p 1395 reinsurance

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

Reinsurance: Insurance to Insurers’ 1

DECLARATIONDECLARATION

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)

CERTIFICATECERTIFICATE

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


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.


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


“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


court would help him. Jahez, a historian and writer, writes in one of his

books on ancient Iran: "Whenever the owner of the present is in trouble or

wants to construct a building, set up a feast, have his children married, etc.

the one in charge of this in the court would check the registration. If the

registered amount exceeded 10,000 derrik, he or she would receive an

amount of twice as much."

A thousand years later, the inhabitants of Rhodes invented the concept of the

'general average'. Merchants whose goods were being shipped together

would pay a proportionally divided premium which would be used to

reimburse any merchant whose goods were jettisoned during storm or

sinkage.The Greeks and Romans introduced the origins of health and life

insurance c. 600 AD when they organized guilds called "benevolent

societies" which cared for the families and paid funeral expenses of

members upon death. Guilds in the middle ages served a similar purpose.

Separate insurance contracts were invented in Genoa in the 14th century, as

were insurance pools backed by pledges of landed estates. These new

insurance contracts allowed insurance to be separated from investment, a

separation of roles that first proved useful in marine insurance. Insurance

became far more sophisticated in post-renaissance Europe, and specialized

varieties developed.

The first insurance company in the United States underwrote fire insurance

and was formed in Charles town (modern-day Charleston), South Carolina,

in 1732.

Benjamin Franklin helped to popularize and make standard the practice of

insurance, particularly against fire in the form of perpetual insurance. In


1752, he founded the Philadelphia contribution ship for the insurance of

houses from loss by fire. Franklin's company was the first to make

contributions toward fire prevention. Not only did his company warn against

certain fire hazards, it refused to insure certain buildings where the risk of

fire was too great, such as all wooden houses. Nominee of the assured could

get the policy value either at maturity or by installments and an agreed

bonus.


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, co-

insurance remained a more common way of spreading the risk. Insurers

wishing to spread their risks then had to turn to the continental merchant

banks for their reinsurance protection.

It was in continental Europe, in the early 1 SOPs, that automatic treaty

reinsurance was first developed and there are numerous examples on record

of facultative and treaty reinsurance arrangements at that time.

However, it took until 1852 for the first independent reinsurance company to

be established, and that company was the Ruchversicherrungs Gesellschaft

of Cologne. Several German companies, including the Aachener Ruck,

followed suit, proving themselves to he as productive as their forerunner.

Unfortunately, British reinsurers’’ who decided to enter the field found that

their initial experiences were not so fortuitous.

In the 1 870s, quite soon after setting up, a number of UK reinsurance

companies went into liquidation. Ike reasons for heir lack of success are not

altogether clear, but the UK retained its role as a modest reinsurance market


for some time, with its European counterparts continuing to hold the

stronger market position.

It is in 1880 that we find the earliest trace of excess of loss reinsurance, as

established by Mr Cuthbert Heath of Lloyd’s, and nor until 1907 do we find

the establishment of Britain’s oldest and longest operating reinsurance

company, the Mercantile and General.

Then came the First World War, which brought with it a curtailment in

trading relationships between the UK and its primary reinsurance markets.

This forced companies to look within their own national boundary for cover

and Lloyd’s, a late entrant to the reinsurance market, began to take a more

active role, attracting a large volume of business from the United States of

America.

By the end of the Second World War London had successfully established

itself at the heart of the international reinsurance market. The City of

London had become the 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


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.


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


ceding companies for individual risks not covered by their reinsurance

treaties, for amounts in excess of the monetary limits of their reinsurance

treaties and for unusual risks. Underwriting expenses and, in particular,

personnel costs, are higher relative to premiums written on facultative

business because each risk is individually underwritten and administered.

The ability to separately evaluate each risk reinsured, however, increases the

probability that the underwriter can price the contract to more accurately

reflect the risks involved.

o Individual risk review

o Right to accept or reject each

risk on its own merit

o A profit is expected by the

reinsurer in the short and long

term, and depends primarily

on the reinsurer’s risk

selection process

o Adapts to short-term ceding

o No individual risk scrutiny by

the reinsurer

o Obligatory acceptance by the

reinsurer of covered business

o A long-term relationship in

which the reinsurer’s

profitability is expected, but

measured and adjusted over an


philosophy of the insurer

o A contract or certificate is

written to confirm each

transaction

o Can reinsure a risk that is

otherwise excluded from a

treaty

o Can protect a treaty from

adverse underwriting results

extended period of time

o Less costly than “per risk”

reinsurance

o One contract encompasses all

subject risks

• 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

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

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

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.

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.


Financial reinsurance

Financial Reinsurance, also known as 'fin re', is a form of reinsurance

which is focused more on capital management than on risk transfer. In the

non-life segment of the insurance industry this class of transactions is often

referred to as finite reinsurance.

One of the particular difficulties of running an insurance company is that its

financial results - and hence its profitability - tend to be uneven from one

year to the next. Since insurance companies generally want to produce

consistent results, they may be attracted to ways of hoarding this year's

profit to pay for next year's possible losses (within the constraints of the

applicable standards for financial reporting). Financial reinsurance is one

means by which insurance companies can "smooth" their results.

A pure 'fin re' contract for a non-life insurer tends to cover a multi-year

period, during which the premium is held and invested by the reinsurer. It is

returned to the ceding company - minus a pre-determined profit-margin for

the reinsurer - either when the period has elapsed, or when the ceding

company suffers a loss. 'Fin re' therefore differs from conventional

reinsurance because most of the premium is returned whether there is a loss

or not: little or no risk-transfer has taken place.

In the life insurance segment, fin re is more usually used as a way for the

reinsurer to provide financing to a life company, much like a loan except

that the reinsurer accepts some risk on the portfolio of business reinsured

under the fin re contract. Repayment of the fin re is usually linked to the

profit profile of the business reinsured and therefore typically takes a


number of years. Fin re is used in preference to a plain loan because

repayment is conditional on the future profitable performance of the

business reinsured such that, in some regimes, it does not need to be

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.


A REINSURANCE PROGRAMME


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.


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.


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


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.


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.


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.


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.


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


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.


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:


— 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.


Reinsurance Contracts

The relationship between the insurer and reinsurer rests upon the wordings

of the contracts, which consist of important ingredients such as premium,

commission, retention and limit. The key lies in clarity while drafting the

contract, the absence of which, results in a dispute later on. The negotiating

process plays an important role while drafting the contract. Therefore, senior

executives of both the parties should take a lead role in the process and

identify the loopholes in the contract and leave no communication gap.

Reinsurance generally operates under the same legal principles as insurance,

and reinsurance agreements, as with any legally binding contract, must

satisfy fundamental criteria to ensure that a valid contract is formed.

In order to decide whether a contract has been entered into, it is necessary to

establish that the basic elements of offer, acceptance and an intention to

form a legal relationship are present.

A further essential element in establishing a contract is “consideration”,

which in insurance and reinsurance contracts equates to the premium. This is

the missing ingredient in the formation of proportional reinsurance

agreements such as quota share and surplus treaties and, therefore, these

treaties are termed contracts for reinsurance. Whereas other contracts, such

as facultative and excess of loss agreements, are termed contracts of

reinsurance. A contract for reinsurance becomes a contract of reinsurance as

each individual cession is ceded to the treaty and premium becomes due.

A valid insurance contract must additionally satisfy the following criteria:


There must be an insurable interest in the risk.

The principles of indemnity must be observed.

The principle of utmost good faith must be observed.

A breach of the principle of utmost good faith or, to give it its Latin name,

uberrimae fidei, has been the grounds for many a legal battle between

contracting parties. The principle of uberrimae 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.


MARKET SHARE OF REINSURERS


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


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


Reinsurance In India

GIC RE

General Insurance Corporation of India (GIC) has assumed the role of

National Reinsurer for the market. It provides treaty and facultative capacity

to the insurance company.

It continues to manage Hull Pool on behalf of the market (mainly public

sector Insurance companies).

The Pool received cession on fixed percentage basis from direct companies

and after protection; the business is retro-ceded back to member companies.

Large risks opt for Package Policies, insurance terms for which are obtained

from International Market.

Each direct writing company arranges surplus treaties and excess of loss

protection.GIC arranges market surplus treaty for Property, Cargo, and

Miscellaneous accident business and direct company can utilize the market

surplus treaties after utilization of their own treaties.

Public sector Insurance companies are adopting inter-company cession to

utilize other companies’ net retention.

GIC arrange excess of loss protection from International market.

REINSURANCE REGULATION


The placement of reinsurance business from the Indian market is now

governed by Reinsurance Regulations formed by the IRDA. The objective of

the regulation is to maximize the retention of premiums within the country

Placement of 20% of each policy with National Re subject to a

monetary limit for each risk for some classes

Inter-company cession between four public sector companies.

Indian Pool for Hull managed by GIC.

The treaty and balance risk after automatic capacity are to be first

offered to other insurance companies in the market before offering it

to international re-insurers.

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

insurer

Procedure to be Followed for Reinsurance Arrangements as

per IRDA

The Reinsurance Program shall continue to be guided by

a) Maximize retention within the country;

b) Develop adequate capacity;

c) Secure the best possible protection for the reinsurance costs incurred;

d) Simplify the administration of business

Every insurer shall maintain the maximum possible retention

commensurate with its financial strength and volume of business. The

Authority may require an insurer to justify its retention policy and may


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

Indian insurer is not merely fronting for a foreign insurer.

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

policy for different classes of insurance written in India to the Indian

insurer as may be specified by the Authority in accordance with the

provisions of Part lV-A of the Insurance Act, 1938.

The reinsurance program of every insurer shall commence from the

beginning of every financial year and every insurer shall submit to the

Authority, his reinsurance programs for the forthcoming year, 45 days

before the commencement of the financial year.

Within 30 days of the commencement of the financial year, every in

surer shall file with the Authority a photocopy of every reinsurance

treaty slip and excess of loss cover 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.


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


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.


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


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:


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


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


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.


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


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%.


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


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.


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?


Munich Re - The History

The insurance industry was initially triggered by the rapid commercial

activity in Germany. Carl Thieme started Munich Re in 1880 at a time when

there was a sense of disappointment for insurance and reinsurance

companies in the country. The company was started in two rented rooms

with five employees and a share capital of three million marks. After eight

years of its commencement it was quoted in the stock exchange and its share

capital was increased to 4.8 million marks. The number of staff also kept

rising. It employed 55 people by 1890, 348 in 1900, 450 in 1914, 614 in

192O

The company faced its first tough time in April 1906 when an earthquake

occurred in California devastating the city of San Francisco. Around 3,000

people died and there was a property damage to the tune of 500 million

dollars of which, 11 million Goldmark happened to be of Munich Re The

prompt settlement of claims fetched Carl Thieme the complement, “Thieme

is money” instead of “time is money” from the clients This event triggered

the idea of reinsurance especially in. the US. It was the first company to

prepare set of terms and conditions for machinery insurance in 1900. In the

1930s, the company’s medical staff developed life insurance manuals by the

help of which it was possible to insure chronically ill who were considered

uninsurable until then. In 1970, it created a geo-sciences research group to

analyze natural hazards covers from a technical point of view. As of 2003,

the company employs engineers and scientists from 80 different disciplines

meteorologists, geologists, geographers doctors, ships’ masters and experts

with a wide range of qualifications. Currently the company is the largest


player in the reinsurance segment with competitors such as Swiss Re and

Berkshire Hathaway.

The Reinsurance Market

The origin of reinsurance can be traced to 14th or 15th century in marine

insurance The concept of reinsurance evolved when a single party found it

difficult to insure high risks involving large payouts. In other words

insurance for the primary insure is reinsurance. It is mainly a tool to increase

capacity enhance stability, protection against catastrophes, obtain surplus

relief to enable growth, gain underwriting ability and withdraw from

territory or line of business. Reinsurance is mainly classified under two

categories; facultative and treaty. A facultative contract is for a single risk

and treaty is for multiple risks of certain type. 0ver years, reinsurance

industry has been handling various catastrophes such of Hurricane Andrew

and successfully paying the claims.

September 11, 2001 attacks at the World Trade Center had a big blow to

insurance industry including the reinsurers. The attacks resulted in insurance

industry paying $40 billion as claims, two-thirds of which was paid by

reinsurance industry. This setback was coupled with the stock market losses

trend following the attacks has forced many reinsurers across the globe to

revise their core business of reinsurance and withdraw from businesses such

as management, investment banking and also the lines business in which

they specialize. With the changed scenario the reinsurers cannot depend on

investment income in their toughtimes. Days when reinsurers could rely on

cushion of investment income, or seek new markets to make-up for the stage


in their own are long gone Reinsurers now need to focus on delivering better

more consistent underwriting results in their core markets.

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


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


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.”


Future Outlook

On July 10, 2003 Munich Re became the first nationwide reinsurer in China

after receiving the country-wide operating license from China Insurance

Regulatory Commission. This was an important move for Munich Re to

enter into high growth- oriented Asian market in testing times. Though the

company had business relationships with China through offices in Beijing,

Shanghai and Hong Kong since 1956, this license opens the door to an

opportunity of an industry that has a double-digit growth rate.

With this backdrop the new CEO has the challenge to bring the company out

from the vicious circle and continue its image of the largest reinsurer in the

world. At the time of succession of CEO the issues confronting the new

CEO are, how to come out of the loss-making investments of Munich Re at

Allianz, HVB and Commerzbank? How to retain the existing customers

without straining profits? How to attract new business despite the ratings

cut? And finally, how to win the AAA rating by S&P, which it used to


enjoy?


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


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.


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


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


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


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


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.


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


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.


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.


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


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


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.


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


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.


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.


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:


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


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


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.


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.


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/

industryinsight20030826_001.htm

http://www.allbusiness.com/management/193921-1.html


http://www.allbusiness.com/management/193921-1.html

http://www.zurich.com/main/productsandsolutions/industryinsight/2003/september2003/industryinsight20030826_001.htm

http://www.zurich.com/main/productsandsolutions/industryinsight/2003/september2003/industryinsight20030826_001.htm

http://www.swissre.com/pws/research%20publications/sigma%20ins.%20research/sigma%20archive/sigma%20archive%20(english).html

http://www.swissre.com/pws/research%20publications/sigma%20ins.%20research/sigma%20archive/sigma%20archive%20(english).html

http://www.scor.com/www/index.php?id=16&L=2

http://en.wikipedia.org/wiki/Reinsurance

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


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

http://www.businessinsurance.com/

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://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.generalinsurancecouncil.org.in/

http://www.indiainfoline.com/

http://www.google.com/

http://www.insuranceinstituteofindia.com/

http://www.irdaindia.org/

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