PRESENTATION REORT IN THE SUBJECT (COC101)BANKING AND INSURANCE
TOPIC: REINSURANCE
ROLLNO: 103-2015
CLASS: MCOM PART- I
POST GRADUATE DEPARTMENT OFCOMMERCE
ST. XAVIERS COLLEGE, MAPUSA-GOA
ACADEMIC YEAR 2016-2017
SR.NO
CONTENT
Meaning
Nature of a reinsurance contract
Functions of re-insurance
Advantages of re-insurance
Methods of re-insurance
Double insurance v/s reinsurance
Re-insurance future in India
PAGE NO
1. MEANING OF RE-INSURANCE :
Reinsurance as the word suggests means insuring again. Reinsurance may be defined as the
practice whereby one party called the reinsurer in consideration of the premium paid to him
agrees to indemnify another party, called the reinsured, for a part or all of the liability assumed
by the latter party under a policy or policies of insurance which it has issued. In fact it is a
contract between two insurers.
The insurer transferring the business is called the principle or ceding original office and the
insurer to whom business is transferred is called the reinsurance or the guaranteeing office.
Reinsurance works like this: the insurer gives the reinsurer a portion of the premium it collects
from the insured and in return is covered for losses above a particular limit. It is an independent
contract between the reinsurer and the insurer and the original insurer is not a party to the
contract.
Reinsurance primarily deals with catastrophic risks that are not predictable and cause the greatest
exposure for the insurance company. The situation in the wake of 9/11 attacks in America was
similar. A single insurer may not be able to bear the damaging financial impact of such losses.
Therefore unbearable loss is broken down into bearable units by risk transfers. An insurance
company limits the amount of risk it takes depending on the reinsurance terms along with factors
like the worth of its assets, trend of inflation in the economy, a price of the insurance products
and the type of the risk.
2.NATURE OF A REINSURANCE CONTRACT
As it is a contract of insurance between two parties, it has to fulfill the following:
1. Principal of Utmost Good Faith: Reinsurance maintains utmost faith in underwriters of
their company. These underwriters in turn maintain utmost good faith in the underwriters
of the primary insurance company.
2. Principal of Indemnity: Reinsurance is also a contract of indemnity. The principle of
indemnity applies automatically to a contract of reinsurance. A reinsurer automatically
follows the legal and technical future of the reinsured in writing and underwriting a risk.
Indemnity limit is reinsurance can be more than the sums insured if there are additional
legal expenses against the insurer that are incurred while contesting a claim. If the
reinsurers indemnity limit is in foreign currency transactions, it is affected by foreign
currency exchange rate fluctuations.
3. No Reinsurance without Retention: The insurer must retain a part of the risk before
reinsuring. Though there cannot be reinsurance of the complete risk, there can be
complete retention of a risk. Those risks that are within the retention capacity of an
insurer must be retained completely.
3.FUNCTIONS OF RE-INSURANCE
1. Risk Transfer:
The main use of any insurer that might practice reinsurance is to allow the company to
assume greater individual risks than its size would otherwise allow, and to protect a
company against losses. Re-insurance allows an insurance company to offer higher limits
of protection to a policyholder than its own assets would allow. Reinsurance can be
treated as carefully planned hedging strategy.
2. Income Smoothing:
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. Surplus Relief:
An insurance companys writings are limited by its balance sheet (this test is known as
the solvency margin). When that limit is reached, an insurer can either stop writing new
business, increase its capital or buy surplus relief reinsurance. The latter is usually done
on a quota share basis and is an efficient way of not having to turn clients away or raise
additional capital.
4. Arbitrage:
The insurance company may be motivated by arbitrage in purchasing reinsurance
coverage at a lower rate than what they charge the insured for the underlying risk.
4.ADVANTAGES OF RE-INSURANCE
1. The reinsurance safeguards capital and reinforces stability:
In a highly volatile market it may sometimes be hard to correctly price new
products because of inadequate information. Incorrect pricing could lead to
unanticipated claims that the insurance company cannot meet. If there were no
reinsurance the insurance company would have to settle these claims out of its
own capital. Therefore, reinsurance helps to protect the solvency of the insurance
company. Reinsurance enables the insurer to take up large claims and expand
capacity in India: regulation restrict the insurer from risking more than 10 per cent
of its surplus on any one risk. Reinsurance provides the insurer with ability to
cover large individual risks and guarantees timely settlement of the claim.
2. Reinsurance helps insurance company to upgrade itself:
An insurance company can benefit immensely by tying up with a successful
reinsurer can provide important underwriting training and skill development and
share expertise gained from other countries. Since the success of the reinsurer is
linked to the profits of the insurance company, it is in the best interest of the
reinsurer to measure that the company is sound. The reinsurer can contribute to
designing the product, pricing and marketing new products. It can also offer backoffice support such as faster claims processing and automation of operations.
3. Reinsurance can also help a company to withdraw from a line of business:
Reinsurance provides more diversification when risks are accepted on a
worldwide basis and just in a specific region or country. The reinsurer can also
help an insurance company withdraw a particular geographical territory or the line
of business. Thus, the company can vary its business decision with a swift
transition for a known cost, without being restricted by policy duration and other
consideration. This is also termed as portfolio reinsurance. The insurance buyers
are now much more aware of the way the market work. Increasingly they are
demanding high quality insurance products and are conscious of the fact that
reinsurance is an important criterion to be considered while selecting an insurance
policy. New insurance companies, when entering reinsurance arrangement with
both Indian and foreign firms, will be asked to supply quality in terms of the
authenticity of the claim. Thus, reinsurance will continue to remain a deciding
factor that determines whether or not to enter into business with an insurance
company.
5.METHODS OF REINSURANCE:
There are two methods of reinsurance, treaty reinsurance and facultative reinsurance.
1. Treaty reinsurance: This kind of reinsurance requires that the reinsurer will assume part
or all of a ceding companies 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 homogeneous risks
are considered.
2. Facultative reinsurance: 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 reduced the ceding
companies exposure to risk from an individual policy . Reinsurance can be classified into
proportional and non-proportional reinsurances.
1. Proportional Reinsurance: In this case , the two companies share the premium as well
as risk . The reinsurer usually pays a ceding commission. The basis of proportional
reinsurance may be.
Pro rata reinsurance : 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 2 types of pro- rata reinsurance, quota share and surplus share .
Quota share pro-rata reinsurance: The primary insurer cedes a fixed
percentage of premiums and loses for every risk accepted.
Surplus share pro-rata reinsurance : It is different in that not every risk is
ceded but only those that exceed certain predetermined amounts.
2. Non proportional reinsurance: As the name suggests it is not proportional and the
reinsurer only responds if the loss suffered by the insurer exceeds a certain amount.
The bais of such non proportional reinsurance.
Excess of loss: It covers a single risk or a certain type of business. Catastrophe
reinsurance is a type of excess of loss reinsurance. It provides the captive with
a great deal of flexibility.
Stop loss reinsurance: It covers the whole account and is also known as
excessive loss ratio reinsurance.
These are the various types of reinsurance. There are firms that offer their services as well as
their products to help new business start up flourish and succeed.
6.REINSURANCE VS DOUBLE INSURANCE
Reinsurance
Double insurance
When the risks in high , the insurers get a When the same risk and subject matter is
part
required
with
another
insurance insured with more than one insurer, it is
company called the reinsurer
termed as double insurance .
The reinsurer has an insurable interest in the Here , the insured has insurable interest in the
risk which he may reinsure.
subject matter of insurance
The original insurer is able to transfer a part Here, insurers can adjust their risks and
of the risk to the reinsurer.
contribution among themselves when the
claim arises.
Reinsurance contract terminates once the In the case of double insurance, it does not
original insurance lapse for any reason
happen, if one insurer has paid he can ask
others for contribution .
In the event of loss, the original insurer has to Assured cannot recover more than the
pay the insured sum to the insured
amount of actual loss. If loss occurs the
insured may claim payment from the insurers
in such an order as he chooses and insurers
will adjust the amounts among themselves, in
proportion to the insurance cover granted by
them.
7.FUTURE OF REINSURANCE IN INDIA
GIC, the sole reinsurance company of our country, by virtue of its experience and exposure in
providing reinsurance support and guidance to its erstwhile non-life insurance subsidiaries for
more than three decades, has excellent organizational and technical skills in taking care of
insurance arrangements for the present Indian insurance market-life and has since adequately
established itself as the national reinsurance leader. Looking to the proactively effective
regulatory mechanism put in place in our country, the accelerated growth momentum generated
in Indian insurance market and the technical expertise of GIC as national reinsurance leader
having been made available, all the market players, including the regulator, are sure to take full
advantage of the electronic communication technology to further improvise the existing
reinsurance arrangements and network globally.
Meanwhile, GIC as part of its strategy to expand its operations and to make its presence felt
globally has recently upgraded its representative officers in London and Dubai with full- fledged
branches and also accelerated its action plan to finalize alliance with local reinsurance companies
in the eastern and southern parts of the African continent. Incidentally, the sole national reinsurer
of India also has another representative office in Moscow, which has been playing a proactive
role in coordinating the strategic reinsurance arrangements with that part of the world.
GIC ranks 21st among non-life reinsurers with a net worth of $ 1.4 bn. As per GIC chairman, it is
positioned as the lead reinsurer in the Afro-Asian region and other emerging economies.
Bibliography
Insurance management-Swarup Sahoo and Suresh Das
www.wikipedia.com