Chanakya National Law University,

Patna

Insurance law

Project on:-

The concept of reinsurance

Submitted To: Dr.
Shaiwal Satyarthi,

(Faculty for
Insurance Law)

Submitted by-
GauravMisra

Roll No.: 734,

Semester: 8th
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 ACKNOWLEDGEMENT
The present project on the The Concept Of Reinsurance has been able to get its final shape
with the support and help of people from various quarters. My sincere thanks go to all the
members without whom the study could not have come to its present state. I am proud to
acknowledge gratitude to the individuals during my study and without whom the study may
not be completed. I have taken this opportunity to thank those who genuinely helped me.

With immense pleasure, I express my deepest sense of gratitude to Dr. Shaiwal Satyarthi,
Faculty for D.P.C, Chanakya National Law University for helping me in my project. I am also
thankful to the whole Chanakya National Law University family that provided me all the
material I required for the project. Not to forget thanking to my parents without the co-
operation of which completion of this project would not had been possible.

I have made every effort to acknowledge credits, but I apologize in advance for any omission
that may have inadvertently taken place.

Last but not least I would like to thank Almighty whose blessing helped me to complete the
project.

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 RESEARCH METHODOLOGY

Method of Research:

The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the library at the Chanakya National Law University and also the internet
sources.

Aims and Objectives:

The aim of the project is to present an overview of the terms The Concept Of
Reinsurance through different writings and articles.

Scope and Limitations:

Though the study of the topic is an immense project and pages can be written over the topic
but due to certain restrictions and limitations I was not able to deal with the topic in great
detail.

Sources of Data:

The following secondary sources of data have been used in the project-
1. Books
2. Articles
3. Internet

Method of Writing:

The method of writing followed in the course of this research paper is primarily analytical.

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 TABLE OF CONTENTS
1. INTRODUCTION
2. Reinsurance: insurance for insurers
3. CAPITAL RESERVES AND THE ROLE OF
REINSURANCE
4. INSURANCE AND REINSURANCE LAW
5. PARTIES INVOLVED IN REINSURANCE
6. PARTIES INVOLVED IN REINSURANCE
7. CONCLUSION
BIBLIOGRAPHY

INTRODUCTION

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The Indian insurance market was nationalised shortly after Indias independence in 1947 and
remained so until the Indian governments industrial policy of 1991 announced the advent of
a liberalised Indian economy, which included private participation in the insurance sector. In
1993 the government set up the Malhotra Committee to review the then existing structure of
the regulation and supervision of the insurance industry and to suggest reforms. The
Committee recommended, inter alia that the private sector be permitted to enter the insurance
industry and that foreign insurers be allowed to enter the Indian market by forming joint
venture companies with Indian partners. There was considerable delay in implementing these
recommendations, and in particular a rather lengthy debate over the right level of the cap on
foreign ownership, but in 1999 the Insurance Regulatory and Development Authority (IRDA)
was set up as an autonomous body to regulate the insurance industry and develop the
insurance market, and in August 2000 private competition was permitted with a foreign
ownership cap of 26 per cent.
Despite the growing complaints about the relatively low 26 per cent cap on foreign
investment, the insurance sector has grown by approximately 15 to 20 per cent a year since
the advent of liberalisation. India now has 24 life insurers, 28 general insurers and five stand-
alone health insurers, 31 third-party administrators, 380 insurance brokers, nine web
aggregators, five insurance repositories and innumerable corporate agents and insurance
agents. At present, the government-owned General Insurance Corporation is the only
reinsurance company registered in India.

Reinsurance: insurance for insurers

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This is perhaps the briefest, simplest and most understandable definition, despite the
existence of various general (legal, technical, etc.) suggestions. Reinsurance is the
insurance of the risk borne by the insurer1. Reinsurance would not be possible without the
existence of insurance and, conversely, insurers could not exist (they would do so very
precariously) if it were not for reinsurers.

BRIEF HISTORY OF REINSURANCE

Early insurances
Even in Greek and Roman times, a type of marine insurance known as bottomry loans
existed and was governed by Roman law (foenus nauticum). This continued up to the Middle
Ages and constituted a fledgling insurance system. These contracts were used to finance the
purchase of commodities that were going to be transported by sea so that, if the cargo reached
its destination safe and sound, the person financing the voyage received the amount of the
loan plus substantial interest.
The first reinsurance contract
The first known reinsurance contract, written in Latin, was effected in Genoa in July 1370. It
concerned a cargo that was to be carried by sea from Cadiz (in Spain) to Sluis (in Flanders)
and was insured. However, because of the dangerous nature of the voyage, the insurer
transferred most of the risk to a second insurer, who accepted it. This represented a true
reinsurance between the insurer and reinsurer, without the owner of the cargo having any
contractual relationship with the reinsurer2. The contract also had two interesting aspects in
relation to reinsurance:
Firstly, only the last part of the route was reinsured (not from Genoa to Cadiz, but from
Cadiz to Flanders) due to its particular risk.
The most probable or substantial risk was transferred, a form that is also in general use
today.
This reinsurance agreement did not mention the premium that had to be paid, most probably
because of the canon laws against usury that prevailed in Genoa at the time.
From rasichurare to riassicurare

1 An introduction to Reinsurance. 2013

2 Reinsurance Professional's Deskbook A Practical Guide. Thomson Reuters DRI. 2015. pp. Chapter
6

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We move on to the 15th century, and more specifically to 16 May 1409 in Florence, where a
reinsurance contract appears for a shipment of wool worth 200 gold florins from
Southampton to Porto Pisano, in which the term rasichurare, equivalent to modern-day
riassicurare, appears for the firsttime. This term seems to have been adopted by other
European languages to refer to this type of commercial relationship. Anyway, it was in
Renaissance Italy where these written agreements were first drawn up, due, amongst other
things, to the considerable increase in trade between influential Mediterranean cities which,
in turn, extended their business relations with the countries of the OrientReinsurance and
other classes of insurance. We have seen that both insurance and reinsurance basically
originated in maritime trade3. As a natural development, however, for the other classes of
insurance, the need to reinsure began to appear as new forms of insurance were consolidated.
Some examples are given below:
The first known fire reinsurance contract dates back to 1813, between Eagle Fire Insurance
Company, of New York, and Union Insurance.
Another similar one appeared in 1824, between National and Imperial Fire.
Fire reinsurance started to become international at that time. Sun Insurance Office accepted
an offer from Germanys Aachener und Mnchener and extended its acceptances to all
European countries, India and America.
The oldest known hail reinsurance contract dates back to 1854 in Trieste, between
Magdeburger and Riunione Adriatica.
The first life reinsurance contracts were effected in England in 1844 and on the Continent
in 1858, between Schweizerische Rentenanstalt and Frankfurter Rck.
The first accident reinsurance was taken out by two Scottish companies in 1888.

Almost all insurance companies have a reinsurance program. The ultimate goal of that
program is to reduce their exposure to loss by passing part of the risk of loss to a reinsurer or
a group of reinsurers. In the United States, insurance is regulated at the state level, which
only allows insurers to issue policies with a maximum limit of 10% of their surplus (net
worth), unless those policies are reinsured. In other jurisdictions allowance is typically made
for reinsurance when determining statutory required solvency margins.

Risk transfer

3 Powers, M. R. and Shubik, M., 2006, "A 'Square-Root Rule' for Reinsurance.

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With reinsurance, the insurer can issue policies with higher limits than would otherwise be
allowed, thus being able to take on more risk because some of that risk is now transferred to
the reinsurer. The reason for this is the number of insurers that have suffered significant
losses and become financially impaired. Over the years there has been a tendency for
reinsurance to become a science rather than an art: thus reinsurers have become much more
reliant on actuarial models and on tight review of the companies they are willing to reinsure.
They review their financials closely, examine the experience of the proposed business to be
reinsured, review the underwriters that will write that business, review their rates,

Income smoothing

Reinsurance can make an insurance company's results more predictable by absorbing larger
losses and reducing the amount of capital needed to provide coverage. The risks are
diversified, with the reinsurer bearing some of the loss incurred by the insurance company.
The income smoothing comes forward as the losses of the cedant are essentially limited. This
fosters stability in claim payouts and caps indemnification costs.

Surplus relief

An insurance company's random writings are limited by its balance sheet (this test is known
as the solvency margin). When that limit is reached, an insurer can do one of the following:
stop writing new business, increase its capital, or (in the United States) buy "surplus relief".

Arbitrage

The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at

a lower rate than they charge the insured for the underlying risk, whatever the class of
insurance4. In general, the reinsurer may be able to cover the risk at a lower premium than the
insurer because:

The reinsurer may have some intrinsic cost advantage due to economies of scale or
some other efficiency.

Reinsurers may operate under weaker regulation than their clients. This enables them
to use less capital to cover any risk, and to make less prudent assumptions when valuing
the risk.

4 Venezian, E. C., Viswanathan, K. S., and Juc, Iana B., 2005, "A 'Square-Root Rule' for
Reinsurance? Evidence from Several National Markets," Journal of Risk Finance, 6, 4, 319-334.

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 Reinsurers may operate under a more favourable tax regime than their clients.

Reinsurers will often have better access to underwriting expertise and to claims
experience data, enabling them to assess the risk more accurately and reduce the need for
contingency margins in pricing the risk.

Even if the regulatory standards are the same, the reinsurer may be able to hold
smaller actuarial reserves than the cedant if it thinks the premiums charged by the cedant
are excessively prudent.

The reinsurer may have a more diverse portfolio of assets and especially liabilities
than the cedant. This may create opportunities for hedging that the cedant could not
exploit alone. Depending on the regulations imposed on the reinsurer, this may mean they
can hold fewer assets to cover the risk.

The reinsurer may have a greater risk appetite than the insurer.

Reinsurer's expertise

The insurance company may want to avail itself of the expertise of a reinsurer, or the
reinsurer's ability to set an appropriate premium, in regard to a specific (specialised) risk. The
reinsurer will also wish to apply this expertise to the underwriting in order to protect their
own interests5.

Creating a manageable and profitable portfolio of insured risks

By choosing a particular type of reinsurance method, the insurance company may be able to
create a more balanced and homogeneous portfolio of insured risks. This would lend greater
predictability to the portfolio results on net basis (after reinsurance) and would be reflected in
income smoothing. While income smoothing is one of the objectives of reinsurance
arrangements, the mechanism is by way of balancing the portfolio.

Types
Proportional

5 Marcos Antonio Mendoza, "Reinsurance as Governance: Governmental Risk Management Pools as

a Case Study in the Governance Role Played by Reinsurance Institutions", 21 Conn. Ins. L.J. 53, 68-
70, 129 (2014) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573253

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Under proportional reinsurance, one or more reinsurers take a stated percentage share of each
policy that an insurer issues ("writes"). The reinsurer will then receive that stated percentage
of the premiums and will pay the stated percentage of claims. In addition, the reinsurer will
allow a "ceding commission" to the insurer to cover the costs incurred by the insurer (mainly
acquisition and administration). The arrangement may be "quota share" or "surplus
reinsurance" (also known as surplus of line or variable quota share treaty) or a combination of
the two. Under a quota share arrangement, a fixed percentage (say 75%) of each insurance
policy is reinsured. Under a surplus share arrangement, the ceding company decides on a
"retention limit" - say $100,000. The ceding company retains the full amount of each risk,
with a maximum of $100,000 per policy or per risk, and the balance of the risk is reinsured.
The ceding company may seek a quota share arrangement for several reasons. First, it may
not have sufficient capital to prudently retain all of the business that it can sell. For example,
it may only be able to offer a total of $100 million in coverage, but by reinsuring 75% of it, it
can sell four times as much. The ceding company may seek surplus reinsurance to limit the
losses it might incur from a small number of large claims as a result of random fluctuations in
experience. In a 9 line surplus treaty the reinsurer would then accept up to $900,000 (9 lines).
So if the insurance company issues a policy for $100,000, they would keep all of the
premiums and losses from that policy. If they issue a $200,000 policy, they would give (cede)
half of the premiums and losses to the reinsurer (1 line each). The maximum automatic
underwriting capacity of the cedant would be $1,000,000 in this example. Any policy larger
than this would require facultative reinsurance6.

Non-proportional

Under non-proportional reinsurance the reinsurer only pays out if the total claims suffered
by the insurer in a given period exceed a stated amount, which is called the "retention" or
"priority". For instance the insurer may be prepared to accept a total loss up to $1 million,
and purchases a layer of reinsurance of $4 million in excess of this $1 million. If a loss of $3
million were then to occur, the insurer would bear $1 million of the loss and would recover
$2 million from its reinsurer. In this example, the insured also retains any excess of loss over
$5 million unless it has purchased a further excess layer of reinsurance.

The main forms of non-proportional reinsurance are excess of loss and stop loss.

6 "Top 50 Reinsurers Revealed". Insurance Networking News.

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Excess of loss reinsurance can have three forms - "Per Risk XL" (Working XL), "Per
Occurrence or Per Event XL" (Catastrophe or Cat XL), and "Aggregate XL". In per risk,
the cedant's insurance policy limits are greater than the reinsurance retention. For example, an
insurance company might insure commercial property risks with policy limits up to $10
million, and then buy per risk reinsurance of $5 million in excess of $5 million. In this case a
loss of $6 million on that policy will result in the recovery of $1 million from the reinsurer.
These contracts usually contain event limits to prevent their misuse as a substitute for
Catastrophe XLs. In catastrophe excess of loss, the cedant's retention is usually a multiple of
the underlying policy limits, and the reinsurance contract usually contains a two risk warranty
(i.e. they are designed to protect the cedant against catastrophic events that involve more than
one policy, usually very many policies). For example, an insurance company issues
homeowners' policies with limits of up to $500,000 and then buys catastrophe reinsurance of
$22,000,000 in excess of $3,000,000. In that case, the insurance company would only recover
from reinsurers in the event of multiple policy losses in one event (e.g., hurricane,
earthquake, flood). Aggregate XL affords a frequency protection to the reinsured. For
instance if the company retains $1 million net any one vessel, $5 million annual aggregate
limit in excess of $5m annual aggregate deductible, the cover would equate to 5 total losses
(or more partial losses) in excess of 5 total losses (or more partial losses). Aggregate covers
can also be linked to the cedant's gross premium income during a 12-month period, with limit
and deductible expressed as percentages and amounts. Such covers are then known as"Stop
Loss" contracts.

Risks attaching basis

A basis under which reinsurance is provided for claims arising from policies commencing
during the period to which the reinsurance relates. The insurer knows there is coverage
during the whole policy period even if claims are only discovered or made later on. All
claims from cedant underlying policies incepting during the period of the reinsurance contract
are covered even if they occur after the expiration date of the reinsurance contract. Any
claims from cedant underlying policies incepting outside the period of the reinsurance
contract are not covered even if they occur during the period of the reinsurance contract.

Losses occurring basis

A Reinsurance treaty under which all claims occurring during the period of the contract,
irrespective of when the underlying policies incepted, are covered. Any losses occurring after

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the contract expiration date are not covered. As opposed to claims-made or risks attaching
contracts. Insurance coverage is provided for losses occurring in the defined period. This is
the usual basis of cover for short tail business.

Claims-made basis

A policy which covers all claims reported to an insurer within the policy period irrespective
of when they occurred.

Contracts

Most of the above examples concern reinsurance contracts that cover more than one policy
(treaty). Reinsurance can also be purchased on a per policy basis, in which case it is known
as facultative reinsurance. Facultative reinsurance can be written on either a quota share or
excess of loss basis. Facultative reinsurance contracts are commonly memorialized in
relatively brief contracts known as facultative certificates and often are used for large or
unusual risks that do not fit within standard reinsurance treaties due to their exclusions. The
term of a facultative agreement coincides with the term of the policy. Facultative reinsurance
is usually purchased by the insurance underwriter who underwrote the original insurance
policy, whereas treaty reinsurance is typically purchased by a senior executive at the
insurance company. Reinsurance treaties can either be written on a "continuous" or "term"
basis. A continuous contract has no predetermined end date, but generally either party can
give 90 days notice to cancel or amend the treaty. A term agreement has a built-in expiration
date. It is common for insurers and reinsurers to have long term relationships that span many
years. Reinsurance treaties are typically longer documents than facultative certificates,
containing many of their own terms that are distinct from the terms of the direct insurance
policies that they reinsure. However, even most reinsurance treaties are relatively short
documents considering the number and variety of risks and lines of business that the treaties
reinsure and the dollars involved in the transactions. There are not "standard" reinsurance
contracts. However, many reinsurance contracts do include some commonly used provisions
and provisions imbued with considerable industry common and practice.

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 CAPITAL RESERVES AND THE ROLE OF
REINSURANCE
All the imponderables mentioned above oblige insurers to set up capital reserves for purely
technical reasons and due to legal requirements which enable them to accept liability at any
time towards their insured for indemnifying claims. Different reserves can or should be set
up, some of which are mentioned below:
Unexpired risk reserves, in order to be able to attend to risks remaining in force at the close
of the accounting year.
Outstanding losses reserves.
Special reserves for claims ratio deviations.
Mathematical reserves for life insurance.
In accordance with legal provisions, the insurer must comply with the so-called solvency
margin. In other words, the insurer has to maintain a given ratio between premiums retained
for its own account and its available assets. If this ratio required bylaw (reduction in own
funds or increase in retained premiums) is not maintained, the insurer has two options:
To increase its funds by increasing capital.
To reduce the amount of the premiums retained for its own account by ceding a larger
amount of premium to reinsurers.
To summarize, the insurer has two options for maintaining its solvency margin: to increase
capital or use reinsurance. It may also opt for a combination of the two. The choice will
depend on factors such as availability, time and price.

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 INSURANCE AND REINSURANCE LAW
Sources of law
The Insurance Act 1938, the Insurance Regulatory and Development Authority Act 1999, the
Marine Insurance Act 1963 and the regulations, guidelines, circulars and notifications issued
by the IRDA govern insurance and reinsurance business in India. Indian courts may refer to
common law if there are no judicial precedents available under Indian law. Common law is,
however, not binding on Indian courts7.
Making the contract
The terms and conditions of property and engineering insurance covers are currently
governed by the policy wordings specified by the former Tariff Advisory Committee. Very
few modifications to these policy wordings have been permitted. On all other lines of
insurance business (except mega risks, which are written on a special contingency basis),
insurers are permitted to issue only those policy terms and conditions, endorsements and
other ancillary documentation that have been approved by the IRDA in advance. No changes
are permitted to be made unless the prior consent of the IRDA is obtained. In addition, for
health insurance policies, the IRDA has specified a standard set of definitions, standard
nomenclature for critical illness, standard pre-authorisation and claim form, standard list of
excluded expenses and standard agreements between insurers, TPAs and hospitals. The IRDA
has also specified a number of other conditions for health insurance policies making these
policies highly regulated8. The IRDA (Protection of Policyholders Interests) Regulations
2002 require general insurance contracts to state several matters, including:
a full description of the property or interest insured with locations and insured values;
b period of insurance;
c sums insured;

7 http://gicofindia.com/index.php?lang=en

8 https://www.irdai.gov.in/

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d perils covered and excluded;
e premium payable;
f policy terms, conditions and warranties;
g action to be taken by an insured for claims and circumstances that may give rise to a claim;
h the insureds obligations in relation to the subject matter of insurance upon occurrence of an
event giving rise to a claim and the insurers rights in the circumstances;
i any special conditions;
j provisions for cancellation;
k insurers address;
l details of endorsements; and
m grievance redressal mechanism.

All condition precedents and warranties are required to be stated in express terms in the
policy documentation. In addition, all product literature is required to be in simple language
and easily understandable to the public at large and all technical terms used in the policy
wording are to be clarified to the insured. To the extent possible, insurers are also required to
use similar wording for describing the same insurance cover or the same requirements across
all their products, particularly in relation to clauses on renewal, basis of insurance, due
diligence, cancellation and arbitration. Under Indian law, an insurance contract is one of the
utmost good faith, and insurers are entitled to a fair presentation of the risk prior to inception.
The Indian Marine Insurance Act 1963 obliges an insured to make a full and frank disclosure
prior to inception and the Supreme Court has said that this includes by way of the proposal.
There is an argument that an insurer may limit the insureds duty by limiting the questions
asked in the proposal form unless the proposal form contains a statement that has the effect of
negating any restriction of the disclosure obligation by reference to the questions asked. The
IRDA (Protection of Policyholders Interests) Regulations 2002 also impose an obligation on
the insured to disclose all material information. If there has been a misrepresentation or non-
disclosure of a material fact then an insurer may avoid the policy ab initio. Unless the
misrepresentation or non-disclosure was fraudulent, the premium must be returned to the
policyholder9.
Interpreting the contract

9 www.iii.org/issue-update/reinsurance

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In general terms, the statutory framework may be said to favour insurers more than insureds,
but the regulatory framework and the interpretation of applicable law is perhaps more
favourable to insureds. For example:
a The Indian courts and consumer forums have held that if there is any ambiguity in the terms
and conditions, then it shall be construed in favour of the insured.
b The Insurance Act 1938 restricts the ability of insurers to call a life insurance policy into
question after two years from inception on the grounds of innocent or negligent non-
disclosure.
c The IRDA (Protection of Policyholders Interests) Regulations 2002 provide, among other
obligations, that insurers follow certain practices at the point of sale of the policy as well as at
the processing or claims stage so that the insured can understand its terms properly; have
proper procedures and mechanisms to hear any grievances of the insured; clearly state the
policy terms (such as warranties, conditions, insureds obligations, cancellation provisions,
etc.); and follow certain claims procedures to expeditiously process claims; pay interest at the
rate of 2 per cent above the prevalent bank rate in cases of delayed payment, etc.
d On 20 September 2011, the IRDA issued a direction in relation to certain types of policies
and policyholders to the effect that insurers should not reject claims on the basis of delayed
notification if the delay was unavoidable, unless the insurer is satisfied that the claim would
have been rejected in any event.
e Following the IRDA (Health Insurance) Regulations 2013 general insurers and health
insurers can decline the renewal of a health insurance policy only on grounds of fraud, moral
hazard or misrepresentation. Renewal cannot be denied on grounds such as an adverse claims
history10.
f The IRDA has also directed that all health insurance policies offer portability benefits
whereby policyholders are given credit for the waiting periods already served under previous
health insurance policies with that insurer or any other Indian insurer.
There is one other feature of the Indian insurance sector that is worth mentioning. This
concerns the government-owned insurers, who are considered an instrument of the state and
are thus expected to act justly and reasonably.

10 https://www.google.co.in/search?
espv=2&q=irda+health+regulations+2013&oq=irdai+health+re&gs_l=serp.3.0.0i13l2j0i13i5i30j0i8i1
3i30l7.94232.97063.0.98571.10.10.0.0.0.0.238.1810.0j5j4.9.0....0...1c.1.64.serp..1.9.1809...0i10.qBD
etesyYAo#

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iv Intermediaries and the role of the broker Insurance brokers, corporate agents, web
aggregators, referral companies and insurance agents are granted a licence for a fixed period
of three years following which the licence may be renewed for a further three years at the
discretion of:
a the IRDA for insurance brokers, web aggregators and referral companies; and
b the insurer in accordance with the IRDAs specified norms, for corporate agents
and insurance agents. Insurance brokers are required to exclusively carry on the distribution
of insurance products, while corporate agents may have a main business other than the
distribution of insurance products. However, if a corporate agent has a main business other
than insurance distribution, then the corporate agent is not permitted to make the sale of its
products contingent on the sale of an insurance product or vice versa. The IRDAs regulations
specify separate codes of conduct for insurance brokers, web aggregators, corporate agents
and insurance agents that govern the conduct expected of brokers, web aggregators, corporate
agents and insurance agents while performing their functions. Breach of the respective code
of conduct could lead to suspension or cancellation of their licence.
There are statutory limits on the commission or remuneration payable to insurance brokers,
web aggregators, corporate agents and insurance agents for the solicitation and procurement
of insurance business. Insurers are not permitted to make any other payments to brokers,
corporate agents or insurance agents. Insurance brokers, web aggregators, corporate agents
and insurance agents are also prohibited from offering rebates to customers on the premium
or commission receivable. All insurance brokers are required to be part of the Insurance
Brokers Association of India.
v Claims
Insurance policy terms and conditions are meant to specify the requirements for notification
of claims or circumstances that may give rise to a claim. Although it is common for these
clauses to be expressed as condition precedent to the insurers liability to make payment of
the claim, the IRDAs Circular of 20 September 2011 makes it clear that insurers cannot
reject claims on the basis of delayed notification if the delay was unavoidable, unless the
insurer is satisfied that the claim would have been rejected in any event. Insurance policy
terms and conditions are also meant to expressly state the insurers grievance redressal
procedure and the applicable dispute resolution provisions for differences or disputes arising
under the policy. While there are no specific regulatory requirements in this regard, it is
common for retail policies to give exclusive jurisdiction to the Indian courts and commercial
lines policies to contain express arbitration provisions. At present, general insurance policies

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are usually annually renewable policies with the entire premium being paid in advance and it
is not common to offer these policies on a long-term basis or to provide for premium
payments in installments. Life insurance policies usually have policy terms of at least 10
years and unless a single premium is payable in advance, it would usually be payable at
regular intervals during the policy terms. All life insurance policies are required to contain
express provisions and conditions for reinstatement of the policy in the event of
discontinuance of premium payments.

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 PARTIES INVOLVED IN REINSURANCE
1. DIRECT INSURERS
These are the largest buyers of reinsurance and the amount purchased partly depends on the
structure of the insurance market in each country The size of any claim, or accumulation of
claims, arising from one single event, that an insurance company retains for its own account
tends to increase directly in proportion to: a) the volume and distribution of the policies
issued and b) the size of its reserves in relation to written premiums. Consequently, the
tendency is that the greater the spread of a countrys insurance business between new and
small companies, the greater the total demand for reinsurance. Consequently, changes in
market structures, such as insurance company mergers in many countries, can have a
significant effect on the demand for reinsurance11.
2. REINSURERS
A brief history
As we have seen, the reinsurance institution grew up mainly in relation to marine transport.
However, it is in the fire class of business where it has developed most. The development of
fire reinsurance in the second half of the 19th century:
The first two reinsurers to be set up, as such, were Germanys Klnische Rck and Aachener
Rck, around 1850, prompted by the Great Fire of Hamburg in 1842. This rapid development
was also due to major fires in New York (1835), Germany (Memel, 1854), Switzerland
(Glarus, 1861) and England (Tooley Street Fire, 1861).
The large reinsurance companies
If we refer to volume of business, the two largest reinsurance companies have their Head
Offices in Europe, specifically in Germany and Switzerland. They are followed in size by the
North American reinsurers. US reinsurers are relatively small in relation to the size of the
countrys market. This is because:
American reinsurers write most of their business for the national market and, since the
direct insurance companies are very strong financially, there is less need for reinsurance
protection.

11 https://www.scor.com/en/the-group/about-reinsurance.html

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 The large European reinsurance companies have set up offices in the United States, where
they have acquired some of the largest American reinsurers.
Reinsurance companies in England
The first companies
The first reinsurance companies to be set up, such as the Reinsurance Company Limited in
1867, disappeared after a short time.
English reinsurance became consolidated with the creation of the Mercantile and General
Reinsurance Co. in 1907 and other companies.
The reinsurance market in England
With the creation of these companies, British reinsurance grew to the extent that it became a
globally recognized market.
The international nature of reinsurance
Lloyds conducts reinsurance business internationally and is not alone in this, in the rest of
Europe too, as in almost every country in the world, there are large reinsurance companies
conducting business internationally. It should be pointed out that being international is not a
prerequisite for transacting reinsurance, as many reinsurers only operate on a national level.
Direct insurance companies in reinsurance
Whilst, so far, we have only referred to professional reinsurers, it should not be forgotten that
a large number of direct insurance companies also act as reinsurers.

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 CONCLUSION

Reinsurance is insurance for insurance companies. Its a way of transferring or ceding some
of the financial risk insurance companies assume in insuring cars, homes and businesses to
another insurance company, the reinsurer. Reinsurance is a highly complex global business.
U.S. professional reinsurers (companies that are formed specifically to provide reinsurance)
accounted for about 7 percent of total U.S. property/casualty insurance industry premiums
written in 2010, according to the Reinsurance Association of America.

The reinsurance business is evolving. Traditionally, reinsurance transactions were between

two insurance entities: the primary insurer that sold the original insurance policies and the
reinsurer. Most still are. Primary insurers and reinsurers can share both the premiums and
losses, or reinsurers may assume the primary companys losses above a certain dollar limit in
return for a fee. However, risks of various kinds, particularly of natural disasters, are now
being sold by insurers and reinsurers to institutional investors in the form of catastrophe
bonds and other alternative risk-spreading mechanisms. Increasingly, new products reflect a
gradual blending of reinsurance and investment banking, see also Background section.

When an insurance company issues an insurance policy, an auto insurance policy, for
example, it assumes responsibility for paying for the cost of any accidents that occur, within
the parameters set out in the policy.

By law, an insurer must have sufficient capital to ensure it will be able to pay all potential
future claims related to the policies it issues. This requirement protects consumers but limits
the amount of business an insurer can take on. However, if the insurer can reduce its
responsibility, or liability, for these claims by transferring a part of the liability to another
insurer, it can lower the amount of capital it must maintain to satisfy regulators that it is in
good financial health and will be able to pay the claims of its policyholders. Capital freed up
in this way can support more or larger insurance policies. The company that issues the policy
initially is known as the primary insurer. The company that assumes liability from the

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primary insurer is known as the reinsurer. Primary companies are said to cede business to a
reinsurer.

The terrorist attacks on the World Trade Center left their mark on the reinsurance business in
many ways. First, the huge losses incurred accelerated rate hikes over a broad spectrum of
coverages, unlike the aftermath of Hurricane Andrew, the most costly disaster prior to
September 11, where only catastrophe insurance, a property coverage, was in short supply.
Furthermore, the reinsurers that are now offering some terrorism coverage look at the
business they are being offered from an accumulation-of-loss viewpoint in addition to
traditional considerations, particularly in areas that may be terrorism targets. Computer
programs are now being developed that not only estimate likely terrorism losses but also
enable companies to determine more easily what other businesses they have reinsured in the
same neighborhood.

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 BIBLIOGRAPHY

BOOKS
1. C.L.Tyagi & Madhu Tyagi, Insurance - Law and Practice,2013, Atlantic
Publishers & Distributors,New Delhi.
2. Banking and Insurance - Law and Practice, The Institute of Company
Secretaries of India (ICSI),2015.
3. Insurance Laws, 17th edition, 2015,Bharat Law House,New Delhi.
INTERNET
1. www.manupatra.com
2. http://www.iii.org/

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