INWARD REINSURANCE

Madhulika Bhaskar, Asst. General Manager, GIC Re

INTRODUCTION

Insurance

Company

Direct business

Reinsurance

outward

Reinsurance Inward

Why is inward reinsurance said to be An Art?

Why is it not as simple as Direct Insurance?

Blind acceptances

Underwriter far away from risk

Little transparency

Values involved are large

Results can be volatile

Profit margins low or negative

Face International competition

Purchaser has knowledge and bargaining power

Chances of reinsurer going wrong higher than Insurer

Consequences of misjudgment can be severe

WHY INWARD REINSURANCE IS SAID TO BE AN ART

ESTABLISHING STRATEGY & DEFINING PARAMETERS

Capital Available Reinsurance business is capital intensive and cyclical thus profits can be earned over a long period. Direct Insurers writing inward reinsurance as a side activity must specify part of the capital that will be committed for this operation.

Administrative Set-up Adequate administrative set up needed like man power with reinsurance know-how, statistical expertise, facilities of fast communication and travel, state of the art IT support etc.

ESTABLISHING STRATEGY & DEFINING PARAMETERS..

Business Plan Business targets for minimum 3 years one year is too

small to gauge the impact of the plan

Identifying Countries for inward acceptances one may want to avoid markets known to fluctuate like USA

Identifying Classes to be written or avoided eg. liability

Identifying forms of Reinsurance Proportional, Non-Proportional, Facultative

Controlling accumulations

Acceptance Limits specified as a % of the net worth. It can be different for different classes, forms etc.

In short aim at achieving a good spread and balance!!!

What exactly is your cos underwriting appetite?

UNDERWRITING CONSIDERATIONS

1. Underwriting Environment

Background of the offer

Routine renewal

Renewal with a change

Existing reinsurer ceasing to participate

Reinsured seeking improvement in terms

New cover being sought

The Market and the Reinsured

Who is the reinsured his reputation

His overall profitability

Claims management practices adopted

UNDERWRITING CONSIDERATIONS

Acceptance capacity of the Reinsurer

Depends on business plan

Past experience of the class and the country

Business written to date leading to accumulation

The Broker

Play a vital role in bringing together two parties slowly changing a placements are being made through electronic modes

Value addition by broker

Brokers repuutation

Volumes and profitability of the business shwon by him

UNDERWRITING CONSIDERATIONS..

2. Analysis of Statistics Currency Movement

Analysis of claims information

Inflation

Scrutiny of statistics

Various As ifs

3. Underwriting Information Must be trustworthy and transparent

Must be exhaustive to include in the minimum: Gross and net premium for the past minimum 5 years

Estimated premium for the next 2 years

UNDERWRITING CONSIDERATIONS..

Geographical distribution of business

Composition of the portfolio (residential, commercial,

industrial)

Details of top target risks and large losses

Perils covered in std. cover and those covered on request

Zonewise aggregates

Measures proposed to improve UWg

Risk and Loss profile

Rating structure followed by the Company

Etc. etc.

CASH FLOW UNDERWRITING

Reinsurer like any other commercial organisation depends upon revenue. Many Reinsurers survive on investment income from the reserves

Key to success is keeping track of the inflow of cash and balancing it with outflow

Cashflow Uwg : Business is often written at terms below technically justifiable levels with the hope that deficiency in terms will be made up through investment income on premium as losses will take time to materialise and also some profits can be earned on exchange rate fluctuations. It is an attempt to maximise operating surplus by accepting business with focus on generating cash inflow and earning investment income.

CASHFLOW UNDERWRITING.

Cash flow underwriting can fail if:

Reinsurer has adopted an overoptimistic approach

Losses build up faster & higher than expected

Investment income not realised as visualised

Anticipated exchange gain does not materialise

Careless underwritten business can give losses

which are heavier than interest earnings

PLACEMENT PRACTICES

Acceptance expressed in monetary terms

Line to stand

Signing Down

Acceptance open only upto _____

Warranted most favoured terms

ACCEPTANCE LIMITS

Shareholders fund: 20 Mln

Max exposure : Any one risk - 600,000 i.e 3% of shareholders fund

Surplus Treaty: Retention : 1 Mln

Treaty Capacity : 10 lines, 10 Mln

Acceptance Limit: 6% of treaty or 0.6 lines

Risk XL: 3mln xs 1 mln each and every loss

Acceptance Limit: 20%

What will be the acceptance limit if there were no Event

Limits or if there were unlimited reinstatements?