DAY 7: PARTIES INVOLVED IN REINSURANCETariq Al-Bashatariqalbasha@outlook.com – 00962 7 9767 7418

INDEX

▪ Insurance & reinsurance pools

▪ Captive companies

▪ About Tariq Al-Basha

INSURANCE & REINSURANCE POOLS –WHAT IS A POOL?

▪ A pool is a cooperation agreement between a number of companiesoperating in a specific market, the basic idea of which is to obtain abalance in the results of the business originating from the pool’smembers.

▪ There are two types of pools: coinsurance pools and reinsurance pools.

▪ The main reason for setting up pools is the need to exhaust a market’sor a country’s capacity in respect of risks that can produce large orwidespread claims, as in the case of nuclear risks, or for risks which areof a limited number in a market so that it is not possible to applystatistical calculations, such as oil pools, environmental pollution pools,etc.

INSURANCE & REINSURANCE POOLS –THE COINSURANCE POOL

▪ In this pool, the members undertake to underwrite the risks stipulatedwithin the structure of the pool and not for their own account. Theymust cede such risks to the pool and, in return, receive a share in all thebusiness arranged by the pool in accordance with a previously agreedsystem of apportionment.

▪ The pool has a series of advantages and disadvantages for its members.

INSURANCE & REINSURANCE POOLS –THE COINSURANCE POOL (CONT.)

▪ Advantages

▪ Where underwriting is carried out as a group, the pool’s retention limits are fixedaccording to the financial resources of the group, totally or partially replacing theretention of each member and, as a result, reducing the need to cede toreinsurance.

▪ If the pool is constituted by a group of insurers with a relevant weight in themarket, they can exert influence by introducing a certain professional discipline inthat market and, thereby, limit any possible deterioration in the business due toexcessive competition.

▪ Disadvantages

▪ In this type of arrangement, the members have to operate in accordance with therules established by the pool, which may detract from their being competitive vis-à-vis other companies outside the pool.

INSURANCE & REINSURANCE POOLS –DIFFERENCES BETWEEN A REINSURANCE POOL AND A COINSURANCE POOL

▪ Reinsurance pools operate in a similar way to pools of insurers,although there are some differences.

▪ In pools of insurers, since this involves coinsurance, all the participating membershave to appear on the policy, each with their respective share.

▪ In a reinsurance pool, the policy is issued by one of the members and apportionedamong the remainder according to the percentages agreed within the pool, butunknown to the insured.

CAPTIVE COMPANIES – THE CONCEPT OF A CAPTIVE COMPANY

▪ Captive insurance and reinsurance companies are referred to ascaptives because they are founded by large industrial or commercialcompanies, almost always multinationals, in order to obtain insuranceor reinsurance cover for their own risks. This leads to a situation inwhich the insured, insurer and reinsured share the same companyphilosophy and some common interests.

▪ Certain captives not only insure the interests of their group but extendtheir activities to underwriting business from other companies.

CAPTIVE COMPANIES – HOW CAPTIVES ARE FORMED

▪ The captive of a company that only operates in a certain country: aninsurance company is usually set up to protect its risks and to obtainmore favorable reinsurance conditions.

▪ Captives of industrial multinationals: multinationals tend to set up acaptive reinsurance company domiciled in the most advantageouscountry for tax purposes or in the country where legislation mostfacilities its establishment, thereby avoiding having to set up variouscaptives in the different countries in which it operates.

CAPTIVE COMPANIES – HOW CAPTIVES WORK

▪ Captives use a local insurer as a fronting company, thereby acting asintermediary. The latter generally underwrite the whole risk, retaining avery small share for their own account and ceding the rest to thecaptive.

▪ For this service they receive a commission and the portion of premiumcorresponding to their retention.

▪ After fixing its own retention, the captive cedes to the reinsurancemarket as a retrocession.

CAPTIVE COMPANIES – SETTING UP OF CAPTIVES

▪ These are usually set up in tax havens such as the Bahamas, Bermuda,the Seychelles, etc. and, in Europe, generally in small principalities,where they enjoy very favorable tax treatment and are practically just a“PO Box”.

CAPTIVE COMPANIES – THE DISADVANTAGES OF CAPTIVES

▪ For the reinsurance markets, the formation of these captives constitutes anincrease in their accepted business, because most companies do not wish toinvest more capital than necessary in their captives, and so the captives’ netretentions are lower than what they would normally be for traditionalcompanies.

▪ Despite this, captives also have disadvantages:

▪ A reinsurer accepting cessions from a captive should examine whether its underwritingpolicy meets normal insurance criteria, whether it is committed to continuity andwhether it has the financial capacity to accept liability for itself retentions.

▪ The accepting reinsurer may experience difficulties in respect of the prevention andsettlement of claims. Although they write almost the entire risk, and therefore have tosettle the majority of any claim, reinsurers do not have a say in risk prevention orclaims handling, unless special clauses are incorporated.

▪ It should always be remembered that the interests of the insurer/reinsurerand the claimant are the same, which means that there can often be atendency to settle claims in the most favorable manner.

CAPTIVE COMPANIES – MANAGEMENT OF CAPTIVES

▪ Captives do not normally have technical staff, large volumes of businessor experience and, consequently, are dependent on the prevailingreinsurance markets and brokers. This means that part of the costsaving arising from eliminating an insurer’s general expenses has to bepaid as commission to intermediaries. For that reason, specializedcompanies have been set up to deal with the administration, accountingaspects, etc. of these captives.

ABOUT TARIQ AL-BASHA• Promoting entrepreneurship and

innovative SMEs in MENA Market.

• Business & Financial ModellingConsultant at several consulting firms inthe Middle East.

• Business management graduate from theUniversity of Greenwich, London – UK.