reinsurance-100marks

L.N. COLLEGE OF MANAGEMENT & TECHNOLOGY MALAD (WEST) MUMBAI – 64. ACADEMIC YEAR (2007-2008) SEMESTER II

PROJECT ON

Reinsurance: Insurance to Insurers’ (Business Environment) PROJECT GUIDE Prof. Mrs. Sucheta Pawar SUBMITTED BY Piyush Goyal MBA Full Time Roll NO - 11

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Reinsurance: Insurance to Insurers’

 DECLARATION

WE students of MBA {full time} LN COLLEGE OF MANAGEMENT & TECHNOLOGY (Semester II) hereby declare that we have completed this project on “Reinsurance: Insurance to Insurers’” in the academic year 2007-2008. The information submitted is true and original to the best of our knowledge.

STUDENT OF LN COLLEGE MBA (FULL TIME)

 CERTIFICATE I, PROF

Mrs. Sucheta Pawar

hereby certify that HORLICKS

GROUP of MBA {Full Time} student of LN COLLEGE OF MANAGEMENT & TECHNOLOGY (Semester II) has completed project in the academic year 2007-2008. The information submitted is true and original to the best of my knowledge.

SIGNATURE OF PROJECT GUIDE

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Reinsurance: Insurance to Insurers’

ACKNOWLEDGEMENT It gives me pleasure to present this project on “Reinsurance: Insurance To Insurers’ ” to the student of MBA (full time). The subject matter is made more compact and logical. I gratefully acknowledging the valuable efforts, suggestion and clarifications provided by many by making this project practical. It would be rather unfair on our part for not thanking our college LN College Management & Technology for having shown their continuous faith in us. I take this opportunity to express my sincere appreciation and gratitude to our college administrative staff that helped us. I express my grateful thanks to every one who have contributed even in a small way towards successful completion of this project. Last but not least, I would like to thank my parents for providing me with such good education and our professors in the completion of this project.

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Reinsurance: Insurance to Insurers’

Index Introduction

5

History of Reinsurance

8

Literature Review

10

Types of Reinsurance

12

Reinsurance Markets

28

Market Share of Reinsurers

37

Reinsurance in India

40

Terrorism- A Setback to the industry

45

News on Reinsurance Industry

48

Some Case Studies

55

Bibliography

84

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Reinsurance: Insurance to Insurers’

“Man owes his success to his creativity. No one doubts the need for it. It is more useful in good times and essential in bad”.

INTRODUCTION Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage.

HISTORY OF INSURANCE INDUSTRY The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 derrik (Achaemenian gold coin weighing 8.35-8.42) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered. Achaemenian monarchs were the first to insure their people and made it official by in special offices.The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the 5

Reinsurance: Insurance to Insurers’

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 6

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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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Reinsurance: Insurance to Insurers’

HISTORY OF RE-INSURANCE

The development of a reinsurance market took a rockier road. Reinsurance of marine risks is thought to be is old as commercial insurance, but it was not until 1864 that the practice in the UK was legalised and the ban on marine reinsurance was removed. Previously, reinsurance had been considered as a form of gambling. As reinsurance of fire business appeared unattractive to UK insurers, coinsurance 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 8

Reinsurance: Insurance to Insurers’

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 centre 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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Reinsurance: Insurance to Insurers’

LITERATURE REVIEW

WHAT IS REINSURANCE? Reinsurance is a means by which an insurance company can protect itself against the risk of losses with other insurance companies. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.). Reinsurers’’, in turn, provide insurance to insurance companies Reinsurance helps primary insurers to reduce their capital costs and raise their underwriting capacity since major risks are transferred to reinsurers’’; the primary insurer no longer needs to retain capital on its balance sheet to cover them. Reinsurance thus serves the primary insurer as an equity substitute and provides additional underwriting capacity. This indirect capital is cheaper for the primary insurer than borrowing equity, since reinsurers’’ can offer to assume risks at more favorable rates thanks to their superior risk diversification. The additional underwriting capacity permits the primary insurers to assume additional risks which without reinsurance they would either have to refuse or which would compel them to provide a lot more of their own capital. In a globalized world, in which potential financial claims are steadily rising and in which the limits of insurability are being constantly extended, reinsurance thus assumes a major significance for the whole economy. 10

Reinsurance: Insurance to Insurers’

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Types of reinsurance • 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 12

Reinsurance: Insurance to Insurers’

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

○

Individual risk review

○

Right to accept or reject each risk on its own merit

○

○

involved.

No individual risk scrutiny by the reinsurer

○

A profit is expected by the reinsurer in the short and long

○

risks

Obligatory acceptance by the reinsurer of covered business

○

A long-term relationship in

term, and depends primarily

which the reinsurer’s

on the reinsurer’s risk

profitability is expected, but

selection process

measured and adjusted over

Adapts to short-term ceding

an extended period of time

philosophy of the insurer 13

Reinsurance: Insurance to Insurers’

○

Less costly than “per risk”

○

A contract or certificate is written to confirm each transaction

○

reinsurance ○

One contract encompasses all subject risks

Can reinsure a risk that is otherwise excluded from a treaty

○

Can protect a treaty from adverse underwriting results

• Proprotional And Non-Propoertional Reinsurance Both treaty and facultative reinsurance can be written on a proportional, or pro rata, basis or a non-proportional, or excess of loss or stop loss, basis.

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 14

Reinsurance: Insurance to Insurers’

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 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 15

Reinsurance: Insurance to Insurers’

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

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 16

Reinsurance: Insurance to Insurers’

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 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. 17

Reinsurance: Insurance to Insurers’

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 uncollectibles). This is particularly important on long-tail lines of business where the claims may arise many years after the premium is paid. 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. 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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Financial reinsurance Financial Reinsurance, also known as 'fin re', is a form of reinsurance which is focused more on capital management than on risk transfer. In the non-life segment of the insurance industry this class of transactions is often referred to as finite reinsurance. One of the particular difficulties of running an insurance company is that its financial results - and hence its profitability - tend to be uneven from one year to the next. Since insurance companies generally want to produce consistent results, they may be attracted to ways of hoarding this year's profit to pay for next year's possible losses (within the constraints of the applicable standards for financial reporting). Financial reinsurance is one means by which insurance companies can "smooth" their results. A pure 'fin re' contract for a non-life insurer tends to cover a multi-year period, during which the premium is held and invested by the reinsurer. It is returned to the ceding company - minus a pre-determined profit-margin for the reinsurer - either when the period has elapsed, or when the ceding company suffers a loss. 'Fin re' therefore differs from conventional reinsurance because most of the premium is returned whether there is a loss or not: little or no risk-transfer has taken place. In the life insurance segment, fin re is more usually used as a way for the reinsurer to provide financing to a life company, much like a loan except that the reinsurer accepts some risk on the portfolio of business reinsured under the fin re contract. Repayment of the fin re is usually linked to the profit profile of the business reinsured and therefore typically takes a number of years. Fin re is used in preference to a plain loan because 20

Reinsurance: Insurance to Insurers’

repayment is conditional on the future profitable performance of the business reinsured such that, in some regimes, it does not need to be recognised 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.

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A REINSURANCE PROGRAMME

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Basis of Insurance and Need for Reinsurance General insurance business is still largely untouched by the discipline of a mathematical base. It is obvious that insurance operates on the law of probability. The risk premium should represent the sum total expected value of loss during a year using the probability of occurrence of losses of different magnitudes affecting the risk. In practice, this estimation is derived from the observed incidence of losses on the insured portfolio. Even if an accurate mathematical determination of the expected value of loss be possible, the actual observed losses will be different from this figure. The extent of variation will 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. 24

Reinsurance: Insurance to Insurers’

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 honour 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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Reinsurance: Insurance to Insurers’

Proper Retention Policy Reinsurance is not the means to get-rid-of bad business. Automatic reinsurance arrangements are like products manufactured by an industrial company. Similar attention to quality of product and the reputation of the company is necessary. When there was easy availability of reinsurance (which may not continue for ever) some companies have been able to expand premium volume without attention to quality and have produced good net results by keeping very low retentions and reinsuring out. However, this is a dangerous management policy and exposes the entire future of the company to the operation of market forces. The reinsurance program should be based on a sound retention policy. The schedule of retentions is based on the following factors: (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 26

Reinsurance: Insurance to Insurers’

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: Insurance to Insurers’

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 harmonising of EU insurance and reinsurance regulations, this may also bring about further changes which will influence reinsurers’ future business strategies. The five main international trading areas or markets of Reinsurance • The United Kingdom • The Continent of Europe • The United States of America • The Far East • Offshore. 28

Reinsurance: Insurance to Insurers’

The United Kingdom London is an international centre for the placing of protections for insurance and reinsurance companies throughout the world. It has a reputation for the strength of its security and its innovative style of underwriting, leading the way in electronic risk placement and electronic claim advice and settlement systems. The London 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 centre 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. 29

Reinsurance: Insurance to Insurers’

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. 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. 30

Reinsurance: Insurance to Insurers’

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. 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 31

Reinsurance: Insurance to Insurers’

brokers and broker orientated reinsurers, and the RAA represents all the major US reinsurance companies.

The Far East The main insurance centres in the Far East are situated in Japan and Hong Kong and, although their international reinsurance markets are still relatively small, they are considered to have considerable growth potential. Japan is one of the most highly regulated insurance markets in the world and all its domestic insurers accept both insurance and reinsurance business. Quota shares of marketwide pools and reciprocal exchanges of business have ensured a well-spread domestic account for insurers. Based on net written premium income in 1994, the Tokio Marine and Fire, Toa Fire & Marine and Yasuda Fire & Marine are three of its top reinsurance writers, the Tokio and Toa being among the top 15 largest reinsurance companies in the world. There are only two professional reinsurance companies, the Toa and Japan Earthquake Re, the latter accepting only domestic earthquake business. It was through reciprocal exchanges on their proportional treaty business that Japan first entered the international markets. Non-reciprocal business, particularly catastrophe excess of loss protection, is now freely placed and although there is considerable reinsurance capacity in Tokyo, international reinsurance has not proved to be particularly attractive to Japanese companies.

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Reinsurance: Insurance to Insurers’

Reinsurance brokers feature heavily in servicing the Japanese market. The main market association to which all Japanese property/casualty insurance companies belong is the Marine and Fire Insurance Association of Japan. Hong Kong has established itself as a regional insurance centre for the Asia Pacific Rim and in 1993 there were 224 authorised insurers. There are approximately 10 reinsurance companies based in Hong Kong, which have traditionally serviced northern Asia, China, Korea, Taiwan, the Philippines and Thailand.

Offshore markets A large, and growing number of governments around the world have set up international financial centres or “havens”, with the purpose of encouraging, through tax incentives and other financial benefits, captive insurance companies and reinsurance operations into their country. A captive insurance company is owned by a company, or companies, not primarily engaged in the business of insurance, and all, or a major portion of the risks accepted by the captive relate to the risks of its parent and affiliated companies. The rapid growth of the captive insurance industry is relatively recent and in 1996 there were approximately 3,600 captives worldwide. The rise in popularity of establishing captives in offshore domiciles can be attributable to the less restrictive insurance regulations, freedom from exchange control, and the absence or low rates of taxation which apply. The major offshore centres arc situated in: 33

Reinsurance: Insurance to Insurers’

— Bermuda — The Cayman Islands — Guernsey — Isle of Man. Bermuda is the largest of the offshore markets, housing over 1200 captives. It is heavily supported by the US and it is estimated that two-thirds of all US foreign reinsurance flows through the island. The island has also become a major reinsurance market and has attracted a number of highly capitalised reinsurance companies with high levels of international reinsurance capacity. The 1994 net premium income written by international insurance and reinsurance companies was just over $18.8 billion. The Bermuda based Centre Re is included in Standard and Poor’s top 30 reinsurers in the world. Other financial centres, which may be included in the ever-lengthening list of offshore domiciles, are situated in: ●

Dublin

●

Luxembourg.

34

Reinsurance: Insurance to Insurers’

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:

35

Reinsurance: Insurance to Insurers’

●

There must be an insurable interest in the risk.

●

The principles of indemnity must be observed.

●

The principle of utmost good faith must be observed.

A breach of the principle of utmost good faith or, to give it its Latin name, uberrimae fidei, has been the grounds for many a legal battle between contracting parties. The principle of uberrimae fidei is probably a more onerous one in reinsurance negotiations than insurance, due to the way in which reinsurance business is transacted. In order that the principle may be satisfied, all material facts relating to the risk must be disclosed to 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.

36

Reinsurance: Insurance to Insurers’

MARKET SHARE OF REINSURERS

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World’s Top 10 Reinsurers Rank Company

Net premiums written

1

Swiss Re Group

$27,680,199,200

2

Munich Re Group

$23,760,161,400

3

Hannover Re Group

$9,661,392,406

4

Berkshire Hathaway/Gen Re Group

$9,491,000,000

5

Lloyd's of London

$6,948,466,800

6

XL Re

$5,012,910,000

7

Everest Re Group Ltd.

$3,972,041,000

8

PartnerRe Ltd.

$3,615,878,000

9

Transatlantic Holdings Inc.

$3,466,353,000

10

ACE Tempest Reinsurance Ltd.

$2,848,758,000

38

Reinsurance: Insurance to Insurers’

The growth of insurance premium by years is shown on the following chart:

39

Reinsurance: Insurance to Insurers’

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

GIC arrange excess of loss protection from International market.

REINSURANCE REGULATION 40

Reinsurance: Insurance to Insurers’

retention.

The placement of reinsurance business from the Indian market is now governed by Reinsurance Regulations formed by the IRDA. The objective of the regulation is to maximize the retention of premiums within the country ●

Placement of 20% of each policy with National Re subject to a monetary limit for each risk for some classes

●

Inter-company cession between four public sector companies.

●

Indian Pool for Hull managed by GIC.

●

The treaty and balance risk after automatic capacity are to be first offered to other insurance companies in the market before offering it to international re-insurers.

●

Not more than 10% of reinsurance premium to be placed with one reinsurer

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

41

Reinsurance: Insurance to Insurers’

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 covernote in respect of that year together with the list of reinsurers and their shares in the reinsurance arrangement.

●

The Authority may call for further information or explanations in respect of the reinsurance program of an insurer and may issue such direction, as it considers necessary.

●

Insurers shall place their reinsurance business outside India with only those reinsurers who have over a period of the past five years counting from the year preceding for which the business has to be placed enjoyed a rating of at least BBB (with Standard & Poor) or equivalent rating of any other international rating agency. Placements with other reinsurers shall require the approval of the Authority. Insurers may also place reinsurances with Lloyd’s syndicates taking care to limit placements with individual syndicates to such shares as are commensurate with the capacity of the syndicate.

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Reinsurance: Insurance to Insurers’

●

The Indian Reinsurer shall organize domestic pools for rcinsurancc 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

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protecting the portfolio by suitable excess of loss covers. Such retrocession shall be at original terms plus an over-riding commission to the Indian Reinsurer not exceeding 2.5 percent. The retrocession to each ceding insurer shall be in proportion to its cessions to the Indian Reinsurer. ●

Every insurer shall be required to submit to the Authority statistics relating to its reinsurance transactions in such forms as the Authority may specify, together with its annual accounts.

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Terrorism & Natural Calamaties 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

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Reinsurance: Insurance to Insurers’

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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Reinsurance: Insurance to Insurers’

On the chart you can see claims paid by insurance companies by years:

48

Reinsurance: Insurance to Insurers’

Some Important News on the Reinsurance Industry Foreign reinsurers may get India access Government May Allow Cos To Open Local Branches; No Move Yet To Allow PSU Insurers To Go Public The Economic Times 24/05/2005 THE government may allow foreign reinsurance companies to set up branch offices in the country with certain regulatory restrictions, according to a senior finance ministry official. “This is one of the areas, where there is a broader political consensus with respect to foreign investment in the insurance sector,” said joint secretary (banking & insurance) GC Chaturvedi after a seminar here on Wednesday. At present, foreign reinsurers are already allowed to set up representative offices in the country. However, these outfits cannot underwrite business, which branches would be in a position to do. The proposal to allow foreign reinsurers is one of the 113 amendments proposed in the IRDA Act and the group of ministers (GoM) looking into this has already met thrice. The GoM is expected to meet again soon, he said. Mr Chaturvedi also clarified that there is no move to allow public sector insurance companies to tap the capital market to meet the fund requirement for their overseas expansion plans. “The general insurance companies have reserves of over Rs 1, 000 crore, which was adequate to meet their overseas expansions plan,” he said. As for Life Insurance 49

Reinsurance: Insurance to Insurers’

Corporation (LIC), the government has given the corporation Rs 160 crore exclusively for its foreign business. However, there could be some revisions to the norms for standalone health insurance companies. There could be differential capital bases and the overall equity cap could be brought down from Rs 100 crore to Rs 50 crore. Earlier, speaking on the trends in the sector, PC James, member of IRDA, said that as the economy is moving from an industrial economy to service economy, the need for risk cover on various services is increasing, which, in turn, makes a strong case for more liability products. Already in FY07, liability products have recorded the fastest growth, he said. New India plans mortgage insurance JV NEW India Assurance (NIA), the country's largest general insurer by premium income, plans to team up with General Insurance Corporation (GIC) and National Housing Bank (NHB) to float India's first mortgage insurance company, report Atmadip Ray & Debjoy Sengupta in Kolkata. NIA is in talks with potential partners in the mortgage insurance JV. When contacted, NIA chairman and managing B Chakrabarti confirmed his company is in discussions with other promoters on picking up stakes in the proposed JV. However, it is undecided how much NIA will hold in the company. "A final decision is yet to be taken as there are regulatory issues involving both Reserve Bank of India and Insurance Regulatory & Development Authority,” he said. GIC Housing Finance, a subsidiary of the country’s only reinsurer GIC, is also slated to buy a tiny stake in the proposed mortgage insurance company.

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Reinsurance: Insurance to Insurers’

Global reinsurers’ capitalisation floor set at Rs 5,000 crore 09/11/2007 The Economic Times INTERNATIONAL reinsurers, looking to start operations in India, may soon be able to set up branches with a minimum capitalisation of Rs 5,000 crore. This forms part of a set of amendments to the Insurance Act, 1938. The minimum capitalisation amount has been linked to the existing capitalisation of India’s only reinsurer, General Insurance Corporation (GIC). The amendments to the Act is pending before Parliament. Once the amendments are approved, international reinsurers will have legal and regulatory clearance to open branches of their parent company to transact business in the country. The Insurance Act only permits companies having a joint venture to sell products in India. Currently, only 26% FDI is allowed in reinsurance sector. A joint venture company should have a minimum capitalisation of only Rs 200 crore. Reinsurance enables insurance companies to offload their risks by placing part of the cover with reinsurers. Global reinsurance companies, including Swiss Re and Munich Re, are keen on setting up branches in India, instead of coming through joint ventures. “International reinsurers having branches in India will ensure that the liabilities of the branches will be accountable to the parent company,” Swiss Re India managing director Dhananjay Date told ET. “Most reinsurers are large enough to provide for claims arising from the mega insurance covers provided by the general insurance companies. Stiff capitalisation 51

Reinsurance: Insurance to Insurers’

requirements of Rs 5,000 crore will ensure that only serious well-capitalised international insurers will be able to enter the market,” he added. “On the other hand, a joint venture with Rs 200 crore would have been under capitalised and would not be able absorb huge claim payouts,” Mr Date said. The amendments to the Act also has provisions to recognise a ‘society’ for reinsurance. This will facilitate UK’s Lloyd an entry into India. Lloyd’s is a society and not a company that underwrites reinsurance risks. Under free-pricing, international reinsurers are cautious about underwriting practices adopted by domestic insurance companies. However, with insurance companies in India being well-capitalised, it is increasing their capacity to retain some of the smaller risks. As the sole reinsurer in the domestic market, GIC receives a 20% statutory cession (20% of the premium) on each policy subject to certain limits. Hitherto, the policy for international reinsurers was determined by concerns about retaining capital within the country. The omnibus insurance legislation is pending in Parliament since last year. The Left parties have raised objections to several amendments, primarily the proposed hike in FDI in the sector from 26% to 49%.

52

Reinsurance: Insurance to Insurers’

Govt may cut reinsurance cap to 10% 02/01/2007 The Economic Times

AFTER getting their freedom in pricing, non-life insurers are set to experience freedom in reinsurance — the process where an insurance company buys cover to transfer some risks out of its books. Until now, insurance companies have to mandatorily transfer 20% of their risks and consequently 20% of their premium income to the General Insurance Corporation (GIC), which has been designated by the government as the national reinsurer. Moves are afoot to bring down this compulsory reinsurance to 10% from April 2007. For insurers, this would give them the ability to shop for best deals from international reinsurers. However, for GIC, this would mean a loss of half of its captive business. Industry officials say that public sector companies are likely to reinsure less since they are well capitalised and in a position to retain risks. Private companies, with a smaller capital base, are likely to continue to reinsure. However, they now have the choice of buying cover from international reinsurers. GIC, on its part, will have to be more proactive in marketing its reinsurance services to companies. The Corporation has already become more proactive in trying to get reinsurance business from developing countries and has opened offices overseas, including the Middle East. It has also sought permission from the FSA in London. Incidentally, no private player has come forward to set up a reinsurance company in India even after liberalisation. This is because the

53

Reinsurance: Insurance to Insurers’

economics of reinsurance supports having a giant corporation in financial centre rather than distributing capital across countries. The concept of compulsorily passing on risks (or ceding risks) to a national reinsurer was common in most countries in the past. With liberalisation, most countries have withdrawn the requirement for compulsory cessions. The objection to the removal of compulsory cession has been that this would result in flight of foreign exchange as companies reinsure overseas, and secondly, policymakers felt that there was a need to increase insurance capacity in India. To ensure that there is no flight of capital; legislation has focussed on increasing retention of risks in the country. While introducing the IRDA Act, the government had assured Parliament that the level of retention of risks in the country would not go down upon liberalisation. However, with the economy witnessing large inflows by way of investment, capital outflows are not a major concern. The concept of a national reinsurer was there in most countries. With liberalisation, most countries have done away with the national reinsurer tag and allowed free competition in the market.

54

Reinsurance: Insurance to Insurers’

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Reinsurance: Insurance to Insurers’

Case: I 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? 56

Reinsurance: Insurance to Insurers’

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 57

Reinsurance: Insurance to Insurers’

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 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

58

Reinsurance: Insurance to Insurers’

in their own are long gone Reinsurers now need to focus on delivering better more consistent underwriting results in their core markets.

A BusinessWeek article mentioned that, “The pricing pressure is starting at top. Reinsurers, the large entities such as Swiss Re and Munich Re that primary insurance carriers buy coverage from to reduce risk, have upped their rates to recover capital reserves depleted by large September 11 claims and stock market losses.” Another AON survey report for the year 2003 mentioned the views of reinsurance buyers, who expect that the softening trends, which emerged over the course of 2003, will continue. In the same report, underwriters felt that slight softening will continue in some lines of business but rates in others will be driven higher by contracting supply.

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 59

Reinsurance: Insurance to Insurers’

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 takeover 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 60

Reinsurance: Insurance to Insurers’

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 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.”

61

Reinsurance: Insurance to Insurers’

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

62

Reinsurance: Insurance to Insurers’

enjoy?

63

Reinsurance: Insurance to Insurers’

64

Reinsurance: Insurance to Insurers’

Case: I I

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 65

Reinsurance: Insurance to Insurers’

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 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. 66

Reinsurance: Insurance to Insurers’

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 this remains so now for Swiss Re.” 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 head quarters 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 67

Reinsurance: Insurance to Insurers’

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 interpreting NatCat 68

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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 CEOJohn 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 69

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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 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 70

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more mature markets, emerging Asia, in particular China and India, will remain highly attractive international insurers.”

Future Outlook Swiss Re has been the first entrant in all the three emerging markets of Asia. The company is backed by strong fundamentals, financials and global expertise. It possesses all the prerequisites to be a market leader in these countries. The presence of Swiss Re has been long in these nations and the representative offices had been opened at the right time. The major challenge for Swiss Re as of now especially in India is the regulatory barrier. So far Swiss Re is the first and only global player involved in reinsurance services in all the three markets. The company has already proven its expertise for long in the global market and the presence has to be increased in these liberalized markets only by the passage of time.

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Case: I I I General Insurance Corporation of India This case provides the history of General Insurance corporation of India (GIC’ since nationalization. GIC’S role has been significant in the indian insurance industry and it is currently the sole national reinsurer. GIC is also aspiring to be a global player in reinsurance. It is evolving itself as an effective reinsurance solutions partner for the Afro- Asian region. In addition to that, it has also started leading reinsurance programmes for several insurance companies in SAARC countries, South EastAsia, Middle East and Africa.

Insurance has always been a growth-oriented industry globally. On the Indian scene too, the insurance industry has always recorded noticeable growth vis-a-vis other Indian industries. In 1850, the first general insurance company, Triton Insurance Co. Ltd., was established in India and the shares of the company were mainly held by the British. The first Indian general insurance company, lndias Mercantile Insurance Co. Ltd., was set up in 1907. After independence, General Insurance Council, a wing of Insurance Association of India, framed a code c conduct for ensuring fair conduct and sound business practices in the area ct general insurance. The Insurance Act was amended and tariff advisory committee was set up in 1968. In 1972, general insurance industry was nationalized through the promulgation of General Insurance Business (Nationalisation) Act. Around 55 insurers were amalgamated and general insurance business undertaken by the General Insurance Corporation of India (GJC) and it subs Oriental Insurance 72

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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 cross the country. The main customer interface for these units were in agents, development officers and employees at branch, divisional and region. offices in various parts of the country. The total workforce of GIC and its subsidiaries was around 85,000. GIC has made a huge contribution to the overall development of the nation, through investments in the socially-oriented sectors. The Government of India had entrusted to, GIC, the administration of various social welfare schemes, such as personal accident insurance and hut insurance schemes operated all over the country. in addition to this, its joint ventures in the form of GIC mutual fund and GIC housing finance have contributed not only to the development of the nation but also to the income growth of the corporation. 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. 73

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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 divisions motor insurance and mediclaim policy. Collusion between the surveyors and customers also bled GIC, leading to low morale among the employees and public discontentment The main reason for such a pathetic condition lies within the management of these public sector companies. The management of these units is strongly dominated by employee unions, which transformed the insurance sector to a class business from a value-based company. The domestic insurance companies, meeting their social objectives of going into the deepest interiors 75

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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 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 76

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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. Recommendations Specific to GIC: • The government should takeover the holdings of GIC and subsidiaries, so that they can act as independent corporations. • GIC and subsidiaries are not to hold more to an 5% in any company. The current holdings of the companies should be brought down to the specified level over a period of time. 77

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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 equitystake 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

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companies. The Authority is a ten member team consisting of a chairman, a five whole-time members and four part-time members. Breaking Up of GIC The delinking of the four national subsidiaries of GIC was recommended by the Poddar committee. The committee also recommended transforming ‘GIC’ as a national re On August 7, 2002, the President of lndia later gave his assent to the Geural Insurance Business (Nationalization) Amendment Bill, 2002 and the Insu, nce (Amendment) Bill 2002. The General Insurance Business (Nationalization) Amendment Act, 2002, amended 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.

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GIC — The National Reinsurer Reinsurance business in India dates hack to the 1960s. After independence there rapid development of the insurance business, hut there was negligible presence reinsurance companies in India. Thus, the domestic requirement of reinsurance was netted mostly from foreign markets mainly British and continental. As undertaking reinsurance business by Indian companies meant huge outflow of foreign exchange and in 1956 Indian Reinsurance Corporation was established. It formed as a professional reinsurance company by some general insurance companies. The company received voluntary quota share cessions from member companies. Later another reinsurance company, the Indian Guarantee and General Insurance Co. was formed in 1961. With this set up, a regulation was promulgated which made it statutory on the part of every insurer to cede 20% in Fire and Marine Cargo, 10 % in Marine hull and miscellaneous insurance, and five percent in credit solvency business. Prior to nationalization, there were 55 non-life domestic insurers and each company had its own reinsurance arrangement. After nationalization, all these companies were brought under the aegnts of General Insurance Corporation and four subsidies were formed, with 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.

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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. As the sole reinsurer of the d insurance market, GIC s capacity for each class of business on treaty and facultative ( business is given below:

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GIC is also emerging as an international player in the global reinsurance evolving itself as an effective reinsurance solutions partner for the African region. In addition to that, it has also started leading reinsurance programmes several insurance companies in SAARC countries, South East Asia, MidAfrica. GIC provides the following capacities for treaty and facultative the international market on risk emanating from international market 1 merits of the business. General Insurance Corporation, as the ‘Indian Reinsurer,’ completed year on March 31, 2002. Although, there has been an increasing presence in international markets, the focus of the Corporation’s operations continue domestic market, as it constitutes around 94% of it’s total portfolio. The Corporation increased to Rs.10,378.84 crore from Rs.7,773.67 cr0’

March 31, 2002. Similarly the total investments of the Corporation stood 82

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Rs.7135.83 crores as against Rs.6,345.33 in the previous year. The total investment income of the corporation was Rs.961.80 crore as against Rs.873.40 crore in the previous year and gross direct premium income of GIC for the year amounted Rs.311.57 crore. According to industry sources, General Insurance Corporation (GIC) is targeting significant growth for its inward foreign reinsurance business. The reinsurer is planning to open its branch in Dubai in the near future. The reinsurance business the Middle East 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 an international, it has taken various decisions to support its new corporate 83

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vision. I January 2004, GIC has decided to exit its mutual fund arm, GIC Mutual Fund, so to focus on core reinsurance operations. The fund had been constantly underperforming for the last few years. In 2002 -2003, there has been whopping increase in the foreign inward reinsurance premium at Rs.600 crore. This increase has pushed the total reinsurance premium to over Rs.3,800 crore. The India reinsurer, is willing to write more risks in the domestic market. The underwriting, losses fell below the Rs.500 crore-mark. Though the severe drought, took its toll cii 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 premiun has been over 15% compared to just 6% in the previous year. International credit rating agency, A M Best, has given “A (Excellent)” rating tc 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 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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CONCLUSION

With the outster of such terrorist attacks, calamities and stiff competition the reinsurers have to fight with each other to grab their share of premium market share this will be more stiffer and difficult in the times to come.

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REFERENCES Books Reinsurance Concepts And Cases – Abhishek Agrawal, ICfai Press Practice of Reinsurance in Uk Reinsurance IC-85, III

Newspapers, Magazines & Journals The Economic Times Mint The Times of India Business Standard Business Today Business line

Websites http://en.wikipedia.org/wiki/Reinsurance http://www.scor.com/www/index.php?id=16&L=2 http://www.swissre.com/pws/research%20publications/sigma%20ins.%20research/sigma %20archive/sigma%20archive%20%28english%29.html http://www.zurich.com/main/productsandsolutions/industryinsight/2003/september2003/industryi nsight20030826_001.htm http://www.allbusiness.com/management/193921-1.html 86

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

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