Introduction: Reinsurance
Reinsurance is a valuable and diverse product that assists an insurance company in properly hedging its business risks while also protecting its capital position. It has a critical role in the Indian economy, and as a result, it holds a significant position in the financial markets to protect and sustain insurance entities. It is a risk-transfer mechanism in which an insurance company transfers the risk of an insurance policy to a reinsurer in exchange for a fee under a Reinsurance treaty (contract). In reinsurance, one direct insurance company (also known as a Ceding firm) transfers (cedes) a portion of the risk to another (called Reinsurer). In simple terms “Reinsurance is an insurance for the insurance companies.”
Need for reinsurance
Mainly a direct insurer needs reinsurance
- To be protected in case of catastrophe.
- To keep the annual fluctuations in the losses he must endure on his account to a minimum (as much as practicable).
Reinsurance is divided into two types first is treaty reinsurance and second is facultative reinsurance. Treaty reinsurance is divided into two parts proportional treaty and non-proportional treaty.
- Types of proportional Treaty Reinsurance
- Quota Share
- Surplus
- Types of non-proportional Treaty Reinsurance
- Excess of Loss
- Excess of Loss Ratio (Stop-Loss)
- Pools
Insurance and reinsurance play a crucial part in support of the growth and development of any economy. Insurance helps and supports people as also an industry in case of accidents and insurance investments that are long-term in nature aid in infrastructure development for a developing economy. By promoting appropriate risk management and providing a source of finance to respond to damages and losses sustained by consumers, corporations, and governments, the insurance industry also plays an important role in minimizing risks in the economy.
Reinsurance is a high-capital industry. It also has to adhere to reserving regulations similar to those used by insurers, implying that profitability and dividend declaration/release will take a lengthy time. It’s a business whose prospects are intertwined with those of primary insurers, and reinsurer profitability is a pipe dream in an era of fierce competition and sloppy/unscientific ratemaking on the part of primary insurers.
GIC Re was founded in 1972 as an Indian reinsurer in the expanding reinsurance market. It began as a single point of contact for the four state-owned Indian general insurance firms to safeguard their risks, and then grew into a full-service worldwide reinsurer.
The Market for Reinsurance expansion in India
In India, the sole indigenous reinsurance business, General Insurance Corporation of India (GIC Re), has long had a monopoly on professional reinsurance activities. Recent legislative amendments have progressively opened the market to multinational organizations, making it easier to create overseas reinsurance offices.
GIC Re is primarily focused on Asia, the Middle East, and Africa, with subsidiaries in the United Kingdom, Russia, the United Arab Emirates, Malaysia, South Africa, and Brazil.
During the 2018-2019 fiscal year, GIC Re held 81 percent of the Indian reinsurance market’s revenue or 6.357 billion dollars. At the end of the 2019-2020 financial year, which ended on March 31, 2020, the Indian reinsurance market as a whole recorded a turnover of 637.12 billion INR (8.46 billion USD). This is a 16.57 percent increase over the 546.56 billion INR (7.85 billion USD) reported in the previous fiscal year. With a turnover of 510.3 billion INR, the General Insurance Corporation of India (GIC Re), the only domestic reinsurance provider, controls 80.09 percent of the market (6.78 billion USD).
GIC Re-recorded a financial loss of 3.59 billion INR (47.72 million USD) in the 2019-2020 fiscal year, compared to a net profit of 22.24 billion INR (319.67 million USD) in the previous fiscal year.
The obligatory reinsurance cession rate in India has been reduced by the Insurance Regulatory Authority of India (IRDAI). The proportion decreased from 5% in the years 2021-2022 to 4% in the years 2022-2023.
How Reinsurance Affects the Direct Insurer
The reinsurer offers value to the services a direct insurer provides to his clients in a variety of ways.
- By taking on the direct insurer’s disaster risks, the reinsurer minimizes the likelihood of the direct insurer’s failure.
- By taking up a portion of the direct insurer’s risk of random fluctuation, change, and error, he helps to stabilize the balance sheet.
- By covering huge sums-insured and highly exposed risks, he improves the direct insurer’s portfolio’s balance.
- He increases the capacity of the direct insurer’s underwriting by absorbing a proportional share of the risks and providing a portion of the required reserves.
- By releasing stock that had been tied up to pay risks, he raises the amount of capital effectively available to the direct insurer.
- He improves the efficiency of the direct insurer’s operations by providing a variety of services.
- Kinds of services: for example, by
- Getting underwriting data from all across the world and putting it together:
- Special dangers are assessed and evaluated.
- Provision of loss prevention consultancy
- Supporting actuarial work by assisting with loss adjustment.
- Members of the cedent’s team are being trained in the following areas
Business Figures of Re-Insurance in India
One of the most important factors of reinsurance is to reduce the disruption in India or worldwide.Because of the increased pandemic uncertainty, reinsurance demand is rising. While improving pricing movement is a huge plus for both the reinsurance and insurance sector, economic challenges might reduce premium revenue and undermine asset quality for main insurers.
Reinsurance Lines
- Property reinsurance – Fire and Engineering
It is primarily concerned with a variety of various types of initial insurance businesses. The reinsurance contract completely covers physical loss or damage to real and personal property, as well as the financial repercussions of such loss or damage, as defined in the original policy.
- Accident/Liability Reinsurance
Motor, personal accident, burglary, jeweller’s block, non-traditional insurances, and a variety of liability insurances cover the risk of legal exposures to third parties and the general public as a result of products sold, as an employer, a director, or executive, like software vendors, like stock exchanges, banks, and financial institutions.
- Marine Reinsurance
Hull insurance is classified into two major groups, namely
- Ocean-going boats, such as bulk carriers, tankers, and OBOS.
- Local vessels such as barges, lighters, launches, tugs, dredgers, trawlers, and so on.
- Marine Cargo reinsurance
Most nations’ marine cargo industry is dominated by the ocean and air transit, but in countries like India, inland transit via rail, road, or waterways accounts for a significant percentage of the premium.
- Aviation reinsurance
Aviation reinsurance makes advantage of all types of reinsurance protection that have been created throughout time. Although the challenges connected with aviation insurance are not uncommon, it is unusual to find a class of company where they all exist at the same time. Because risks are put in all nations through reinsurance exchange, the aviation insurance industry is global. On a global scale, this results in a competitive and free market. Reinsurance is important in aviation insurance since about 80% of all aircraft are reinsured.
- Agriculture reinsurance
This comprises farmers’ production and financial risks, as well as other stakeholders’ shortfall risks, such as input suppliers and grain processors.Multi-peril crop, hail, and named peril insurance, which covers both production and revenue changes from catastrophic occurrences, are among their main requirements.
Reinsurance – Claims
The above graph shows the total reinsurance claims experience (CR) FY 2017-21, it can be seen that both Indian & foreign reinsurers received higher claims in FY2019-20 covid-19 would be the main cause of the higher premium.
Conclusion – systematic review
Reinsurance businesses are experts in risk management, drawing on their extensive study and knowledge of risk causes from throughout the world. Reinsurance businesses combine risks from a variety of insurers and price them accordingly. To ensure their risks, they collect premiums from insurance firms. When a client’s reinsurance business receives a claim, they pay the insurance company their portion of the risk insured, which then settles the claim with the consumer. Insurance and reinsurance businesses can share high-value or sub-standard risks in this way.
The COVID-19 pandemic has added to the sector’s uncertainty, which was already seeing an increase in loss activities as a rise in claims portion. The COVID-19 pandemic has a significant impact on the aviation sector throughout the world, with airline operations being halted for most of 2020-21.
Going Concern On the basis of their assessment of the reinsurance companies’ financial positions and after making appropriate enquiries, the report reasonably expect that the companies have adequate resources to continue in operational existence for the foreseeable future. The report has considered the impact of Covid-19 and believed that, due to participating on multiple syndicates and thus diversifying their risk, it will not impact on the companies’ ability to continue as a going concern.
Economic issues caused by Covid-19 could lead to large losses in some lines and an increase reinsurance purchases. Reduced claims in some areas like motor insurance may lead to insurers purchasing less reinsurance. These competing forces mean that the longer-term impact on reinsurance remains highly uncertain.
