reinsurance in india (1)

7/28/2019 Reinsurance in India (1)

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REINSURANCEIN INDIA

By:

Akash Bhardwaj

Kriti JainKanika Gupta

Nitin Dokania

Rahul Jain

Rohit Kothari


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Re-insurance- Overview

Insurance is a contract between two parties whereby one partycalled insurer undertakes in exchange for a fixed sum called

premiums, to pay the other party called insured a fixed amount ofmoney on the happening of a certain event.

Reinsurance is understood to be that practice where an originalinsurer, for a definite premium, contracts with another insurer (orinsurers) to carry a part or the whole of a risk assumed by theoriginal insurer.

In short :

Transfer of a certain portion of risk exposure to anothercompany.


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Holborns Model


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Historical Perspective

Capacity

Capital

Management

Product

Development

Tax

Planning

UnderwritingGuidance

Risk

Management

Mortality

Guidance


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History as a whole


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History cont.

Inspired by the Hamburg fire of 1842

December 22, 1842 -Invitation to deliberate on the founding of a

reinsurance company in Cologne Cologne Re Statutes drafted in 1843

April 8, 1846 -Cologne Re founded

Cologne Re first treaty -Oct./Nov. 1852

The earliest reinsurances first appeared in transport, especiallymarine insurance.


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Reinsurance Pre-1900s

1846 Cologne Re founded 1863 Swiss Re founded

1880 Munich Re founded

1886 Frankona Re founded


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IRDA Regulations on Investment

According to the IRDA regulations, the insurer under theGeneral Insurance Corporation should invest his money in thefollowing way:

20% of the investments should get diverted to Central GovernmentSecurities.

30% of the investments should be in state government and otherguaranteed securities.

5% investment should be made in the housing sector and state

government loans.

10% of the investment should be done in the infrastructure and the socialsector.


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GIC Re General InsuranceCompany

VisionTo be a leading Re-insurance and risksolution provider.

GIC Re

Mission1.Building long termmutuallybeneficialrelationship withbusiness partners.2.Practicing fairbusiness ethics andpractices.3. Applying state of arttechnology.4. Enhancingprofitability & financialstrength.

CMDMr. Yogesh Lohiya


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HISTORY

Nationalization of Insurance Business

Later 4 fully owned Co. formed by GIC National Insurance Co. Ltd.

The New India Assurance Co. Ltd.

The Oriental Insurance Co. Ltd.

United India insurance Co. Ltd.

Formation of IRDA in 2000

GIC re-notified as Reinsurer and its supervisory role ended oversubsidies.

General Insurance Buss. (Nationalization) Amendment act 2002


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Salient Features

Receiving Obligatory Cessions from all non-life insurance companies.

Organize and manage Market Pools and arrange for their excess of loss

protection.

Accept treaty and facultative business from Indian companies.

Collect, Analyze and Present Indian and International Insurance Dataand Trend Analysis.

Develop automatic capacity for products and lines of business, includingnew ones to be introduced.


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Reinsurance Arrangements

Maximize retention within the country;

Develop adequate capacity;

Secure the best possible protection for the reinsurance costsincurred;

Simplify the administration of business.


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62%

38%

Net Premium Earned2008-09

Domestic International

73%

27%

Net Premium Earned2007-08

Domestic International


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Motor

42%

Fire

14%

Life0%

Hull2%

Cargo4%

Misc9%

Health16%

P.A3%

Liability2% Engg.

8%

Premium Earned in %

Net Premium Indian Business (2008-09)


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Segment wise claim experience

2007-08 National

(Cr.)

Foreign

(Cr.)

Earned

premium

Incurred

claim

Incu.claim

ratio

Earned

premium

Incurred

claim

Incu.clai

m ratio

Fire 817.01 914.33 112% 936.69 729.78 78%

Engineer. 382.51 253.27 66% 111.44 65.24 59%

Marine 238.06 339.81 143% 163.56 198.91 122%

Misc. &Others 1606.77 1379.41 86% 130.90 99.04 76%

Life -1.06 1.04 -98% 10.56 0.73 7%

Aviation 52.00 56.48 109% 262.87 193.69 74%

Motor 2489.39 1758.65 71% 28.25 21.11 75%


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Future Outlook of GIC

Obligatory cession reduced.

Takaful Islamic way of insurance.

Afro- Asian Market

New London office- UK, European, Caribbean & worldwideAviation Business.


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GENERAL CONSIDERATIONS

Difficult and sometime impossible to get credible loss

experience

low claim frequency and high severity nature of many

reinsurance coverage,

Length time delays between the occurrence, reporting &

settlement of many covered loss events

Leveraged effect of inflation upon excess claim

REINSURANCE PRICING


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Cost of Reinsurance to the Cedant

The Reinsurers Margin

Brokerage Fee

Loss investment Income

Additional Cedant expenses

Reciprocity


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Reinsurance Pricing Method

The pricing formula a reinsurance actuary would use depends upon thereinsurers pricing philosophy, information availability, and complexityof the coverage.

A flat rate reinsurance pricing model.

Where

RP = Reinsurance premium

PVRELC = PV of RELC (Reinsurance estimate of the reinsuranceexpected loss cost)

RL = Reinsurance Loss

RCR = Reinsurance ceding commission rate ( as a % of RP)RBF = Reinsurance Brokerage Fee (as a % of RP)

RIXL= Reinsurance internal exp. loading (as a % of RP net of RCR & RCF)

RTER = Reinsurances target economic return (as a % of reinsurance purepremium)

)1()1()1( RTERxRIXLxRCFRCB

PVRELC

RP


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Reinsurance Distribution

Direct Writer - The reinsurer sells directly to the buyers of

reinsurance. Ceding company is in direct contact with the

reinsurer. Reinsurers account executive manages relationship

between the ceding company & the reinsurer.

Reinsurance Brokers - The reinsurer accepts business offered

through reinsurance brokers or intermediaries. Reinsurers pay

commission in return, which usually represent a specified

percentage of the reinsurance premium. Ceding company is indirect contact with the reinsurance broker.


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DIRECT WRITING BROKERAGE MARKET

Offers ceding company aclose, personal relationshipwith the reinsurer.

Ceding companies placesbusiness with fewerreinsurers, simplifying

accounting procedures Payment of large losses

may be handled morequickly

Brokers know the marketplace and have access to

appropriate facilities. Can furnish in-depth

information and adviseabout policy forms,capacity and financial

conditions. Maintain own staff so

ceding company may beable to do with less staff.

COMPARISON


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Current Developments

Minimum capitalization of Rs5000 Cr required to set up branches

FDI cap is 26%

Minimum capitalization for Joint Venture is only Rs 200 Cr

Swiss Re and Munich Re have set branches in India

London-based global reinsurance giant Lloyds returns

New entrants, including Asia Capital Re, Slovenian Re, Best Re,

Malaysia Re and Kuwait Re

The New Insurance Bill was on track and would be placed beforethe Upper House in December :Seeks to pursue FDI limit from

26% to 49%


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Cont

compulsory reinsurance from 20 % to 10% from April 2007.

General Insurance Corporation (GIC Re), the state-owned

national reinsurance company, has acquired the distinction of

being the only reinsurer among significant players worldwide to

report profits in `08-09.

Global presence of GIC


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Scenario 2009-10

Firming of rates by Regular players

Entry of new players capturing about 30-35% of market share

Average reinsurance rates increased to 5-10%

Indian market facing difficulties in renewing treaties specially

proportional ones

Decline in business by 50%.


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CHALLENGES FORREINSURANCE IN INDIA


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CHALLENGES

Difference between price charged by international reinsurer

& domestic ones leading to price affordability issue

Absence of competition

Tight regulations regarding reinsurance Lack of large capital base required

Limited insurance penetration

Quasi monopolistic condition

Operational challenges

Socio economic challenges


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WHAT INDIA NEED TO DO?

Domestic companies increase their capacity

More disciplinary watch on insurance sector

More information gathering is needed

Pooling of financial & technical resources

Joint ventures, alliances & partnerships

Developing standard accounting system

Creating investment opportunities

Research & development


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THANKING YOU

reinsurance in india (1)

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