PROJECT REPORT ON

Reinsurance

Submitted by:Arushi Agrawal

BACHELOR OF COMMERCEBANKING & 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.

_______________________ _____________________

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 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

ACKNOWLEDGEMENTPage | 3

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 Co-

coordinator 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.

EXECUTIVE SUMMARY

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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.

RESEARCH METHODOLOGY

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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.

TABLE OF CONTENT

SR.NO PARTICULARS PAGE NO.1 Introduction to Introduction 8

2 Characteristics of an Insurable Risk 10

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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

17 Terrorism & Natural Calamities a Setback 61

18 Case Study I 64

19 Case Study II 70

20 Case Study III 75

21 Annexure A 84

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22 Annexure B 85

23 Annexure C 87

24 Annexure D 89

25 Bibliography 91

INSURANCE

Introduction

People seek security. A sense of security may be 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

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as risk) is the possibility of losing economic security. Most economic risk 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 enough cows to replenish the milking stock. This

cooperative (pooling) concept became formalized in the 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 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

expected for the insurance pool and the potential for variation in order to charge premiums that, in total,

will be sufficient to cover 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 any special characteristics of 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 payment of a known premium.

Under the formal arrangement, the party agreeing to make the claim payments is the insurance company

or the insurer. The pool 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.

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The insurer may restrict the particular kinds of losses covered. For example, a peril is a potential cause

of a loss. Perils may 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 Section I, is the variation in potential economic outcomes. It is measured by the

variation between possible outcomes and the expected outcome: the greater the standard deviation, the

greater the risk.

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?

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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 necessary.

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

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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.

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.

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2. Property InsuranceIf 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 InsuranceCommercial 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.

5. Worker’s CompensationWorker’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,

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but all require you to have workers compensation if you have W2 employees.  Penalties for non-

compliance can be very stiff.

6. Professional Liability InsuranceThis 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 InsuranceThis 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.

9. Homeowner’s InsuranceHomeowner’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.

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10. Renter’s InsuranceRenter’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 InsuranceLife 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.

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.

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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.

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

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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 States) 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 categories-

i. 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:

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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

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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 its

own merit

o A profit is expected by the reinsurer in

the short and long term, and depends

primarily on the reinsurer’s risk

selection process

o Adapts to short-term ceding philosophy

of the insurer

o A contract or certificate is written to

confirm each transaction

o Can reinsure a risk that is otherwise

excluded from a treaty

o Can protect a treaty from adverse

underwriting results

o No individual risk scrutiny by the

reinsurer

o Obligatory acceptance by the reinsurer of

covered business

o A long-term relationship in which the

reinsurer’s profitability is expected, but

measured and adjusted over an extended

period of time

o Less costly than “per risk” reinsurance

o One contract encompasses all subject

risks

2. Proportional and Non-Proportional ReinsuranceBoth 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

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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

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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 company 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 company 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 may

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.

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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

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

Page | 35

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

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

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General Insurance Corporation of India $625

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.

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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)

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

Page | 38

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.

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.

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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

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

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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

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.

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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 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 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.

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 transition economies is in need

of further development. There is evidence of a need for better understanding of the techniques as

well as the potential dangers and consequences of current reinsurance practices among

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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 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.

In several republics of the former Soviet Union as well as in Bulgaria and Romania the state sell-

off 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

Page | 43

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 is generally not static, the

reinsurance arrangements have to be kept under review continuously. Hence, the concept of

dynamic reinsurance management is important.

Page | 44

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.

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Reinsurance TreatyThe 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 Austro-Russian 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 | 47

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.

Page | 48

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 | 50

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.

Page | 52

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 capacity.

The 1994 net premium income written by international insurance and reinsurance companies was

just over $18.8 billion. The Bermuda based Centre Re is included in Standard and 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 | 55

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

29%

8%

4%

6%9%

3%

9%

32%

Market Share of Reinsurers

US Bermuda

France Others

UK Ireland

Switzerland Germany

Source: Standard & Poor’s

Page | 57

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.

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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 incurred;

d) Simplify the administration of business

Every insurer shall maintain the maximum possible retention commensurate with its financial

strength and volume of business. The Authority may require an insurer to justify its retention

policy and may give such directions as considered necessary in order to ensure that the

Indian insurer is not merely fronting for a foreign insurer.

Every insurer shall cede such percentage of the sum assured on each policy for different

classes of insurance written in India to the Indian insurer as may be specified by the

Authority in accordance with the provisions of Part lV-A of the Insurance Act, 1938.

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 | 60

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.

Property WTC; $3,600

Property Other; $6,000 WC; $1,800

Aviation; $500

Event Cancellation; $1,000

Aviation liability; $3,500

Page | 63

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?

Page | 66

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 | 67

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.

11%

36%

13%

40%

Munich Re's premiums by Sector, % of total

Reinsurance Life and Healthprimary insurance Life and Healthprimary insurance property nd ca-sualtiesreinsurance property and casualty

Page | 68

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 | 69

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 IncomeIn € Billion 2002 2001 2000 1999 1998

Reinsurance 25.4 22.2 18.3 15.4 14.1Primary Insurance 16.6 15.7 14.4 13.5 12.7Consolidation -0.2 -1.8 -1.6 -1.5 -1.3Total 40 36.1 31.1 27.4 25.5Premium GrowthIn % 2002 2001 2000 1999Reinsurance 14.6 21.1 19.2 8.6Primary Insurance 5.6 9.0 6.8 6.5Total 10.8 16.1 13.5 7.5

Source: Munich Re Annual Report

Page | 70

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?

Page | 71

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 | 72

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.”

Page | 73

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 offices 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 important 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

Page | 74

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 | 75

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 wholly-

owned 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.

Page | 76

Case Study III

General Insurance Corporation of IndiaThis 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

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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 socially-

oriented sectors. The Government of India had entrusted to, GIC, the administration of various

social welfare schemes, such as personal accident insurance and hut insurance schemes operated

all over the country.

in addition to this, its joint ventures in the form of GIC mutual fund and GIC housing finance

have contributed not only to the development of the nation but also to the income growth of the

corporation. 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.

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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

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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

Page | 82

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 business.

General Insurance Corporation, as the ‘Indian Reinsurer,’ completed year on March 31, 2002.

Although, there has been an increasing presence in international markets, the focus of the

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

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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 | 84

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 REINSURANCEThe 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

ANNEXURE B

ARTICLES ABOUT REINSURANCEPage | 86

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.“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,”

Page | 87

ANNEXURE C

SWOT Analysis of Group of America

Page | 88

Parent Company Reinsurance Group of America

Category Diversified Insurance

Sector Banking and Financial Services

Tagline/ Slogan -

USPA company offering wide range of products catering to each reinsurance need with the best of the best people working to deliver to you

STP

SegmentIndividual life reinsurance, individual living benefits reinsurance, health reinsurance, long-term care reinsurance, group reinsurance

Target Group Insurance companies

PositioningA specialist in providing life and health-related reinsurance and financial solutions to help their clients effectively manage risk and capital

SWOT Analysis

Strength

1. The company has been witnessing high growth sales rate contributing to the company’s success.

2. The company has extensive reach in the world, 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 reinsurance

Weakness

1. The company has been seeing deteriorating trends of profitability.

2. The company has poor debt rating which poses a problem for the company to find sources of funds.

3. The company, apart from poor profitability has to face a complex tax structure.

Opportunity 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.

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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 great opportunity for the company.

Threats

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 the reinsurance industry can increase the strength of competition and poses as a threat.

Competition

Competitors

1. AEGON N.V.

2. Munich Re

3. Swiss Re

ANNEXURE D

SWOT Analysis of SWIS RE

Page | 90

Swiss Re

Parent Company Swiss Re Group

Category Diversified Insurance

Sector Banking and Financial Services

Tagline/ Slogan Risk is our Business

USP

Delivers standard to tailor made insurance solutions to all lines of businesses leveraging on its capital strength, innovation power and expertise

STP

Segment Reinsurance, Corporate Solutions, Insurance

Target GroupInsurance companies, Mid-to-Large-sized corporations and Public sector clients

Positioning

Striving for sustainable development of all stakeholders and society, by being open, transparent, honest and respecting everybody inside and outside

SWOT Analysis

Strength

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

5. The company has presence in over 25 countries

Weakness

1. The group has been showing a weak trend in its life and health operations with a decline in revenues and operating income.

2. The group has been witnessing erosion in the investment income which is likely to affect the group financially.

Opportunity 1. The capital strength of the company poses opportunities for expanding business through both inorganic and organic means.

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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 great opportunity for the company.

Threats

1. The increase in the consolidation in the reinsurance 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 disasters poses a threat to the insurance industry.

Competition

Competitors

1.Munich Re

2.Swiss Life Insurance and Pension Company

3.Everest Re

4.General Re

Bibliography

Newspapers, Magazines & Journals

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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/

sigma%20archive%20%28english%29.html

http://www.zurich.com/main/productsandsolutions/industryinsight/2003/september2003/

industryinsight20030826_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/

http://www2.standardandpoors.com/portal/site/sp/en/us/page.siteselection/site_selection/

0,0,0,0,0,0,0,0,0,0,0,0,0,0,0,0.html

http://www.businessinsurance.com/

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http://www.ficci.com/media-room/speeches-presentations/2003

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