Understanding Reinsurance and Reinsurance Market in Pakistan

Understanding Reinsurance and
Reinsurance Market in Pakistan
1
Basic Terms and Concepts
Reinsurance
• The transfer of insurance risk from one insurer
to another through a contractual agreement
under which one insurer (the reinsurer)
agrees, in return for a reinsurance premium, to
indemnify another insurer (the primary
insurer) for some or all of the financial
consequences of certain loss exposures
covered by the primary insurer’s policies.
2
Primary Insurer
• In reinsurance, the insurer that transfers or cedes all
or part of the insurance risk it has assumed to
another insurer in a contractual arrangement.
Reinsurer
• The insurer that assumes some or all of the potential
costs of insured loss exposures of the primary
insurer in a reinsurance contractual agreement.
3
Reinsurance Agreement
• Contract between the primary
insurer and reinsurer that
stipulates the form of
reinsurance and the type of
accounts to be reinsured.
4
Insurance Risk
• Uncertainty about the adequacy of
insurance premiums to pay losses.
Retention
• The amount retained by the primary
insurer in the reinsurance transaction.
5
Reinsurance Premium
• The consideration paid by the primary insurer to
the reinsurer for assuming some or all of the
primary insurer’s insurance risk.
Ceding Commission
• An amount paid by the reinsurer to the primary
insurer to cover part or all of the primary
insurer’s policy acquisition expenses.
6
Retrocession
• A reinsurance agreement whereby one reinsurer
(the Retrocedent) transfers all or part of the
reinsurance risk it has assumed or will assume to
another reinsurer (the Retrocessionaire).
Retrocedent
• The reinsurer that transfers or cedes all or part of the
insurance risk it has assumed to another reinsurer.
7
Retrocessionaire
• The reinsurer that assumes
all or part of the
reinsurance risk accepted
by another reinsurer.
8
Reinsurance Functions
Reinsurance Functions
• Increases large-line capacity.
• Provides Catastrophe Protection.
• Stabilizes Loss Experience.
• Provides Surplus Relief.
• Facilitates withdrawal from a market segment.
• Provides underwriting guidance.
9
Time Period Actual Losses Amount Stabilized Loss
(Year) (Rs.000) Reinsured Level (Rs.000)
(Rs.000)
1 15,000 --- 15,000
2 35,000 15,000 20,000
3 13,000 --- 13,000
4 25,000 5,000 20,000
5 40,000 20,000 20,000
6 37,000 17,000 20,000
7 16,500 --- 16,500
8 9,250 --- 9,250
9 18,000 --- 18,000
10 10,750 --- 10,750
Total 219,500 57,000 162,500
10
Stabilization of Annual Loss Experience
Stabilization of Annual Loss Experience
45,000
40,000
35,000
30,000
Rs.(000)
25,000 Actual Losses (Rs.000)

20,000 Stabilized Loss Level
(Rs.000)
15,000
10,000
5,000
0
1 2 3 4 5 6 7 8 9 10
Years
11
Reinsurance Transactions
• No single reinsurance agreement performs
all the reinsurance functions. Instead,
reinsurers have developed various types of
reinsurance, each of which is effective in
helping insurers meet one or more goals. A
primary insurer often combines several
reinsurance agreements to meet its particular
needs.
12
Types of Reinsurance
Types of
Reinsurance
Treaty Facultative
Pro-Rata Excess of Loss Pro Rata Excess of Loss
Per
Per Risk (Per Aggregate
Quota Share Surplus Share Occurrence
Policy) Excess
(Catastrophic)
13
• There are two types of reinsurance transactions: treaty
and facultative.
• Treaty reinsurance uses one agreement for an entire
class or portfolio of loss exposures and is also referred
to as obligatory reinsurance. The reinsurance
agreement is typically called the treaty.
• Facultative reinsurance uses a separate reinsurance
agreement for each loss exposure it wants to reinsure
and is also referred to as non-obligatory reinsurance.
14
Treaty Reinsurance
• Treaty reinsurance agreements are tailored to fit the
primary insurer's individual requirements. The price and
terms of each reinsurance treaty are individually
negotiated.
• Treaty reinsurance agreements are usually designed to
address a primary insurer’s need to reinsure many loss
exposures over a period of time. A primary insurer’s
management usually finds that a long-term relationship
with a reinsurer enables the primary insurer to be able to
consistently fulfil its producers’ requests to place insurance
with them.
15
Treaty Reinsurance
• In treaty reinsurance, the reinsurer agrees in advance to reinsure all the
loss exposures that fall within the treaty. Although some treaties allow the
reinsurer limited discretion in reinsuring individual loss exposures, most
treaties require that all loss exposures within the treaty's terms must be
reinsured.
• Primary insurers usually use treaty reinsurance as the foundation of their
reinsurance programs. Treaty reinsurance provides primary insurers with
the certainty needed to formulate underwriting policy and develop
underwriting guidelines. Primary insurers work with reinsurance
intermediaries (or with reinsurers directly) to develop comprehensive
reinsurance program that address the primary insurers’ varied needs. The
reinsurance programs that satisfy those needs often include several
reinsurance agreements and the participation of several reinsurers.
16
Facultative Reinsurance
• In facultative reinsurance, the primary insurer negotiates
a separate reinsurance agreement for each loss exposure
that it wants to reinsure. The primary insurer is not
obligated to purchase reinsurance, and the reinsurer is
not obligated to reinsure loss exposures submitted to it.
• The reinsurer issues a facultative certificate of
reinsurance (or facultative certificate) that is attached to
the primary insurer’s copy of the policy being reinsured.
17
• Facultative reinsurance serves four functions:
• Facultative reinsurance can provide large-line capacity for loss
exposures that exceed the limits of treaty reinsurance
agreements.
• Facultative reinsurance can reduce the primary insurer’s
exposure in a given geographic area. For example, a marine
underwriter may be considering underwriting numerous
shiploads of cargo that are stored in the same warehouse and
that belong to different insureds. The underwriter could use
facultative reinsurance for some of those loss exposures,
thereby reducing the primary insurer’s overall exposure to loss.
18
• Facultative reinsurance serves following functions:
• Facultative reinsurance can insure a loss exposure with
typical hazard characteristics and thereby maintain the
favourable loss experience of the primary insurer's treaty
reinsurance and associated profit-sharing arrangements.
Maintaining favourable treaty loss experience is important
because the reinsurer has underwritten and priced the treaty
with certain expectations. A loss exposure that is
inconsistent with the primary insurer’s typical portfolio of
insurance policies may cause excessive losses and lead to the
treaty’s termination or a price increase.
19
• The treaty reinsurer is usually willing for the primary insurer to remove
high-hazard loss exposures from the treaty by using facultative
reinsurance. These facultative placements of typical loss exposures also
benefit the treaty reinsurer. For example, an insured under a commercial
property policy may request coverage for an expensive fine arts collection
that the primary insurer and its treaty reinsurer would not ordinarily
want to cover. Facultative reinsurance of the fine arts collection would
eliminate the underwriting concern by removing this loss exposure from
the treaty. Often, the treaty reinsurer’s own facultative reinsurance
department provides this reinsurance. The facultative reinsurer knows
that adverse selection occurs in facultative reinsurance. Consequently, the
loss exposures submitted for reinsurance are likely to have an increased
probability of loss. Therefore, facultative reinsurance is usually priced to
reflect the likelihood of adverse selection.
20
• Facultative reinsurance serves
following functions:
• Facultative reinsurance can insure
particular classes of loss exposures
that are excluded under treaty
reinsurance.
21
• Primary insurers purchase facultative
reinsurance mainly to reinsure loss
exposures that they do not typically
insure or on exposures with high
levels of underwriting risk.
22
• The expense of placing facultative reinsurance can
be high for both the primary insurer and the
reinsurer. In negotiating facultative reinsurance,
the primary insurer must provide extensive
information about each loss exposure.
Consequently, administrative costs are relatively
high because the primary insurer must devote a
significant amount of time to complete each
cession.
23
Pro Rata Reinsurance
• A type of reinsurance in which the primary insurer and reinsurer
proportionately share the amounts of insurance, policy premiums, and
losses (including loss adjustment expenses).
• Under pro rata reinsurance, or proportional reinsurance, the primary
insurer cedes a portion of the original insurance premiums to the
reinsurer as a reinsurance premium. The reinsurer usually pays the
primary insurer a ceding commission for the loss exposures ceded. The
ceding commission reimburses the primary insurer for policy
acquisition expenses incurred when the underlying policies were sold.
In addition to policy acquisition expenses, insurers incur loss
adjustment expenses. Loss adjustment expenses that can be related to a
specific loss are usually shared proportionally by the primary insurer
and the reinsurer.
24
• When the ceding commission s a fixed percentage of the ceded
premium with no adjustment for the primary insurer’s loss
experience, it is referred to as a flat commission. The reinsurance
agreement may also include a profit-sharing commission, or
profit commission, which is negotiated and paid to the primary
insurer after the end of the treaty year if the reinsurer earns
greater-than-expected profits on the reinsurance agreement. The
profit-sharing commission percentage is predetermined and
applied to the reinsurer's excess profits; that is, the profits are
deducted/ profit commission is also called “contingent
commission” because its payment is contingent on the
reinsurance agreement’s profitability.
25
• Sometimes, as an alternative to the flat commission and profit-sharing
commission, the ceding commission initially paid to the primary insurer may
be adjusted to reflect the actual profitability of the reinsurance agreement.
This type of commission is called a sliding scale commission and could result
in the commission being lower than the commission initially paid.
• Pro rata reinsurance is generally chosen by newly incorporated insurers or
insurers with limited capital because it is effective in providing surplus relief.
Its effectiveness results from the practice of paying ceding commission under
pro rata treaties, a practice not common under excess of loss treaties.
• Pro rata reinsurance can be identified as either quota share or surplus share.
The principal difference between them is how each one indicates the primary
insurer’s retention.
26
Quota Share Reinsurance
• The distinguishing characteristic of quota
share reinsurance is that the primary insurer
and the reinsurer use a fixed percentage in
sharing the amounts of insurance, policy
premiums, and losses (including loss
adjustment expenses). Quota share
reinsurance is more frequently used in
property insurance.
27
• For example, an insurer may arrange a
reinsurance treaty in which it retains 45
percent of policy premiums, coverage limits,
and losses while reinsuring the remainder.
Such a treaty would be called a “55 percent
quota share treaty” because the reinsurer
accepts 55 percent of the liability for each
loss exposure subject to the treaty.
28
• Most reinsurance agreements specify a maximum Rupee
limit above which responsibility for additional coverage
limits or losses reverts to the primary insurer (or is taken by
another reinsurer). With a pro-rata reinsurance agreement,
the maximum Rupee amount is stated in terms of the
coverage limits of each policy subject to the treaty. For
example, a primary insurer and a reinsurer may share
amounts of insurance, policy premiums, and losses on a 45
percent and 55 percent basis, respectively, subject to a Rs.1
Billion maximum coverage amount for each policy.
29
• In addition to a maximum coverage amount limitation,
some pro-rata reinsurance agreements include a per
occurrence limit, which restricts the primary insurer’s
reinsurance recovery for losses originating from a single
occurrence. This per occurrence limit may be stated as
an aggregate Rupee amount or as a loss ratio cap.
• The exhibit shows how the amounts of insurance, policy
premiums, and losses would be shared between a
primary insurer and a reinsurer for three policies subject
to a quota share treaty.
30
Policy Description ABC XYZ Total
Number Insurance Reinsurance Rs. (000)
Retention Cession
(25%) (75%)
Rs. (000) Rs. (000)
Policy A Amounts of 6,250 18,750 25,000
Insurance
Premiums 100 300 400
Losses 2,000 6,000 8,000
Policy B Amounts of 25,000 75,000 100,000
Insurance
Premiums 250 750 1,000
Losses 2,500 7,500 10,000
Policy C Amounts of 37,500 112,500 150,000
Insurance
Premiums 375 1,125 1,500
Losses 15,000 45,000 60,000
31
• These observations can be made about quota share reinsurance:
• Because the retention and cession amounts are each a fixed
percentage, the Rupee amount of the retention and the Rupee
amount of the cession change as the amount of insurance
changes. On policies with higher amounts of insurance, the
primary insurer will have a higher Rupee retention.
• Because the primary insurer cedes a fixed percentage under a
quota share treaty, even policies with low amounts of insurance
that the primary insurer could safely retain are reinsured.
32
• These observations can be made about quota share
reinsurance:
• Quota share treaties are straightforward because of the
fixed percentage used in sharing premiums and losses.
• Because the primary insurer and the reinsurer share
liability for every loss exposure subject to the quota
share treaty, the reinsurer is usually not subject to
adverse selection. The loss ratio for the reinsurer is the
same as that of the primary insurer for the ceded loss
exposures.
33
Surplus Share Reinsurance
• The distinguishing characteristic of surplus share
reinsurance is that when an underlying policy’s
total amount of insurance exceeds a stipulated
Rupee amount, or line, the reinsurer assumes the
surplus share of the amount of insurance (the
difference between the primary insurer's line and
the total amount of insurance). Surplus share
reinsurance is typically used only with property.
34
Policy Description ABC XYZ Total
Insurance Reinsurance Rs. (000)
Retention Cession
Rs. (000) Rs. (000)
Policy A Amounts of 25,000 (100%) 0 (0%) 25,000
Insurance
Premiums 400 0 400
Losses 8,000 0 8,000
Policy B Amounts of 25,000 (25%) 75,000 (75%) 100,000
Insurance
Premiums 250 750 1,000
Losses 2,500 7,500 10,000
Policy C Amounts of 25,000 125,000 150,000
Insurance (16.67%) (83.33%)
Premiums 250 1,250 1,500
Losses 10,000 50,000 60,000
35
• These observations can be made about surplus share reinsurance:
• The surplus share treaty does not cover policies with amounts of
insurance that are less than the primary insurer’s line. Many
primary insurers use surplus share reinsurance instead of quota
share reinsurance so that they do not have to cede any part of the
liability for loss exposures that can be safely retained.
• The amount of insurance for a large number of loss exposures may
be too small to be ceded to the treaty but, in the aggregate, may
cause the primary insurer to incur significant losses that are not
reinsured. For example, many homeowners policies in the same
region that do not exceed the primary insurer’s line could incur
extensive losses from a single occurrence, such as a hurricane.
36
• These observations can be made about surplus share reinsurance:
• Because the percentage of policy premiums and losses varies for each loss
exposure ceded, surplus share treaties are more costly to administer than
quota share treaties. Primary insurers must keep records and, in many cases
periodically provide the reinsurer with a report called a bordereau (A report
the primary insurer provides periodically to the reinsurer that contains a
history of all loss exposures reinsured under the treaty.)
• Surplus share treaties may provide surplus relief to the primary insurer
because the reinsurer usually pays a ceding commission for those policies
ceded. Loss exposures with amounts of insurance that are less than the
primary insurer’s line are not reinsured, so a surplus share treaty typically
provides less surplus relief than does a quota share treaty.
37
• When the total underwriting capacity of the primary
insurer’s surplus share treaty is insufficient to meet its
large-line capacity needs, the primary insurer can arrange
for additional surplus share reinsurance from another
reinsurer. When a primary insurer arranges more than one
surplus share treaty, the surplus share treaty that applies
immediately above the primary insurer’s line is referred to
as the first surplus. Other surplus share treaties are referred
to in the order that they provide additional large-line
capacity, such as second or third surplus treaties.
38
Excess of Loss Reinsurance
• In an excess of loss reinsurance agreement, also called “non-
proportional reinsurance,” the reinsurer responds to a loss only
when the loss exceeds the primary insurer’s retention, often
referred to as the attachment point. The primary insurer fully
retains losses that are less than the attachment point, and will
sometimes be required by the reinsurer to also retain
responsibility for a percentage of the losses that exceed the
attachment point.
• Excess of loss reinsurance can be visualized as a layer, or a series
of layers, of reinsurance on top of the primary insurer’s retention.
See the diagram “How Excess of Loss Reinsurance is Layered.”
39
How Excess of Loss Reinsurance is Layered
Reinsurance Layer 4
200,000,000 Reinsurance Layer 3
Reinsurance Layer 2
Reinsurance Layer 1
Retention
40,000,000
,5,000,000
2,500,000
Rs.2,500,000
40
• Excess of loss reinsurance premiums are negotiated based on the
likelihood that losses will exceed the attachment point. The
reinsurance premium for excess of loss reinsurance is usually
stated as a percentage (often called a rate) of the policy premium
charged by the primary insurer. Therefore, unlike quota share and
surplus share reinsurance, the excess of loss reinsurer receives a
non-proportional share of the premium.
• Generally, reinsurers do not pay ceding commissions under excess
of loss reinsurance agreements. However, the reinsurer may
reward the primary insurers for favourable loss experience by
paying a profit commission or reducing the rate used in
calculating the reinsurance premium.
41
• The primary insurer’s attachment point is usually set at a level where
claims that are expected are retained. However, if the primary
insurer’s volume of losses is expected to be significant, an excess of
loss reinsurance agreement may have a low attachment point. This
type of reinsurance agreement is sometimes referred to a working
cover (An excess of loss reinsurance agreement with a low
attachment point). A working cover enables the primary insurer to
spread its losses over several years. The primary insurer and the
reinsurer anticipate that profitable years will offset unprofitable ones.
Primary insurers selling a type of insurance with which they have
little expertise may choose to purchase a working cover until they
better understand the frequency and severity of losses that the
portfolio for that particular type of insurance produces.
42
• Sometimes a co-participation provision is contained within an
excess of loss reinsurance agreement. The purpose of this
provision is to provide the primary insurer with a financial
incentive to efficiently manage losses that exceed the attachment
point. A co-participation provision (A provision in a reinsurance
agreement that requires the primary insurer to retain a specified
percentage of the losses that exceed its attachment point.) is
usually noted by specifying a percentage before the position of its
layer. For example, if the further layer in the “How Excess of Loss
Reinsurance is Layered” exhibit had a 5 percent co-participation
provision, that layer would be specified as “95% of Rs.20,000,000
xs Rs.5,000,000.”
43
• In addition to indemnifying losses in a layer of
coverage, the reinsurer’s obligation may also
extend to payment of loss adjustment expenses.
Loss adjustment expenses are often a substantial
insurer expense, especially for insurance for
liability loss exposures. Therefore, excess of loss
reinsurance agreements are usually very specific
regarding how loss adjustment expenses
attributable to specific losses are handled.
44
• Provide the loss adjustment expenses between the
primary insurer and the reinsurer based on the same
percentage share that each is responsible for the loss.
This approach is commonly referred to as “pro rata in
addition.”
• Add the loss adjustment expenses to the amount of the
loss when applying the attachment point of the excess of
loss reinsurance agreement. This approach is commonly
referred to as “loss adjustment expenses included in the
limit.”
45
Five Types of Excess of Loss
Reinsurance
• Per risk excess of loss.
• Catastrophe excess of loss.
• Per policy excess of loss.
• Per occurrence excess of loss.
• Aggregate excess of loss.
46
Per Risk Excess of Loss
• The first type of excess of loss reinsurance is per risk
excess of loss reinsurance (A type of excess of loss
reinsurance that covers property insurance and that
applies separately to each loss occurring to each risk),
which is often referred to as property per risk excess of
loss and is generally used with property insurance. It
applies separately to each loss occurring to each risk,
with the primary insurer usually determining what
constitutes one risk (loss exposure).
47
Example of Per Risk Excess of Loss Reinsurance
Applying Rs.950,000,000 xs Rs.50,000,000
Building Loss Amount Primary Insurer’s Reinsurer’s
Number Rs. (000) Retention Payment
Rs. (000) Rs. (000)
1 500,000 50,000 450,000
2 350,000 50,000 300,000
3 700,000 50,000 650,000
Total 1,550,000 150,000 1,400,000
48
Catastrophe excess of Loss
• The second type of excess of loss reinsurance is catastrophe
excess of loss reinsurance, which protects the primary
insurer from an accumulation of retained losses that arise
from a single catastrophic event. It may be purchased to
protect the primary insurer and its reinsures on a combined
basis but is more frequently purchased to protect the
primary insurer on a net basis after all other reinsurance
recoveries are made. Examples of catastrophic events
include tornadoes, hurricanes, and earthquakes. Such
events, especially major hurricanes, can result in losses
totalling billions of dollars.
49
Catastrophe excess of Loss
• Because the attachment point and reinsurance limit apply separately
to each catastrophe occurring during a policy period, the catastrophe
excess of loss reinsurance agreement defines the scope of a
catastrophic occurrence through a loss occurrence clause (A
reinsurance agreement clause that defines the scope of a catastrophic
occurrence for the purposes of the agreement.) The loss occurrence
clause specifies a time period, in hours, during which the primary
insurer’s losses from the same catastrophic occurrence can be
aggregated and applied to the attachment point and reinsurance
limits of the catastrophe excess of loss reinsurance agreement. Such
clauses usually specify a time period of 72 consecutive hours (three
days) for hurricane losses and 168 consecutive hours (Seven days) for
earthquake losses.
50
Example of the Operation of a Loss Occurrence Clause
in a Catastrophe Excess of Loss Reinsurance Agreement
Day Losses Period of Coverage Providing Maximum
Rs. (000) Recovery
Rs. (000)
1 1,000,000
2 1,000,000 Day 2 to 4 (7,000,000)
3 2,000,000
4 4,000,000
Total 8,000,000
51
Per Policy Excess of Loss
• The third type of excess of loss reinsurance, per policy excess of
loss reinsurance (A type of excess of loss reinsurance that applies
the attachment point and the reinsurance limit separately to each
insurance policy issued by the primary insurer regardless of the
number of losses occurring under each policy.) is used primarily
with liability insurance. The exhibit provides an example of how a
reinsurer would respond under a Rs.900,000,000 xs
Rs.100,000,000 per policy excess of loss treaty. In this example,
three separate general liability policies issued by the same
primary insurer incur losses from separate events. See the exhibit
“Example of Per Policy Excess of Loss Reinsurance Applying
Rs.900,000,000 x Rs.100,000,000.”
52
Example of Per Policy Excess of Loss Reinsurance
Applying Rs.900,000,000 xs Rs.100,000,000
Policy Loss Amount Primary Insurer’s Reinsurer’s
Rs. (000) Retention Payment
Rs. (000) Rs. (000)
1 300,000 100,000 200,000
2 500,000 100,000 400,000
3 600,000 100,000 500,000
Total 1,400,000 300,000 1,100,000
53
Per Occurrence Excess of Loss
• Per occurrence excess of loss reinsurance (A type of excess
of loss reinsurance that applies the attachment point and
reinsurance limit to the total losses arising from a single
event affecting one or more of the primary insurer’s
policies.), the fourth type of excess of loss reinsurance, is
usually used for liability insurance. It applies the
attachment point and the reinsurance limit to the total
losses arising from a single event affecting one or more of
the primary insurer's policies. See the exhibit “Example of
Per Occurrence Excess of Loss Reinsurance Applying
Rs.4,900,000,000 xs Rs.100,000,000.
54
Example of Per Occurrence Excess of Loss
Reinsurance Applying Rs.4,900,000,000 xs
Rs.100,000,000
Policy Loss Amount Primary Insurer’s Reinsurer’s Payment
Rs. (000) Retention Rs. (000)
Rs. (000)
1 300,000
2 500,000
3 600,000
Total 1,400,000 = 100,000 + 1,300,000
55
Aggregate Excess of Loss
• The fifth type of excess of loss reinsurance is aggregate excess of loss
reinsurance. This type of excess of loss reinsurance can be used for
property or liability insurance and covers aggregated losses that
exceed the attachment point and occur cover a stated period, usually
one year. The attachment point in an aggregate excess of loss treaty
can be stated as a dollar amount of loss or as a loss ratio. When the
attachment point is stated as a loss ratio, the treaty is called “stop loss
reinsurance.” With stop loss the primary insurer’s retention may be a
loss ratio of 90 percent, and the reinsurer would indemnify losses up
to a loss ratio of 120 percent. The reinsurance agreement in this
instance would specify the attachment point and reinsurance limit as
“30 % xs 90% loss ratio.” the primary insurer retains responsibility for
losses above a loss ratio of 120 percent.
56
Aggregate Excess of Loss
• Aggregate excess of loss treaties are less common and can
be more expensive than the other types of excess of loss
reinsurance. The treaty usually specifies an attachment
point and reinsurance limit that does not result in the
primary insurer earning a profit on the reinsured policies
when the polices were unprofitable overall. Most
aggregate excess of loss treaties also contain a co-
participation provision of 5 to 10 percent to provide the
primary insurer with an incentive to efficiently handle
claims that exceed the attachment point.
57
Aggregate Excess of Loss Reinsurance Example
• Because of the stabilizing effect aggregate excess of loss reinsurance
on a primary insurer’s loss ratio, it many be argued that it is the only
type of reinsurance needed. However, aggregate excess of loss
reinsurance has limited availability. When used, the aggregate excess
of loss reinsurer usually expects to pay losses only after the primary
insurer has been reimbursed under its other reinsurance agreements.
• While a catastrophe excess of loss reinsurance agreement only
protects against catastrophe losses, an aggregate excess of loss
reinsurance agreement provides the reinsured with broader
protection. This is because the aggregate excess of loss reinsurance
agreement includes catastrophes and unforeseen accumulations of
non-catastrophic losses during a specified period (addressing both
loss severity and loss frequency).
58
Available Reinsurance Coverage in
Pakistan
History of Pakistani Insurance Market
• In 1947, the Sub-continent of India was divided in two
independent sovereign states, Bharat (India) and Pakistan.
Pakistan's inheritance of insurance, like all other industries, was a
total five indigenous insurance companies. Besides, there were
seventy seven foreign insurance companies that were operating
within the geographical limits of Pakistan at the time of Partition.
All the reinsurance business at that time was placed with foreign
reinsurers.
• The Pakistani insurers were conducting business on rather a
modest scale because of their size of resources the foreign
insurers, quite naturally, dominated the industry and the bulk of
the business remained in their hands till 1952.
59
Pakistan
• Realising the need of promoting Pakistani insurers to handle
ever growing insurance needs in the country, consistent with
industrialization and to check the drain of funds taken away by
the foreign insurers, the Government of Pakistan decided to
provide complete and full support to insurance industry. In
1953, Pakistan Insurance Corporation (PIC) was established
under the Pakistan Insurance Corporation (PIC) Act, 1952. All
the insurance companies were to cede 30 percent of their
business as compulsory quota share and 20 percent surplus to
PIC. For any further reinsurance requirement they could
approach foreign market.
60
Pakistan
●
To broaden the base of maximising retention capacity within the country and to share the business with the ceding
companies, 30 percent compulsory reinsurance business was pooled by PIC and more than 50 percent of the pool was
redistributed among the companies for their net retention. All the business given back to the companies was, thus,
retained in Pakistan. It had the additional advantage of strengthening the financial position of private insurers,
particularly of those with smaller resources. This system not only enabled the private insurers to improve their
retention and profitability but also conserved precious foreign exchange which would have gone abroad in absence of
this system.
61
Pakistan
●
Consequently, the local insurance industry started to grow. New companies were floated and old Pakistani insurers
consolidated their position with the help and cooperation of PIC. The number of Pakistani insurers increased from 26
to 47 by 1971.
●
The overall picture of the compulsory and voluntary Premiums during 1978 to 1985 retained within Pakistan was
Rs.5,025 million against the gross Premium of Rs.7,667 million. On this score PIC was doing an excellent job and thus
helping indigenous companies to grow conserved valuable foreign exchange and also contributed towards the
development of the economy of the country.
62
Available Reinsurance Coverage in Pakistan
●
In the absence of PIC the country would have lost the scarce foreign exchange amounting to Rs.14,088
million during a period of 37 years up-to 1989.
●
No doubt, PIC has contributed substantially towards the growth and promotion of the insurance
industry during 37 years but now the industry has attained the maturity. PIC being a public sector
organisation could not pace with the changing demands and its bureaucratic style discouraged the
insurers. In 1989, the National Insurance Reforms Commission recommended reorganisation of PIC.
63
Pakistan
●
In the Year 2000, Pakistan Insurance Corporation was restructured and reorganised into a public
limited company as Pakistan Reinsurance Company Limited (PRCL). There remained no compulsion
to cede to PRCL. Before going to foreign reinsurers up to 35 percent surplus is to be offered to PRCL. If
PRCL refuses the treaty can go to foreign reinsurers.
●
With this change the major part of reinsurance business ceded to PRCL started to go to foreign
reinsurers. Only 4-7 percent is retained by PRCL and up to 30 to 37 percent goes to foreign reinsurers.
64
Pakistan
Need of Reinsurance by Pakistani Insurance Industry
●
On 1st January, 2001 Federal Government issued a notification to reduce the proportion required to be
ceded and reinsured with PRCL on the following percentages of each direct non-life insurance
contracts insured by the insurers in Pakistan on any individual risk:
●
15% with effect from 1st day of January, 2001;
●
10% with effect from 1st day of January, 2003; and
●
0% with effect from 1st day of January, 2004; onwards.
65
Pakistan
●
As such it is not now compulsory to get reinsurance fr0m PRCL but Pakistani direct insurance companies are
required to first offer 35% surplus to PRCL and then to foreign reinsurers. The reinsurance up to 50 percent of
entire business (30 percent compulsory quota Share and 20 percent Surplus) received by PRCL which was
redistributed to direct insurers is no more available.
●
In case of Facultative placement first right of refusal is of PRCL then if all other authorised insurance companies
refuses to accept Facultative Reinsurance only then Primary insurer can place any facultative reinsurance abroad.
66
Pakistan
●
In 2005, the total General Insurance Written Premium amounted to $323 million
which increased to $465 million in the year 2009. Further, in 2005 $119 million is
gone out of Pakistan in the form of Reinsurance from Direct Insurers and
Retrocession from PRCL which is36.84 percent of total Written Premium. In year
2005 retained premium was $181 million ie 7 percent of Total Written premium.
67
Available Reinsurance Coverage in Pakistan
●
This means that PRCL is only retaining 7 percent of total premium in the year 2005 and we are losing 37
percent of total premium to foreign reinsurers ie costing a loss of $119 million in foreign exchange. This
trend continued during the years 2006, 2007, 2008 and 2009. In year 2009 $269 million were retained by
direct Pakistani insurers ie 58 percent of total written premium, $29 million was retained by PRCL ie 6
percent of total written premium and $166 million were transferred to foreign reinsurers ie 36 percent of
total written premium. That means over all in five years, premium retained by PRCL is not increasing.
68
Options for Enhancement of local
Reinsurance Capacity
Option to enhance capacity of PRCL
●
PRCL has been working as a Monopoly, Government owned bureaucratic organisation. It could
not work efficiently and effectively to increase its capacity. PRCL over time had retained maximum
premium in Pakistan and protected foreign exchange out flow when there was compulsion to cede
to PRCL. After lifting that compulsion it could not retain the business and enhance its capacity.
There are no chances of improvement in future without Government protection.
69
Option to Share with local insurers on co-insurers on co-insurance

basis/facultative
●
In Pakistan companies share business among themselves in the form of co-insurance but they cannot
accept beyond their limits determined by banks and financial institutions. Market structure is such
that major market share is taken by two or three top leaders of the market. The small insurance
companies rely mainly on co-insurance shares from these top leaders. Despite this practice direct
insurers will need reinsurance protection to enhance their capacity to get more share of the market.
Without the support from reinsurers they cannot enhance their capacity.
70
Option to Establish Local/private Reinsurance Companies
●
Private Reinsurance Company can be established to enhance capacity by creating competition
with PRCL and Foreign Reinsurers. It will lead to better competitive terms to direct insurers and
also enhance their capacity to underwrite more insurance business in Pakistan. The ground for
private sector is open because of low or no competition. Foreign reinsurance market is getting
harder for direct insurers thus increasing need of reinsurers inside Pakistan.
71
Position of Existing Direct Insurers
●
Statistical data indicate that there are three key players ie EFU General Insurance
Ltd., Adamjee Insurance Company Ltd., and Jubilee General Insurance Company
Ltd. These three companies are leading in the market. Out of these private sector
insurance companies any one can establish a private Reinsurance company.
72

Understanding Reinsurance and Reinsurance Market in Pakistan

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Understanding Reinsurance and Reinsurance Market in Pakistan

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Understanding Reinsurance and

Reinsurance Market in Pakistan

25,000 Actual Losses (Rs.000)

Pro-Rata Excess of Loss Pro Rata Excess of Loss

1 500,000 50,000 450,000

2 350,000 50,000 300,000

3 700,000 50,000 650,000

Total 1,550,000 150,000 1,400,000

2 1,000,000 Day 2 to 4 (7,000,000)

1 300,000 100,000 200,000

2 500,000 100,000 400,000

3 600,000 100,000 500,000

Total 1,400,000 300,000 1,100,000

Total 1,400,000 = 100,000 + 1,300,000

History of Pakistani Insurance Market

History of Pakistani Insurance Market

History of Pakistani Insurance Market

History of Pakistani Insurance Market

Need of Reinsurance by Pakistani Insurance Industry

Need of Reinsurance by Pakistani Insurance Industry

Need of Reinsurance by Pakistani Insurance Industry

Need of Reinsurance by Pakistani Insurance Industry

Option to enhance capacity of PRCL

Option to Share with local insurers on co-insurers on co-insurance

Option to Establish Local/private Reinsurance Companies

Position of Existing Direct Insurers

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