A. Emerging Trends Since 1965
1965-1987 :
UNCTAD’s guidelines gave rise to the trends favouring Monopoly of Reinsurance with State Owned Reinsurance Public Sector Companies e.g. Kenya Re, Zim Re, Niegeria Re.
v Regional Reinsurers emerged with obligatory of Reinsurance Treaties in African Market. Africa Re, CICA Re, PTA Re thus camp up for Trans-African Reinsurances and also wrote Afro-Asian Reuinsurance.
1987-2000:
Daregulation, Competition and rise of Private Sector are remarkable features of Era of Liberalisation since Uruguay Round Conference of September 1987 in Rio De Janero. For instance, ZIM Re in Zimbabwe, East Africa Re in Kenya, Union Re and Continental Re in Nigeria.
* Gulf War marked the beginning of Globalisation of WTO Treaty in January 1995, setting the stage for the trends of Borderless World of Economies Foreign Direct Investments with or without local partner. It gave rise to new players in the Third World Markets.
* Increasing number of companies without adequate increase of market premiums.
* Ridiculous Rate Reduction in the name of Competition reducing market premium.
* Exchange Rate Fluctuations inflation resulted into Imbalance in Liberalised Market.
2001 Onward:-
9/11 Attack on WTC with estimated loss of US$ 88.50 billion was more than Germany’s market premiums! This event was the largest man-made catastrophe breaking all past records. Back to the basics was the New Millennium’s Fundamentals
* Financial strength related underwriting capacity
* Profit Oriented Underwriting Policy to tap local and regional markets of Afro-Asian Third World.
* Net Operating Expenses =
Acquisition expenses Maximum 20% – 25%
Management Expenses 5% – 7%
25% – 32%
* Combined Expenses Ratio including Incurred Loss Net Expenses should not be more than 95%. If they exceed 100% there is underwriting loss.
v Solvency Margint to be increasing Shareholder’s Funds.
B. Financial Strength Related Underwriting
A new reinsurance company must adhere to following norms:
1. Minimum Paid Up Capital Base to be kept preferably in US$ so that exchange rate fluctuation do not reduce Minimum Paid up Capital.
Minimum Paid Up Capital of New Reinsurer should be more than Normal Minimum Paid up Capital requirements for Direct Insurer in a Market.
2. Fixing Net Retentions by not more than 5% Paid Up Capital + Free Reserves. New company will start with no Free Reserve which is to be built in first three formative years.
Net Retention Norms as % of Paid Up Capital + Free Reserves
Fire 3.5%
Engineering 3.5%
Misc. Accident 2.5%
Marine 2.0%
Aviation bare minimum say 0.10%
3. Underwriting Capacity should be about 2% of Paid up Capital. Free reserves for Sum Insured of any one risk for treaty business and 4% for Fac Re acceptances.
It should be applied per company or programme basis.
Zonal Accumulations should be closely monitored while writing risks.
Actual Utilisation of Underwriting Capacity should be lower than Maximum Amounts of Underwriting Capacity.
Prudent Underwriting implies CARE-CAUTION-CONSERVATISM.
4. Capacity Creation by Reinsurance
Reinsurers provides Capacity as per the need of insurer.
Capacity = Coverage of all insured perils
+ Confidence in Security of Reinsurers/Retrocessionaris.
+ Continuity after a Loss Event.
By providing Capacity to insurers, a reinsurer extends his own Financial Srength to the risks written by insurers and transferred to reinsurers.
5. Balance Sheet’s Net Premiums
A reinsurance company’s retained premium levels are almost 85% to 90% as Retro Capacity is shrinking.
Foreign inward business can bring more premiums with negative results or with marginal profit.
Investment incomes should absorb underwriting losses.
Retro Protections are with very limited Capacity.
However, ART protections by Multiline Multiyear Financial Reinsurances is a fevourable method. Also, Securitisation of Risks by Cat Bonds is also a favourable method to protect Retro Portfolio of Reinsurers.
6. Net Operating Expenses & Combined Ratio
Business Acquisition Expenses : 20% – 25%
+ Management Expenses : 5% – 7% ) 25% to 32%
Net Operating Expenses : 25% – 32%
Incurred Loss Ratio : 65% – 70%
Combined Ratio : 90% – 92%
If Combined Ratio is more than 100%, there is underwriting loss.
A new Reinsurance Company can at least control Net Operating Ratio.
7. Shareholder’s Funds
Paid Up Capital
+ Capital Reserves
+ Revenue Reserves
+ Consolidated Profit
= Shareholder’s Equity
8. Solvency Margin for Reinsreres
Shareholder’s Funds x 100 = Solvency Margin %
Net Premium 1
Determinents Solvency Margin
a) Macro Factors Management Decisions
GDP Income Expenditure i.e.
Inflation Net Operating Expenses Expenditure
Interest Rate
Income Expenditure
Earned Premium Incurred Losses
Interest Income Cost including taxes
Net Investment Income Dividends
Realised Capital Gain
Regulatory Provisions
= Capital Changed Trends of Losses e.g
= Technical Reserves Natural Disaster or
= Investments Man-made Catastrophe
= Price and Product
Regulations
Shareholder’s Funds x 100
Net Premium 1
= S.M. Ratio
9. A Continuous Process of Security & Solvency Check should be in place.
10. A Good Security is a Matter of Opinion
A Bad Security is Matter of Fact
C. Underwriting Norms
1. WTC Attack affected Munich Re for around US$ 2500 million. The loss could have been much more without a prudent underwriting policy of Munich Office Underwriters. Risk above 50th floor of WTC Towers were underwritten by American Re’s Underwriters say with a share of 10% on 25% PNL Limits. According to German Underwriters in Munich, 25% PML was too low. They reduced their share to 5% and reduced their exposures. Prudent Underwriting reduced Munich Re’s losses of WTC Attack.
2. Territorial Scope of Reinsurances accepted by any Third World Reinsurers must excluded USA/Canada. USA Risks Underwritten with full capacity resulted into GIO Re’s insolvency.
3. Proportional Treaties involve UNKNOWN, UNCONTROLLED and UNLIMITED Accumulation in the event of a Natural Catastrophe loss. Therefore, reinsurers must provide for a CAPPING OF EVENT OF LOSS, thus, limiting any one event of loss.
4. Earthquake, storms and floods premium must be without Profit Commission and with lowest commission in a Proportional Treaty.
5. Developing Market Companies place their Reinsurance Treaties on Bouquet basis. Reinsurance Company must ascertain overall Profitability of entire bouquet. Acceptance/Renewal must be with overall profitability.
6. Foreign Inward Reinsurance Portfolio of Treaty and Facultative business must have:
* Transparency
* Aggregate Exposure Data and
* Accumulation Assessment Excercised every year.
7. Accounting and Remittance situation must be remedied by PPW Premium Payment Warranties, Loss Participation Clauses or Co-Reinsurance Warranties may be insisted on continuity of negative treaty’s renewal.
8. Services of a Professional Reinsurance Broker with Expertise and Value Added services must be utilized in developing a Foreign Inward Reinsurance Portfolio.
9. Travelling is a must in establishing first hand Market contacts. Travelling and Appointments may be co-ordinated with Placing Broker whenever necessary. International Forums of AIO, OESAI, Monte Carlo etc. may be attended regularly.
10. Global news of insurance and reinsurance developments must be closely noted through Periodicals, Press Cutting, SIGMA Reports of Swiss Re and Pamphlets of Munich Re with experts overview must be available.
11. In-house workshops and training seminars must be regularly held. Personnel must be encouraged to pass technical exams and attend international seminars.
12. Retro Programmes:
A foreign inward reinsurance portfolio of treaties and fac re needs protection by retro programme to create retro capacity.
Crises of confidence and shrinking capacity make retrocessions very difficult.
Thererfore, net retained premiums of reinsurers reach 85% to 90% which means portfolio of risks underwritten is not fully protected.
Conclusion
In insurance and reinsurance risks are written and underwritten with good or bad rates.
In direct writing, a risk price is fixed before the cost becomes known! The rating levels of direct insurers in a market decide reinsurance premium in proportional treaty. But in a excess of loss of treaty, xl premiums are quoted by reinsurers. Reinsurers therefore, prefer excess of loss treaty method to cover aog perils exposures of direct insurers.
Minimum rating levels are also prescribed by reinsurers as bad rating levels continue after catastrophic losses.
Retro protections are advisable only in strong currency like us$ and not original currencies of markets.
Reinsurers must exercise CARE – CAUTION AND CONSERVATISM.
In our borderless world of all economies, the global reinsurers have created a united world of reinsurers. The security rating agencies like s & p and am best provide list of first 25 reinsurer of the world who act as leaders/leading reinsurers worldwide.
Actually, all global reinsurers are providers of PRE DISASTER MANAGEMENT as well as POST DISASTER MANAGEMENT.
Authored By:
K. L. Naik
Director Naik Consultancy &
Advisors L.L.P
Mumbai
