurance 7or!oration *as re8uire# to carry on reinsurance (usiness+ as the Onational reinsurer o$ the In#ian insurance in#ustry' The su(si#iaries *ere as)e# to increase their e8uity (ase to Rs'111 crore+ to com!ly *ith the regulations o$ IRAA' All these !u(lic sector com!anies ha# an e8uity (ase o$ Rs'61 crore !re iously' The shares o$ these com!anies !re iously hel# (y the #7+ *ere trans$erre# to the go ernment' Accor#ing to o$$icials+ hi)ing ca!ital (ase is a !art o$ an o erall e$$ort to restructure the entire nationali9e# general insurance in#ustry' The restructuring *as aime# at !ro i#ing autonomy to !u(lic sector com!anies'
78
GIC E T2# N),$-%)6 R#$%&'(#(

Reinsurance (usiness in In#ia #ates hac) to the 1E@1s' A$ter in#e!en#ence there ra!i# #e elo!ment o$ the insurance (usiness+ hut there *as negligi(le !resence reinsurance com!anies in In#ia' Thus+ the #omestic re8uirement o$ reinsurance *as nette# mostly $rom $oreign mar)ets mainly British an# continental' As un#erta)ing reinsurance (usiness (y In#ian com!anies meant huge out$lo* o$ $oreign e,change an# in 1E.@ In#ian Reinsurance 7or!oration *as esta(lishe#' It $orme# as a !ro$essional reinsurance com!any (y some general insurance com!anies' The com!any recei e# oluntary 8uota share cessions $rom mem(er com!anies' -ater another reinsurance com!any+ the In#ian Guarantee an# General Insurance 7o' *as $orme# in 1E@1' <ith this set u!+ a regulation *as !romulgate# *hich ma#e it statutory on the !art o$ e ery insurer to ce#e 21K in Fire an# Marine 7argo+ 11 K in Marine hull an# miscellaneous insurance+ an# $i e !ercent in cre#it sol ency (usiness' Prior to nationali9ation+ there *ere .. non-li$e #omestic insurers an# each com!any ha# its o*n reinsurance arrangement' A$ter nationali9ation+ all these com!anies *ere (rought un#er the aegnts o$ General Insurance 7or!oration an# $our su(si#ies *ere $orme#+ *ith GI7 as the hol#ing com!any' <ith this (ac)#ro!+ it has (een a 8uantum "um! $or the In#ian reinsurance mar)et+ *ith GI7 (eing esta(lishe# as the Onational reinsurer' Barlier insurance com!anies ha# to #e!en# on $oreign mar)ets+ (ut no* a$ter the IRAA Act has (een !asse#+ GI7 has $ocuse# on com!eting *ith the (est in the *orl#'
79
GI7s reinsurance (usiness can (e #i i#e# into t*o categories; #omestic reinsurance an# international reinsurance' On the #omestic $ront+ GI7 !ro i#es reinsurance to the #irect general insurance com!anies in the In#ian mar)et' GI7 recei es statutory cession o$ 21K on each an# e ery !olicy su("ect to certain accor#ing to the current statute It lea#s many o$ #omestic com!anies !rograms an# $acultati e !lacements' As the sole reinsurer o$ the # insurance mar)et+ GI7 s ca!acity $or each class o$ (usiness on treaty an# $acultati e % (usiness is gi en (elo*:
80
GI7 is also emerging as an international !layer in the glo(al reinsurance e ol ing itsel$ as an e$$ecti e reinsurance solutions !artner $or the A$rican region' In a##ition to that+ it has also starte# lea#ing reinsurance !rogrammes se eral insurance com!anies in 3AAR7 countries+ 3outh Bast Asia+ Mi#A$rica' GI7 !ro i#es the $ollo*ing ca!acities $or treaty an# $acultati e the international mar)et on ris) emanating $rom international mar)et 1 merits o$ the (usiness' General Insurance 7or!oration+ as the OIn#ian Reinsurer+ com!lete# year on March 41+ 2112' Although+ there has (een an increasing !resence in international mar)ets+ the $ocus o$ the 7or!orations o!erations continue #omestic mar)et+ as it constitutes aroun# E6K o$ its total !ort$olio' The 7or!oration increase# to Rs'11+450'06 crore $rom Rs'5+554'@5 cr1
March 41+ 2112' 3imilarly the total in estments o$ the 7or!oration stoo#
81
Rs'514.'04 crores as against Rs'@+46.'44 in the !re ious year' The total in estment income o$ the cor!oration *as Rs'E@1'01 crore as against Rs'054'61 crore in the !re ious year an# gross #irect !remium income o$ GI7 $or the year amounte# Rs'411'.5 crore' Accor#ing to in#ustry sources+ General Insurance 7or!oration %GI7& is targeting signi$icant gro*th $or its in*ar# $oreign reinsurance (usiness' The reinsurer is !lanning to o!en its (ranch in Au(ai in the near $uture' The reinsurance (usiness the Mi##le Bast region targete# (y GI7 ranges (et*een Rs'4-. million' Aroun# 24K o$ the total in*ar# (usiness $or GI7 comes $rom the Mi##le Bast countries' In a##ition to that GI7 is !lanning to esta(lish its !resence in -on#on+ Mosco*+ 7hina+ Dorea+ an# Malaysia' In 2112+ GI7 $loate# Tari9ln#ia in Tan9ania through Denln#ia+ *hich is a "oint enture *ith -i$e Insurance 7or!oration' At !resent it is also loo)ing a strategic !artnershi! *ith A$rican reinsurance ma"or+ Bast A$rica Re' On the #omestic $ront+ the GIn#ian Reinsurer+H !lays the role o$ reinsurance $acilitator $or the In#ian insurance com!anies' The 7or!oration continues to act as Manager o$ the Marine /ull Pool on (ehal$ o$ the insurance in#ustry' The 7or!orations reinsurance !rogram is #esigne# to $ul$ill the o("ecti es ma,imi9ing retention *ithin the country+ #e elo!ing a#e8uate ca!acity+ security the (est !ossi(le !rotection $or the reinsurance costs incurre# an# sim!li$ying ti a#ministration o$ (usiness' T2# !(#&#%, S*#%)($General Insurance 7or!oration has (een *ell a#a!ting itsel$ to the changing re$orms scenario' To $ocus itsel$ on the reinsurance mar)et (oth #omestic an international+ it has ta)en arious #ecisions to su!!ort its ne* cor!orate
82
ision' I =anuary 2116+ GI7 has #eci#e# to e,it its mutual $un# arm+ GI7 Mutual Fun#+ so to $ocus on core reinsurance o!erations' The $un# ha# (een constantly un#er!er$orming $or the last $e* years' In 2112 -2114+ there has (een *ho!!ing increase in the $oreign in*ar# reinsurance !remium at Rs'@11 crore' This increase has !ushe# the total reinsurance !remium to o er Rs'4+011 crore' The In#ia reinsurer+ is *illing to *rite more ris)s in the #omestic mar)et' The un#er*riting+ losses $ell (elo* the Rs'.11 crore-mar)' Though the se ere #rought+ too) its toll cii GI7s un#er*riting *ith agricultural losses 9ooming to Rs'611 crore in 2112-14 The claims ratio re#uce# #uring the year $rom E6 to 0@K' Though the 8uantum o $oreign in*ar# !remium is lo* in the total !remium income+ the increase in it: share o er the last one year is signi$icant' In 2112-14+ the share o$ $oreign !remiun has (een o er 1.K com!are# to "ust @K in the !re ious year' International cre#it rating agency+ A M Best+ has gi en GA %B,cellent&H rating tc the cor!oration in#icating its $inancial strength' The rating re$lects not only th 7or!orations e,cellent $inancial !osition an# conser ati e in estment !ort$olio (ut also recogni9es its lea#ing !osition in the glo(al insurance mar)et' General Insurance 7or!oration has $ormulate# !lans to ca!itali9e its strengths an# ca!a(ilities in the international mar)et an# consoli#ate its o!erations in In#ia to !ro i#e re8uisite e,!ertise an# technical s)ills to the #omestic !layers' Thus+ *e can conclu#e that our ONational Reinsurer has the re8uisite an# inherent ca!a(ility o$ meeting the $uture challenges an# is rea#y to ma)e strenuous e$$orts to achie e its cor!orate ision o$ (ecoming lea#ing international reinsurer in the years to come'
83
CONCL:"ION
<ith the outster o$ such terrorist attac)s+ calamities an# sti$$ com!etition the reinsurers ha e to $ight *ith each other to gra( their share o$ !remium mar)et share this *ill (e more sti$$er an# #i$$icult in the times to come'
84
REFERENCES
B--@&
Reinsurance 7once!ts An# 7ases Z A(hishe) Agra*al+ I7$ai Press Practice o$ Reinsurance in C) Reinsurance I7-0.+ III
N#3&=)=#(&C M)7)G$%#& & "-'(%)6&

The Bconomic Times Mint The Times o$ In#ia Business 3tan#ar# Business To#ay Business line
W#:&$,#&
htt!:LLen'*i)i!e#ia'orgL*i)iLReinsurance htt!:LL***'scor'comL***Lin#e,'!h!Ui#[1@I-[2 htt!:LL***'s*issre'comL!*sLresearchK21!u(licationsLsigmaK21ins'K21researchLsigma K21archi eLsigmaK21archi eK21K20englishK2E'html htt!:LL***'9urich'comLmainL!ro#uctsan#solutionsLin#ustryinsightL2114Lse!tem(er2114Lin#ustryi nsight2114102@\111'htm htt!:LL***'all(usiness'comLmanagementL1E4E21-1'html 85
***'ir#ain#ia'org ***'insuranceinstituteo$in#ia'com ***'google'com ***'in#iain$oline'com htt!:LL***'generalinsurancecouncil'org'inL htt!:LL***2'stan#ar#an#!oors'comL!ortalLsiteLs!LenLusL!age'siteselectionLsite\selectionL1+1+1+1+1 +1+1+1+1+1+1+1+1+1+1+1'html htt!:LL***'(usinessinsurance'comL htt!:LL***'$icci'comLme#ia-roomLs!eeches-!resentationsL2114
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L.N. COLLEGE OF MANAGEMENT & TECHNOLOGY MALAD (WEST) MUMBAI 64.

ACADEMIC YEAR (2007-200 ) SEMESTER II

R#$%&'()%*#+ I%&'()%*# ,- I%&'(#(&. (B'&$%#&& E%/$(-%0#%,)

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Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

HISTORY OF INSURANCE INDUSTRY

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

I% ,(#),8 (#$%&'()%*#+ the ce#ing com!any is contractually (oun# to ce#e

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Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

Reinsurance: Insurance to Insurers

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THE REINSURANCE MAR?ETS

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MAR?ET SHARE OF REINSURERS

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W-(69.& T-= A0 R#$%&'(#(&

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R#$%&'()%#+ I%&'()%# ,- I%&'(#(&. (B'&$%#&& E%/$(-%0#%,)

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The groth o$ insurance !remium (y years is shon on the $ollo*ing chart:

!(-#9'(# ,- :# F-66-3#9 1-( R#$%&'()%# A(()%7#0#%,& )& =#( IRDA

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