CHAPTER 1 1.1 INTRODUCTION TO REINSURANCE 1.2 DEFINITION 1.3 ORIGIN AND DEVELOPMENT OF REINSURANCE 1.4 OBJECTIVES OF REINSURANCE 1.

5 PRINCIPLES OF REINSURANCE 1.6 IMPORTANCE OF REINURANCE 1.7 FUNCTIONS OF REINSURANCE

1.1 INTRODUCTION TO REINSURANCE INTRODUCTION The term Reinsurance, also termed as insurance of insurance. Means that an insurer who has assumed a large risk may arrange with another insurer to insure a proportion of the insured risk. In other words, in the event of loss, if it would be beyond the capacity of the insurer than this reinsurance process is restored to. In reinsurance, therefore, one insurer insures the risk which has been undertaken by another insurer. The original insurer who transfers a part of the insurance contract is called the reinsured and the second insurer is called the reinsurer. f course the reinsurance has to pay reinsurance premium for risk shifted. !or e"ample, a man wishing to insure his premium for #$ lakhs goes to an insurance company, which will accept the risk if it is satisfied as to the condition of the property. %ut if it its own limit is probably Rs & lakhs, it will arrange with another company to reinsure or to take up so much of the risk as e"ceeds its limits, i.e. Rs & lakhs, so that if the house is burnt down the original insurer would pay the owner Rs #$ lakhs. %ut they would be recouped & lakhs, by the reinsurance offices. To be effective, the reinsurance policy must be formulated after carefully considering all aspects of the situation to which it is to be applied. 1.2 DEFINITION Reinsurance is a transaction in which one insurer agrees, for a premium, to indemnify another insurer against all are part of the loss that insurer may sustain under its policy or policy or policies of insurance. The company purchasing reinsurance is known as the ceding insurer' the company selling

reinsurance is known as the assuming insurer, or, more simply, the reinsurer. Reinsurer can also be described as the (insurance of insurance companies) Reinsurance provides reimbursement to the ceding insurer for lasses covered by the reinsurance agreement. It enhances the fundamental ob*ectives of insurance to spread the risk so that no single entity finds itself saddled with a final burden beyond its ability to pay. Reinsurance can be ac+uired directly from a reinsurance intermediary. 1.3 ORIGIN AND DEVELOPMENT OF REINSURANCE In the years #,-# to #,-., no less than twelve independent reinsurance institutions were founded in /ermany, of which very few survive today. The pressure of competition led to unwholesome practices, and soon many of these newly formed companies found themselves in dire straits. In branches of insurance, other than fire insurance, we find no definite tendency in the 0-$0s toward the establishment of separate reinsurance facilities in /ermany. 1rnst 2lbert Masius, in his 3Rundschau3 in #,45, deplored the lack of reinsurance facilities in hail insurance. 1ven at the present time, this branch of the business lacks ade+uate reinsurance service. Fun !"#n$!%& In the most widely accepted sense, reinsurance is understood to be that practice where an original insurer, for a definite premium, contracts with another insurer 6or insurers7 to carry a part or the whole of a risk assumed by the original insurer. %y insurers we mean all persons, partnerships, corporations, associations, and societies, associations operating as 8loyd0s,

inter9insurers or individual underwriters authori:ed by law to make contracts of insurance. ;e may define insurance as an agreement by which one party, for a consideration, promises to pay money or its e+uivalent, or to do an act valuable to the insured, upon the happening of a certain event or upon the destruction, loss or in*ury of something in which the other party has an interest. The insurance business is the business of making and administering contracts of insurance. Insurance contracts are of two types those which engage merely to pay a sum of money on the happening of an event, or merely to begin a series of payments on or after the happening of a certain event, are contracts of investment. <ontracts of insurance which engage to pay money or its e+uivalent, or the doing of acts valuable to the insured, upon destruction, loss or in*ury involving things, are contracts of indemnity. 2nd so, reinsurance may be second insurance of 6a7 <ontracts of investment and=or 6b7 <ontracts of indemnity. There may e"ist, therefore, two types of insurance business, depending upon which of these two organic contracts the business engages to administer. R'&(& )!**'# +, $-# 'n&u*#* The need for reinsurance arises out of the fact that a first or primitive insurer bears two distinctly different ma*or risks' 6#7 The risk that the events insured against will happen among a number of homogeneous risks> 6?7 The risk that certain events insured against will happen among a heterogeneous group of risk to one or several insured entitled by contract to

an e"ceptional payment in money or its e+uivalent, or entitled to e"ceptional, costly service. C!&# 1. 2n insurer contracts to pay @#$,$$$ to the beneficiary of each of ,$5 persons insured by him at ?# years of age, in event of the death of the insured during the contract year. This group is homogeneous in respect to amount insured and class of risk. Ae charges a net premium of #.?? per cent., or @B,,..? to meet the e"pected claims in that year of age. C!&# 2. 2ssume, however, that the insurer has accepted, as a second instance, a heterogeneous group composed of ,$& risks at @#$,$$$ each and one risk at @#$$,$$$. This produces @BB,4.$ in premiums. If in <ase #, only , deaths actually occur with a uniform coverage of @I$, $$$ each, the premiums are @B,,..? and the claims @,$,$$$, leaving an underwriting profit of @#,,..?. If in <ase ?, the @#$$,$$$ policyholder and seven @#$,$$$ policyholders die, the premiums are @BB,4.$, and the claims @#-$,$$$, or an underwriting loss of @-$,&-$. ;e had in the first case the carrier of a group of primary, homogeneous risks, with only a slight ha:ard to him that the number of actual claims would e"ceed the e"pected. 2gainst this slight ha:ard the insurer is supposed to hold paid9in capital and surplus 6or 3guarantee capital3 in case he was a mutual underwriter7. Clightly e"ceptional losses above the e"pected are to be made up by slightly favorable underwriting profits in the long run of the business. In the second case, the insurer is not only carrying a group of primary, homogeneous risks but also the secondary risk of selective loss through the death of the @#$$,$$$ policyholder. The +uality of the second group of risks is heterogeneous with respect to the carrier0s interests. Insurers have

historically met the second risk through the practice of two varieties of coinsurance' 6#7 1"ternal or true coinsurance or 6?7 Internal coinsurance or reinsurance. HISTOR/ OF REINSURANCE Reinsurance has a rather illustrious history eating back #$ the fourteenth century. 1ven though there is no authentic information of the first reinsurance contract, it is widely recogni:ed that 8ombardians beggar Develop the concept of reinsurance in circa #?$$ 2D and from whence the concept of reinsurance took ground. 120011600 AD The emergence of the reinsurance concept and its slow pace of e"pansion was one of the remarkable features of this time. Marine business was one of the earliest fields that recogni:ed the need of reinsurance to protect its business from the dangers and rakes of marine transport.

160011250AD Though marine insurance nourished during this period in 1urope, it suffered a set back in EF, where it went largely unrecogni:ed e"cept when the insurer became insolvent or went bankrupt or died. This ban lasted till #,54 and as such there was no recorded reinsurance business in 1ngland. 2fter the great fire of 8ondon in #555, an interest to insure against fire suit faced and regulators soon made modifications to reduce their losses. In the year #--5 royal concession was granted to the Royal <hartered !ire insurance

<ompany of <openhagen to undertake fire insurance one of the earliest recorded fire reinsurance transactions place in #,#. when the 1agle hire Insurance <ompany of Gew Hork assumed all of the outstanding rim the Enion Insurance <ompany, but it really e"ecuted, as the insurer did not avail this facility and after this the earliest recorded fire insurance then which was e"ecuted dates back to the year I,?# between the Gational 2ssurance <ompany, Iaris, !rance and the assuming reinsurer the Enited Iroprietors of %elgium. Jalidation of the reinsurance contract by the Cupreme <ourt of Gew Hork boosted a number of reinsurance contracts contracted. In l,,. the Cupreme <ourt gave its consent in the case between Gew Hork %rowery Insurance <ompany, the cedent, and the Gew Hork !ire Insurance <ompany, the reinsurer. This case acted as a catalyst for the emergence of reinsurance companies and thus began a new era in the reinsurance sector and in KC42 the current system of life reinsurance took seed. The first life treaty as such dates back to #,&,. F*3" 1250 3n4!* & %y he mid nineteenth century there was a boom in the 1uropean reinsurance business and /ermany became the hotbed for reinsurance activity. Many /erman reinsurance companies undertook business of> large scale and new reinsurance companies flourished. %ut the after9effects of the two world wars spilled over to the reinsurance markets leading to the emergence of 8ondon as a strong player in the reinsurance sector. ne of the pioneers of the insurance industry, 8loyd0s of 8ondon, began its operations in the year #5,,. It initially ventured into life insurance only and because of the ban imposed on marine insurance they could not make much

headway. nce the ban was lifted it opened its business in all the spheres of insurance activity and with the introduction of e"cess of loss reinsurance it aggressively *umped into the fray and became one of the strongest players in the industry. THE FIRST INDEPENDENT REINSURANCE COMPAN/ In #,45, the first independent reinsurance company was founded in /ermany, the <ologne Reinsurance <ompany. This was the idea of Mevissen. Ae held that an independent reinsurance company would be no competitor of the direct9writing companies and that it was certain to be welcomed by and to receive a good volume of business from those companies. Mevissen0s idea of #,45 did not mature, however. !or various reasons the company did not begin business until #,&?, and then only with the assistance of considerable !rench capital. This marked the establishment of reinsurance as a specific, independent branch of the business. ut of small beginnings, this company began to prosper and its e"ample began to attract other enterprising persons. During the first three years of its business life the <ologne Reinsurance <ompany e"tended its operations in /ermany, 2ustria, Cwit:erland, %elgium, Aolland and !rance, and then tried to arrange treaty contracts with 1nglish companies. It seems that domestic 1nglish reinsurance business, at that time, was +uite unprofitable to the reinsures and the Manager of the <ologne was obliged to keep out f the 1nglish market. n Lune ?4, #,&., a fire treaty was concluded between the 2achen and Munchener !ire Insurance <ompany and its subsidiary, the 2achener Reinsurance <ompany. This was an early e"ample of a true 3first surplus3 treaty under which the reinsurer was allotted one9tenth of every surplus risk, with certain modifications in respect to various classes of risk enumerated in

the contract. It is interesting to note that the 2achen 9 Munchener <ompany had an earlier arrangement with 80 Erbaine, Iaris. FIRST RECORDED REINSURANCE CONTRACT The first reinsurance contract on record relates to the year #.-$, when an underwriter named /uilano /rillo contracted with /offredo %enaira and Martino Caceo to reinsure a ship on part of the voyage from /enoa to the harbor of %ruges. 2s early as the twelfth century, marine insurance began to be transacted through the so9called 3<hambers or 1"changes of Insurance,3 which had for their ob*ect, first, the promotion of the marine insurance business on a solid basis and, second, the settling of disputes arising among merchants and others concerned in bottomry and respondentia contracts. In later years, these <hambers or 1"changes of Insurance became corporate bodiesand instead of remaining confined to the original function of regulating and registering insurance made by others, actually undertook an insurance business themselves. ;ith the establishment and functioning of 8loyd0s in #-#$, there was a marked decline in the transaction of insurance business through these <hambers or 1"changes. There is a suggestion of reinsurance practice in the 32ntwerp <ustoms3 of #5$B. Come mention of reinsurance practice is to be found also in the 3/uidon de la Mer,3 a code of sea laws in use in !rance from a very early date. These marine regulations were consolidated and published at %ordeau" in #54- and at Rouen in #5-#. The author of the consolidations was said to have been <leirac. ;ith the shift of centers of commerce from the south, southwest and west of 1urope to the north, 1ngland0s foreign trade grew. Marine insurance followed in its wake. Come underwriters found they could affect reinsurance with others.

Enderwriters were accustomed to assign parts of risks to others at lower rates, and these reinsures had hopes of finding other persons who would take parts of these risks at still lower rates. This traffic in premium differences was so greatly abused that in #-45 it was forbidden. 6#B /eo. II, c .-, Cection 47. Ender this statute, reinsurance was permitted only if the party whose risk was reinsured was insolvent, bankrupt or in debt and if the transaction was e"pressed in the policy to be a reinsurance. The statute was more or less of a dead letter and was repealed by ?- and ?, Jict.c &5, Cection I on Luly ?&, #,54 1.4 OBJECTIVES OF REINSURANCE In&u*#* 5u*)-!&#& *#'n&u*!n)# 63* #&&#n$'!%%, 63u* *#!&3n&. #7 To limit liabilities on specific risks ?7 To stabili:e loss e"panses .7 To protect against catastrophes> and 47 To increase capacity. Different types of reinsurance contract are available in the market commensurate with the ceding companys goals. 1. L'"'$'n7 %'!+'%'$,.

%y providing a mechanism in which companies limit loss e"posure to levels commensurate with net asset, reinsurance companies allows insurance companies to offer coverage limits considerably higher then they could otherwise provide. This function of reinsurance is crucial because they allow all companies, large and small, to offer coverage limits to meet their policyholders needs. In this manner, reinsurance provides an avenue for small9to9medium si:e companies to compete with industry giants. In

calculating an appropriate level of reinsurance, a company takes in to account the amount of its available surplus and determines its retention based on the amt of loss it cam absorb financially. Curplus, sometime referred to as policyholders surplus, in the amount by which the asset of an insurance e"ceeds its liabilities 2 companys retention may range from a few lakhs rupees o thousand of crores. The reinsurer indemnifies the loss e"posure above the retention, up to the policy limits of the reinsurance contract. Reinsurance helps to stabili:e loss e"perience on individual risks, as well as an accumulated loss under many policies occurring during a specified period. 2. S$!+'%'8!$'3n.

Insurance often seeks to reduce the wide swing in profit and loss margins inherent to the insurance business. These fluctuations result, in part, from the uni+ue nature of insurance, which involves pricing a product whose actual cost will not be known until sometime in the future. Though reinsurance, insurance can reduce these fluctuations in loss e"perience, thus stabili:ing the company overall operating result. 3. C!$!&$*35-# 5*3$#)$'3n.

Reinsurance provides protection against catastrophe loss in much the same way it helps stabili:e an insurers loss e"perience. Insurer uses reinsurance to protect against catastrophes in two ways. The first is to protect against catastrophic loss resulting from a single event, such as the total fire loss of large manufacturing plant. Aowever, an insurer also seeks reinsurance to protect against the aggregation of many smaller claims, which could result from a single event affecting many policyholders simultaneously, such as an

earth+uake as a ma*or hurricane. !inancially, the insurer is able to pay losses individually, but when the losses are aggregated, the total may be more than the insurer wishes to retain. Though the careful use of reinsurance, the descriptive effect catastrophes have on an insurers loss e"perience can be reduced dramatically. The decision a company makes when purchasing catastrophe coverage are uni+ue to each individual company and vary widely depending on the type and si:e of the company purchasing the reinsurance and the risk to be reinsured. 4. In)*#!&# )!5!)'$,.

<apacity measures the rupee amount of risk an insurer can assume based on its surplus and the nature of the business written. ;hen an insurance company issues a policy, the e"penses associated with issuing that policy9 ta"es, agents commissions, administrative e"penses9are changed immediately against the companys income, resulting in a decrease in surplus, while the premium collected must be set aside in an unearned premium reserved to be recogni:ed as income over a period of time. ;hile this accounting procedure allows for strong solvency regulation, it ultimately leads to decreased capacity because the more business an insurance company writes, the more e"penses that must be paid from surplus, thus reducing the companys ability to write additional business. PURPOSES OF REINSURANCE 3Reinsurance achieves to the utmost e"tent the technical ideal of every branch of insurance, which is actually to effect 6#7 The atomi:ation,

6?7 6.7

The distribution and The homogeneity of risk. Reinsurance is becoming more and more the essential element of each of the related insurance branches. It spreads risks so widely and effectively that even the largest risk can be accommodated without unduly burdening any individual.

1.5 PRINCIPLES OF REINSURANCE 9HAT IS REINSURANCE: Insurers take out their own insurance 9 this is called reinsurance. ;hen you look at the risks that insurers take on, it is not surprising that they themselves might want to have insurance. ;hen insurers insure a risk again, it is called reinsurance. Reinsurance is an e"tension of the concept of insurance, in that it passes on part of the risk for which the original insurer is liable. Reinsurance contracts are slightly more specialists than insurance contracts but for most part they work in e"actly the same way M it is *ust that the insured is another insurer, known as the reinsured 6Cee the %asics of Insurance for an e"planation of how insurance contracts work7. 2 contract of reinsurance is between the insurer and reinsurer only and legally there is no direct link between the original insured and any reinsurer. The original insurer is still the one who must pay any claim from the insured M the insurer must then make its own separate claim against the reinsurer.

1.6 I"53*$!n)# 36 R#'n&u*!n)# #7 To protect against large claims. !or e"ample, in the case of a fire in a large oil refinery or a large city hit by an earth+uake, insurers will spread the risk by reinsuring part of what they have agreed to insure with other reinsures so that the loss is not so severe for any one insurer. ?7 To avoid undue fluctuations in underwriting results. Insurers want to ensure a balanced set of results each year without peaks and troughs. They can therefore get reinsurance which will cover them against any unusually large losses. This keeps a cap on the claims the insurer is e"posed to having to pay it. .7 To obtain an international spread of risk. This is important when a 47 country is vulnerable to natural disasters and an insurer is heavily committed in that country. Insurance may be reinsured to spread the risk outside the country. &7 To increase the capacity of the direct insurer. Cometimes insurers want to insure a risk but are not able to do so their own. %y using reinsurance, the insurer is able to accept the risk by insuring the whole risk and then reinsuring the part it cannot keep for itself to other reinsures. 8ike the direct insurance market, reinsurance usually involves specialist brokers who have e"pert knowledge of the market and access to reinsurance underwriters on behalf of their clients.

1.7 FUNCTIONS OF REINSURANCE There are many reasons why an insurance company would choose to reinsure as part of its responsibility to manage a portfolio of risks for the benefit of its policyholders and investors '
#. R'&( $*!n&6#*

The main use of any insurer that might practice reinsurance is to allow the company to assume greater individual risks than its si:e would otherwise allow, and to protect a company against losses. Reinsurance allows an insurance company to offer higher limits of protection to a policyholder than its own assets would allow. !or e"ample, if the principal insurance company can write only @#$ million in limits on any given policy, it can reinsure 6or cede7 the amount of the limits in e"cess of @#$ million. Reinsurances highly refined uses in recent years include applications where reinsurance was used as part of a carefully planned hedge strategy.
2. In)3"# &"33$-'n7

Reinsurance can help to make an insurance companys results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage.
3. Su*5%u& *#%'#6

2n insurance company0s writings are limited by its balance sheet 6this test is known as the solvency margin7. ;hen that limit is reached, an

insurer can stop writing new business, increase its capital or buy 3surplus relief3 reinsurance. The latter is usually done on a +uota share basis and is an efficient way of not having to turn clients away or raise additional capital.
4. A*+'$*!7#

The insurance company may be motivated by !*+'$*!7# in purchasing reinsurance coverage at a lower rate than what they charge the insured for the underlying risk

CHAPTER 2 2.1 T/PES OF REINSURANCE 2.2 DOUBLE INSURANCE 2.3 OVER INSURANCE 2.4 E;TERNAL AND INTERNAL INSURANCE

2.1 T/PES OF REINSURANCE. There are two kinds of reinsurances, treaty reinsurance and facultative reinsurance. 1. T*#!$, *#'n&u*!n)#. This kind of reinsurance re+uires that the reinsurer will assume part or all of a ceding companys responsibility for certain sections or classes of business in accordance with the terms of the policy. It is an obligatory contract as the ceding company has to cede the business and the reinsurer is obliged to assume the business as per the treaty. It is the preferred type of reinsurance when groups of homogenous risks are considered. 2. F!)u%$!$'<# *#'n&u*!n)#. This kind of reinsurance is used while considering a particular underlying risk of an individual contract. It is the reinsurance of all or part of a single policy after the terms and conditions have been negotiated. It reduces the ceding companys e"posure to risk from an individual policy. It is non9 obligatory. In another way, reinsurance is classified as proportional and non9 proportional reinsurances. A. PROPORTIONAL REINSURANCES.

The two companies share the premium as well as risk. The reinsurer usually pays a ceding commission.

!=

P*31*!$! *#'n&u*!n)#. It is a classification based on the way the two companies share the risk. The cedent and the reinsurer share a pre decided percentage of the premium and losses. It is used widely as it provides surplus protection. There are two types of pro9rata reinsurance, +uota share and surplus share.

+=

>u3$! &-!*# 5*31*!$! *#'n&u*!n)#. The primary insurer cedes a fi"ed percentage of premiums and loses for every risk accepted.

)=

Su*5%u& &-!*# 5*31*!$! *#'n&u*!n)#. It is different in that not every risk is ceded but only those that e"ceed certain predetermined amounts.

B.

NON1PROPORTIONAL REINSURANCE. 2s the name suggests it is not proportional and the reinsurer only responds if the loss suffered by the insurer e"ceeds a certain amount. != E?)#&& 36 %3&&.

It covers a single risk or a certain type of business. <atastrophe reinsurance is a type of e"cess of loss reinsurance. It provides the captive with a great deal of fle"ibility += S$35 %3&& *#'n&u*!n)#. It covers the whole account and is also known as e"cessive loss ratio reinsurance. These are the various types of reinsurances. There are firms that offer their services as well as their products to help new business start up flourish and succeed. 2.2 DOUBLE INSURANCE The sub*ect matter of the double insurance implies that it is insured with two or more insurers and the total sum insured e"ceeds the actual value of the sub*ect matter. It is called as Double insurance. In other words, the sub*ect mater of double insurance must be insured with different insurers. If the actual value of the sub*ect matter is more than the total sum insured, it is not treated as double insurance. In the case of life insurance, double insurance can be shone profitable because the insured can get full policy money under all policies. !or e"ample if a premises worth of Rs. ?,$$,$$$ is insured with y for Rs. #,4$,$$$ and Rs. #,&$,$$$ it is treated as double insurance because the total value of the sub*ect matter i.e. total of all the policies e"ceeds the actual value of the premises. Cuppose if it is insured with N and H for Rs -$,$$$ each, there is no double insurance. 2.3 OVER INSURANCE

;hen the amount for which a sub*ect matter is insured is more than its actual value it is called as over insurance. !or over insurance, the only criterion is the amount of insurance. It can even be with one insurer alone. 8ords Mansfield, while dealing with these rules of contribution in case of over9insurance lay down as follows' In the case of over insurance, the different sets of policies are considered as making but one insurance, and are good to the e"tent of the value of the effects put in risk' the assured can cover an the different policies, and recover from those, he so sued, to the full e"tent of his loss, supposing it to be covered by the policies on which he effects to sue, leaving the underwriter on the policy to recover a ratable sum by way of contribution from the underwriters of the other policy. F3* E?!"5%#. ;here a merchant, the value of those whose whole interest is @??$$#, first effected a policy on his interest at 8iverpool for @ #-$$#, and hen without fraud another policy on the same interest at 8ondon for @??$$#, he is allowed to recover the whole amount on the 8ondon Iolicy, and the 8ondon underwriters are allowed to recover a ratable amount by way of contribution from the 8iverpool underwrite. 2.4 E;TERNAL AND INTERNAL INSURANCE Depending on their nature and scope, the risk insurance may be broadly classified as 1"ternal insurance and Internal Insurance. 1= E;TERNAL INSURANCE

1"ternal insurance is referred to any insurance a firm facing in the commercial market. <aptive insurers, risk retention group and risk sharing pools are the important alternative techni+ues that have been developed for commercial insurance. The group captives may be classified into pure captive and association or group captives. Risk retentions groups are formed for the purpose of retention or pooling risk. 2= INTERNAL INSURANCE Internal insurance may be described as an alternative to purchasing insurance in the commercial market. Come public organisation, enterprise, individual and institutions have established a fund to meet the insurable losses. 2s the risk is retained within the organisation, here is no market transaction of buying insurance cover. Internal insurance is also termed as self insurance. This mainly focuses attention and effort on the high fre+uency and low severity profile and implies that the losses are predictable. motor claims are the best e"ample of self insurance. NE9 ECONOM/ @ NE9 RISAS1 ARE REINSURANCE wn damages

COMPANIES LISTENING: The 3Gew 1conomy3 present0> new and significant challenges to business, government, education> religion, and culture. /eographic borders are becoming anachronistic symbols of the old economy as the powerful force of e9commerce tears down artificial obstacles to trans9border trade. ;hat do all these issues mean for the insurance and reinsurance industry.

;hile all industries are affected by this electronic sea change in the world0s economy, no industry is more affected than the insurance industry. It is the insurance and reinsurance industry that provides the protection against risk that allows businesses to produce their products and e"pand their markets and it is this industry that must meets the challenges of the now economy and protect against old and new risks generated by e9commerce. Reinsures must constantly monitor court decisions, new e9commerce coverage products, and changes in technology. The new economy already has claimants seeking coverage for a range of losses from damaged hardware and software to claims of defamation. <overage disputes have arisen about whether this looses is covered under traditional commercial liability policies 63</837 or under newer policies specifically designed for e9 commerce risk. Reinsures must be prepared to address new risks as they arise out of e9commerce transaction. The following are some of the important issues that reinsurance companies have to tread undertaking new economy risk. 1commerce risk insurance and reinsurance companies have to take new kind of risks that come bundled with the e9commerce are a variety of risks that present loss both to the business undertaking e9commerce and the companies which are writing their risks.

CHAPTER 3 3.1 ASSESSMENT OF RISA TRANSFER @ ACCOUNTING 3.2 DESIGNING A REINSURANCE PROGRAM 3.3 PROCEDURE TO BE FOLLO9ED FOR REINSURANCE ARRANGEMENTS 3.4 SECURIT/ 3.5 THE IMPORTANT E1COMMERCE RISAS ARE

3.1 ASSESSMENT OF RISA TRANSFER @ ACCOUNTING In additional to substantially increased disclosure re+uirements, the G2I<s 2ccounting Iractices and Irocedures Task !orce has modified the G2I<s accounting guidance. The 2ccounting Iractices and Irocedures Manual identify the essential ingredient of a reinsurance contract as the transfer of insurance risk. This element of insurance risk transfer is essential because it enables a reinsurance contract to +ualify for loss reserve credit, and this credit is an important financial consideration. The Manual goes on to state that investment risk is not an element of insurance risk. The result of this re+uirement that there be an insurance risk is to curb a practice that the insurance regulators consider a misuse of reinsurance contracts. Aowever, the regulators have used changes in accounting re+uirements rather than regulatory restraint to bring about the change. 2 failure of a reinsurance contract to contain insurance risk will result in the reinsurance balances being accounted for as deposits rather than +ualifying for loss reserve credit. 3.2 DESIGNING A REINSURANCE PROGRAM Aaving decided a particular class and amount of business to be involved in, a company must decide some form of reinsurance which it re+uires. %asically the facultative form is more cumbersome, time9consuming and

also more e"pensive. 2s such it is always wiser to consider a suitable combination of treaties. The ultimate choice as regards a particular treaty or a combination of treaties would depend upon whether the portfolio is e"posed to large individual losses or accumulation of losses from sporadic, isolated events. 2part from the above, other considerations that have a bearing on a company0s choice of portfolio are' 2dministrative costs and ease of operations. 1ffect on company0s net retained premium income ;hether it wishes insurers. In case of large risks on classes of business such as !ire, 1ngineering, Marine hull, etc., a surplus treaty would be the best option for the cedent company as it would enable retention of a large part of premium income. Aowever, because of the special skills involved, a company might be inclined towards reinsuring the business on a risk e"cess of loss. !urther, the administrative hassles of maintaining a suipbis treaty are more as compared to those of +uota share or e"cess of icss. It would also enable the company to attain a higher rate of commission on a +uota share treaty. The e"cess of loss treaty is also very beneficial in that it is very simple to operate. The company after deciding on the amount of e"cess of loss cover protection need not go for any reinsurance on individual risks. If the company is in the habit of issuing policies for unlimited liability 6motor third party7, the final layer of e"cess of loss cover should also be for an unlimited amount. to have reciprocal arrangements with other

2n insurance company which is also involved in inward reinsurance can increase its capacity to accept large reinsurance risks. Aowever, in order to keep a check on its net retention, retrocession facility should be made use of. Depending on its net retention ability, the company can retrocede the surplus amounts to retrocession 2ires, for which it may make use of the +uota9share retrocession policy. !or the protection of its net retained part an e"cess loss cover would be useful. Geed for reinsurance is paramount because a company has to target the ma"imum amount of business in order to ensure growth and achievement of its goals. Aowever, while assuming high amounts of risks it is possible for the growth to sustain large losses which may have an impact on the capital reserves. To avoid this, an insurance company has to necessarily go for reinsurance. Ceveral obligatory treaties can help achieve this re+uirement by providing automatic cover with minimum e"clusion. Ii is particularly useful for a new insurance company with a low retention capacity. ;hile arranging for reinsurance, a company must concentrate on good security of the reinsurer. /ood security amounts to power of withstanding any large risk and not the offer of large commissions and lower premium rates. Cimilarly, the reinsurer also *udges whether the cedent company is worth entering into a contract with. Mutually, the two should decide upon the level of reinsurance arrangements and the rates at which it is to be finali:ed. 3.3 PROCEDURE TO BE FOLLO9ED FOR REINSURANCE ARRANGEMENTS 6#7 The Reinsurance Irogramme shall continue to be guided by the following ob*ectives to'

a7 ma"imi:e retention within the country> b7 develop ade+uate capacity> c7 secure the best possible protection for the reinsurance costs incurred> d7 Cimplify the administration of business. 6?7 1very insurer shall maintain the ma"imum possible retention commensurate with its financial strength and volume of business. The 2uthority may re+uire an insurer to *ustify its retention policy and may give such directions as considered necessary in order to ensure that the Indian insurer is not merely fronting for a foreign insurer. 6.7 1very insurer shall cede such percentage of the sum assured on each policy for different classes of insurance written in India to the Indian reinsurer as may be specified by the 2uthority in accordance with the provisions of Iart IJ2 of the Insurance 2ct, #B.,. 647 The reinsurance Irogramme of every insurer shall commence from the beginning of every financial year and every insurer shall submit to the 2uthority, his reinsurance programmes for the forthcoming year, 4& days before the commencement of the financial year> 6&7 ;ithin .$ days of the commencement of the financial year, every insurer shall file with the 2uthority a photocopy of every reinsurance treaty slip and e"cess of loss cover note in respect of that year together with the list of reinsures and their shares in the reinsurance arrangement>

657 The 2uthority may call for further information or e"planations in respect of the reinsurance Irogramme of an insurer and may issue such direction, as it considers necessary> 6-7 Insurers shall place their reinsurance business outside India with only those reinsures who have over a period of the past five years counting from the year preceding for which the business has to be placed, en*oyed a rating of at least %%% 6with Ctandard O Ioor7 or e+uivalent rating of any other international rating agency. Ilacements with other 6,7 reinsures shall re+uire the approval of the 2uthority. Insurers may also place reinsurances with 8loyds syndicates taking care to limit placements with individual syndicates to such shares as are commensurate with the capacity of the syndicate. 6B7 The Indian Reinsurer shall organi:e domestic pools for reinsurance surpluses in fire, marine hull and other classes in consultation with all insurers on basis, limits and terms which are fair to all insurers and assist in maintaining the retention of business within India as close to the level achieved for the year #BBB9?$$$ as possible. The arrangements so made shall be submitted to the 2uthority within three months of these regulations coming into force, for approval. 6#$7 Curplus over and above the domestic reinsurance arrangements class wise can be placed by the insurer independently with any of the reinsures complying with sub9regulation 6-7 sub*ect to a limit of #$P of the total reinsurance premium ceded outside India being placed with

any one reinsurer. ;here it is necessary in respect of speciali:ed insurance to cede a share e"ceeding such limit to any particular reinsurer, the insurer may seek the specific approval of the 2uthority giving reasons for such cession. 6##7 1very insurer shall offer an opportunity to other Indian insurers including the Indian Reinsurer to participate in its facultative and treaty surpluses before placement of such cessions outside India. 6#?7 The Indian Reinsurer shall retrocede at least &$P of the obligatory cessions received by it to the ceding insurers after protecting the 6#.7 portfolio by suitable e"cess of loss covers. Cuch retrocession shall be at original terms plus an over9riding commission to the Indian Reinsurer not e"ceeding ?.&P. The retrocession to each ceding insurer shall be in proportion to its cessions to the Indian Reinsurer. 6#47 1very insurer shall be re+uired to submit to the 2uthority statistics relating to its reinsurance transactions in such forms as the 2uthority may specify, together with its annual accounts. 3.4 SECURIT/ Aeightened regulatory oversight is primarily the result of concern about the financial soundness of reinsurers. This heightened oversight is intended to assure that reinsurance assures security. Ender the law, if security is not deemed to e"ist, then a credit for reinsurance against loss reserves is not allowed the ceding company. The

effect on the ceding company in the event that security is not seen to e"ist is a charge against its surplus. Cince surplus is the vital ingredient in an insurers ability to write business, this is a significant issue. S#)u*'$, '& n3$ ##"# $3 #?'&$ '6. The reinsurer is not authori:ed or accredited and The reinsurance from the unauthori:ed insurer is not secured by funds withheld, trust funds or letters of credit The result of this increased regulatory oversight is a much increased security for primary insurer and, ultimately, for their policy owners. change. 3.5 THE IMPORTANT E1COMMERCE RISAS ARE. P-,&')!% !"!7#. 2s the new economys dominated by computer9base operations, physical damage losses caused to computer and networks, damage caused to the infrastructure of the c9commerce business due to power failures or power surges leading to network or system failures, etc., will become commonplace. Bu&'n#&& 'n$#**u5$'3n. These costs may include remediation costs and the addition of hardware and software such as routers, firewalls and upgrade anti9virus programs. 2 mere difficult coverage +uestion arises when business interruption leads to third party liability. !or reinsurers, the decade of this heightened regulatory oversight has been a period of significant turmoil and

P*'<!), '&&u#&. 2mong the e9commerce risks that have garnered significant publicity are those concerning rights of privacy. These risks are similar to the traditional risks inherent in the banking, financial services, and medical industries. %ecause so much more personal and financial data is collected today and stored electronically this issue has become the focal point for market regulators, governments and also for consumer advocacy groups. In$#%%#)$u!% 5*35#*$, *'&(&. The new economy has stretched the boundaries of intellectual property law to the breaking point. Gew economy entrepreneurs are finding ways to use the Internet to allow consumers to locate and 3share3copyrighted works. 2s many websites compete to provide the best of the online material, this trend has led to numerous infringement lawsuits involving the downloading of copyrighted clipart, software, music movies and TJ shows, etc 2s more and more businesses move onto the Internet, claims involving intellectual property will only multiply in die coming days. T-'* 15!*$, n#7%'7#n)# )%!'"&. Reinsures can e"pect to see third party liability claims arising out of e9commerce and related websites risk in coming years. Medical, legal, accounting, and financial services websites are *ust a few e"amples of Internet sites distilling advice, displaying advertising, and encountering negligence claims for erroneous information posted on the Cites. OTHER POTENTIAL E1COMMENCE RISAS.

The nature of e9commerce and its modalities of doing business give rise is to new e"posures for insured in the new economy. Reinsures need to be aware of these potential e"posures. 2part from the risk highlighted above, some of the potential risks lurking which can affect insurance and reinsurance industry are highlighted below. H!)(#*&. 19commerce business activities re+uire that key information and business processes e"ist in digital Qform and be accessible through web portals and websites. Chould the security of their servers be breached, these insured and their customers and business partners could suffer significant harm V'*u&#&. ;ith new kind of viruses hitting the www everyday, the potential damage they can wreck on an e9commerce business is of significant level. The damage of 3I 8ove Hou3 bug outbreak in ?$$$ has e"perts put it may had caused a worldwide economic impact of @,.-& billion. I he mid9?$$# 3<ode Red3 attacks am estimated to have cost @?.5? billion worldwide. E%#)$*3n') @ '7'$!% &'7n!$u*#&. The issues concerning electronic and distal signatures are no longer whether they are valid or not nationwide, the real issue is what happens when a hacker or an in+uisitive minor forges a signature on an electronic contract without authori:ation. 1ven though new solutions are being developed to overcome the problem of digital signatures like developments of Digital IDs, encryption, etc, reinsures should stay informed about any litigation that may ensue from individuals or entities tampering with digital signatures and the methods of proving authenticity.

ver the course of history, as new ways of doing business have emerged, the insurance and reinsurance industry has provided protection against new risks of loss. The e9commerce revolution is no different than previous changes in the world economy. Insurers and reinsures will have to adapt and provide the necessary security for the new economy. Reinsures should start working with their clients to craft properly underwritten new forms of coverage for these new economy e"posures. Reinsurer should consider reinsuring web based liability covers separately from traditional liabilities to better analy:e these new e"posures. Reinsurer must also be alert to *udicial alterations in coverage provisions of traditional </8 and other third party liability policies as the courts cope with claims for ecommerce and emotional damages arising cut of e9commerce activities and the industry= should reinvent itself to confront the new e9challenges facing the business community across the world

CHAPTER 4 4.1 REINSURANCE IN INDIA 4.2 THE INDIAN REINSURANCE MARAET 4.3 FACTORS THAT AFFECT REINSURANCE BUSINESS 4.4 INDIAN REINSURANCE PROGRAM 4.5 REINSURANCE REGULATION 4.6 DISCLOSURE 4.7 REINSURANCE UNDER9RITING 4.2 STATE REINSURANCE CORPORATION BSRC= 4.CTHE ROLE OF REGIONAL REINSURANCE

CORPORATIONS 4.10 PROFESSIONALISM IN THE REINSURANCE INDUSTR/

4.1 REINSURANCE IN INDIA Reinsurance in India dated back to the #B5$s. 2fter independence there was rapid development of the insurance business. ;ith various sectors growing in the post independence era the need for reinsuring the development work was also felt. Cince reinsurance industry has negligible presence in India after independence, the domestic re+uirement of reinsurance was netted from mostly was foreign markets mainly %ritish and continental. !or undertaking reinsurance by Indian entities meant drain of precious foreign e"changed earned by the country. To prevent the outflow of foreign e"change, in year #B&5 Indian Reinsurance <orporation, a professional reinsurance company was formed by some general insurance companies. This company started receiving the voluntary +uote share cession from member companies. S#%#)$'3n 36 Cu&$3"#*&. In the reinsurance industry business is ac+uired in two ways. ne is when a customer directly approaches the reinsurance for ceding their claims and the other method is when the reinsurer gets their business from the reinsurance broker appointed by he customer. In certain parts of the world, reinsurance accepts business routed only through a reinsurance broker. The important thing to be noted here is that it is not the +uantum of business generated by the reinsurer but the customer for whom they are undertaking the business. Come go that e"tra mile by going to their business and accordingly tailor their policies to fit their needs and business. The more the

reinsurance knows about the business nature of their clients, they can serve them. T-# >u!%'$, 36 S#*<')#. The +uality of services offered by the reinsurer to their customers matter a lot in the reinsurance industry. Most customers go for reinsurance for e"tra benefits like e"pertise, e"perience, and the advisory role of the insurer. If these services cannot meet customers, e"pectations, then reinsurance can accepts a rundown of their businesses which the customer shifting base to the other players providing better services. It is to be remembered that the reinsurance industry is a highly competitive market and hence the reinsurance needs to carefully grade its customer. T-# S('%% S#$. The skill set of the reinsurance is the most important aspect of a contract to the customer. It matters a lot to a reinsurance too because a skill set represent the basic amour which it can showcase to its costume. The skill set generally refers to the underwriting, financial, actuarial, claims management and last but not the least management skills which it can serve its clients. Aence the reinsurance gives due consideration to its available skill set and sees how best it can serve the client with such skills. Thus reinsurer who takes risk in the hope of gaining the premium volume ceded to him, as part of a contract, would like to reap the benefits over a period of time and hope for a long9term relation with its customers.

9H/ REINSURANCE: Risk managers and other buyers of insurance rarely think about how reinsurance affects their company or the insurance they purchase for their company. Insurance buyers mainly focus on the direct insurers M the primary, e"cess, and umbrella carriers that provide the coverage. Cmart insurance buyers look for 299rated or better insurance companies with long histories. ther buyers rely on their brokers to put together the best +uality insurance program with the best insurance security available. 2fter all, the insured must rely on the insurance policy issued by the direct insurer. %ut what stands behind the 299rated carrier or the high +uality program for a comple" riskR The answer is (Reinsurance). <ommercial insurance cannot e"ist without reinsurance. The +uality of the reinsurance security purchased by the direct insurer is what helps to insure that loss will be paid. Suality reinsurer provides special e"pertise to their direct insurer client and assists the direct insurer in providing the best possible protection and risk management for the direct insurers own client. Come large professionals reinsure help small insurance companies e"pand into new areas and provide them with technical, actuarial, and claims e"pertise and training 4.2 THE INDIAN REINSURANCE MARAET INTRODUCTION Irior to nationali:ation, India had as many as 5. domestic companies and 44 foreign insurers operating in the country. 2s soon as the

government nationali:ed the insurance industry, five insurance companies were left to take care of the general insurance needs apart from 8I< taking care of health insurance. The /eneral Insurance <orporation of India and its four subsidiaries vi:. Gational Insurance <o. 8td., The Gew India 2ssurance <o. 8td., riental Insurance <o. 8td. and Enited India Insurance <o. 8td. take care of the general insurance needs in the country. 2part from these companies, certain state governments like Maharashtra, /u*arat. Ferala and Farnataka have their own departments of insurance funds i.e take care of insurance needs. %efore nationali:ation, a large number of domestic and foreign companies used to operate in India. !or their reinsurance needs, they used to access international reinsurance markets and hence there was no visible reinsurance market in the country. %ut the formation of two reinsurance corporal ions in the country to take care of domestic needs has provided the much9needed impetus for the growth of domestic reinsurance industry. 1arly Reinsures in India The year #B&5 saw the launch of the India Reinsurance <orporation, a professional reinsurance company formed by some general insurance companies. This company started receiving the voluntary +uota share cessions from member companies. Het another reinsurance corporation called Indian /uarantee and /eneraT Insurance <o. was opened in the year #B5# this company was formed to supplement the role of the Indian Reinsurance <orporation. ;ith this set9up, a regulation was promulgated which made it statutory on the part of every insurer to cede twenty percent in !ire and Marine

<argo, ten percent in Marine Aull and Miscellaneous insurance and five percent in <redit and Colvency business to two approved Indian reinsures as mentioned above. 2s new innovations started appearing in the market, the idea of formation of pools received a boost in the country during the late #B5$s. Ender this method, a pool was created to deal with certain ha:ardous classes of business or as a means of increasing the business retained within the country. The premium income and claims are pooled together and usually divided in proportion to premium written by each member. 2s a conse+uence, in the year #B55, the Indian Insurance <ompanies 2ssociation initiated the formation of reinsurance pools in !ire and Aull departments to increase the retained premiums in the country. 4.3 FACTORS THAT AFFECT REINSURANCE BUSINESS !or underwriting to be effective in the long run, a clear understanding of the reinsurance contract is absolutely essential for both the parties. The cedent company needs this understanding to plan its risk9retention, types of reinsurance re+uired etc. !or the reinsurer, it is necessary to plan for his portfolio, with an eye on the possible accumulations of losses, underwriting a single large risk etc. 2fter identifying the type of contracts that a reinsurance company has to underwrite during a period, it has to identify the various sources of business that it wanes to get involved in. The different sources of reinsurance business are' Domestic direct underwriting companies !oreign direct underwriting companies ther reinsurance companies

 Reinsurance brokers Domestic business has various advantages like low ac+uisition costs, easy manageability etc and further it is free from ether complications like adverse fluctuation of foreign e"change, economic instability of the country etc. It suffers from the drawbacks of low volume and spread of business, which is essential to build up a stable and profitable portfolio. !urther, the e"pertise and e"perience of the reinsures that are spread across the globe are also denied in case of domestic business. r the other hand, overseas business has the advantages of wide geographical spread but the cost of maintenance may be higher. !urther, other complications like difference in language, legal systems, market practices and e"change control regulations may surface hence, a healthy balance of domestic and overseas business will enable the reinsurer to develop a strong, stable and profitable portfolio. Retrocession treaties among various reinsures could be a source of underwriting international business with a balanced geographical spread. %ut the company should closely watch for higher costs of ac+uisition and low profitability. ne possible solution to overcome these difficulties is to develop business through intermediaries or brokers, sub*ect to cost of brokerage, delays in remittances and underwriting being in control. 2nother aspect which has to be considered in finali:ing a reinsurance contract is the class and spread of risks. The reinsurance company will have to make a selection of risks depending on the si:e and intensity. 2 single aviation portfolio may consist of a very small number of large risks, whereas there can be several small household burglary accounts with limited risk e"posure. Cimilarly, even within a class, mere can be variation in risk e"posure, like fire policy for residential dwellings as against that of a large industrial

undertaking or industrial comple"es. Aence a proper balance will have to be struck between various classes> and within a class, between various risks

4.4 INDIAN REINSURANCE PROGRAM The Indian reinsurance industry is characteri:ed by development of a market reinsurance Irogramme, which influences the working of Indian business entities and the way they do reinsurance. The chief features of the Irogramme are as follows' #. ?. To achieve ma"imi:ation of the retention capacity within the country. Retention of the domestic insurers to be achieved through obligatory cessions, pools, etc. .. To protect inter9company and individual retentions by providing them with e"cess of loss covers. 4. To make provisions, wherein different classes of business can be ceded to treaties based on +uota share or surplus basis. &. To make most of the outward treaties by the companies by providing automatic covers and restore facultative reinsurance in few caseR 2s we have noted earlier, general reinsurance business in India is carried on by four subsidiaries of the /eneral Insurance 8id. These companies, to meet their own reinsurance needs, made arrange a man is with foreign companies. 2part from reciprocal arrangements, /#< and its subsidiaries accept non9reciprocal inward reinsurance from overseas markets. 2part from providing the above two facilities, /I< also takes care of inward facultative reinsurance.

Cince the business generated by the Indian Markets if not of huge amount in international markets, they have to merely follow the trend in the markets and only in some cases, do the Indian players get to dictate the terms of the agreement in the intentional markets. 4.5 REINSURANCE REGULATION INTRODUCTION 2s recently as fifteen years ago, reinsures accounting re+uirements were minimal and were addressed in the space of two or three pages in the G2I< 2ccounting Iractices and Irocedures Manual. which these increases have been found include' Disclosure Risk transfer assessment and accounting and Cecurity This increased regulation has resulted from the regulators reali:ation that the solvency of primary insurers often depends on their ability to collect under their reinsurance agreements. Cince primary insurers cede more than @&$ billion in premiums in any given year to reinsures, the ability to collect under reinsurance agreements is a very serious issue. 2nother significant factor in the pressure that state regulators feel towards their regulation of the reinsurance industry is the federal governments interest in this area. The failure of several large property O Cince that time, reinsurance regulatory oversight has increased significantly. The areas in

casualty insurers resulting from their inability to collect under their reinsurance agreements has spurred this federal interest. Ceveral natural catastrophes occurred during the decade of the #BB$s that caused many to fear the imminent collapse of the reinsurance industry. 1ven 8loyds of 8ondon would have difficulty meeting its obligations. Due to these natural disasters and the growing concern about reinsures financial stability, the !inancial 2ccounting Ctandards %oard has tightened generally accepted accounting principles 6/22I7 for reinsurance transactions. !ollowing !2C%s lead, the Gational 2ssociation of Insurance <ommissioners developed new accounting guidance for reinsurance that was based on the Ctandards %oards action. 4.6 DISCLOSURE The first area to feel the increase in regulatory oversight is disclosure. The re+uired additional disclosure permits regulators to perform a more e"tensive analysis of a primary insurers reinsurance programs and a more Thorough going evaluation of its e"posure to additional risk in the event any of its reinsures fail to fulfill their contractual obligations. Cchedule ! in the G2I< 2nnual Ctatement provides a detailed disclosure of information regarding the insurers reinsurance. 2ll of the information on the ceded business can be found there. This schedule was greatly e"panded in #BB? to include eight separate parts. ;hile an analysis of each part of the schedule would probably provide little in the way of important information, it is instructive to appreciate the magnitude of the change between the old part # of Cchedule ! and the new part #. ;hile the

old part # only re+uired financial information concerning reinsurance payable on paid and unpaid losses to each reinsured, the new part # re+uires substantial increases in disclosure. In fact, the new part # re+uires, for each reinsured, that the following disclosures be made' The paid losses and loss ad*ustment e"penses The known case losses The incurred but not reported losses The contingent commission payable The assumed premium receivable The funds held or on deposit The letters of credit posted and The amount of assets pledged or compensating balances

The net effect is a significant increase in the disclosure re+uirements of reinsurance operations. 4.7 REINSURANCE UNDER9RITING INTRODUCTION

Reinsurance underwriting is the process of building up a portfolio of assumed risks> ii involves selecting the accounts and defining the conditions=rates at which the accounts are to be accepted for assumption of risk. It is one of the most vital functions of the management and the ultimate results of the company depend upon the efficacy. Ceveral arguments have been put forth as to whether underwriting is an art or a science in fact it several traits of both M one has to consider the previous results, make +uantitative=+ualitative analysis of the results of the previous years. 2t the same time it involves a g deal of the underwriter0s intuitive *udgment and often his gut9feeling. In the long run it is the correct and positive dynamics of underwriting that decide the success of a reinsurance company, *ust as much as that of an insurance company. Enderwriting being a function of such vital importance holds the key to the success of an organi:ation. Aistory is witness that very rarely has a reinsurance company got into difficulties due to a poor investment decision but a ma*or underwriting loss can critically impair the company and throw it out of business.

4.2 STATE REINSURANCE CORPORATION BSRC= The role and importance of establishment of state reinsurance corporations was highlighted by world development organi:ations like EG<T2D 6Enited Gations <onference on Trade and Development7. ;ith the encouragement received from multilateral bodies like EG<T2D many

countries have established their own stale reinsurance corporations to take care of the reinsurance needs arising out of their domestic insurance

industry. Many countries in 2frica, 2sia, including India have opened state reinsurance corporations. The main principles behind the encouragement of domestic reinsurance corporations are as follows' T3 )3n&#*<# 63*#'7n #?)-!n7#.

!or developing countries like India, foreign e"change is a precious resource and it needs to be spent very cautiously. The setting up of these corporations will prevent draining of foreign e"change resources from the country in the form of premiums to overseas reinsure. T3 5*#<#n$ #?)#&&'<# #5#n #n)#. Depending on a foreign country for reinsurance coverage for a long period of time is not advisable. %ecause at the times of war, especially, and political tensions, the reinsurer country may not allow the reinsurer to discharge its liability and it may drastically affect the insured0s business. C*#!$'3n 36 "!*(#$ 5%!)#. The setting up of state reinsurance corporation will help in developing the domestic reinsurance market and lay a strong foundation for development and growth of the domestic reinsurance industry. T3 !<3' )3"5#$'$'3n. In a domestic market, where the insurance industry has not advanced on, the presence of a strong state reinsurance corporation will help prevent setting up of new reinsurance companies, betting up 9 of more reinsurance companies in less advanced will create wasteful and

destructive forces. B#$$#* +!*7!'n'n7 )!5!)'$,. Iresence of a single state reinsurance corporation will increase

bargaining capacity of the country vis9U9vis internal agencies. D#<#%35 %3)!% "!*(#$. The presences of state reinsurance corporations will help nurture the domestic reinsurance industry and develop the reinsurance skills. It is to encourage the growth of CR<s, many rules were implemented to ensure that CR<s get their due business and grow strongly in the market. T-# 63%%34'n7 !*# &3"# 36 $-# "#!&u*#*&. #. CR<s receive their business by means of statutory access by way of a certain percentage of all insurance business from domestic insurance companies. ?. The insurance companies in the country are encouraged to voluntarily utili:e the facilities and services of CR<s, apart from meeting their obligatory cessions with CR<s. .. 1ven though the provision of obligator7 cessions is thrust upon the domestic companies, they have the freedom lo reinsure their e"posures with global market players and utili:e their services once they have fulfilled compulsory cessions to CR<s.

H34 SRC& C3n$!'n T-#'* E?53&u*#&

;hen a state reinsurance corporation takes e"posures of the domestic insurance companies, CR<s will be e"posed to the risks of their customers from all angles. In order to prevent the havoc of running their business with heavy and bad e"posures 6which may occur sometimes7, CR<s go in for retrocession 6The method wherein a reinsurer will go in for reinsurance coverage with another reinsurance company7. Thus, state reinsurance corporations may receive all the reinsurance business from local direct insurers to foreign reinsures any business they do not wish to retain. 1ven CR<s have a provision wherein they can retrocede shares out of the national pool to each company in proportion to the volume of its cession to the pool. Aence, retrocession plays an important role for working of state reinsurance corporations.

4.C

THE

ROLE

OF

REGIONAL

REINSURANCE

CORPORATIONS Cimilar to the need of setting up CR<s. a need was felt to set up reinsurance corporations on geographical regional countries wise. %asically, a regional reinsurances corporation will look into the reinsurance reduces arising among a group of neighboring nations. These corporations were proposed to be set up in different developing nations of the world. Kn e"ample of this method of forming a regional reinsurance corporation is the 2sian Reinsurance <ompotation, which was set up at %angkok. The participants in this corporation are 2fghanistan, <hina, India, Ihilippines, Couth Forea, Cri 8anka and Thailand. The basis for setting up regional reinsurance corporations

depends upon some common features which the member countries share due

to their close pro"imity to each other. Come of the common features, which make it viable for member countries to be in the RR< are' #. ?. The member countries have commercial boundaries. ;ell9developed communication facility e"ists between the member countries.

..

The economic and trade ties between the member countries being well9 developed, free flow of trade e"ists between them.

4.

The member countries may share some common customs, language and identity. Cetting up an RR.< is no easy task, especially with many member countries participating> each of them can have their own set of preferences to choose the best market place to locate the head+uarters. The head+uarters may have the following features like well9developed accessibility and good communication facilities, a well9established commercial background. 2dded to that, the presence of a good banking system will provide the smooth environment for functioning of the RR<. 4.10 PROFESSIONALISM IN THE REINSURANCE INDUSTR/ Running a reinsurance company is not similar to running any other business. It re+uires in9depth knowledge of the insurance industry apart from re+uiring speciali:ed skills, proper control, and a nack to brood over statistics and devise appropriate policies to meet customer needs. Ml these have necessitated a professional approach towards the industry. ;ith increased demand for cover and keener competition among insurance companies,

speciali:ed reinsurance companies like marine reinsurance, life reinsurance etc, emerged. !or a successful growth, the reinsures reali:ed the need to fan out across the globe and soon started sei:ing business opportunities wherever they e"isted. This thinking process led to the emergence of a professional global reinsurance industry. The last hundred years have seen tremendous industriali:ation the world over and with it the need and necessity to protect against various risks inherent in the business. The emergence of Gew Hork as an important financial hub apart from 8ondon and the opening of reinsurance e"changes in the EC2, and setting up of new insurance centers in %ermuda, Ianama, Aong Fong, Cingapore and ;est 2sia with ta" concessions and easy regulatory affairs has led droves of insurance companies to set up their operations in these places. Today, it has become a norm rather than an e"ception in this industry to broker deals worth several billions. The youth and development of reinsurance has brightened many changes in the practice of the reinsurance industry. Today0s professional reinsurance companies are they which are financially sound. Technically resourceful and who have the e"pertise in their domain of reinsurance coverage today we find all the reinsurance companies e"tending one or more of the following services to their clients. #. /ive valuable suggestions and help the reinsured tide over the crisis' ?. Aelping program. .. rgani:e training program for the e"ecutives of the reinsured companies. clients in seeing up a suitable reinsurance

Thus, over the years the reinsurance industry has matured in terms of improved development services and policies offered to the clients. %ut, it is to he noted here that the development of reinsurance market is restricted mostly to the developed economies. Developing economics like India, a few Couth 1ast 2sian countries, etc, have *ust recently started their long march towards the development of more mature Reinsurance market domestically. CHAPTER 5 5.1 CASE STUD/ ON GIC 5.2 REINSURANCE REGULATION 5.3 GENERAL INSURANCE CORPORATION OF INDIA

5.1 CASE STUD/ ON GIC REINSURANCE IN INDIA Entil /I< was notified as a Gational Reinsurer, it was operating as a holding = parent company of the 4 public sector companies, controlling their reinsurance programmers. /I< would receive ?$P obligatory cession of each policy written in India. Cince deregulation, /I< has assumed the role of the markets only professional re9insurer. In order to focus on reinsurance, both in India and through its overseas offices and trading partners, /I< has divested itself of any direct business that it wrote prior to Govember ?$$$, with the temporary e"ception of crop insurance. It currently manages Aull Iool on behalf of the market, which receives a cession from writing companies and after a pool protection the business is retro9ceded back to the member companies. /I< also manages the .Terrorism Iool... Got more than #$P of reinsurance premium to be placed with one re9insurer. 5.2 REINSURANCE REGULATION The placement of reinsurance business from the Indian market is now governed by Reinsurance Regulations formed by the IRD2. The ob*ective of the regulation is to ma"imi:e the retention of premiums within the country

and to ensure that IRD2 has issued the following instructions' Ilacement of ?$P of each policy with Gational Re sub*ect to a monetary limit for each risk for some classes. Inter9company cession between four public sector companies. . Indian Iool for Aull managed by /I<. . The treaty and balance risk after automatic capacity are to be first offered to other insurance companies in the market before offering it to international re9insurers. . 1ach company is free to arrange its own reinsurance program, which has to be submitted to the IRD2 4& days before commencement. . Go re9insurer will have a rating of less than .%%% from Ctandard and Ioors or an e+uivalent rating from 2M %est. 5.3 GENERAL INSURANCE CORPORATION OF INDIA /I< as a national re9insurer is providing useful capacity to all insurance companies. BREAA1UP OF NET PREMIUM INCOME @ CLAIMS F'7u*#& 'n INR "'%%'3n& D'<'&'3n Indian Reinsurance !oreign Inward 2viation <rop Total F'7u*#& 'n INR "'%%'3n F'*# M'&)#%%!n#3u& M!*'n# T3$!% P*#"'u" ?#,BB5.. #&B#.4 ?44.# ?,,,$.5 ?5,-#?.. C%!'"& #B,,B,,? #4B,.B #,5.# #.5-.5 ?,B&$.,

<orporation0s !inancial Results 9 6<lass ;ise7

Get Iremium Get 1arned Iremium Get claims E=; Irofit=loss <lass9wise Irofit=8oss after Investment income

5,.4B.B &,$-$., .,&5?.. 95-?.& 9#..-

#,,?,5.& #-, 45.4 #,,$-,.. 9&,$#..9&44.&

?,$-&.B ?,?5-.& #,.#$.? &#?.? #$--.&

?5,-#?.. ?,.,4.??,B&$., 9&,#-4.$ &#B..

GIC AS INTERNATIONAL RE1INSURER %acked by e"perience of more than three decades in handling the reinsurance re+uirement of the Indian market, /I< has now placed itself as an effective .Reinsurance Iartner to 2fro92sian countries and also other markets. If offers a capacity of EC@ &$ million on facultative risks and EC@ #$ million for treaty business. CAPACITIES OFFERED B/ GIC FOR FOREIGN IN9ARD BUSINESS.

F'7u*#& 'n USD ther than 2viation Treaty !acultative Aull 2viation !acultative Treaty & Mln.V .$$,$$$VVV .$ Mln.V & Mln.V 8iability IM8 4 Mln. ?$ Mln. Cpares CI #$ Mln. &$ Mln. Cpares

CASE HISTOR/. INSURANCE COMPAN/ SAVES 33D IN TIME AND UP TO 55D IN COST FOR POLIC/ UNDER9RITING THE PROBLEM 2 global reinsurance company wanted to reduce the time re+uired for submitting +uotes and writing policies. Depending upon the comple"ity of the coverage re+uested and the re+uired reviews, underwriters would take

from a few hours to a few weeks to issue a +uote and write a policy. The company wanted a solution that would shorten the cycle time, bring +uick return9on9investment, and re+uire minimal time commitment from lead underwriters. THE SOLUTION ver an eleven9week period, the company0s best underwriters spent ?9 . hours per week working with 2cappellaWX Coftware consultants to implement a streamlined +uoting and policy writing processes. This included not only supporting the information gathering efforts, but also guiding the thinking behind the +uoting process. In addition, the customi:ed software application was to produce most of the written policy automatically. THE RESULTS The company achieved all of its goals. Esing the 2cappella9 generated application, the company achieved a ..P reduction in the time it takes to develop a +uote and document a submission 6time9to9decision7. Cavings in the cost of underwriting were also significant. Ireviously, the underwriters spent an average of #5 hours per +uote. Esing the 2cappella generated application, they now spend about si" hours. 2 greater percentage of the background research and other data gathering activities is now being handled by the assistant underwriters, following the best practices laid out in the application. The new workload redistribution saved 4?P in the cost of +uoting and &&P in the cost of writing a policy 6cost9to9decision7.

C-!5$#* 6 6.1 SUGGESTION 6.2 CONCLUSION

C-!5$#* 6 6.1 C3n)%u&'3n #. 1very insurer should retain risk proportionate to its financial strength and business volumes. ?. <ertain percentage of the sum assured on each policy by an insurance company is to be reinsured with the Gational Reinsurer. Gational reinsurer has been made compulsory only in the non9life sector. .. The reinsurance programme will begin at the start of each financial year and has to be submitted to the IRD2, forty9five days before the start of the financial year. 4. Insurers must place their reinsurance business, in e"cess of limits defined, outside India with only those reinsurers who have a rating of at least %%% 6COI7 for the preceding five years. This limit has been derived from India0s own sovereign rating, which currently stands at %%%. &. Irivate life insurance companies cannot enter into reinsurance with their promoter company or its associates, though the 8I< can continue to reinsure its policies with /I<.

5. The ob*ective of these regulations is to e"pand retention within India, ensure the best protection for the reinsurance costs incurred and simplify administration.