PROJECT REPORT ON
Reinsurance
Submitted by: Arushi Agrawal
BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER VI MITHIBAI COLLEGE VILE PARLE (W) SUBMITTED TO UNIVERSITY OF MUMBAI ACADEMIC YEAR 2013 - 2014
NAME OF PROJECT GUIDE PROF.NARESH SUKHANI
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CERTIFICATE I, Prof. NARESH SUKHANI, hereby certify that Arushi Agrawal of MITHIBAI COLLEGE OF TYBBI [Semester VI] has completed the projected Reinsurance in the academic year 2013 - 14. The information submitted is true and original to my knowledge. k nowledge.
_____________________ _______________________ __ Signature of Principal
_____________________ _____________________ Project Guide (Prof. Naresh Sukhani)
_________________________ _________________ ________
External Examiner
College Seal
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DECLARATION
I, Arushi Agrawal of MITHIBAI COLLEGE of TYBBI [Semester VI] hereby declare that I have compiled c ompiled this project on Reinsurance in
the academic year 2013 - 14. The information submitted is true and original to the best of my knowledge.
DATE: PLACE: Signature of student (Arushi Agrawal) Roll No. -
01
TYBBI
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ACKNOWLEDGEMENT I would like to thank Mithibai College & the faculty members of BBI for giving me an opportunity to prepare a project on "Reinsurance". It has truly been an invaluable learning experience. Completing a task is never one man's effort. It is often the result of invaluable contribution of number of individuals in direct or indirect way in shaping success and achieving it. I would like to thank principal of the college Dr. KIRAN MANGAOKAR, the vice principal Dr. ANJU KAPOOR and Cocoordinator Prof. NARESH SUKHANI for granting permission for this project. I would like to extend my sincere gratitude and appreciation to Prof. NARESH SUKHANI who guided me in the study of this project. It has indeed been a great learning, experiencing and working under him during the course of the project. I would like to appreciate all my colleagues and family members who gave me support and backing and always came forward whenever a helping hand was needed. I would like to express my gratitude to all those who gave me the possibility to complete this thesis.
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EXECUTIVE SUMMARY
Beyond considering the impact of reinsurance on the solvency of domestic companies, reinsurance regulation has not received much attention, partly because of the absence of significant domestic reinsurance activity and partly due to the absence of a reinsurance regulatory model in Europe, on which much of insurance regulation in economies in transition are based. The majority of countries give significant freedom to using reinsurers at home and abroad. However, some restrict placement by individual insurers beyond a certain proportion to one reinsurer, or to one market. The development of domestic reinsurance markets in transition economies is at an early stage. The numerous reasons which explain this backwardness include the shortage of capital, lack of experienced personnel as well as the failure to cooperate with competitors to establish appropriate market practices. International insurance and reinsurance brokers are now established in most of the transition economies, either serving their western clients or placing reinsurance for local insurers with foreign reinsurers. They are also an important conduit for reinsurance expertise and training for local insurers.
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RESEARCH METHODOLOGY
Objectives of the research: To study Reinsurance and its various Types and Growth in India
Secondary Data: The secondary data has been collected from various reference books and websites which have been mentioned in the bibliography at the end of the project
Limitations of the Research: Problems of selection of right information available from various sources
Scope of the Research: The main objective of the project is to get to know about the different types and more about the organizations that provide this service. To know the shortcomings of this business and its growth prospects.
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TABLE OF CONTENT
SR.NO
PARTICULARS
PAGE NO.
1
Introduction to Introduction
8
2
Characteristics of an Insurable Risk
10
3
History of Insurance Industry
13
4
Types of Insurance
10
5
History of Reinsurance
16
6
What is Reinsurance
18
7
Functions
20
8
Growth of Reinsurance in India
23
9
Types of Reinsurance
27
10
Reinsurance Regulations
36
11
Reinsurance Treaty
45
12
The Reinsurance Markets
47
13
Reinsurance Contracts
53
14
Market Share of Reinsurers
55
15
World’s Top 10 Reinsurers
56
16
Reinsurance in India GIC RE
57
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17 18
Terrorism & Natural Calamities a Setback Case Study I
61 64
19
Case Study II
70
20
Case Study III
75
21
Annexure A
84
22
Annexure B
85
23
Annexure C
87
24
Annexure D
89
25
Bibliography
91
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INSURANCE Introduction People seek security. A sense of security may be the the next basic goal after food, clothing, and shelter. An individual with economic security is fairly certain that he can satisfy his needs (food, shelter, medical care, and so on) in the present and in the future. Economic risk (which we will refer to simply as risk) is the possibility of losing economic security. Most economic risk derives derives from variation from the expected outcome. Historically, economic risk was managed through informal agreements within a defined community. If someone‘s barn burned down and a herd of milking cows was destroyed, the community would pitch in to rebuild the barn and to provide the farmer with with enough cows to replenish the milking stock. This cooperative (pooling) concept became formalized in the insurance insurance industry. Under a formal insurance arrangement, each insurance policy purchaser (policyholder) still implicitly pools his risk with all other policyholders. However, it is no longer necessary for any an y individual policyholder to know or have any direct connection with any other policyholder.
How Insurance Works Insurance is an agreement where, for a stipulated payment called the premium, one party (the insurer) agrees to pay to the other (the policyholder or his designated beneficiary) a defined amount (the claim payment or benefit) upon the occurrence of a specific loss. This defined claim payment amount can be a fixed amount or can reimburse all or a part of the loss that occurred. The insurer considers the losses losses expected for the insurance pool and the potential for variation in order to charge premiums that, in total, will be sufficient sufficient to cover all all of the projected claim payments for the insurance pool. The premium charged to each of the pool participants is that participant‘s share of the total premium for the pool. Each premium may be adjusted to reflect reflect any special characteristics of the the particular policy. As will be seen in the next section, the larger the policy pool, the more predictable its results. Normally, only a small percentage of policyholders suffer losses. Their losses are paid out of the premiums collected from the pool of policyholders. Thus, the entire pool compensates the unfortunate few. Each policyholder exchanges an unknown loss for the the payment of a known premium. Page | 9
Under the formal arrangement, the party agreeing to make the claim payments is the insurance company or the insurer. The pool participant participant is the policyholder. The payments that the policyholder makes to the insurer are premiums. The insurance contract is the policy. The risk of any unanticipated losses is transferred from the policyholder to the insurer who has the right to specify the rules and conditions for participating in the insurance pool. The insurer may restrict restrict the particular kinds of losses covered. For example, a peril is a potential cause of a loss. Perils may include include fires, hurricanes, theft, and heart attack. The insurance policy may define specific perils that are covered, or it may cover all perils with certain named exclusions (for example, loss as a result of war or loss of life due to suicide). In summary, an insurance contract covers a policyholder for economic loss caused by a peril named in the policy. The policyholder pays a known premium to have the insurer guarantee payment for the unknown loss. In this manner, the policyholder transfers the economic risk to the insurance company. Risk, as discussed in in Section I, is is the variation in potential economic outcomes. It is measured measured by the variation between possible outcomes and the expected outcome: the greater the standard deviation, the greater the risk.
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Characteristics of an Insurable Risk We have stated previously that individuals see the purchase of insurance as economically advantageous. The insurer will agree to the arrangement if the risks can be pooled, but will need some safeguards. With these principles in mind, what makes a risk insurable? What kinds of risk would an insurer be willing to insure? The potential loss must be significant and important enough that substituting a known insurance premium for an unknown economic outcome (given no insurance) is desirable. The loss and its economic value must be well-defined and out of the policyholder‘s control. The policyholder should not be allowed to cause or encourage a loss that will lead to a benefit or claim payment. After the loss occurs, the policyholder should not be able to unfairly adjust the value of the loss (for example, by lying) in order to increase the amount of the benefit or claim payment. Covered losses should be reasonably independent. The fact that one policyholder experiences a loss should not have a major effect on whether other policyholders do. For example, an insurer would not insure all the stores in one area against fire, because a fire in one store could spread to the others, resulting in many large claim payments to be made by the insurer. These criteria, if fully satisfied, mean that the risk is insurable. The fact that a potential loss does not fully satisfy the criteria does not necessarily mean that insurance will not be issued, but some special care or additional risk sharing with other insurers may be n ecessary.
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History of Insurance Industry The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 derrik (Achaemenian gold coin weighing 8.35-8.42) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered. Achaemenian monarchs were the first to insure their people and made it official by in special offices. The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "Whenever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 derrik, he or she would receive an amount of twice as much." A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage. The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Guilds in the middle ages served a similar purpose. Separate insurance contracts were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-renaissance Europe, and specialized varieties developed. The first insurance company in the United States underwrote fire insurance and was formed in Charles town (modern-day Charleston), South Carolina, in 1732.
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Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia contribution ship for the insurance of houses from loss by fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. Nominee of the assured could get the policy value either at maturity or by installments and an agreed bonus.
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Types of Insurance
1. General Liability Insurance Every business, even if home-based, needs to have liability insurance. The policy provides both defense and damages if you, your employees or your products or services cause or are alleged to have caused Bodily Injury or Property Damage to a third party.
2. Property Insurance If you own your building or have business personal property, including office equipment, computers, inventory or tools you should consider purchasing a policy that will protect you if you have a fire, vandalism, theft, smoke damage etc. You may also want to consider business interruption/loss of earning insurance as part of the policy to protect your earnings if the business is unable to operate.
3. Business owner’s policy (BOP) A business owner policy packages all required coverage a business owner would need. Often, BOP‘s will include business interruption insurance, property insurance, vehicle coverage, liability insurance, and crime insurance . Based on your company‘s specific needs, you can alter what is included in a BOP. Typically, a business owner will save money by choosing a BOP because the bundle of services often costs less than the total cost of all the individual coverage‘s.
4. Commercial Auto Insurance Commercial auto insurance protects a company‘s vehicles. You can protect vehicles that carry employees, products or equipment. With commercial auto insurance you can insure your work cars, SUVs, vans and trucks from damage and collisions. If you do not have company vehicles, but employees drive their own cars on company business you should have non-owned auto liability to protect the company in case the employee does not have insurance or has inadequate coverage. Many times the non-owned can be added to the BOP policy.
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5. Worker’s Compensation Worker‘s compensation provides insurance to employees who are injured on the job. This type of insurance provides wage replacement and medical benefits to those who are injured while working. In exchange for these benefits, the employee gives up his rights to sue his employer for the incident. As a business owner, it is very important to have worker‘s compensation insurance because it protects yourself and your company from legal complications. State laws will vary, but all require you to have workers compensation if you have W2 employees. Penalties for noncompliance can be very stiff.
6. Professional Liability Insurance This type of insurance is also known as Errors and Omissions Insurance . The policy provides defense and damages for failure to or improperly rendering professional services. Your general liability policy does not provide this protection, so it is important to understand the difference.
Professional liability insurance is applicable for any professional firm including
lawyers, accountants, consultants, notaries, real estate agents, insurance agents, hair salons and technology providers to name a few.
7. Directors and Officers Insurance This type of insurance protects the directors and officers of a company against their actions that affect the profitability or operations of the company. If a director or officer of your company, as a direct result of their actions on the job, finds him or herself in a legal situation, this type of insurance can cover costs or damages lost as a result of a lawsuit.
8. Data Breach If the business stores sensitive or non-public information about employees or clients on their computers, servers or in paper files they are responsible for protecting that information. If a breach occurs either electronically or from a paper file a Data Breach policy will provide protection against the loss.
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9. Homeowner’s Insurance Homeowner‘s insurance is one of the most important kinds of insurance you need. This type of insurance can protect against damage to the home and against damage to items inside the home. Additionally, this type of insurance may protect you from accidents that happen at home or may have occurred due to actions of your own.
10. Renter’s Insurance Renter‘s insurance is a sub-set of homeowner‘s insurance which applies only to those whose who rent their home. The coverage is protects against damage to the physical property, contents of the property, and personal injury within the home.
11. Life Insurance Life insurance protects an individual against death. If you have life insurance, the insurer pays a certain amount of money to a beneficiary upon your death. You pay a premium in exchange for the payment of benefits to the beneficiary. This type of insurance is very important because it allows for peace of mind. Having life insurance allows you to know that your loved ones will not be burdened financially upon your death.
12. Personal Automobile Insurance
Another very important type of insurance is auto insurance. Automobile insurance covers all road vehicles (trucks, cars, motorcycles, etc.). Auto insurance has a dual function, protecting against both physical damage and bodily injury resulting from a crash, and also any liability that might rise from the collision.
13. Personal Umbrella Insurance You may want some additional coverage, on top of insurance policies you already have. This is where personal umbrella insurance comes into play. This type of insurance is an extension to an already existing insurance policy and covers beyond the regular policy. This insurance can cover different kinds of claims, including homeowner‘s or auto insurance. Generally, it is sold in increments of $1 million and is used only when liability on other policies has been exhausted. Page | 16
History of Reinsurance 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 legalized 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 Lloyd‘s, and nor until 1907 do we find the establishment of Britain‘s 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 Lloyd‘s, 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.
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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 center for reinsurance capacity and expertise, with capital provided by British and overseas companies and also those many individuals who were members at Lloyd‘s. Other reinsurance markets overseas, particularly in Germany and the United States, continued to develop their major domestic reinsurance markets
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What is Reinsurance? Reinsurance is a means by which an insurance company can protect itself against the risk of
losses with other insurance companies. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.). Reinsurers‘‘, in turn, provide insurance to insurance companies Reinsurance helps primary insurers to reduce their capital costs and raise their underwriting capacity since major risks are transferred to reinsurers‘‘; the primary insurer no longer needs to retain capital on its balance sheet to cover them. Reinsurance thus serves the primary insurer as an equity substitute and provides additional underwriting capacity. This indirect capital is cheaper for the primary insurer than borrowing equity, since reinsurers‘‘ can offer to assume risks at more favorable rates thanks to their superior risk diversification. The additional underwriting capacity permits the primary insurers to assume additional risks which without reinsurance they would either have to refuse or which would compel them to provide a lot more of their own capital. 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.
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Functions Almost all insurance companies have a reinsurance program. The ultimate goal of that program is to reduce their exposure to loss by passing part of the risk of loss to a reinsurer or a group of reinsurers. In the United States, insurance is regulated at the state level, which only allows insurers to issue policies with a maximum limit of 10% of their surplus (net worth), unless those policies are reinsured. In other jurisdictions allowance is typically made for reinsurance when determining statutory required solvency margins.
1. Risk transfer With reinsurance, the insurer can issue policies with higher limits than would otherwise be allowed, thus being able to take on more risk because some of that risk is now transferred to the reinsurer. The reason for this is the number of insurers that have suffered significant losses and become financially impaired. Over the years there has been a tendency for reinsurance to become a science rather than an art: thus reinsurers have become much more reliant on actuarial models and on tight review of the companies they are willing to reinsure. They review their financials closely, examine the experience of the proposed business to be reinsured, review the underwriters that will write that business, review their rates, and much more.
2. Income smoothing Reinsurance can make an insurance company's results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage. The risks are diversified, with the reinsurer bearing some of the loss incurred by the insurance company. The income smoothing comes forward as the losses of the cedant are essentially limited. This fosters stability in claim payouts and caps indemnification costs.
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3. 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 do one of the following: stop writing new business, increase its capital, or (in the United S tates) buy "surplus relief".
4. Arbitrage The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than they charge the insured for the underlying risk, whatever the class of insurance. In general, the reinsurer may be able to cover the risk at a lower premium than the insurer because:
The reinsurer may have some intrinsic cost advantage due to economies of scale or some other efficiency.
Reinsurers may operate under weaker regulation than their clients. This enables them to use less capital to cover any risk, and to make less prudent assumptions when valuing the risk.
Reinsurers may operate under a more favorable tax regime than their clients.
Reinsurers will often have better access to underwriting expertise and to claims experience data, enabling them to assess the risk more accurately and reduce the need for contingency margins in pricing the risk
Even if the regulatory standards are the same, the reinsurer may be able to hold smaller actuarial reserves than the cedant if it thinks the premiums charged by the cedant are excessively prudent.
The reinsurer may have a more diverse portfolio of assets and especially liabilities than the cedant. This may create opportunities for hedging that the cedant could not exploit alone. Depending on the regulations imposed on the reinsurer, this may mean they can hold fewer assets to cover the risk.
The reinsurer may have a greater risk appetite than the insurer.
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5. Reinsurer's expertise The insurance company may want to avail itself of the expertise of a reinsurer , or the reinsurer's ability to set an appropriate premium, in regard to a specific (specialized) risk. The reinsurer will also wish to apply this expertise to the underwriting in order to protect their own interests.
6. 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 homogeneous portfolio of insured risks. This would lend greater predictability to the portfolio results on net basis (after reinsurance) and 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.
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GROWTH OF REINSURANCE BUSINESS IN INDIA For the convenience of the study the growth of reinsurance is classified into three categoriesi. Reinsurance before Nationalization ii. Reinsurance after Nationalization iii. Reinsurance after Liberalization.
I. REINSURANCE BEFORE NATIONALIZATION In India, the period from 1951 onwards was marked by a rapid growth of insurance business; this was because of large scale economic development in the country during the period. The increased insurance business required the reinsurance protection. At that time reinsurance was arranged from the foreign markets mainly British and Continental. In 1956, Indian Reinsurance Corporation, a professional reinsurance company was formed by general insurers operating in India and it started receiving voluntary quota share cessions from member companies. In 1961, the government made it completely statute on the part of every insurer to cede 20% in Fire and Marine Cargo 10%, 10% in Marine Hull and Miscellaneous insurance and 5% in Credit and Solvency business to approved Indian reinsurers, namely Indian Reinsurance Corporation and Indian Guarantee and General Company. The above mentioned percentages were, to be allocated equally between the two reinsurers. Thus the reinsurance market was further strengthened by the addition of second professional reinsurers. In 1966, Indian Insurance Companies Association initiated the formation of Reinsurance Pools in Fire and Hull departments to increase the retained earned premium in the country.
II. REINSURANCE AFTER NATIONALIZATION At the time of Nationalization of general insurance business in 1971, there were 63 domestic insurers and 44 foreign insurers operating in country and each company had its own reinsurance agreements. In 1973 these companies were reconstituted into four companies. They are: Page | 24
1. National Insurance Company Limited ZENITH International Journal of Business Economics & Management Research Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/ www.zenithresearch.org.in
60
2. The New India Assurance Company Limited 3. Oriental Insurance Company Limited 4. United India Insurance company Limited These four companies were thus left to operate in the country as subsidiaries of a holding company known as GIC (National Reinsurer Act 1972). After nationalization, GIC became the Indian reinsurer. After nationalization of general insurance the outward reinsurance agreements of the Indian insurance companies were rearranged. The main objectives were rearranged. The main objectives were to maximize domestic retention.
III. REINSURANCE AFTER AND LIBERALIZATION As a part of the process of liberalization of the insurance industry in India, the Indian Regulatory and Development of India (IRDA) was given the authority of regulating and controlling the conduct of insurance business in India. IRDA frames rules and regulations for various aspects of the Insurance business including reinsurance. The current regulations relevant to reinsurance are attached as an Appendix II at the end of this thesis. The four subsidiaries viz. National Insurance Company Limited, The New India Assurance Company Limited, Oriental Insurance Company Limited, United India insurance company Limited, have been delinked form GIC and private insurance companies have been allowed to do insurance business after obtaining license from IRDA. Each insurer in India is free to structure his annual reinsurance program in compliance with regulation and solvency requirement. The programmed would need to be approved by the IRDA. In November 2000, GIC is renotified as the Indian Reinsurer and through administrative instruction, its supervisory role over subsidiaries was ended. With the General Insurance Business (Nationalization) Amendment Act 2002 (40 of 2002) coming into force from March 21, 2003 GIC ceased to be a holding Page | 25
company of its subsidiaries. Their ownership were vested with Government of India.General Insurance Corporation of India (GIC Re) is the only reinsurance company in India in the domestic reinsurance market. The headquarter and registered office of the GIC is based in Mumbai. As Indian government had restricted the direct entry of foreign reinsurers some of the companies are working by having joint venture like Munich Re, Swiss Re, Insurance group of America and according to latest news Buffet Berkshier is also coming as an agent with Bajaj Allize to India. GIC Re‘s is providing
Reinsurance
in
the
following
areas:
Property
Reinsurance-
Fire,
Engineering,
Accident/Liability Reinsurance, Marine Reinsurance, Aviation Reinsurance, Life Reinsurance and Miscellaneous. To study the total performance of the GIC Re business, Comparison of the various areas of reinsurance have been studied along with the analysis of the Total Earned premium and profit after Tax of five years (2005-10) are also analyzed.
BUSINESS PERFORMANCE OF GIC: THE INDIAN REINSURER For analyzing the business performance of the GIC in the period of five years i.e. from 2005- 2010, comparison of Earned Premium and Incurred claims and comparison of different segments of the business were studied. Analysis of Total earned premium and Profit after have been done to analyze the growth trend of GIC business. Analysis is as follows: i. Comparison between earned premiums of different classes of business. ii. Comparison of incurred claims of different classes of business. iii. Five year premium of GIC. iv. Profit after Tax of Five years.
(I) Comparison between Earned Premiums of Different Classes of Business In this part of analysis comparison is made between different classes of reinsurance, this include fire, engineering, marine, aviation and miscellaneous on the basis of earned premium of five years i.e. from year 2005 to year 2010. The purpose of this comparative study is to analyze the class of business giving
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maximum business to the GIC. Following table describes earned premium from different classes of business. (In Rs Cr) Year
Fire
Engineering
Marine
Life
Aviation
Misc. Other
2005 - 06
681.51
173.19
207.61
1.26
34.68
2174.19
2006 - 07
771.55
250.70
158.56
0.48
37.74
1026.16
2007 - 08
817.01
382.51
238.06
9.50
52.00
1606.77
2008 - 09
660.71
394.50
393.61
5.53
48.19
1673.81
2009 - 10
633.57
373.48
278.58
5.50
43.17
1619.40
Total
3564.35
1574.38
1276.42
22.27
215.78
8100.33
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Types of reinsurance 1. Treaty and Facultative Reinsurance The two basic types of reinsurance arrangements are treaty and facultative reinsurance .
In treaty reinsurance , 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.
In facultative reinsurance , 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 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. The ability to separately evaluate each risk reinsured, however, increases the probability that the underwriter can price the contract to more accurately reflect the risks involved.
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o
Individual risk review
o
Right to accept or reject each risk on
o
reinsurer
its own merit o
o
A profit is expected by the reinsurer in
on
the
reinsurer‘s
o
risk
Adapts
to
measured and adjusted over an extended short-term
ceding
period of time
philosophy of the insurer o
A contract or certificate is written to confirm each transaction
o
A long-term relationship in which the reinsurer‘s profitability is expected, but
selection process o
Obligatory acceptance by the reinsurer of covered business
the short and long term, and depends primarily
No individual risk scrutiny by the
o
Less costly than ―per risk‖ reinsurance
o
One contract encompasses all subject risks
Can reinsure a risk that is otherwise excluded from a treaty
o
Can protect a treaty from adverse underwriting results
2.
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 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 Page | 30
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 cedant‘s 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 cedant‘s 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
3. Retrocession Reinsurance companies themselves also purchase reinsurance and this is known as a retrocession. They purchase this reinsurance from other reinsurance companies. The reinsurance company who sells the reinsurance in this scenario are known as ―retrocessionaires.‖ The reinsurance company that purchases the reinsurance is known as the ―retrocedent.‖ It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. For example, a reinsurer that provides proportional, or pro rata, reinsurance capacity to insurance companies may wish to protect its own exposure to catastrophes by buying excess of loss protection. Another situation would be that a reinsurer which provides excess of loss reinsurance protection Page | 31
may wish to protect itself against an accumulation of losses in different branches of business which may all become affected by the same catastrophe. This may happen when a windstorm causes damage to property, automobiles, boats, aircraft and loss of life, for example. This process can sometimes continue until the original reinsurance compan y unknowingly gets some of its own business (and therefore its own liabilities) back. This is known as a ―spiral‖ and was common in some specialty lines of business such as marine and aviation. Sophisticated reinsurance companies are aware of this danger and through careful underwriting attempt to avoid it. Well-written software can either detect reinsurance spirals, or poor software will ignore it, with the latter amplifying the effect of spiraling. In the 1980s, the London market was badly affected by the creation of reinsurance spirals. This resulted in the same loss going around the market thereby artificially inflating market loss figures of big claims (such as the Piper Alpha oil rig). The LMX spiral (as it was called) has been stopped by excluding retrocessional business from reinsurance covers protecting direct insurance accounts. It is important to note that the insurance compan y is obliged to indemnify its policyholder for the loss under the insurance policy whether or not the reinsurer reimburses the insurer. Many insurance companies have experienced difficulties by purchasing reinsurance from companies that did not or could not pay their share of the loss (these unpaid claims are known as uncollectible). This is particularly important on long-tail lines of business where the claims ma y arise many years after the premium is paid.
4. Treaty To overcome the high administration costs and uncertainty of reinsuring large numbers of individual risks on a facultative basis, the reinsurance treaty came into being Proportional treaties include quota shares, various levels of surpluses and facultative obligatory treaties. Non proportional treaties include risk excess of losses, catastrophe excess of losses, stop losses and aggregate excesses.
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A proportional treaty may he referred to as a pro-rata or surplus lines or excess lines treaty. A non-proportional treaty may be referred to as an excess of loss, excess or X/L treaty or emit ram. The party passing on liability may be termed the cedant, insured, reinsured or retrocedant and the party accepting the liability may be termed the reinsurer or retrocessionaire. Apart from the term cedant, which can be applied to all parties passing on liability, the terminology used depends on where the party is in the chain of reinsurance buying and selling.
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5. Financial reinsurance Financial Reinsurance , also known as 'fin re', is a form of reinsurance which is focused more
on capital management than on risk transfer. In the non-life segment of the insurance industry this class of transactions is often referred to as finite reinsurance. One of the particular difficulties of running an insurance company is that its financial results and hence its profitability - tend to be uneven from one year to the next. Since insurance companies generally want to produce consistent results, they may be attracted to ways of hoarding this year's profit to pay for next year's possible losses (within the constraints of the applicable standards for financial reporting). Financial reinsurance is one means by which insurance companies can "smooth" their results. A pure 'fin re' contract for a non-life insurer tends to cover a multi-year period, during which the premium is held and invested by the reinsurer. It is returned to the ceding company - minus a pre-determined profit-margin for the reinsurer - either when the period has elapsed, or when the ceding company suffers a loss. 'Fin re' therefore differs from conventional reinsurance because most of the premium is returned whether there is a loss or not: little or no risk-transfer has taken place. In the life insurance segment, fin re is more usually used as a way for the reinsurer to provide financing to a life company, much like a loan except that the reinsurer accepts some risk on the portfolio of business reinsured under the fin re contract. Repayment of the fin re is usually linked to the profit profile of the business reinsured and therefore typically takes a number of years. Fin re is used in preference to a plain loan because repayment is conditional on the future profitable performance of the business reinsured such that, in some regimes, it does not need to be recognized as a liability for published solvency reporting. 'Fin re' has been around since at least the 1960s, when Lloyd's syndicates started sending money overseas as reinsurance premium for what were then called 'roll-overs' - multi-year contracts with specially-established vehicles in tax-light jurisdictions such as the Cayman Islands. These deals were legal and approved by the UK tax-authorities. However they fell into disrepute after
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some years, partly because their tax-avoiding motivation became obvious, and partly because of a few cases where the overseas funds were siphoned-off or simply stolen. More recently, the high-profile bankruptcy of the HIH group of insurance companies in Australia revealed that highly questionable transactions had been propping-up the balance-sheet for some years prior to failure. To be clear, although fin re contracts were involved, it was the fraudulent accounting for those contracts - and not the actual use of fin re - which was the problem. As of
June 2006, General Re and others are being sued by the HIH liquidator in connection with the fraudulent practices.
Reinsurers Reinsurer
2012 Gross Written Premiums (GWP) (US millions)
Munich Re
$37,251
Swiss Re
$31,723
Hannover Re
$18,208
Lloyd's of London
$15,785
Berkshire Hathaway / General Re
$15,059
SCOR
$12,576
Reinsurance Group of America
$8,233
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China Reinsurance Group
$6,708
Korean Reinsurance Company
$5,113
PartnerRe
$4,712
Everest Re
$4,311
Transatlantic Re
$3,577
London Reinsurance Group
$3,319
General Insurance Corporation of India $625
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Reinsurance regulation This section describes the current status of reinsurance regulation in the region. The findings of a postal survey of regulatory views gathered in early 1996 for this survey are reported in section IV, B.
A. Current status of regulation While the regulation of insurance has advanced significantly in Central and Eastern Europe and the CIS countries - albeit with some serious shortcomings - this cannot be said of the regulation of reinsurance. Although it has not been possible to prepare a comprehensive analysis of legislative and regulatory practices affecting reinsurance of the region on the basis of the postal survey carried out in early 1996, it is evident that the majority of countries have done little to impose controls on reinsurance activity. Appendix A shows some of the regulations which have been mentioned during this survey. The most frequently mentioned restraint is that reinsurance may be placed abroad only when is not possible to place it with domestic companies. However, the administration of such conditions is often problematic. There is evidence that these rules are hard to enforce and in fact are often evaded or ignored. Among the reasons which may be cited for the relative neglect of reinsurance regulation in economies in transition are the early stage of development of reinsurance, the lack of experience by supervisors and ceding companies in the region as well as the fact that this has not been a high priority in the EU, on which much of the region‘s insurance regulation has been modeled. Different countries also take different approaches to reinsurance regulation. A survey by the OECD in 19961 notes widely divergent practices on the control of reinsurance activity, which differ in many of its principles as well as in its detail. However, the majority of member countries require authorization specific to reinsurance activities of domestic and foreign direct insurers (including Canada, Germany, Italy, Japan and the UK). Several countries (including Australia, Austria, Denmark, Ireland, Netherlands, Norway, Spain, and Switzerland) Page | 37
require from direct insurers a single authorization for both direct and reinsurance business. On the other hand Belgium, Finland, France and Greece do not require any authorization to do reinsurance business. In New Zealand the only requirement for writing reinsurance is to place a deposit of $500 000.
B. Survey response In order to gain a better insight to the current practice and attitudes of regulators to reinsurance in the region, a questionnaire was sent to 11 countries and this section summarizes the eight replies (from Estonia, Latvia, Lithuania, Moldova, Romania, Slovakia, Slovenia and Ukraine). It should be stressed that in view of the missing or incomplete responses the findings cannot be regarded as comprehensive. However, further information from the press and market sources has also been included here to present an up-to-date picture since the original survey.
1. Reinsurance regulation There were very few references from respondents to reinsurance regulation/legislation beyond the requirement of preparing a business plan on authorization which normally demands the setting out an outline of the reinsurance arrangements. Reinsurance is not a separate line of business in most markets (with the exception of Estonia) where separate authorization is needed to write this class as a line of business. Three countries authorized a specialist reinsurance company: two have been authorized in Ukraine and one each in Bulgaria and Estonia (although it is understood that this is dormant). In two of the successor republics of the former Yugoslavia (Croatia and Slovenia) there are specialist reinsurance companies and there are numerous insurers in Russia which write more reinsurance than direct business.
2. Data collection The majority of the supervisors responding collected data on reinsurance transactions within their markets. In some instances this is done by insurance company associations. Some supervisors collect this data but do not publish it. Several do not distinguish between reinsurance placed in the home market and placed abroad. Page | 38
3. Control powers Respondents were equally divided between those that have powers to control reinsurance activity at the company level and ask about the nature of reinsurance contracts in force and those that do not. However, it is not clear what powers they have in this regard. Estonia, Latvia and Moldova have powers to specify limits on net retention levels (see Appendix A) All but one of the respondents indicated that they collect data from companies regarding their solvency status (which takes into account the impact of reinsurance).
Two of these do so
annually, the rest quarterly. All but one (with the exception of Ukraine) have looked at the ownership relationships of insurers in the solvency context.
4. Reinsurance security Several supervisors were uncertain if they have adequate technical knowledge to monitor complex reinsurance transactions. An equal number answered ‗yes‘ and ‗no‘ to the question about having adequate expertise. Only one respondent (Estonia) associated potential problems of insolvency and suspensions associated with inappropriate/inadequate reinsurance. Most supervisors monitor domestic companies‘ reinsurance programmes and prepare an analysis of insurance company reserves. However, the only country to report the preparation of a list of approved reinsurers was Ukraine The majority of respondents also said that they lack adequate powers to issue ―cease and desist‖ orders in the reinsurance context. Ukraine is the only country which reports powers which enables it to refuse placement overseas if the reinsurance purchased is not in line with local regulations. The majority of respondents have kept in touch with supervisors in other countries with regard to the solvency/capital adequacy of foreign domiciled reinsurers, although it is not known if this is done on a regular basis. Several people consulted referred to the complexity of monitoring reinsurer security and the expertise needed to form correct judgment about their soundness. It became evident that few supervisors in the region have the necessary expertise. One appropriate response to these difficulties could be to make use of the insurance rating services (e.g. AM Best, Standard & Poor). However, the main obstacles to their use are firstly, that few of the domestic reinsurance Page | 39
companies in the region publish adequate information to enable analysis to be undertaken and secondly, that the cost of these services may be higher than some regulators in the region would be prepared to meet.
5. Minimum Capital Only one country (Lithuania) referred to adjustment to minimum capitalization to respond to inflation and exchange rate changes, although the fact that solvency minima were or intended to be specified in terms of US dollars or ECU (Russia and Ukraine) goes some way to meet this desideratum.
6. Deposits In some countries supervisors require that reinsurance treaties concluded domestically contain clauses providing that technical reserves must be left at the disposal of ceding companies. This provides the ceding company with additional security in the event of problems with the reinsurer. However, reinsurers draw attention to the fact that the rates of return on deposits held by ceding companies are often far lower than the rates that could be earned by them. This practice may increase the cost of reinsurance. The survey has not identified any countries in the region demanding deposits
7. Pools Five countries - Latvia, Lithuania, Romania Slovenia and Ukraine -referred to the existence of insurance pools, all on a voluntary basis. These usually are concerned with the insurance of nuclear facilities within their region. However, there may be several others, not identified due to non-response.
8. State owned reinsurer The only country which is currently considering the formation of a state owned national reinsurer is the Russian Federation. There have been several proposals put forward, but none of them have come to fruition. The current status of this proposal -which has been debated widely within the market - is not known. In addition, Romania was also proposing to form a specialist reinsurance
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company, although there is no information about the suggested ownership, or the current status of this proposal.
9. Limiting reinsurance outflow There were some obstacles in responding countries to the transfer of a large proportion of the business (via reinsurance) by a foreign controlled domestic company with the main constraints listed in Appendix A. In addition Estonia commented that there was some ―pure fronting with parents‖, but ―so far we have not taken steps against it‖. This would need amendment to the insurance act. However, none of the responding countries controlled the activities of foreign reinsurance companies. Several countries view the low capitalization and the high volume of reinsurance premium outflow as a problem especially in non-life business. (Lithuania, etc.). The Romanian response refers to the formation of a reinsurance operation ―to increase the proportion of transactions with Romanian insurance/reinsurance insurance/reinsurance companies to approx. 25 per cent next year‖. At the same time, most respondents are aware of the low volume of domestic reinsurance activity. However, quantitative information is lacking about the split of reinsurance placements between domestic and foreign in most of the countries covered in this survey.
10. Brokers The activities of insurance/reinsurance brokers were on the whole lightly lightly controlled. However, Estonia and Ukraine are about to introduce broker legislation and Belarus also intends to make foreign reinsurance brokers a subject of regulation/legislation.
However, it is evident that many companies prefer to place domestic reinsurance transactions without the use of brokers. Ukraine noted that they rely on international brokers only when dealing with foreign reinsurers.
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11. Using foreign reinsurance The majority of companies make use of foreign reinsurance, often on a proportional treaty (quota share) type. The Lithuanian response refers to substantial amount of motor third party liability and green card business being reinsured abroad. But in other markets the principal risks being reinsured are marine and aviation risks as well high exposure property accounts. The findings of the supervisory survey as well as discussions with other participants in the market indicated that the current state of reinsurance activity in in transition economies is in need of further development. There is evidence evidence of a need for better understanding of the techniques as well as the potential dangers and consequences of current reinsurance practices among supervisors as well as for local insurers and reinsurers. In order to assist insurance legislators, supervisors as well as other market practitioners in the improvement of their approach, the present report includes section IX, entitled Reinsurance and its regulation which describes the chief types of reinsurance and their application. Prepared Prepared by Professor R. L. Carter, this section also includes suggestions for improving supervisory oversight and monitoring reinsurance security by the use of regulatory techniques which are appropriate in the current state of the development of transition economies.
V. Privatization The transfer of insurance activity from state ownership to the private sector has made significant progress in most countries, although the rate of progress varies widely. Privatization has taken various routes. Almost every country has completed the conversion of insurance departments responsible to the state into joint stock companies. Some have sold the majority of these shares as part of the voucher privatization process (Slovakia) or transferred part of the shares to other state owned entities such as banks or holding companies. Albania has also announced that it intends to follow this route with its monopoly company INSIG. Other routes to full privatization include the splitting up of the original monopoly supplier and selling shares to domestic investors, usually banks, with Romania as an example.
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In several republics of the former Soviet Union as well as in Bulgaria and Romania the state selloff has not gone far due to the absence of local investors. There are several countries where there is reluctance to allow foreign investors to take a significant stake in these previously state owned units as some governments regard them as strategic assets. Similar situations exist in some of the Baltic republics.
Basis of insurance and Need of 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 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 company‘s operation.
Good Reinsurance Management Optimization of a company‘s 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 company‘s prosperity. Since the nature of a company‘s portfolio company‘s portfolio is generally not static, the reinsurance arrangements have to be kept under review continuously. Hence, the concept of dynamic reinsurance management is important.
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The objectives of a good reinsurance program are as follows: (a) Provide adequate reinsurance capacity to enable the business of different branches to operate without any handicaps. (b) Provide maximum possible freedom in rating and claims settlement. (c) Facilitate development of knowledge and skills for the underwriting staff. (d) 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. (e) Ensure stable reinsurance arrangements both with regard to availability of cover as well as terms. (f) Help minimize profit ceded on reinsurances placed. Such minimization should be equitable and should not be entirely subject to forces. (g) Establish business relationships with reinsurers‘‘ of the highest standing. Reinsurers‘‘ who will willingly and readily honor their obligations, who will take a long-term view and stand by the company. (h) 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. i) Keep administration of reinsurance simple and economic.
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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 forever) 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: (a) Capital and surplus funds (h) Complexion of the portfolio i.e., number of risks, types of risks, premium volume, adequacy of terms, catastrophe exposures, etc. (c) 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 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. Page | 45
Reinsurance Treaty The Reinsurance Treaty of June 18, 1887 was an attempt by German Chancellor Otto von Bismarck to continue to ally with Russia after the League of the Three Emperors had broken down in the aftermath of the 1885 Serbo-Bulgarian War. Facing the competition between Russia and Austria – Hungary on the Balkans, Bismarck felt that this agreement was essential to prevent a Russian convergence toward France and to continue the diplomatic isolation of the French so ensuring German security against a threatening two-front war. He thereby hazarded the expansion of the Russian sphere of influence toward the Mediterranean and diplomatic tensions with Vienna. The secret treaty signed by Bismarck and the Russian Foreign Minister Nikolay Girs was split in two parts: 1. Germany and Russia both agreed to observe neutrality should the other be involved in a war with a third country. Neutrality would not apply should Germany attack France or Russia attack Austria-Hungary. 2. In the most secret completion protocol Germany declared herself neutral in the event of a Russian intervention in the Bosphorus and the Dardanelles. As part of Bismarck's system of "periphery diversion" the treaty was highly dependent on his personal reputation. After the dismissal of Bismarck, his successor Leo von Caprivi felt unable to obtain success in keeping this policy, while the German Foreign Office under Friedrich von Holstein had already prepared a renunciation toward the Dual Alliance with Austria – Hungary. When in 1890 Russia asked for a renewal of the treaty, Germany refused persistently. Kaiser Wilhelm II believed his own personal relationship with Tsar Alexander III would be sufficient to ensure further genial diplomatic ties and felt that maintaining a close bond with Russia would act to the detriment of his aims to attract Britain into the German sphere. Like the ongoing AustroRussian conflict, the Anglo-Russian relations too were strained at this point due to the gaining influence of Russia in the Balkans and their aims to open up the Straits of the Dardanelles which would threaten British colonial interests in the Middle East. However, having become alarmed at its growing isolation, Saint Petersburg, as Bismarck had feared, entered into the Franco-Russian Alliance in 1892 thus bringing to an end the French isolation. According to professor Bury, the dismissal of chancellor Bismarck, the erratic temper of emperor William II, and the uncertain policy of the men who succeeded Bismarck (partly out of consideration for England they failed to renew the Reinsurance Treaty with Russia but did renew the Triple Alliance), were joint causes of the inauguration of a period of fundamental change. Page | 46
In 1896 the treaty was exposed by a German newspaper, the Hamburger Nachrichten, which caused an outcry in Germany and Austria-Hungary. The failure of this treaty is seen as one of the factors contributing to World War I, due to Germany's increasing sense of diplomatic isolation.
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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 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(s) 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 over-spills and, with the current harmonizing 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 • The United Kingdom • The Continent of Europe • The United States of America • The Far East • Offshore.
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The United Kingdom London is an international center 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 Market‘s underwriting resources are produced by Lloyd‘s 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 Lloyd‘s. The uniqueness of the Lloyd‘s operation and the position of the surrounding reinsurance companies is considered to have made London the major reinsurance center it is today.
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 Switzerland‘s 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 relatively small domestic market, developed with the help of a widely spread international network of offices. Page | 49
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 URZ‘vIA‘s 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).
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 Lloyd‘s 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 Lloyd‘s 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. 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.
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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.
The Far East
The main insurance centers 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 reinsurance capacity in Tokyo, international reinsurance has not proved to be particularly attractive to Japanese companies.
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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 center for the Asia Pacific Rim and in 1993 there were 224 authorized insurers. There are approximately 10 reinsurance companies based in Hong Kong, which have traditionally serviced northern Asia, China, Korea, Taiwan, the Philippines and Thailand.
Offshore markets
A large and growing number of governments around the world have set up international financial centers 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 — Guernsey — Isle of Man.
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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 capitalized reinsurance companies with high levels of international reinsurance capa city. 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 Poor‘s top 30 reinsurers in the world. Other financial centers, which may be included in the ever-lengthening list of offshore domiciles, are situated in: — Dublin — Luxembourg.
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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 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 Page | 54
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 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 non-disclosed fact is material or not is often decided by the legal courts.
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Market Share of Reinsurers
Market Share of Reinsurers
US 32%
29%
Bermuda France Others UK Ireland
8% Switzerland
9% 4% 3% 9%
Germany
6%
Source: Standard & Poor s ’
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World’s Top 10 Reinsurers Rank Company
Net premiums written
1
Swiss Re Group
$27,680,199,200
2
Munich Re Group
$23,760,161,400
3
Hannover Re Group
$9,661,392,406
4
Berkshire Hathaway/Gen Re Group
$9,491,000,000
5
Lloyd's of London
$6,948,466,800
6
XL Re
$5,012,910,000
7
Everest Re Group Ltd.
$3,972,041,000
8
PartnerRe Ltd.
$3,615,878,000
9
Transatlantic Holdings Inc.
$3,466,353,000
10
ACE Tempest Reinsurance Ltd.
$2,848,758,000
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Reinsurance in India
GIC RE General Insurance Corporation of India (GIC) has assumed the role of National Reinsurer for the market.
It
provides
treaty
and
facultative
capacity
to
the
insurance
company.
It continues to manage Hull Pool on behalf of the market (mainly public sector Insurance companies). The Pool received cession on fixed percentage basis from direct companies and after protection; the
business
is
retro-ceded
back
to
member
companies.
Large risks opt for Package Policies, insurance terms for which are obtained from International Market. Each direct writing company arranges surplus treaties and excess of loss protection. GIC arranges market surplus treaty for Property, Cargo, and Miscellaneous accident business and direct company can utilize the market surplus treaties after utilization of their own treaties. Public sector Insurance companies are adopting inter-company cession to utilize other companies‘ net retention. GIC arranges excess of loss protection from International market. 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. Page | 58
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 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 incu rred; d) Simplify the administration of business Every insurer shall maintain the maximum possible retention commensurate with its finan cial 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.
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 Page | 59
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 Lloyd‘s 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 sub-regulation (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.
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.
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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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Terrorism & Natural Calamities A Setback to the Reinsurance Industry Throughout the insurance industry, it is not business as usual. The attacks on the World Trade Center on September 11, 2001, sent shock waves through society and the business community that will significantly impact the availability and cost of insurance for years to come . The devastating floods, earthquakes, Hurricanes and other natural calamities have added pain on every insurer and reinsurer .
Aviation liability, $3,500
Property WTC, $3,600
Event Cancellation, $1,000
Aviation, $500
WC, $1,800
Property Other, $6,000
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Total claims paid by all reinsurance companies in 2005 reached 15.951.878 million GEL, which was 25,9 % of total income. The dynamic of loss according to the years has the following structure:
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On the chart you can see claims paid by insurance companies by years:
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Case Study – 1
Munich Re - in a Whirlpool?
Munich Re, the largest reinsurer in the world is facing a threat of getting trapped into a vicious circle. Recently there has a downgrade in ratings by S&P that might lead to another downgrade if the company resorts to inferior quality of business or less premium rates. The business has been Tough for the company due to the ripple effects of 9/11 attacks coupled by dismal investment performance. Von Bombard has recently assumed the position of CEO and has a daunting task of sailing the company out of this storm.
Munich Re, the world‘s largest reinsurer has reported losses of $680 million in e first -half of 2003 and its rating is downgraded by SAP from AA- to A+ resulting Munich Re the lowest rated reinsurance company in the European region. The ratings downgrade was on account of bad equity investments and its stakes in Allianz, HVB and Commerzbank, whose performances were unsatisfactory. The company is facing a threat that this ratings cut may be a trigger to get trapped in a vortex. Since the ability to attract new business is reduced, a compromize either on quality of business or premium levels may lead to fall in profits which may further lead to ratings downgrade. How will the new CEO Von Bomhard, take stock of this situation?
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Munich Re - The History
The insurance industry was initially triggered by the rapid commercial activity in Germany. Carl Thieme started Munich Re in 1880 at a time when there was a sense of disappointment for insurance and reinsurance companies in the country. The company was started in two rented rooms with five employees and a share capital of three million marks. After eight years of its commencement it was quoted in the stock exchange and its share capital was increased to 4.8 million marks. The number of staff also kept rising. It employed 55 people by 1890, 348 in 1900, 450 in 1914, 614 in 192O The company faced its first tough time in April 1906 when an earthquake occurred in California devastating the city of San Francisco. Around 3,000 people died and there was a property damage to the tune of 500 million dollars of which, 11 million Goldmark happened to be of Munich Re The prompt settlement of claims fetched Carl Thieme the complement, ―Thieme is money‖ instead of ―time is money‖ from the clients This event triggered the idea of reinsurance especially in. the US. It was the first company to prepare set of terms and conditions for machinery insurance in 1900. In the 1930s, the company‘s medical staff developed life insurance manuals by the help of which it was possible to insure chronically ill who were considered uninsurable until then. In 1970, it created a geo-sciences research group to analyze natural hazards covers from a technical point of view. As of 2003, the company employs engineers and scientists from 80 different disciplines meteorologists, geologists, geographers doctors, ships‘ masters and experts with a wide range of qualifications. Currently the company is the largest player in the reinsurance segment with competitors such as Swiss Re and Berkshire Hathaway.
The Reinsurance Market The origin of reinsurance can be traced to 14th or 15th century in marine insurance The concept of reinsurance evolved when a single party found it difficult to insure high risks involving large payouts. In other words insurance for the primary insure is reinsurance. It is mainly a tool to increase capacity enhance stability, protection against catastrophes, obtain surplus relief to enable growth, gain underwriting ability and withdraw from territory or line of business. Reinsurance is mainly classified under two categories; facultative and treaty. A facultative contract is for a single risk and treaty is for multiple risks of certain type. 0ver years, reinsurance Page | 66
industry has been handling various catastrophes such of Hurricane Andrew and successfully paying the claims. September 11, 2001 attacks at the World Trade Center had a big blow to insurance industry including the reinsurers. The attacks resulted in insurance industry paying $40 billion as claims, two-thirds of which was paid by reinsurance industry. This setback was coupled with the stock market losses trend following the attacks has forced many reinsurers across the globe to revise their core business of reinsurance and withdraw from businesses such as management, investment banking and also the lines business in which they specialize. With the changed scenario the reinsurers cannot depend on investment income in their toughtimes. Days when reinsurers could rely on cushion of investment income, or seek new markets to make-up for the stage in their own are long gone Reinsurers now need to focus on delivering better more consistent underwriting results in their core markets.
Munich Re's premiums by Sector, % of total 11%
Reinsurance Life and Health primary insurance Life and Health 40% primary insurance property nd casualties reinsurance property and casualty 36%
13%
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The Current Problem of Munich Re The company is facing troubles on various fronts. Firstly, the investment losses have been excessive. As quoted by The Economist, ―At the end of 2001 Munich Re had 33% of its assets in equities; new, it has less than 10%, besides its stake in HypoVereinsbank (HVB), Munich Re owns one-fifth of Allianz, the company situated at its neighbor in Koniginstrasse. Both holdings have lost more than 75% of their value in the past three years.‖ In March 2003, the company announced reduction of its cross shareholding with Allianz to about 15%. This was a step taken to strengthen the capital base of Munich Re, since the performance of Allianz was not up to the mark. The press release from the company said, ―The effect of reducing shareholdings on both sides will be that the respective participations are no longer valued at equity; consequently, Munich Re will in future book the dividend of Allianz instead of the proportional result for the year in its income statement. Furthermore, the groups‘ free floats and thus the weightage of their shares in stock market indices will increase.‖ The news of Mr. Hans-Jurgen Schinzler‘s retirement on April 28, 2003 was delicate considering the turbulent times of the company. Mr. Schinzler who is 62 has to retire as per corporate Germany standards. The company made profits in the year 2002 only because it sold €4.7 billion-worth of shares to Allianz. Un Mr. Schjnzler the company initiated a diversification strategy. It shares 25 ownership in HVB, the country‘s second biggest bank. It also Owns 10% of Commerzbank, One of its subsidiaries ERGO is Germany‘s biggest primary insurer however it incurred a loss of €1.1 billion last year mainly due to investments these circumstances when Mr. Bernhard has to take over the charge, there was daunting task ahead of him. Following that the biggest blow came with the ratings downgrade by S&P on account of weak profits and reduced capital base. The company in press release next day claimed the downgrade to be unjustified. The company bragged of its AAA rating. A Business Week article commented ―All the more so in the cloistered world of reinsurance, where billions of dollars on corporate and private-risk coverage are guaranteed by a few lop firms. The slightest slip in creditworthiness is a big blow, since it raises questions about the underwriter‘s ability to make good on claims when disaster This had put the company into a vicious circle where the competitors had an edge over company due to ratings and hence it was tough to obtain new Page | 68
business, since ratings have a large role to play in the business of insurance and reinsurance Secondly, this would force Munich Re to lessen the premium in order to retain clients. A London insurance broker rightly commented, ―The big worry is that ratings cut can be the start of a vicious circle, you have to pay more for business as a result, which means profits fall and your rating can get cut again.‖
Group Premium Income In € Billion 2002 Reinsurance Primary Insurance Consolidation Total Premium Growth In % Reinsurance Primary Insurance Total
2001
2000
1999
1998
25.4 16.6 -0.2 40
22.2 15.7 -1.8 36.1
18.3 14.4 -1.6 31.1
15.4 13.5 -1.5 27.4
14.1 12.7 -1.3 25.5
2002 14.6 5.6 10.8
2001 21.1 9.0 16.1
2000 19.2 6.8 13.5
1999 8.6 6.5 7.5
Source: Munich Re Annual Report
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Future Outlook On July 10, 2003 Munich Re became the first nationwide reinsurer in China after receiving the country-wide operating license from China Insurance Regulatory Commission. This was an important move for Munich Re to enter into high growth- oriented Asian market in testing times. Though the company had business relationships with China through offices in Beijing, Shanghai and Hong Kong since 1956, this license opens the door to an opportunity of an industry that has a double-digit growth rate. With this backdrop the new CEO has the challenge to bring the company out from the vicious circle and continue its image of the largest reinsurer in the world. At the time of succession of CEO the issues confronting the new CEO are, how to come out of the loss-making investments of Munich Re at Allianz, HVB and Commerzbank? How to retain the existing customers without straining profits? How to attract new business despite the ratings cut? And finally, how to win the AAA rating by S&P, which it used to enjoy?
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Case Study II
Swiss Re: Expansion in Asia Swiss Re is one of the leading global players in the market. The company has a strong history of profitability that was only affected by the claims related to 9/1l. The company is in the expansion spree in Asia particularly in China, India and Japan. It has a liaison office in all these countries and has got a branch license in china and Japan. Swiss Re is currently lobbying for obtaining a branch license in India as well. After starting of business, the countries will get access to the global capital and for Swiss Re it‘s a new market added with diversification of risks.
Swiss Re was founded in 1863 at Zurich, It is one c f the leading reinsurers of the world. Currently, it does business from over 70 offices in more than 30 countries and has on its rolls around 8,100 employees. The company provides risk transfer, risk management, alternative risk transfer (ART) and asset management services to its global clients through its three business groups — property and casualty; life and health; and financial services. The gross premiums written by the company in the financial year 2002 amounted to CHF 32.7 billion. The rating of Swiss Re from Standard & Poor‘s is AA, Moody‘s is Aal, and AM Best is A+ (superior). It is a public listed company and the shares are being traded in the Swiss exchange. Brief History
Swiss Re‘s incorporation was triggered by a major fire on 10-11 May 1861 when 500 houses got burnt and 3000 people became homeless. The inade insurance cover among the households was highlighted at that point of time provide more effective means of coping with the risks posed by such developed the Helvetia General Insurance Company in St. Gall, the Schweizt Kreditanstalt (Credit Suisse) in Zurich and the Basler Handeisbank founded the Swiss Reinsurance Company in Zurich with a capital of six Swiss Francs. The fire also happened to be the motivation behind the company‘s fast growth in the initial years after its formation. Initially Swiss Re offered fire, marine reinsurance and later on added life insurance after two years business in 1880. In 1906, the company suffered one of its biggest losses after the earthquake San Francisco. Swiss Re opened its overseas branch in the United States in its first step to overseas business. The Page | 71
company was also affected by the Titanic on 14/15 April 1912. It acquired major shareholding in Mercantile General in 1916 and acquired Bavarian Re in 1923. After the World War II was a season of economic boom. During the period, lot of developments took with regard to Swiss Re. In the same period Swiss Re‘s business presence increased in the United States, Canada, South Africa and Australia. An advisory committee called, Swiss Re Advisers Limited was found in Hong Kong. In 1959, the corn premium income crossed one billion mark with 1,043 million Swiss Francs. In 1977, Swiss Re acquired 94% shares of Switzerland General Insurance Company Ltd, Zurich. Swiss Re started selling its majority shareholdings in insurance companies from 1994. It merged with Union Re in 1998 of which it acquired majority stake holding in 1988. In 2001, Bavarian Re was made as Swiss Re Germany and Swiss Re restructured itself in making three business groups at the corporate center. Swiss Re and the Impact of September 11
Swiss Re resulted in loss for the first time in its history of 138 years of profitability in 2001. This was mainly due to the impact of huge payouts of September attacks. Where the firm reported profit of 2.97 billion CHF in 2000, it reported loss of 165 million CHF in 2001 and 9l million in 2002. The payouts arising from September 11 attacks amounted to CHF 2.95 billion. Chief executive Walter Kielholz said in an interview, ―Despite the worst year ever for insured losses, Swiss Re strengthened its position during 2001 and is now well placed to capitalize on improving markets and achieve superior results in the coming years.‖ At the end of 2001, Swiss Re‘s shareholders‘ equity amounted to CHF 22.6 billion (USD 13.6 billion) and the total balance sheet stood at CHF 170 billion (USD 02.4 billion). In the first-half of 2002, Swiss Re profits came down to £50.91 million from £582 million corresponding to the previous year. On this Mr. Kielholz said, ―However, in tough times experience tells us the opportunities are greatest for the strongest players. I believe these remains so now for Swiss Re.‖
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Expansion in Asian Countries Swiss Re has been eying Asian market for long, specifically Japan, China and India and has taken significant steps to pursue the same. It has got entry into Chinese and Japanese market and is lobbying for an entry through branch network in India. In early 2002, Swiss Re relocated its Asian headquarters from Zurich to Hong Kong. This move was strategic and made in order to oversee and manage 14 off ices in Asia. The chief executive of Swiss Re‘s Asia division, Mr. Pierre Oaendo, said ―The move to Hong Kong is designed to expand Swiss Re‘s market leadership and to meet the current and future requirements of the Asian insurance industry. We chose Hong Kong as our Asian huh because it, has a strong infrastructure, is the gateway to China, is located centrally within Asia, and is already home to a number of other Swiss Re operations. There is also the availability of insurance and other financial professionals here,‖ he added.
China Swiss Re opened its representative offices in Beijing and Shanghai in 1996 and 1997 respectively. In August 2002, Swiss Re received an authorization from China Insurance Regulatory Commission (CIRC) for operating a branch for both property! casualty as well as life reinsurance. According to Swiss Re officials, this is a step towards obtaining a full license and will enable them to establish local services within China in order to support and contribute to the growth of country‘s insurance and reinsurance industry and economy per Se. Insurance market in China steadily growing and the growth in premium income has been 23.6% over the 10 years. Foreign insurance companies have increased from two in 1992 to date. Commenting on this im portant approval, Mr. Pierre Ozendo, chief executive Swiss Re‘s Asia Division, said ―Swiss Re‘s close relationship to the China insurance industry is an excellent foundation upon which to build as China to meet the growing needs of its economy and its people in protecting live property as well as business and asset growth.‖ Swiss Re also believes in tile social growth of the Chinese economy and mat‘. of fact it has set up a research center on natural catastrophe exposure insurance risks together with the Beijing Normal University in Beijing in 1999. The research center is dedicated to collecting and
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interpreting NatCat data, developing risk measures and maintaining close ties to other research Institutions and state organizations of interest. The main objective lies in developments of models for assessing risks and respective economic and insurance. models On December 19, 2003, Swiss Re officially opened the branch office in Beijing ―The Chinese insurance market today is demonstrating exciting growth. I delighted that Swiss Re has received authorization to open this branch and now participate directly in tile development of the market,‖ said Swiss Re CEO John Coomber, on the occasion.
Japan December 2003, Swiss Re received a branch license to provide reinsurance service in Japan for both property/casualty as well as life and health domains. Swiss happens to be the first leading global reinsurance player to obtain a full license to run a branch in Japan. ―We are delighted to receive approval for our branch license Japan which will strengthen our ability to service our portfolio of valued clients Japan,‖ stated Swiss Re CEO, John Coomber on this occasion. Company‘s relationship with Japan dates back to 1913 according to Swiss Re officials. The company runs a services company in Japan since 1999 in order to provide global business expertise to local players. Apart from this, the company was holding a representative office in Japan since 1972. Swiss Re though received non-life insurance license intends to extend services limited to reinsurance only.
India Swiss Re has presence in India from over 70 years. Swiss Re through Swiss Re Services India Private Limited offers clients exclusive and specialized risk management services, international technical expertise and other support services. It also has a wholly-owned subsidiary in India, Swiss Re Shared Services (India) Private Limited incorporated in 2000 for providing back office administration support. The center will handle contract administration, claims administration and reinsurance accounting support for all Swiss Re offices in Asia. Indian regulations allow foreign reinsurers to set up a reinsurance company with an Indian partner and minimum capital of Rs. 200 crore where foreign participation is restricted to 26%. Swiss Re has been urging Indian regulator for de-linking reinsurance from direct insurance Page | 74
regulations and allowing reinsurance branching. Calling for an end to the joint venture requirements currently imposed on foreign reinsurers. Mr. Davinder Rajpal, Swiss Re Head of India, Turkey and Middle-East, pointed out the key benefits available from allowing whollyowned reinsurance branches: • A full range of technology know-how and services, available locally to serve India‘s increasingly complex risk landscape; • Local insurers can access reinsurer‘s global balance sheet; • Increased security and reduced credit risk due to the regulator‘s direct supervision of reinsurance branches; and • Encourages more foreign direct investment to India. Swiss Re expects Asian market to grow substantially in the coming years and says, ―In Asia, sound economic fundamentals will continue to support robust insurance business growth in 2004. Life insurance will in particular benefit from increasing affluence and rising risk awareness. Compared to more mature markets, emerging Asia, in particular China and India, will remain highly attractive international insurers.‖
Future Outlook Swiss Re has been the first entrant in all the three emerging markets of Asia. The company is backed by strong fundamentals, financials and global expertise. It possesses all the prerequisites to be a market leader in these countries. The presence of Swiss Re has been long in these nations and the representative offices had been opened at the right time. The major challenge for Swiss Re as of now especially in India is the regulatory barrier. So far Swiss Re is the first and only global player involved in reinsurance services in all the three markets. The company has already proven its expertise for long in the global market and the presence has to be increased in these liberalized markets only by the passage of time.
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Case Study III General Insurance Corporation of India This case provides the history of General Insurance Corporation of India (GIC since nationalization. GIC‘S 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 Afro- Asian region. In addition to that, it has also started leading reinsurance programs for several insurance companies in SAARC countries, South East Asia, 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, India‘s 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 (Nationalization) 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 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 across the country. The main customer interface for these units were in agents, development officers Page | 76
and employees at branch, divisional and regional 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 sociallyoriented 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. GIC‘s 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 croré.
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. 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. Page | 77
What Went Wrong? General Insurance Corporation recorded a net premium of $1.3 billion in the year 1995-96. 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 division‘s 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 into the deepest interiors of the country lagged behind in meeting customer expectations in products and services. 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 Page | 78
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 industry‘s 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. 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.
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Recommendations Specific to GIC: • The government should take over 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.
IRDA Act The Insurance Regulatory and Development Authority Act, 1999, is the product of a Bill submitted to the Parliament in December 1999. Insurance Regulatory and Development Authority Bill was passed on December 2, 1999. The IRDA Bill opened the Indian insurance sector to the rest of the world, through the entry of competitive players in the insurance sector and the inflow of long-term capital. The IRDA Bill provided for the establishment of Insurance Regulatory and Development Authority, as an authority to protect the interests of the holders of insurance policies and for the regulation and promotion of Indian insurance industry. The IRDA Act provides statutory status to the regulator. The IRDA Bill has amended the Insurance Act, 1938, the Life Insurance Act, 1956, and the General Insurance Business (Nationalization) Act, 1972. The Bill allowed foreign participation in the insurance sector. The foreign companies could have an equity stake up to 26% of the total paid-up capital. IRDA Act also fixed minimum capital requirement for life and general insurance at Rs.100 crore and for reinsurance firms at Rs.200 crore. The minimum solvency margin for private insurers is Rs.500 million for life insurance companies, Rs.500 million or a sum equivalent to 20 percent of net premium income for general insurance and Rs.1 billion for reinsurance companies. The Authority is a ten member team consisting of a chairman, a five whole-time members and four part-time members.
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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 India later gave his assent to the General Insurance Business (Nationalization) Amendment Bill, 2002 and the Insurance (Amendment) Bill 2002. The General Insurance Business (Nationalization) Amendment Act, 2002, amended 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.
GIC — the National Reinsurer Reinsurance business in India dates back 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
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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 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. GIC‘s 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 programs several insurance companies in SAARC countries, South East Asia, Mid Africa. GIC provides the following capacities for treaty and facultative the international market on risk emanating from international market 1 merits of the b usiness. 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 Corporation‘s 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 cr 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 Page | 82
the Middle East 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 Re. 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 Corporation‘s 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.
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 and international, it has taken various decisions to support its new corporate vision. I January 2004, GIC have 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 GIC‘s underwriting with agricultural losses zooming to Rs.400 crore in 2002-03 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 premium has been over 15% compared to just 6% in the previous year. International credit rating agency, A M Best, has given ―A (Excellent)‖ rating to the corporation indicating it‘s financial strength. The rating reflects not only th Corporation‘s excellent financial position and conservative investment portfolio but also recognizes its leading position in the Page | 83
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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ANNEXURE A
RESTRICTIONS ON PLACEMENT OF REINSURANCE The present appendix list some of the regulation relating to reinsurance transaction which have been mentioned during the survey. It should be noted that this is a fast changing field with rapidly changing regulation and practice and readers should not rely on the statements made here alone. Belarus Placement of reinsurance abroad subject to approval policy by policy. Remmittances abroad to insurers without permanent representation in Belarus are subject to 15 per cent tax. Romania The following is a provision of article 6 of Law no 136 of Romania: ― The ceding of reinsurance on the international market will be done only when the subject risk cannot be placed on the domestic market‖. Source: Correspondence with Romanian Ministry of Finance, Supervisory office of insurance and reinsurance activity, Bucharest. Moldova According to section 6, Paragraph 17 of the Insurance Act of Moldova of June 1993: ―Assignment of risks to foreign reinsurers bearing no special licenses by the Insurance Supervision Administration shall be allowed solely when coverage of these risks in the domestic reinsurance market is not feasible‖. Estonia and Latvia Insurance law specifies a 10 per cent limit of statutory capital on maximum retention per risk. Slovenia Local reinsurance capacity must be exhausted before business can be ceded abroad Ukraine The insurance supervisor is considering to oversee the annual reinsurance business plan of each company. Information to be provided include the structure of the programme, choice of conditions and reinsurers. Supervisor may also demand additional information and may refuse consent if not in line with regulations. Approval will be needed where over 50 per cent is placed abroad and for excess of loss treaties are placed with foreign reinsurers. Supervisor is also considering the establishment of a list of approved reinsurers
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ANNEXURE B ARTICLES ABOUT REINSURANCE Big investments are being lined up by global reinsurance giants looking to gain a foothold in India. Even as the Insurance (Laws) Amendment Bill, 2008, to allow foreign reinsurers to set up branch operations is getting delayed in Parliament, bullish global reinsurers are getting ready to enter the Indian market, with many of them slowly in the early stages of developing business through their offshore branches. Most global reinsurers are now developing their insurance business offshore. ―India is an exciting market to be present in. We are encouraged to learn about the possibility of the Insurance Bill being cleared in the Parliament with regard to the opening of branches by foreign reinsurers,‖ said Victor Peignet, CEO, SCOR Global P&C, the sixth largest global reinsurer. ―We hope to have a branch office in India conducting reinsurance business as soon as it is permissible to do so. Such a perspective suits the ―multi-domestic‖ business model based upon which the SCOR Group operates,‖ Peignet said. SCOR is currently conducting business with its Indian clients offshore from Singapore. Currently, public sector GIC Re is the only reinsurance company in India. More than euro 1 trillion ($1.382 trillion) in additional premiums will be generated in the Asian region by 2020 with growth markets such as China and India contributing almost 70 per cent, said a top official of Munich Re. Ludger Arnoldussen, management board member, Munich Re, world‘s largest reinsurer, said as a reliable partner of India‘s non-life insurance industry for more than five decades, Munich Re sees India as an important emerging market with high potential and is ready to participate in its growth, offering professional expertise, global knowledge and unmatched financial strength. ―At the moment our reinsurance premiums from India are about euro 30 million ($41.5 million), while we have roughly euro 1 billion ($1.382 billion) in China. Regulation in India is still too spontaneous and some protectionist tendencies still exist,‖ Arnoldussen said. Michel M Liès, Group CEO, Swiss Re, the second largest global reinsurer said in the long term, Swiss Re sees India is an important market. ―If I analyse our Indian reinsurance portfolio, the opportunities on life side have been real and we have taken advantage of them. We would like to increase our business by participating in government schemes that we have been talking but nothing much has happened till now,‖ he said. Swiss Re which is keen to set up a health insurance company is currently negotiating with L&T for a joint venture. Hannover, the third largest global reinsurer, has a collaboration with Hannover Re for developing life reinsurance business. Ulrich Wallin, CEO, Hannover said the company already has a portfolio of around euro 60-70 million.
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―India is an interesting market. We have grown our business in certain pockets. The premiums are sufficient enough to cover the losses. We will be seriously considering to set up a branch if we allowed to do so. Like China, if we are allowed to open a branch India, we will look at that possibility,‖
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ANNEXURE C SWOT Analysis of Group of America
Parent Company
Reinsurance Group of America
Category
Diversified Insurance
Sector
Banking and Financial Services
Tagline/ Slogan
-
A company offering wide range o f products catering to each reinsurance USP
need with the best of the best people working to deliver to you
STP
Individual life reinsurance, individual living benefits reinsurance, health Segment
reinsurance, long-term care reinsurance, group reinsurance
Target Group
Insurance companies
A specialist in providing life and health-related reinsurance and financial Positioning
solutions to help their clients effectively manage risk and capital
SWOT Analysis
1. The company has been witnessing high growth sales rate contributing to the company’s success. 2. The company has extensive reach in the w orld, with operations being present in 25 countries. 3. The company boasts of ‘the best of best’ people, with an employee count of 1700+ 4. Its services include individual life reinsurance, individual living benefits reinsurance, health reinsurance, long-term care reinsurance, group Strength
reinsurance
1. The company has been seeing deteriorating trends of profitability. Weakness
2. The company has poor debt rating which poses a problem for the
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company to find sources of funds. 3. The company, apart from poor profitability has to face a complex tax structure.
1. The company can see an opportunity in other emerging markets and add to the company’s size and grow, also to reducing its geographic risk. 2. There are great opportunities in the insurance linked markets that the company can leverage on. 3. The global reinsurance market is on the path of recovery and poses a Opportunity
great opportunity for the company.
1. The rise in incidents of fraud and defaults pose a threat to the insurance industry. 2. The American insurance market is very competitive affecting the small nature of the company’s business. 3. The increase in the consolidation in t he reinsurance industry can Threats
increase the strength of competition and poses as a threat.
Competition
1. AEGON N.V. 2. Munich Re Competitors
3. Swiss Re
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ANNEXURE D SWOT Analysis of SWIS RE Swiss Re
Parent Company
Swiss Re Group
Category
Diversified Insurance
Sector
Banking and Financial Services
Tagline/ Slogan
Risk is our Business
Delivers standard to tailor made insurance solutions to all lines of businesses leveraging on its capital strength, innovation power and USP
expertise
STP
Segment
Reinsurance, Corporate Solutions, Insurance
Insurance companies, Mid-to-Large-sized corporations and Public sector Target Group
clients
Striving for sustainable development of all stakeholders and society, by being open, transparent, honest and respecting everybody inside and Positioning
outside
SWOT Analysis
1. Swiss Re is one of the world’s largest reinsurance players with operations across the globe 2. The company has an experience of over 150 years. 3. Business and geographic diversification is helping the company reduce its risk with business spread across life, non-life reinsurance and insurance linked securities and present in all continents. 4. Over 11,000 employees form a strong workforce for the company Strength
5. The company has presence in over 25 countries
1. The group has been showing a weak trend in its life and health Weakness
operations with a decline in revenues and operating income.
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2. The group has been witnessing erosion in the investment income which is likely to affect the group financially.
1. The capital strength of the company poses opportunities for expanding business through both inorganic and organic means. 2. There are great opportunities in the insurance linked markets that the company can leverage on. 3. The global reinsurance market is on the path of recovery and poses a Opportunity
great opportunity for the company.
1. The increase in the consolidation in the re insurance industry can increase the strength of competition and poses as a threat. 2. There is likely to be increase in competition for capital due to Solvency II adoption. 3.Increase in the incidence of catastrophic events and natural di sasters Threats
poses a threat to the insurance industry.
Competition
1.Munich Re 2.Swiss Life Insurance and Pension Company 3.Everest Re Competitors
4.General Re
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Bibliography Newspapers, Magazines & Journals The Economic Times Mint The Times of India Business Standard Business Today Business line
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.%20research/sigma%20archive/sig ma%20archive%20%28english%29.html http://www.zurich.com/main/productsandsolutions/industryinsight/2003/september2003/industryinsight2 0030826_001.htm http://www.allbusiness.com/management/193921-1.html www.irdaindia.org www.insuranceinstituteofindia.com www.google.com www.indiainfoline.com http://www.generalinsurancecouncil.org.in/
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