DAY 6: PARTIES INVOLVED IN REINSURANCETariq Al-Bashatariqalbasha@outlook.com – 00962 7 9767 7418

INDEX

▪ Retrocessionaires

▪ Reinsurance brokers

▪ About Tariq Al-Basha

RETROCESSIONAIRES – A DEFINITION OF RETROCESSION

▪ A retrocession is reinsurance ceded by a reinsurer to another insuranceor reinsurance company in order to release a part of the risks it haswritten and, in this way, stabilizing its results and homogenizing itsliabilities. It is reinsurance for the reinsurer.

RETROCESSIONAIRES – WHEN A RETROCESSION IS MADE

▪ This can be when an insurer writes very large risks that exceed the capacity ofthe national market and which, when ceded to reinsurance, also exceeds theretention that any reinsurer wishes to retain for its own account. As a result,the spread of risk is produced via reinsurance and its retrocessionaires.

▪ An example of such spread of risk was the sinking of the Italian passenger shipthe Andrea Doria in 1956.

▪ The sum insured for the hull amounted to 16 million dollars.

▪ When the claim was settled, it was founded that the original policy, underwritten by16 Italian insurance companies, had been distributed amongst 300 companiesthroughout the world.

▪ Some reinsurers participated via 25 companies originating from five differentcountries.

▪ As regards the indemnity, only 10% remained in the Italian market, 30% being in theUSA and 60% in the British market.

RETROCESSIONAIRES – RETROCESSION AS A SERVICE

▪ Spreading risks via reinsurance and retrocessions is also a serviceprovided by reinsurers for their ceding insurers, it means that they donot have to contact reinsurers in different countries.

▪ A reinsurer who has agreed to participate in a risk with higher sharesthan it wishes to retain for its own account has to look forretrocessionaires in order to distribute the risk

RETROCESSIONAIRES – METHODS OF DISTRIBUTING LARGE RISKS

▪ Many of these reinsurance cessions and retrocessions tend to becarried out via obligatory (or ‘automatic’) treaties. This system has twopossible drawbacks:

▪ There is the risk that some accepting offices find themselves participating withhigher shares than they would like, due to their obligatory treaties.

▪ Other participants, in the confidence that they will receive automaticparticipations, may reject underwriting offers and consequently not participate tothe extent that they would like.

▪ Finally, we would point out the experience has shown that theinternational distribution of large risks is the best means of distributingthe risks and utilizing the international underwriting capacity.

REINSURANCE BROKERS – RELATIONS BETWEEN INSURERS AND INTERNATIONAL REINSURERS

▪ There are different ways in which an international reinsurer canestablish business relations with the insurers of a specific country.

▪ Travel: the reinsurer may opt to make regular trips and visits to its clients.

▪ Opening a representative office or branch: this is the most effective way, but it isalso, usually, the most expensive as, in order to optimize its technical service andits relations with its reinsured, the reinsurer will need a team of people who knowand are expert in the various subjects and specialties.

▪ Use of reinsurance intermediaries or brokers: reinsurers are always prepared toincrease their volume of business and also to accept reinsurance through brokersin order not to lose this business segment, although they are aware that the haveto pay commission to these intermediaries.

▪ None of the three options exclude the others and the three types canco-exist simultaneously, as often happens in the case of large reinsurers.

REINSURANCE BROKERS – SPECIFIC SITUATIONS FOR USING BROKERS

▪ An insurance company may arrange its reinsurance directly withreinsurers but, for certain forms of reinsurance or in specificreinsurance market situations, brokers are used to place reinsurance.

▪ In the case of Lloyd’s, insurers cannot place reinsurance directlybecause the syndicates are not able to do business on a direct basis andhave to operate through brokers who must be accredited by the Lloyd’sCommittee that examines their experience and financial situation.

▪ These accredited brokers can also carry out transactions with otherinsurers and reinsurers, apart from Lloyd’s.

REINSURANCE BROKERS – THE FUNCTIONS OF A BROKER

▪ In return for commission, which is deducted from the premium paid toreinsurers, brokers perform the following duties:

▪ When an insurance company wishes to arrange reinsurance, the broker will lookfor the best financial, technical and solvency conditions. Brokers also adviseceding companies on the most appropriate reinsurance program for theirinsurance portfolio.

▪ Brokers have more knowledge about the international reinsurance markets andhave information on legislation, rules, customs and normal procedures in thedifferent countries. They can pass on this information to reinsurers notestablished in the country in question.

▪ By keeping up to date with the latest trends and types of cover provided byreinsurers, as well as with rating methods, risk-distribution, administrativesystems, etc., they are in a position to offer insurance companies a good service.

REINSURANCE BROKERS – DUTY OF DISCLOSURE

▪ The reinsurance broker generally acts as an agent and is usually authorized tonegotiate and bind reinsurance on behalf of the party for which it is acting. Itis therefore required to inform the reinsurer of the conditions of the insurancein question and of any circumstance and information provided by the cedingcompany. This information must be correct, appropriate and adequate.

▪ If this duty is not complied with, the reinsurer is entitled to deny liability andeven cancel the acceptance on the grounds of misleading information.

▪ In order to protect their position, British brokers often write the letters ofE&OE (errors and omissions excepted) on their slips (summary of theconditions offered) and, with regard to statistical data, “this information is notguaranteed”. In this way, when slips containing such annotations have beensigned, the reinsurer waives the right of cancellation in the event ofnegligence or error in information, expect in the case of proven fraudulentconduct on the part of the broker. Both insurers and reinsurers always try todeal only with brokers that are accredited for their professionalism and moralsolvency.

REINSURANCE BROKERS – PAYMENTS THROUGH BROKERS AND THE DISADVANTAGES

▪ When reinsurance is arranged through brokers, payments may be madein two different ways:

▪ Both parties’ payments are made through the broker

▪ This tends to be the most common system, for reasons of convenience, as brokersusually place the reinsurance with a large number of reinsurers, thus saving the insurerconsiderable time and money if the broker handles the accounts and remittances.

▪ This system has several disadvantages

▪ The procedure has the disadvantage that it can lead to delays in transferring the money,with the consequent loss of interest and even producing the need to have to financeclaims payments due to possible delays in their recovery.

▪ Only the accounts pass through the intermediary, but payments are transferreddirectly to the interest parties.

▪ This is done only in the case of special agreements, or in some countries when makingpayments through the broker is prohibited by law.

ABOUT TARIQ AL-BASHA• Promoting entrepreneurship and

innovative SMEs in MENA Market.

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

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