Reinsurance - Insuring The Insurer

REINSURANCE INSURING THE INSURER
RAHUL | HR COLLEGE OF MANAGEMENT STUDIES | TY BMS
A PROJECT REPORT ON
SUBMITTED BY ________ FOR THE DEGREE OF THE BACHELOR OF MANAGEMENT STUDIES UNDER THE GUIDANCE OF MISS _____________
HR COLLEGE OF COMMERCE AND ECONOMICS _________ ( E ) , MUMBAI 4000____ ACADEMIC YEAR 2009 - 2010
DECLARATION
I, RAHUL______ OF THE HR COLLEGE OF COMMERCE AND ECONOMICS, ___________( E ) , HEREBY DECLARE THAT I HAVE COMPLETED THE PROJECT ENTITLED REINSURANCE INSURING THE INSURER IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE THIRD YEAR OF THE BACHELOR OF MANAGEMENT STUDIES COURSE FOR THE ACADEMIC YEAR 2009-2010 I FURTHER DECLARE THAT INFORMATION SUBMITTED BY ME IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE.
DATED:
_________ NAME OF THE STUDENT
CERTIFICATE
I MR ______________ HEREBY CERTIFY THAT MR. MANDIP STUDYING IN TYBMS AT HR COLLEGE OF COMMERCE AND ECONOMICS, __________ (E), HAS COMPLETED A PROJECT ON REINSURANCE INSURING THE INSURER IN THE ACADEMIC YEAR 2009-2010 UNDER MY GUIDANCE. I FURTHER CERTIFY THAT THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE. DATED: PLACE: NAME OF THE GUIDE EXAMINERS SIGN & DATE PROJECT GUIDE _____________________ COLLEGE SEAL PRINCIPAL
ACKNOWLEDEGEMENT
I EXPRESS MY SINCERE THANKS TO MISS ______________FOR HER VALUABLE GUIDANCE IN DOING THIS PROJECT. I WISH TO TAKE THE OPPORTUNITY TO EXPRESS MY DEEP SENCE OF GRATITUDE TO PRINCIPAL ___________________________ AND PROF. (Mr.) ________________________ OF INSPIRATION. FINALLY IT IS THE FOREMOST DUTY TO THANK ALL MY RESPONDENTS, FAMILY & FRIENDS WHO HAVE HELPED ME DIRECTLY OR INDIRECTLY IN COMPLETING MY FIELD WORK, WITHOUT WHICH THIS PROJECT WOULD NOT HAVE BEEN SUCCESSFUL. FOR THEIR INVALUABLE GUIDANCE AND SUPPORT IN THIS ENDEAVOUR. THEY HAVE BEEN A CONSTANT SOURCE
NAME OF THE STUDENT
TABLE OF CONTENTS
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CHAPTER 1
1.1 SYNOPSIS
In today's dynamic insurance market, it is seen that one important entity has an affect on the operations of all the players - this being the reinsurer. Reinsurance primarily deals with catastrophe risks that are not predictable and cause greatest exposure for insurance company. The post-9/11 attack situation in America was similar.
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. As one of the business market research paper has put it Reinsurance is an international, multi billion dollar industry that is vital to the financial stability of all types of insurance companies. It is a method of ceding part of the financial risk the direct insurers assume by accepting risk from risk owners, particularly mega risk, mainly against the earthquakes, tsunami, terrorism, etc. However, in terms of magnitude / size, reinsurance is highly complex global business and for example, it accounts for more than 9% of the total premiums generated from property. The whole mechanism of insurance and reinsurance has being a dynamic process. The electronic media and internet technology have substantially added to the efficiency and simplification of mechanism of reinsurance operations. The increased use of information and internet technology by the insurance companies have made collecting, compiling, and data warehousing of updated technical data on millions of mega risk faster and also revolutionized the procedural input on underwritings, accounting and claims processing and settlement by both primary insurance and reinsurance.
1.2 HISTORY OF RE-INSURANCE

The development of a reinsurance market took a rockier road. Reinsurance of marine risks is thought to be is old as commercial insurance, but it was not until 1864 that the practice in the UK was legalised and the ban on marine reinsurance was removed. Previously, reinsurance had been considered as a form of gambling.
As reinsurance of fire business appeared unattractive to UK insurers, co-insurance remained a more common way of spreading the risk. Insurers wishing to spread their risks then had to turn to the continental merchant banks for their reinsurance protection. It was in continental Europe, in the early 1 SOPs, that automatic treaty reinsurance was first developed and there are numerous examples on record of facultative and treaty reinsurance arrangements at that time. However, it took until 1852 for the first independent reinsurance company to be established, and that company was the Ruchversicherrungs Gesellschaft of Cologne. Several German companies, including the Aachener Ruck, followed suit, proving themselves to he as productive as their forerunner. Unfortunately, British reinsurers who decided to enter the field found that their initial experiences were not so fortuitous. In the 1 870s, quite soon after setting up, a number of UK reinsurance companies went into liquidation. Ike reasons for heir lack of success are not altogether clear, but the UK retained its role as a modest reinsurance market for some time, with its European counterparts continuing to hold the stronger market position. It is in 1880 that we find the earliest trace of excess of loss reinsurance, as established by Mr Cuthbert Heath of Lloyds, and nor until 1907 do we find the establishment of Britains oldest and longest operating reinsurance company, the Mercantile and General. Then came the First World War, which brought with it a curtailment in trading relationships between the UK and its primary reinsurance markets. This forced companies to look within their own national boundary for cover and Lloyds, a late entrant to the reinsurance market, began to take a more active role, attracting a large volume of business from the United States of America. By the end of the Second World War London had successfully established itself at the heart of the international reinsurance market. The City of London had become the centre for reinsurance capacity and expertise, with capital provided by British and overseas companies and also those many individuals who were members at Lloyds. Other
reinsurance markets overseas, particularly in Germany and the United States, continued to develop their major domestic reinsurance markets
1.3
What Does Reinsurance Mean?
INTRODUCTION
The practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company
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to reduce the risks associated with underwritten policies by spreading risks across alternative institutions. Also known as "insurance for insurers" or "stop-loss insurance". The term 'reinsurance' stands for the practice whereby a reinsurer, in return of a premium paid to it, indemnifies another person/company for a portion or all of the liability taken up by the latter due to a policy of insurance that it has issued. This latter party is called the 'reinsured'. Reinsurance is a type of risk management involving transfer of risk from insurer to the reinsurer. What that reinsurer does is to provide insurance for the insurers on the basis of a contract of indemnity. It 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. A reinsurer enters into a reinsurance agreement for a very specific reasoneither the nature of risk insured or the business strategies of the insurer or other possible reasons. It is an independent contract between the reinsurer and the insurer and the original insurer is not a part of the contract. If the claimant is an individual or even a group of individuals, an insurance company will find it, relatively easy to cover the claims. But if there are a huge number of claims at the same time and the loss is massive and widespread, this may not be possible. It is in this context that reinsurance plays an important part in determining the success of the insurance business. Reinsurance primarily deals with catastrophe risks that are not predictable and cause the greatest exposure for the insurance company. The situation in the wake 9/11 attacks on America was similar. A single insurer will not be able to bear the damaging financial impact of such losses. Therefore, an 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 asssets, trend of inflation in the economy, a price of the insurance products and the type of risk.
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1.4 TYPES OF REINSURANCE

1.4.1 TREATY REINSURANCE
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This method is defined to cover an entire category of risk or line of business in advance. It is obligatory and binding in nature for both the reinsured and reinsurers. So as long as a risk meets all the conditions as given in the reinsurance contract, acceptance of that risk by the insurer is automatic. Reinsurance by this method creates capacity for insurers. Capacity + Coverage of all prerils with adequate limits + confidence on security of reinsurers + continuity of reinsurance after a loss. The ceding company is contractually bound to cede and the reinsurer is bound to assume a specified portion of a type or category of risks insured by the ceding company. Treaty reinsurers, including the SCOR Group, do not separately evaluate each of the individual risks assumed under their treaties and, consequently, after a review of the ceding company's underwriting practices, are dependent on the original risk underwriting decisions made by the ceding primary policy writers. Such dependence subjects reinsurers in general, including SCOR, to the possibility that the ceding companies have not adequately evaluated the risks to be reinsured and, therefore, that the premiums ceded in connection therewith may not adequately compensate the reinsurer for the risk assumed. The reinsurer's evaluation of the ceding company's risk management and underwriting practices as well as claims settlement practices and procedures, therefore, will usually impact the pricing of the treaty. 1.4.2 FACULTATIVE REINSURANCE This is for the reinsurance of current single risk and options are open for both the reinsured and reinsurers. In a facultative contract relationship, the reinsurer retains the faculty or power to either accept or reject each individual risk offered to it by the insurer. The ceding company cedes and the reinsurer assumes all or part of the risk assumed by a particular specified insurance policy. Facultative reinsurance is negotiated separately for each insurance contract that is reinsured. Facultative reinsurance normally is purchased
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by ceding companies for individual risks not covered by their reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks. Underwriting expenses and, in particular, personnel costs, are higher relative to premiums written on facultative business because each risk is individually underwritten and administered.
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Individual risk review Right to accept or reject each risk on its own merit
No individual risk scrutiny by the reinsurer Obligatory acceptance by the reinsurer of covered business A long-term relationship in which the reinsurers profitability is expected, but measured and adjusted over an extended period of time Less costly than per risk reinsurance One contract encompasses all subject risks
A profit is expected by the reinsurer in the short and long term, and depends primarily on the reinsurers risk selection process Adapts to short-term ceding philosophy of the insurer
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A contract or certificate is written to confirm each transaction Can reinsure a risk that is otherwise excluded from a treaty
Can protect a treaty from adverse underwriting results
Proportional and Non-Proportional Reinsurance Both treaty and facultative reinsurance can be written on a proportional, or pro rata, basis or a non-proportional, or excess of loss or stop loss, basis.
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Proportional Proportional reinsurance (the types of which are quota share & surplus reinsurance) involves one or more reinsurers taking a stated percent share of each policy that an insurer produces ("writes"). This means that the reinsurer will receive that stated percentage of each dollar of premiums and will pay that percentage of each dollar of losses. In addition, the reinsurer will allow a "ceding commission" to the insurer to compensate the insurer for the costs of writing and administering the business (agents' commissions, modeling, paperwork, etc.). The insurer may seek such coverage for several reasons. First, the insurer may not have sufficient capital to prudently retain all of the exposure that it is capable of producing. For example, it may only be able to offer $1 million in coverage, but by purchasing proportional reinsurance it might double or triple that limit. Premiums and losses are then shared on a pro rata basis. For example, an insurance company might purchase a 50% quota share treaty; in this case they would share half of all premium and losses with the reinsurer. In a 75% quota share, they would share (cede) 3/4 of all premiums and losses. The other form of proportional reinsurance is surplus share or surplus of line treaty. In this case, a retained line is defined as the ceding company's retention - say $100,000. In a 9 line surplus treaty the reinsurer would then accept up to $900,000 (9 lines). So if the insurance company issues a policy for $100,000, they would keep all of the premiums and losses from that policy. If they issue a $200,000 policy, they would give (cede) half of the premiums and losses to the reinsurer (1 line each). The maximum underwriting capacity of the cedant would be $ 1,000,000 in this example. Surplus treaties are also known as variable quota shares
Non-proportional Non-proportional reinsurance only responds if the loss suffered by the insurer exceeds a certain amount, called the retention or priority. An example of this form of reinsurance is where the insurer is prepared to accept a loss of $1 million for any loss which may occur
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and purchases a layer of reinsurance of $4m in excess of $1 million - if a loss of $3 million occurs the insurer pays the $3 million to the insured(s), and then recovers $2 million from its reinsurer(s). In this example, the reinsured will retain any loss exceeding $5 million unless they have purchased a further excess layer (second layer) of say $10 million excess of $5 million. The main forms of non-proportional reinsurance are excess of loss and stop loss. Excess of loss reinsurance can have three forms - "Per Risk XL" (Working XL), "Per Occurrence or Per Event XL" (Catastrophe or Cat XL), and "Aggregate XL". In per risk, the cedants insurance policy limits are greater than the reinsurance retention. For example, an insurance company might insure commercial property risks with policy limits up to $10 million and then buy per risk reinsurance of $5 million in excess of $5 million. In this case a loss of $6 million on that policy will result in the recovery of $1 million from the reinsurer. In catastrophe excess of loss, the cedants per risk retention is usually less than the cat reinsurance retention (this is not important as these contracts usually contain a 2 risk warranty i.e. they are designed to protect the reinsured against catastrophic events that involve more than 1 policy). For example, an insurance company issues homeowner's policies with limits of up to $500,000 and then buys catastrophe reinsurance of $22,000,000 in excess of $3,000,000. In that case, the insurance company would only recover from reinsurers in the event of multiple policy losses in one event (i.e., hurricane, earthquake, flood, etc.). Aggregate XL afford a frequency protection to the reinsured. For instance if the company retains $1m net any one vessel, the cover $10m in the aggregate excess $5m in the aggregate would equate to 10 total losses in excess of 5 total losses (or more partial losses). Aggregate covers can also be linked to the cedant's gross premium income during a 12 month period, with limit and deductible expressed as percentages and amounts. Such covers are then known as "Stop Loss" or annual aggregate XL
1.5 WHY IS OBLIGATORY REINSURANCE NEEDED?

It is not for nothing that the laws of the land prescribe a minimal portion of the insurance business to be compulsorily reinsured with another insurer / reinsurer.
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The insurance business is inherently and intrinsically risky as the losses are of a probabilistic nature, and when they take place, they do so with a randomly varying frequency. This is more so, in the case of new or small insurers, or where existing insurance companies underwrite new classes of business. In such cases, a certain portion of their insurance risk cover must, in their own interest, be reinsured to ensure that the risks are spread. In India, at least till the market attains maturity, it is essential for compulsory / obligatory cessions to remain in the statute book (or alternatively in subordinate legislationslikesinsurancesregulations). In medium size and mega value risks, it is inevitable that certain cessions are placed on an optional (what we in insurance business parlance refer to as facultative) basis. Facultative reinsurance arrangements always carry a lower rate of reinsurance commission. For example, in the fire businesses an insurer gets 30 per cent reinsurance commission through obligatory cessions, whereas on high-value risks the optional portion fetches anywhere between 17 per cent and 25 per cent depending on market conditions. Thus, the insurer stands to gain substantially on direct cessions. Obligatory cessions apply to all policies across the board. Motor insurance, particularly, in India is a bleeding portfolio. An insurer, therefore, has the advantage of minimising his losses in motor insurance by at least 20 per cent, thanks to the obligatory cessions. For the national reinsurer, the loss in the motor portfolio due to the obligatory cessions is so high, that it often wipes out the profit earned in other classes of business. As mentioned earlier, in the Indian market, which has a combination of new, small and existing insurers underwriting new businesses, the 20 per cent obligatory cessions has always been a matter of comfort. It is a source of reassurance to the insured as well. Therefore, obligatory cessions create an automatic capacity to the extent of the amount ceded, so that the direct insurers do not become vulnerable to the vagaries and whims of the foreign reinsurance market and brokers.
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Obligatory cessions ensure that a minimum of 20 per cent (subject to certain quantum restrictions in fire and engineering) premiums are retained within India provided, of course, the reinsurer again does not cede them on proportionate basis. In case of perils like earthquake and terrorism, among others, foreign reinsurers are usually unwilling to provide full cover. This has paved way for market pools to provide the capacity / cover. Market pools are also a form of obligatory cession, normally managed by the national reinsurer. However, it must be conceded that this concept of obligatory cession should be progressively phased out as the market grows and gets integrated with world markets. The concept of obligatory cession may seem restrictive to insurers, who feel that they should be given the freedom to choose their own reinsurer. Even so, regulators must ensure that even if risks were to be reinsured abroad in the absence of obligatory cessions, the premium loss on account of such cessions should be replaced by corresponding 'inward acceptances'. Through this, they achieve:

good spread of risks geographically and class-wise foreign exchange cost is restored insurers also learn and get experience in the foreign reinsurance business
1.6 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:
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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. Reinsurance allows an insurance company to offer higher limits of protection to a policyholder than its own assets would allow. For example, if the principal insurance company can write only $10 million in limits on any given policy, it can reinsure (or cede) the amount of the limits in excess of $10 million. Reinsurances highly refined uses in recent years include applications where reinsurance was used as part of a carefully planned hedge strategy. 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. Surplus relief An insurance company's writings are limited by its balance sheet (this test is known as the solvency margin). When that limit is reached, an insurer can 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. 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. Reinsurer expertise The insurance company may want to avail of the expertise of a reinsurer in regard to a specific (specialized) risk or want to avail of their rating ability in odd risks.
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Creating a manageable and profitable portfolio of insured risks By choosing a particular type of reinsurance method, the insurance company may be able to create a more balanced and homogenous portfolio of insured risks. This would lend greater predictability to the portfolio results on net basis ie after reinsurance an would be reflected in income smoothing. While income smoothing is one of the objectives of reinsurance arrangements, the mechanism is by way of balancing the portfolio. Managing the cost of capital for an insurance company By getting a suitable reinsurance, the insurance company may be able to substitute "capital needed" as per the requirements of the regulator for premium written. It could happen that the writing of insurance business requires x amount of capital with y% of cost of capital and reinsurance cost is less than x*y%. Thus more unpredictable or less frequent the likelihood of an insured loss, more profitable it can be for an insurance company to seek reinsurance.
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CHAPTER 2
2.1 PRINCIPLES OF REINSURANCE

Principle of utmost good faith Reinsurers maintain utmost faith in underwriters of their company. These underwriters in turn maintain utmost good faith in the underwriters of the primary insurance company.
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Principle of Indemnity The principles of indemnity of the insured risk apply automatically on reinsurance. A reinsurer automatically follows the legal and technical future of the Reinsured in writing and underwriting a risk. Indemnity limit in reinsurance can be more than the sums insured in there are additional legal expenses against the insurer that are incurred while contesting a claim. If the reinsurer's indemnity limit is in foreign currency transactions, it is affected by foreign currency exchange rate fluctuations. 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.
2.2 WHAT TO REINSURE?

The question of what to reinsure has to be considered from both the insurer's and reinsurer's perspectives. Reinsurance replaces the risk of an uncertain large payout, with a certain low payout. The insurer must decide how much of that certain payout to accept in
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return for avoiding the risk of large payouts. That is, the decision to reinsure is a question of how much risk to cede/retain based on financial management of the trade-off between reinsurance cost and the risk of pay out fluctuations. In deciding how much cover to offer, the reinsurer faces the same issues that determine whether an insurer's risk is reinsurable as the insurer faced in the original contract with the individual. Quite simply, if a risk is insurable it is reinsurable. zecision making process arises because, in practice, decisions on insurability are made for non-underwriting reasons for example, market building and political reasons. Therefore, the reinsurer needs access to the data on which the original insurancesdecisionswassmade. If that data is not available, the reinsurance market can fail to offer reinsurance, not because they risk is intrinsically not reinsurable but because the default decision is to not reinsure. This default is to err on the side of caution. 2.2.1 WAYS TO REINSURE There are three basic ways in which MIU can be reinsured: Pooled reinsurance MIUs join together in a relationship that links them only through the pool. There is typically some form of standardization across the pool to ensure transparency and avoid one scheme profiting at the expense of another. The more heterogeneous the MIUs the better the pool advantage, and the more regionally dispersed, the lesser risk of fluctuation due to epidemic or natural disaster. Pooling enables better use of reserves. Reciprocity also enables a better use of reserves, but in this case the MIUs are known to one another and probably have other ties and commonalities. Subsidies from government or donors this may sustain the MIU, but may also send inappropriate signals to the key players. The lessons from previous insurance experience indicates that subsidies can worsen or alleviate market failure depending on where into
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the system they are paid, that there may not be a perfect method to subsidize, and no matter how well run an MIU subsidy may be essential in the long run due to the gap.
2.3 ADVANTAGES OF REINSURANCE

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
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unanticipated claims that the insurance company cannot meet. If there were not 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, regulations 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. An insurance company can benefit immensely by tying up with a successful reinsurer. The 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 back office support such as faster claims processing and automation of operations. Reinsurance provides more diversification when risks are accepted on a worldwide basis and not just in a specific region or country. The reinsurer can also help an insurance company withdraw from a particular geographical territory or the line of business. Thus, the company can vary out its business decision with a swift transition for a known cost, without being restricted by policy duration and other considerations. This is also termed as portfolio reinsurance. The insurance buyers are now much more aware of the way the market works. 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 India and foreign firms, will be asked to supply quality in terms of the authenticity of the claim.
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Thus, reinsurance will continue to remain a deciding factor that determines whether or not to enter business with an insurance company.
2.4 BASIS OF INSURANCE AND NEED FOR REINSURANCE

General insurance business is still largely untouched by the discipline of a mathematical base. It is obvious that insurance operates on the law of probability. The risk premium should represent the sum total expected value of loss during a year using the probability of occurrence of losses of different magnitudes affecting the risk. In practice, this estimation is derived from the observed incidence of losses on the insured portfolio. Even if an accurate mathematical determination of the expected value of loss be possible, the actual observed losses will be different from this figure. The extent of variation will
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depend on the size of the insured portfolio. The financial impact of such variation must be kept within the sustaining reason for limiting exposure to loss on one risk according to a schedule of retentions. Since a large number of risks offered insurance in practice exceed the retention capacity of a company, reinsurance becomes essential for any companys operation. 2.4.1 GOOD REINSURANCE MANAGEMENT Optimization of a companys profits and growth prospects involve optimization of its retention and designing of its reinsurance program to best advantage. Reinsurance should not be limited to getting rid of the portion of risk that cannot be retained. It should contribute more positively to the companys prosperity. Since the nature of a companys portfolio is generally not static, the reinsurance arrangements have to be kept under review continuously. Hence, the concept of dynamic reinsurance management is important. The objectives of a good reinsurance program are as follows: 1. Provide adequate reinsurance capacity to enable the business of different branches to operate without any handicaps. 2. Provide maximum possible freedom in rating and claims settlement. 3. Facilitate development of knowledge and skills for the underwriting staff. 4. Help the company to optimize its retention both in terms of premium as well as profits. Progressive increase in retention without disruption of arrangements should be possible. 5. Ensure stable reinsurance arrangements both with regard to availability of cover as well as terms. 6. Help minimize profit ceded on reinsurances placed. Such minimization should be equitable and should not be entirely subject to forces. 7. Establish business relationships with reinsurers of the highest standing. Reinsurers who will willingly and readily honour their obligations, who will take a long-term view and stand by the company.
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8. Generate a flow of satisfactory inward reinsurance business. Such business will help to improve the spread and balance the net retained account and should help to increase net premium and profits. 9. Keep administration of reinsurance simple and economic. 2.4.2 PROPER RETENTION POLICY Reinsurance is not the means to get-rid-of bad business. Automatic reinsurance arrangements are like products manufactured by an industrial company. Similar attention to quality of product and the reputation of the company is necessary. When there was easy availability of reinsurance (which may not continue for ever) some companies have been able to expand premium volume without attention to quality and have produced good net results by keeping very low retentions and reinsuring out. However, this is a dangerous management policy and exposes the entire future of the company to the operation of market forces. The reinsurance program should be based on a sound retention policy. The schedule of retentions is based on the following factors: Capital and surplus funds Complexion of the portfolio i.e., number of risks, types of risks, premium volume, adequacy of terms, catastrophe exposures, etc. Management policy in risk-taking. Retaining much lower than justified by these factors can insulate the company from the effects of bad underwriting and encourage a reckless development policy. High profitability cannot justify retaining much more than technically feasible. However, in respect of a portfolio of profitable business with normal exposure of losses, it is possible to increase the net retention to a higher figure based on the spread ov2r a period of five years with a suitable working excess of loss protection. Working excess of loss reinsurance is also the more appropriate method of keeping a reasonable retention in classes such as marine cargo or motor insurance. However, it can cause reduction of net retained profits in some circumstances for business such as marine hull. Linked with determination of the size of retention is the decision pattern of reinsurance protection. It could either be the normal method of proportional reinsurance with only
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catastrophe protection for the net account or it could be an enlarged retention with excess of loss protection and proportional reinsurance beyond the retention or it could be primarily excess of loss protection with some control on exposure through proportional reinsurance. Selection of the most appropriate system of reinsurance depends on the nature of the portfolio, its pattern of exposure and losses.
2.5 REINSURANCE CONTRACTS

The relationship between the insurer and reinsurer rests upon the wordings of the contracts, which consist of important ingredients such as premium, commission, retention and limit. The key lies in clarity while drafting the contract, the absence of which, results in a dispute later on. The negotiating process plays an important role while drafting the
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contract. Therefore, senior executives of both the parties should take a lead role in the process and identify the loopholes in the contract and leave no communication gap. Reinsurance generally operates under the same legal principles as insurance, and reinsurance agreements, as with any legally binding contract, must satisfy fundamental criteria to ensure that a valid contract is formed. In order to decide whether a contract has been entered into, it is necessary to establish that the basic elements of offer, acceptance and an intention to form a legal relationship are present. A further essential element in establishing a contract is consideration, which in insurance and reinsurance contracts equates to the premium. This is the missing ingredient in the formation of proportional reinsurance agreements such as quota share and surplus treaties and, therefore, these treaties are termed contracts for reinsurance. Whereas other contracts, such as facultative and excess of loss agreements, are termed contracts of reinsurance. A contract for reinsurance becomes a contract of reinsurance as each individual cession is ceded to the treaty and premium becomes due. A valid insurance contract must additionally satisfy the following criteria: There must be an insurable interest in the risk. The principles of indemnity must be observed. The principle of utmost good faith must be observed.
A breach of the principle of utmost good faith or, to give it its Latin name, uberrimae fidei, has been the grounds for many a legal battle between contracting parties. The principle of uberrimae fidei is probably a more onerous one in reinsurance negotiations than insurance, due to the way in which reinsurance business is transacted. In order that the principle may be satisfied, all material facts relating to the risk must be disclosed to
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underwriters; it is not a requirement that underwriters must ask the right questions to uncover the facts. Indeed, silence can amount to misrepresentation, in the sense that nondisclosure of some material fact by one of the parties to the contract will give rise to a remedy for the injured party. Where a broker is involved in negotiating terms, potential reinsurers must be informed of all material facts which the cedant has disclosed to the broker. Whether a nondisclosed fact is material or not is often decided by the legal courts.
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CHAPTER 3
3.1 THE REINSURANCE MARKETS

The existence of a market does not require the presence of buyers and sellers in one particular building or area; the main criterion for its successful operation is that traders can communicate to transact business. It could be said that there is really only one
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reinsurance market that is the worldwide market. According to a Swiss Reinsurance study, the worldwide demand for reinsurance in 1992 was some $l5Obn (LlOObn), with the top 10 markets accounting for three quarters of the total. The US remains by far the biggest purchaser at $43.3bn, followed by Germany at 23.8bn and the UK at $16.4bn.The reinsurance market operate in a constantly changing environment. What makes a risk attractive to reinsurers today, may make it unattractive tomorrow and tax regulations, accounting and legal processes all have an effect on reinsurers attitude to risk. As one market contracts, another expands, taking up the surplus capacity which overspills and, with the current harmonising of EU insurance and reinsurance regulations, this may also bring about further changes which will influence reinsurers future business strategies. The five main international trading areas or markets of Reinsurance 1. The United Kingdom 2. The Continent of Europe 3. The United States of America 4. The Far East 5. Offshore.
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3.1.1 THE UNITED KINGDOM London is an international centre for the placing of protections for insurance and reinsurance companies throughout the world. It has a reputation for the strength of its security and its innovative style of underwriting, leading the way in electronic risk placement and electronic claim advice and settlement systems. The London Markets underwriting resources are produced by Lloyds and the company market, and in 1992 the total market generated a gross premium income of approximately L10.8bn (Swiss Re Study); 52 per cent was written by companies and P&I clubs and 48 per cent by Lloyds. The uniqueness of the Lloyds operation and the position of the surrounding reinsurance companies is considered to have made London the major reinsurance centre it is today. 3.1.2 THE CONTINENT OF EUROPE There is a vast amount of reinsurance capacity available from the large number of insurance and reinsurance companies operating on the Continent. In Germany the market is dominated by the largest reinsurance company in the world, the Munich Re. The Cologne Re, Hannover Re & Eisen & Stahl and Gerling Glohale Re rank among the top 10 in the world league table of reinsurance companies In Switzerland the market is dominated by the Swiss Re, which ranks second in the world and writes approximately 65 per cent of Switzerlands reinsurance premiums. The Winterthur Group is based there too. France, Italy and Holland also provide substantial amounts of international capacity through companies such as Scor SA Group, Generali and NRG. Many continental companies, particularly in Germany, have developed their reinsurance accounts through strong domestic insurance portfolios. Some of the direct accounts were built up through links with particular sections of industry and commerce, e.g. trade unions and trade associations. Companies based in countries such as Switzerland, with a
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relatively small domestic market, developed with the help of a widely spread international network of offices. Many major continental companies have also set up UK registered companies, which accept business in the London market. Reinsurers receive offers of reinsurance direct from cedants and from domestic and international brokers. In addition, risk placement via electronic networks should also be available to continental based underwriters when URZvIAs European market strategy comes to fruition. An increasing number of reinsurers and brokers are members of the l3russels based network, RINET (Reinsurance and Insurance Network). 3.1.3 THE UNITED STATES OF AMERICA The United States is mainly a domestic reinsurance market and the largest market of its kind in the world. The high volume of domestic business and the continental spread of risk has encouraged this development, and the amount which is reinsured internationally, especially with Lloyds and London companies, is substantial. The comparatively small volume of business which it accepts from outside its boundaries is continuing to grow. Its top two reinsurers, Employers Re and General Re, are among the top 10 largest global reinsurance companies in the world. Insurance legislation is mainly a matter for the individual state, with the Federal government taking a role in broader constitutional matters. Reinsurance operations can be divided into admitted and non-admitted reinsurers. Admitted reinsurers are licensed in at least one state and include alien, or non-US, companies and Lloyds underwriters. Non-admitted reinsurers are not licensed in any state, but operate subject to compliance with various requirements imposed by the insurance departments within each state.
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All states are members of the National Association of Insurance Commission which is a forum for discussing aspects of insurance regulations, including securities valuation and accounting practices. Its standards form the basis for many state regulations. Business throughout the US can be conducted direct with reinsurance professionals, through reciprocal exchanges or through domestic and international brokers. Over the years a number of American brokers have developed into large international organisations, mainly through company mergers and acquisitions. The two main associations representing the American reinsurance market are BRM.A (Brokers & Reinsurers Market Association), and RAA (Reinsurance Association of America). BRMA is made up of leading US reinsurance brokers and broker orientated reinsurers, and the RAA represents all the major US reinsurance companies. 3.1.4 THE FAR EAST The main insurance centres in the Far East are situated in Japan and Hong Kong and, although their international reinsurance markets are still relatively small, they are considered to have considerable growth potential. Japan is one of the most highly regulated insurance markets in the world and all its domestic insurers accept both insurance and reinsurance business. Quota shares of marketwide pools and reciprocal exchanges of business have ensured a well-spread domestic account for insurers. Based on net written premium income in 1994, the Tokio Marine and Fire, Toa Fire & Marine and Yasuda Fire & Marine are three of its top reinsurance writers, the Tokio and Toa being among the top 15 largest reinsurance companies in the world. There are only two professional reinsurance companies, the Toa and Japan Earthquake Re, the latter accepting only domestic earthquake business. It was through reciprocal exchanges on their proportional treaty business that Japan first entered the international markets. Non-reciprocal business, particularly catastrophe excess of loss protection, is now freely placed and although there is considerable
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reinsurance capacity in Tokyo, international reinsurance has not proved to be particularly attractive to Japanese companies. Reinsurance brokers feature heavily in servicing the Japanese market. The main market association to which all Japanese property/casualty insurance companies belong is the Marine and Fire Insurance Association of Japan. Hong Kong has established itself as a regional insurance centre for the Asia Pacific Rim and in 1993 there were 224 authorised insurers. There are approximately 10 reinsurance companies based in Hong Kong, which have traditionally serviced northern Asia, China, Korea, Taiwan, the Philippines and Thailand. 3.1.5 OFFSHORE MARKETS A large, and growing number of governments around the world have set up international financial centres or havens, with the purpose of encouraging, through tax incentives and other financial benefits, captive insurance companies and reinsurance operations into their country. A captive insurance company is owned by a company, or companies, not primarily engaged in the business of insurance, and all, or a major portion of the risks accepted by the captive relate to the risks of its parent and affiliated companies. The rapid growth of the captive insurance industry is relatively recent and in 1996 there were approximately 3,600 captives worldwide. The rise in popularity of establishing captives in offshore domiciles can be attributable to the less restrictive insurance regulations, freedom from exchange control, and the absence or low rates of taxation which apply. The major offshore centers are situated in: Bermuda The Cayman Islands
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Guernsey Isle of Man.
Bermuda is the largest of the offshore markets, housing over 1200 captives. It is heavily supported by the US and it is estimated that two-thirds of all US foreign reinsurance flows through the island. The island has also become a major reinsurance market and has attracted a number of highly capitalised reinsurance companies with high levels of international reinsurance capacity. The 1994 net premium income written by international insurance and reinsurance companies was just over $18.8 billion. The Bermuda based Centre Re is included in Standard and Poors top 30 reinsurers in the world. Other financial centres, which may be included in the ever-lengthening list of offshore domiciles, are situated in: Dublin Luxembourg.
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3.2 WORLDS TOP 10 REINSURERS

Rank 1 2 3 4 5 6 7 8 9 10 Company Swiss Re Group Munich Re Group Hannover Re Group Berkshire Hathaway/Gen Re Group Lloyd's of London XL Re Everest Re Group Ltd. PartnerRe Ltd. Transatlantic Holdings Inc. ACE Tempest Reinsurance Ltd. Net premiums written $27,680,199,200 $23,760,161,400 $9,661,392,406 $9,491,000,000 $6,948,466,800 $5,012,910,000 $3,972,041,000 $3,615,878,000 $3,466,353,000 $2,848,758,000
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3.3 REINSURANCE IN INDIA

3.3.1 REINSURANCE REGULATION The placement of reinsurance business from the Indian market is now governed by Reinsurance Regulations formed by the IRDA. The objective of the regulation is to maximize the retention of premiums within the country Placement of 20% of each policy with National Re subject to a monetary limit for each risk for some classes Inter-company cession between four public sector companies. Indian Pool for Hull managed by GIC. 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 re-insurers. Not more than 10% of reinsurance premium to be placed with one re-insurer PROCEDURE TO BE FOLLOWED FOR REINSURANCE
3.3.2
ARRANGEMENTS AS PER IRDA The Reinsurance Program shall continue to be guided by a) Maximize retention within the country; b) Develop adequate capacity; c) Secure the best possible protection for the reinsurance costs incurred; d) Simplify the administration of business Every insurer shall maintain the maximum possible retention commensurate with its financial strength and volume of business. The Authority may require an insurer to justify 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. Every insurer shall cede such percentage of the sum assured on each policy for different classes of insurance written in India to the Indian insurer as may be specified by the Authority in accordance with the provisions of Part lV-A of the Insurance Act, 1938.
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The reinsurance program of every insurer shall commence from the beginning of every financial year and every insurer shall submit to the Authority, his reinsurance programs for the forthcoming year, 45 days before the commencement of the financial year.
Within 30 days of the commencement of the financial year, every in surer shall file with the Authority a photocopy of every reinsurance treaty slip and excess of loss cover note in respect of that year together with the list of reinsurers and their shares in the reinsurance arrangement.
The Authority may call for further information or explanations in respect of the reinsurance program of an insurer and may issue such direction, as it considers necessary.
Insurers shall place their reinsurance business outside India with only those reinsurers who have over a period of the past five years counting from the year preceding for which the business has to be placed enjoyed a rating of at least BBB (with Standard & Poor) or equivalent rating of any other international rating agency. Placements with other reinsurers shall require the approval of the Authority. Insurers may also place reinsurances with Lloyds syndicates taking care to limit placements with individual syndicates to such shares as are commensurate with the capacity of the syndicate.
The Indian Reinsurer shall organize domestic pools for reinsurance surpluses in fire. marine hull and other classes in consultation with all insurers on basis, limits and terms which arc fair to all insurers and assist in maintaining the retention of business within India as close to the level achieved for the year 1999-2000 as possible. The arrangements so made shall be submitted to the Authority within three months of these regulations coming into force, for approval.
Surplus over and above the domestic reinsurance arrangements class wise can be placed by the insurer independently with any of the reinsurers complying with subregulation (7) subject to a limit of 10 percent of the total reinsurance premium ceded outside India being placed with any one reinsurer. Where it is necessary in respect of specialized insurance to cede a share exceeding such limit to any particular reinsurer, the insurer may seek the specific approval of the Authority giving reasons for such cession.
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Placement of 20% of each policy with National Re subject to a monetary limit for each risk for some classes Inter-company cession between four public sector companies. Indian Pool for Hull managed by GIC. 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 re-insurers. Every 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
The Indian Reinsurer shall retrocede at least 50 percent of the obligatory cessions received by it to the ceding insurers after protecting the portfolio by suitable excess of loss covers. Such retrocession shall be at original terms plus an over-riding commission to the Indian Reinsurer not exceeding 2.5 percent. The retrocession to each ceding insurer shall be in proportion to its cessions to the Indian Reinsurer.
Every insurer shall be required to submit to the Authority statistics relating to its reinsurance transactions in such forms as the Authority may specify, together with its annual accounts.
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CHAPTER 4
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4.1 GENERAL INSURANCE CORPORATION OF INDIA

This case provides the history of General Insurance corporation of India (GIC since nationalization. GICS role has been significant in the indian insurance industry and it is currently the sole national reinsurer. GIC is also aspiring to be a global player in reinsurance. It is evolving itself as an effective reinsurance solutions partner for the AfroAsian region. In addition to that, it has also started leading reinsurance programmes for several insurance companies in SAARC countries, South EastAsia, Middle East and Africa. Insurance has always been a growth-oriented industry globally. On the Indian scene too, the insurance industry has always recorded noticeable growth vis-a-vis other Indian industries. In 1850, the first general insurance company, Triton Insurance Co. Ltd., was established in India and the shares of the company were mainly held by the British. The first Indian general insurance company, lndias Mercantile Insurance Co. Ltd., was set up in 1907. After independence, General Insurance Council, a wing of Insurance Association of India, framed a code c conduct for ensuring fair conduct and sound business practices in the area ct general insurance. The Insurance Act was amended and tariff advisory committee was set up in 1968. In 1972, general insurance industry was nationalized through the promulgation of General Insurance Business (Nationalisation) Act. Around 55 insurers were amalgamated and general insurance business undertaken by the General Insurance Corporation of India (GJC) and it subs Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United Insurance Company Limited. The Indian insurance industry saw a new sun when the Insurance Regulatory. And Development Authority (JRDA) invited the application for registration for insurers in August, 2000. General Insurance Corporation of india and subsidiaries have been the erstwhile monarch of non-life insurance for almost three decades. After donning the role of the national reinsurer, by GIC, delink of its subsidiaries and entry of foreign players
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through joint ventures have changed the outlook of the whole general insurance industry and forced GIC to enter arena of competition. GIC and its four subsidiaries functioned through a huge network of 4,167 offices spread cross the country. The main customer interface for these units were in agents, development officers and employees at branch, divisional and region. offices in various parts of the country. The total workforce of GIC and its subsidiaries was around 85,000. GIC has made a huge contribution to the overall development of the nation, through investments in the socially-oriented sectors. The Government of India had entrusted to, GIC, the administration of various social welfare schemes, such as personal accident insurance and hut insurance schemes operated all over the country. In addition to this, its joint ventures in the form of GIC mutual fund and GIC housing finance have contributed not only to the development of the nation but also to the income growth of the corporation. GICs net premium and investments stood at Rs.1,710.26 crore and Rs.4,556.5 crore as of March 31, 1999. During the same period, the capital and funds of the Corporation stood at Rs.2,914.64 cror. 4.1.1 HISTORY HOW WAS IT FORMED? The general insurance industry was nationalized through General Insurance Business (Nationalization) Act, 1972 (GIBNA). The Government of India took over the shares of 55 Indian insurance companies and 52 insurance companies carrying on general insurance business. GIC was formed in pursuance of Section 9(1) of GIBNA. Incorporated on November 22, 1972, under the Companies Act, 1956, GIC was formed for the purpose of superintending, controlling and carrying on the business of general insurance. After the formation of GIC, the central government transferred all the shares held by it of various general insurance companies to GIC, Thus, after the whole process of mergers and acquisitions in the insurance industry, the whole business was transferred to General Insurance Corporation and its four subsidiaries.
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Among its four subsidiaries, National Insurance Company was incorporated in the year 1906. As a subsidiary of the GIC, it operates general insurance business in India with its head office located at Kolkata. New India Assurance Company was formed in the year 1919 and operates general insurance business in India with its head office at Mumbai. New India Assurance company is considered as the most successful company in the field of general insurance. Oriental Insurance Company was established in the year 1947 and its head office is located in New Delhi. United India Insurance Company operating its general insurance business with its head office at Chennai. 4.1.2 WHAT WENT WRONG? General Insurance Corporation recorded a net premium of $1.3 billion in the year 199596. Its claim settlement ratio was 74% higher than the global average of 10%. So, what went wrong for this public sector monolith? GIC and its subsidiaries faltered, when it came to customer satisfaction. Large scale of operations, public sector bureaucracies and cumbersome procedures hampered the progress of not only GIC, but also LIC (Life Insurance Corporation of India). The huge staff of agents of GIC and its four subsidiary companies failed to penetrate into the rural hinterland to sell general insurance whether it was crop insurance or any other form of personal line insurance. As evident from the condition of farmers in the country, GIC has failed in its object to provide insurance cover to the needy, which really required the much-needed financial security. The nationalized insurers, both GIC and LIC employ almost half-a-million employees. They are the highest paid but still the both organizations suffer from low productivity, corruption, indiscipline and total ignorance of the basic principles of the insurance business. GIC suffered due to corruption within its own specific business divisions motor insurance and mediclaim policy. Collusion between the surveyors and customers also bled GIC, leading to low morale among the employees and public discontentment The main reason for such a pathetic condition lies within the management of these public sector companies. The management of these units is strongly dominated by employee unions, which transformed the insurance sector to a class business from a value-based company. The domestic insurance companies, meeting their social objectives of going
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into the deepest interiors of the country lagged behind in meeting customer expectations in products and services. 4.1.3 MALHOTRA COMMITTEE As the process of liberalization started from the year 1991, reforms were targeted various sectors of the economy. In the same league, insurance sector had to wait almost nine years before, reforms were implemented. The whole process starts with the setting up of the Malhotra Committee in 1993, headed by R N Malhotra former governor of Reserve Bank of India. Although the achievement of LIC CIC in spreading insurance awareness and mobilizing savings for national development and financing core social sectors was acknowledged, the committee gave a concise report on the Indian insurance industry dominated by the public sector. l report indicated that both the LIC and GIC were overstaffed and faced no competition at all. Thus, consumers were deprived of wider range of products efficient service and lower-priced insurance products. The report indicated that net premium income in general insurance hush had grown from Rs.222 crore in 1973 to Rs.3,863 crore in 1992-93. In addition this, investments also increased from Rs.355 crore to Rs.7,328 crore over the said period. GIC also acquired high reputation in the international reinsurance market But there was the other side of the coin. Excessive control coupled with absence competition led to stagnation of both the public sector units hampering the improvement and operational efficiency. Insurance industrys funds were mainly invested in government-mandated investments with low yield, which affected the financial performance of the insurance c This led to high rates of insurance premia but low returns on savings invested in insurance. In addition to that, due to absence of competition, there was laxity among the insurers to perform well and improve customer satisfaction. Thus, Malhotra Committee made a number of recommendations for the well-being of the Indian insurance industry. The committee recommended proper training of insurance agents, adequate pricing of insurance products and periodic review of premium rates.
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Malhotra Committee recommended for establishing a strong and effective authority for the insurance sector similar to the Securities and Exchange Board of India (SEBI). In addition to this, the committee also recommended that all the four subsidiaries of GIC should function as independent companies and GIC should cease to be the holding company. Malhotra Committee Report submitted in 1994 gave various recommendations for the insurance sector, such as capital investment in the insurer company should be increased to 100 crore for life insurance business or general insurance and Rs.200 crore for the reinsurance business. It also recommended that the share of the foreign investment to the total investment should not be more than 26% of the share capital in the insurance joint venture company. Recommendations Specific to GIC: The government should takeover the holdings of GIC and subsidiaries, so that they can act as independent corporations. GIC and subsidiaries are not to hold more to an 5% in any company. The current holdings of the companies should be brought down to the specified level over a period of time. Considering the above recommendations, the central government enacted, The Insurance Regulatory and Development Authority Act, 1999. The Act is applicable to all states except Jammu and Kashmir, for which this Act is applicable with modifications made by the government. 4.1.4 BREAKING UP OF GIC The delinking of the four national subsidiaries of GIC was recommended by the Poddar committee. The committee also recommended transforming GIC as a national re On August 7, 2002, the President of lndia later gave his assent to the Geural Insurance Business (Nationalization) Amendment Bill, 2002 and the Insu, nce (Amendment) Bill 2002. The General Insurance Business (Nationalization) Amendment Act, 2002, amended
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the General Insurance Business (Nationalization) Amendment Act, 1972, and delinked the General insurance Corporation (GIC) from its four subsidiaries the National Insurance Company Ltd, the New India Assurance Company Ltd, the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. Thus, as per the amendment, General Insurance Corporation was required to carry on reinsurance business, as the national reinsurer of the Indian insurance industry. The subsidiaries were asked to increase their equity base to Rs.100 crore, to comply with the regulations of IRDA. All these public sector companies had an equity base of Rs.40 crore previously. The shares of these companies previously held by the dC, were transferred to the government. According to officials, hiking capital base is a part of an overall effort to restructure the entire nationalized general insurance industry. The restructuring was aimed at providing autonomy to public sector companies. 4.1.5 GIC THE NATIONAL REINSURER Reinsurance business in India dates hack to the 1960s. After independence there rapid development of the insurance business, hut there was negligible presence reinsurance companies in India. Thus, the domestic requirement of reinsurance was netted mostly from foreign markets mainly British and continental. As undertaking reinsurance business by Indian companies meant huge outflow of foreign exchange and in 1956 Indian Reinsurance Corporation was established. It formed as a professional reinsurance company by some general insurance companies. The company received voluntary quota share cessions from member companies. Later another reinsurance company, the Indian Guarantee and General Insurance Co. was formed in 1961. With this set up, a regulation was promulgated which made it statutory on the part of every insurer to cede 20% in Fire and Marine Cargo, 10 % in Marine hull and miscellaneous insurance, and five percent in credit solvency business. Prior to nationalization, there were 55 non-life domestic insurers and each company had its own reinsurance arrangement. After nationalization, all these companies were brought under the aegnts of General Insurance Corporation and four subsidies were formed, with
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GIC as the holding company. With this backdrop, it has been a quantum jump for the Indian reinsurance market, with GIC being established as the national reinsurer. Earlier insurance companies had to depend on foreign markets, but now after the IRDA Act has been passed, GIC has focused on competing with the best in the world. GICs reinsurance business can be divided into two categories; domestic reinsurance and international reinsurance. On the domestic front, GIC provides reinsurance to the direct general insurance companies in the Indian market. GIC receives statutory cession of 20% on each and every policy subject to certain according to the current statute It leads many of domestic companies programs and facultative placements. GIC is also emerging as an international player in the global reinsurance evolving itself as an effective reinsurance solutions partner for the African region. In addition to that, it has also started leading reinsurance programmes several insurance companies in SAARC countries, South East Asia, MidAfrica. GIC provides the following capacities for treaty and facultative the international market on risk emanating from international market 1 merits of the business. General Insurance Corporation, as the Indian Reinsurer, completed year on March 31, 2002. Although, there has been an increasing presence in international markets, the focus of the Corporations operations continue domestic market, as it constitutes around 94% of its total portfolio. The Corporation increased to Rs.10,378.84 crore from Rs.7,773.67 cr0 March 31, 2002. Similarly the total investments of the Corporation stood Rs.7135.83 crores as against Rs.6,345.33 in the previous year. The total investment income of the corporation was Rs.961.80 crore as against Rs.873.40 crore in the previous year and gross direct premium income of GIC for the year amounted Rs.311.57 crore. According to industry sources, General Insurance Corporation (GIC) is targeting significant growth for its inward foreign reinsurance business. The reinsurer is planning to open its branch in Dubai in the near future. The reinsurance business the Middle East
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region targeted by GIC ranges between Rs.3-5 million. Around 23% of the total inward business for GIC comes from the Middle East countries. In addition to that GIC is planning to establish its presence in London, Moscow, China, Korea, and Malaysia. In 2002, GIC floated Tarizlndia in Tanzania through Kenlndia, which is a joint venture with Life Insurance Corporation. At present it is also looking a strategic partnership with African reinsurance major, East Africa. On the domestic front, the Indian Reinsurer, plays the role of reinsurance facilitator for the Indian insurance companies. The Corporation continues to act as Manager of the Marine Hull Pool on behalf of the insurance industry. The Corporations reinsurance program is designed to fulfill the objectives maximizing retention within the country, developing adequate capacity, security the best possible protection for the reinsurance costs incurred and simplifying ti administration of business. 4.1.6 THE PRESENT SCENARIO General Insurance Corporation has been well adapting itself to the changing reforms scenario. To focus itself on the reinsurance market both domestic an international, it has taken various decisions to support its new corporate vision. I January 2004, GIC has decided to exit its mutual fund arm, GIC Mutual Fund, so to focus on core reinsurance operations. The fund had been constantly underperforming for the last few years. In 2002 -2003, there has been whopping increase in the foreign inward reinsurance premium at Rs.600 crore. This increase has pushed the total reinsurance premium to over Rs.3,800 crore. The India reinsurer, is willing to write more risks in the domestic market. The underwriting, losses fell below the Rs.500 crore-mark. Though the severe drought, took its toll cii GICs underwriting with agricultural losses zooming to Rs.400 crore in 200203 The claims ratio reduced during the year from 94 to 86%. Though the quantum o foreign inward premium is low in the total premium income, the increase in it: share over the last one year is significant. In 2002-03, the share of foreign premiun has been over 15% compared to just 6% in the previous year.
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International credit rating agency, A M Best, has given A (Excellent) rating tc the corporation indicating its financial strength. The rating reflects not only th Corporations excellent financial position and conservative investment portfolio but also recognizes its leading position in the global insurance market. General Insurance Corporation has formulated plans to capitalize its strengths and capabilities in the international market and consolidate its operations in India to provide requisite expertise and technical skills to the domestic players. Thus, we can conclude that our National Reinsurer has the requisite and inherent capability of meeting the future challenges and is ready to make strenuous efforts to achieve its corporate vision of becoming leading international reinsurer in the years to come.
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4.2 REGULATING THE REINSURANCE

Given the importance of reinsurance there are several guidelines laid down by the IRDA to ensure fair play. Some of these are as follows: Every insurer should retain risk proportionate to its financial strength and Certain percentage of the sum assured on each policy by an insurance company is National reinsurer has been made compulsory only in the non-life sector. The reinsurance programme will begin at the start of each financial year and has Insurers must place their reinsurance business, in excess of limits defined, outside business volumes. to be reinsured with the National Reinsurer.
to be submitted to the IRDA, forty-five days before the start of the financial year. India with only those reinsurers who have a rating of at least BBB (S&P) for the preceding five years. This limit has been derived from India's own sovereign rating, which currently stands at BBB. Private life insurance companies cannot enter into reinsurance with their promoter company or its associates, though the LIC can continue to reinsure its policies with GIC. The objective of these regulations is to expand retention within India, ensure the best protection for the reinsurance costs incurred and simplify administration.
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4.3 CHALLENGES FOR REINSURANCE MARKET

Prior to nationalization in 1973, the reinsurance market in India had a much diluted presence in the industry. The foreign companies operating in India were managing their risk portfolio with their parent companies overseas. To safeguard the identified and limited risk of insurance companies, local companies created India Insurance Pool. The developments after nationalizations insurance industry created a new body with the merger of India Reinsurance and Indian Guarantee for its reinsurance business to support the technology and engineering mega projects. Some of the major issues in accounting have been undertaken considering the recent developments in the business. The return from foreign companies are to be incorporated when received upto 31st march and returns from indian companies and state insurance funds received as of different dates are accepted upto the date of finalization of accounts. Arising out of the occurrence of disastrous like terrorist attack on world trade center etc. which brought about unprecendented loss of life and property and thereby unbearable liability and operational crisis onto the reinsurance industry world over. There is a wide difference between the rates required by the international reinsurers and those charged by the domestic insurers leading to the price affordability as an issue. Where there are tarrifs, like a case of India, the customers cushioned from the rate of increase in the international market. Such impositions are required to be self absorbed. The Indian market is in absence of the competitive environment of the international reinsurers at the local level, and has depended mainly on the domestic market understanding and basing probability of business ceded rather than on underwriting and risk information criteria. A regular interaction for regional co-operation has to be developed to set up a framework of the areas of co-operation and the mechanism, with this India has to compete with the global reinsurance giants. However, the tightening of reinsurance premium in India has been attributed to the low volumes. As market become global, country regulators face
RAHUL | HR COLLEGE OF MANAGEMENT STUDIES | TY BMS 54
challenges in policy formulation for creating a market that develops and keeps confidence of the industry and for keeping international trade regulation intact.
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4.4 WHAT INDIA NEED TO DO?

The opening up of the market as a whole and insurance sector in specific has created a potential for the Indian companies also to pool up bigger fund to support the capital intensive sectors. The market has to ensure that the domestic companies increase their own capacities and introduce more strict guidelines as first hand risk carriers. Insurance companies have to establish the business relations with their reinsurer to prevent them from worldwide reinsurance cycle that affects on capacity and stability. Worldwide the reinsurers are becoming strict on technical results of the insurance, therefore a disciplinary watch is required on insurance business as it is the base of reinsurance. The above problems or difficulties are not very new for a sector that is the transition. Since, some of the products are losing the importance (like proportional treaty), it is necessary to have sufficient premium income to maintain the balance and to bear unexpected losses. To have the best rates and terms from reinsures, the risk profile and exposure to catastrophe risk information transfer to reinsurer should be comprehensive and reliable. Due to the market opening through the WTO operation, there is net outflow expected in the premium from the developing countries as they have a low capitalization in most of the insurance companies. This could lead to weaken the objective of the serious efforts for the regional cooperation developments amongst the nations. The efforts towards developing a synergetic approach to model a successful cooperation will require to work on many areas simultaneously rather than organizing efforts only for one direction and loosing others, they are as follow: Pooling of financial resources Creating Investment opportunities Pooling of technical resources Joint ventures, alliance and partnership
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Research and developments Pooling of information Developing standard accounting system for business
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4.5 CONCLUSION
In a globalized world, in which potential financial claims are steadily rising and in which the limits of insurability are being constantly extended, reinsurance thus assumes a major significance for the whole economy. Reinsurance mean insuring again. It is transfer of insurance risk from one insurer to another. Under reinsurance the original insurer who has insured a risk, insures a part of that risk with another insurer. Reinsurance premium is an income to the reinsurer and an expense to the insurer. Reinsurance is a good method to diversify and distribute risks of an insurer. Reinsurance even provide technical assistance and rating assistance to the original insurers. Reinsurance is also a contract of indemnity. The object of underwriting is to make a reasonable profit, it is equally essential that the business ceded to reinsurers should also give them a margin. For profit, therefore, the overall quality of business accepted by direct insurers should be good. It is a financial management tool. It is always behind the high quality insurance program or a complex commercial risk of any good insurer. Reinsurance industries are maintaining upward surge all round growth, both in the domestic and global fronts in the last few years. The untapped, both in life and non life insurance, particularly in growing economies like India and china, is the center of attraction to leading players in insurance and reinsurance, thanks to globalizations and liberalizations of financial services particularly in last decades. It is a tool of risk management, mutually support and supplement each other in providing risk mitigation to the individuals and organizations at micro level and to the country. Reinsurance is instrument of risk transfer and risk financing. Today, the environment is more like a business than a gentlemen's club. You have more players, more deals, and contracts can vary greatly between reinsurers. Disputes are no longer resolved by a handshake. They are more frequent and more difficult to resolve. With the outster of such terrorist attacks, calamities and stiff competition the reinsurers
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have to fight with each other to grab their share of premium market share this will be more stiffer and difficult in the times to come
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4.6 BIBLIOGRAPHY
4.6.1 BOOKS Reinsurance Concepts And Cases Abhishek Agrawal, ICfai Press Reinsurance IC-85, III Principal of insurance management, 1st Edition, Author Neelam C. Gulati, chapter 17, Reinsurance, Pg No. 227 to 248 Insurance Theory and Practice, 3rd Edition, Author Nalini Prava Tripathy & Prabir Pal, chapter 9, Reinsurance Global Environment and Indian challenges, Pg No. 89 103 4.6.2 NEWSPAPERS, MAGAZINES & JOURNALS The Economic Times Mint The Times of India Business Standard Business Today Business line
4.6.3 WEBSITES http://en.wikipedia.org/wiki/Reinsurance http://www.scor.com/www/index.php?id=16&L=2 http://www.swissre.com/pws/research%20publications/sigma%20ins. http://www.zurich.com/main/productsandsolutions/industryinsight/2003/septembe http://www.allbusiness.com/management/193921-1.html www.irdaindia.org www.insuranceinstituteofindia.com http://www.generalinsurancecouncil.org.in/
%20research/sigma%20archive/sigma%20archive%20%28english%29.html r2003/industryinsight20030826_001.htm
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http://www.businessinsurance.com/ http://www.ficci.com/media-room/speeches-presentations/2003 http://www.icai.org/resource_file/11213p1355-58.pdf http://www.investopedia.com/terms/r/reinsurance.asp http://www.blonnet.com/2007/03/13/stories/2007031303050600.htm
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