Reinsurance Training

From August 4 -15, 2014

Prepared by Shiferaw Bante
I. History of Reinsurance
1. Early Developments
 The existence of marine insurance is almost as old as
insurance. Later on Fire, Life and Accident
Reinsurances were developed respectively
 All early reinsurances were practiced on a
coinsurance and facultative basis. Treaty
reinsurance on proportional and non-proportional
basis was developed in Europe in the early 19th
century.
 History contd.

• The concept of excess of loss reinsurance was

introduced by Cuthbert Heath at Lloyds.
• Life reassurance on the risk premium method
was introduced by Mercantile and General
Reinsurance (England) in 1927
History contd.

2. Specialist reinsurance companies

The first reinsurance company was Cologne Re
Germany established in 1852
The first reinsurance company in England was
mercantile & General Re which was founded in
1907
In America, the American Re was founded in 1890
Swiss Re was founded in Switzerland in 1863
Munich Re Germany was founded in 1880.
History contd.

3. State Reinsurance Corporations

 The first state reinsurance corporation was Caja
Reasaguredora de Chile founded in 1927. Later
on state reinsurance corporations were
established in Uruguay, France, Brazil and
Argentina.
 Over the last decade UNCTAD encouraged
developing countries to establish state owned
reinsurance corporations consequently Nigeria
Re, Ghana Re,kenya Re, Zimbabwe Re and so on
were founded
History contd.
4. Regional Reinsurance Corporations
 These include Asia Re, Africa Re, PTA Re,
WAICA Re, established in Afro Asian regions in
the 1970s
History contd.

5. Reinsurance Pools
Another project sponsored by UNCTAD is regional
reinsurance pools
These include Arab Aviation pools and Arab
Engineering pool in 1968 followed by Arab Marine
Hull pool in 1973.
Other pools still operating today are F.A.I.R
aviation pool managed by S.C.R Morocco; African
aviation and African oil & energy pools managed
by Africa Re, African Fire pool managed by CICA
Re, OESAI Reinsurance pool managed by Kenya
Re.
6. Reinsurance Brokers
II. Why does a Company buy
reinsurance?
1. Protection against the exposure of large losses due to:
 Individual large risks
 Accumulation of losses from one event
 Accumulation of losses in any one year
2. Capacity
3. Financial reasons
 Government may limit the amount of business a
company can retain according to its financial
strength.
 For protection of solvency margins
Why rein. Contd.
4. Equalization or spread of risks
5. Political reasons
6. Business reasons
III. & IV. Reinsurance Methods
Reinsurance

-Risk/
working
proportional excess
Non-proportional
of loss
-quota
share (workin
-surplus g excess
-Q.S. of loss)
Facultative Treaty Facultative Treaty
and
Surplus -
combin catastro
ed phe
- excess
facultati of loss
ve -risk
obligato excess
ry of loss
- Line cum
slip catastro
- open phe
cover excess
of loss
-stop
loss or
V. Treaty wordings
Treaty wordings are signed agreements which evidence contracts of
treaty reinsurance between the contracting parties.
1. Proportional treaty wordings
1.1. Business clauses
. Preamble
. Business covered
. Territorial scope
. Treaty detail
. Attachment of cessions
. Attachment and termination of treaty
. Original terms, conditions and rates
. Commissions
1.2. Accounting clauses
. Periodical accounts
.Losses advice and settlement
Wordings contd.

2. Non- proportional treaty wordings

2.1 Business clauses
. Preamble
. Scope of cover
. Basis of cover
. Period - risk attaching or policy issued basis
- losses occurring basis
- losses discovered or claims made basis
wordings cont.
2.2 Accounting clauses
 Preamble
 Reinstatement
 Losses
2.3 Definition clauses
 Ultimate net loss clause
 Net retained lines
 Loss occurence
2.4 Other non-proportional clauses
 Index clause
 Currency fluctuation clause
 Extra contractual obligations clause
Wordings contd.
3. Clauses common to both proportional and non-
proportional wordings
 Exclusions
 Underwriting policy
 Error and omissions
 Inspection of records(access to records)
 Alterations and amendments
 Communications (intermediary)
 Arbitration
 Special conditions, warranties and acceptances
 Schedule
 Special cancellation (sudden death)
 Cut through clauses
VI. Legal aspects of reinsurance
contract
1. Formation of reinsurance contract
 Offer and acceptance at the time of placing
 Consideration
 Illegality
2. Contractual documentation and certainty
A contract of reinsurance must have terms which are
certain
 The slip
 The cover note
 The wording
 Incorporation terms- “as original”
3. Basic principles of reinsurance
 Indemnity
 Utmost good faith
 Insurable interest
X. Non life reinsurance accounting
1. Proportional treaty accounting
1.1 Bordereaux services
. Premium bordereaux
. Claims paid bordereaux
. Outstanding claims bordereaux
1.2 Technical statement of accounts
. Premium and claims
. Premium and claims portfolio
transfers
. Premium and claims portfolio
entries
Non life acc. cont.
1.3 Premium and loss reserve deposit
1.4 commissions
Normal commission(flat rate commission or
ceding commission
Sliding scale commission
Overriding commission
Profit commission
Super profit commission
1.5 Facultative reinsurance accounting
Non-life acc. cont.
2. Non- proportional accounting
2.1 premium
. Minimum and deposit premium
. Premium adjustment
2.2 claims
. Loss advise
. Outstanding losses
VII.Retention and reinsurance
programming
1. The fixing of retention
• Assets (capital and free reserves)
• Size of portfolio, premium income and profitability
• Type and spread of risks and pattern of losses
• Type of reinsurance
• Cost of reinsurance
• Corporate strategy
• The type of market
 Retention contd.
2. Reinsurance programming
2.1 objectives o a reinsurance program
. It should provide to the company a large
enough capacity
. The cost of reinsurance should be reasonable
. The reinsurers should be financially strong
. The reinsurers should be able to make
reasonable profit
. Achieve simplicity in reinsurance programe.
Least number of treaties while keeping them
attractive. Decrease the needs for facultative to the
minimum and comply with legal requirements.
 Retention contd
3. No perfect reinsurance programe
4. Reciprocal trading
5. Reviewing the reinsurance programe
6. Reinsurance programe and national market
VIII. Application of the
different forms of reinsurance
1. Property Reinsurance
• Fire & special perils
• Business Interruption
• Engineering risks
• Theft
• Goods in transit
• Miscellaneous accident
Application contd.
1.1 proportional treaties
•Quota share
•Surplus
•Facultative obligatory
1.2 Non-proportional treaties
• Working excess of loss or risk excess of loss
•Catastrophe excess of loss
•Risk excess of loss cum catastrophe excess of loss
•Excess of loss ratio or stop loss or aggregate excess of
loss
Application contd.
2. co-reinsurance
3. Reinstatement
One reinstatement at pro-rata additional premium as
to amount and as to time
One reinstatement at pro-rata additional premium as
to amount and 100% as to time
One reinstatement at pro-rata additional premium as
to amount and 50% as to time
Application contd.
4. Rating of non-proportional treaties
• Burning cost rating method
•Exposure method
•Rate on line
•Payback period
5. Causality Reinsurance
•Classes of business with sum insured
•Classes of business without sum insured
6. Marine & Aviation reinsurance
Application contd.
7. Life reassurance
7.1 Proportional reassurance
.Facultative
.Surplus
.Quota share
7.2 non-proportional reassurance
.Catastrophe reassurance neither excess of loss or stop
loss covers are popular in life reassurance with the
exception of cat XL cover
7.3 basis of reassurance
.Original terms
.Risk premium
IX. Reinsurance Markets
1. International Markets
1.1. London reinsurance markets
The London market is a mixed direct and
reinsurance market comprising:-
 Lloyds underwriters accepting direct insurance and
reinsurance
 British composite companies also accepting
insurance and reinsurance
 British professional reinsurance companies being
generally subsidiary companies of the major Bristish
companies
 Overseas professional reinsurers operating through
branches or UK registered subsidiary companies
Reinsurance markets contd.
1.2 The US reinsurance market
• Reinsurance Companies
•Reinsurance Division of insurers
•Pools and syndicates
1.3 Continental European markets
•Munich Re
•Swiss Re
Reinsurance markets contd.
1.4 African reinsurance markets
Regional reinsurance companies
State reinsurance companies
Public reinsurance companies
Private reinsurance companies
Reinsurance division of insurers
Overseas professional reinsurers through their branch
offices or subsidiary companies.
Reinsurance markets contd.
1.5 Asian markets
Regional reinsurance companies
Private reinsurance companies
Public reinsurance companies
Overseas reinsurance companies
2. Local reinsurance market
Africa Re
Prospective reinsurers namely P.T.A Re and Ethio Re