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REINSURANCE

A contractual agreement under which one

insurer (Primary Insurer) transfers to anotherinsurer (Reinsurer) some or all of the loss

exposures accepted by the primary insurer,

under insurance contracts it has issued or will

issue in future

Portion kept by primary insurer Insurers

Retention

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Reinsurers in turn share loss exposures with

other reinsurers

Retrocession : Transaction between

reinsurers and other reinsurers

Thus loss exposures are shared globally in

the reinsurance community

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Functions ofReinsurance

Stabilization of Loss Experience

Large line capacity

Financing

Catastrophe protection

Underwriting Assistance Withdrawal from a Territory or Class of

Business

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Types ofReinsurance

FacultativeReinsurance:

Primary insurer negotiates a separate reinsurance

agreement for each risk it wishes to reinsure

Primary insurer is not under obligation to reinsurea policy it does not wish to reinsure, and reinsurer

is not obligated to reinsure policies submitted to it

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TreatyReinsurance:

Primary insurer agrees in advance to reinsure

certain lines of business as per the terms &

conditions of the treaty

Reinsurer agrees to accept the business that fallswithin the treaty

Most preferred type

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Primary insurers can underwrite, accept and

reinsure such businesses under treaty without priorconsultation with reinsurers

Reinsurer is obligated to accept all businesses thatfalls within the terms of the treaty

Prior negotiation is not required

Lower handling expenses

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FacultativeTreaty:

Hybrid Reinsurance Contracts

Ceding company has the option to cede

Reinsurer has the option to accept ordecline classified risks of a specific

business line

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Factors determining Reinsurance needs

Kinds of insurance written Exposures subject to catastrophic loss

Volume of insurance written

Available financial resources Growth plans

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Underwriting

Recognizing and evaluating hazards

Establishing prices

Determining policy terms and conditions

Determining selection criteria Determining markets for insurers products

Essential for profitable growth

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Knowledge of individual risk peculiarities

Assessing how the risk & a peril produce

potential losses

Estimating magnitude of lossesperil-wise

Estimating insureds systems & capabilities for

prevention & minimization of losses

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Main purpose To develop and maintain

profitable book of business

Avoids Adverse Selection

Highly important for the success of insurers,

hence cannot be subcontracted or delegated

to outside companies

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Underwriting audit:

Management control tool to check the

implementation of underwriting policy

To reveal whether the existing guidelines causeundesirable results

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Classification ofRisksin LifeInsurance

Physical Hazards:

Age Gender

Build

Physical condition

Physical impairments

Personal History

Family History

Increasing extra risk

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Occupational Hazards

Moral Hazards

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Claims Management

To fulfill the insurers obligations to its policy

holders

Claim : demand that the insurer should

redeem the promise made in the contract

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Claims personnel should check;

Occurrence of the insured event

Obligations under the contract, which should beperformed

Policy status

Persons entitled to demand performance

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Objectives ofClaims Dept.

Complying with the contractual promise Fair, prompt and equitable service

Achieving insurers profit objective Overpaid Claims Reduced profits

Underpaid Claims Decreased goodwill