Defining The Reinsurance Model

As a starting point, it is useful to have a benchmark description of what reinsurance actually means in practice. Reinsurance serves several purposes, but its main purpose is a means used by an insurance company or reinsurance company (buyer) to reduce the financial consequence resulting from the risks or perils that it has accepted.

Besides providing protection against the consequences resulting from various perils, reinsurance provides capacity to the insurance company to write business. For instance, a very large crude oil carrying vessel will be insured for the value of the vessel plus the value of the cargo, which could go beyond Rs 1,000 crore. This is beyond the capacity of an insurance company who therefore depends on reinsurance for the capacity to insure such high values.

Who are the buyers of reinsurance?

- Insurance companies who issue policies directly to customers

- Lloyds Syndicate

- Professional Reinsurance companies like Swiss Re or Munich Re

Who are the Sellers of Reinsurance?  

- Direct Insurance Companies

- Professional Reinsurers

- Lloyds Syndicate

As seen the buyers and sellers of reinsurance can be the same.

So how does reinsurance actually work?

Reinsurance can be for a single risk, known as facultative reinsurance, which operates on a case-by-case risk assessment and pricing basis. Also, reinsurance can be for the entire portfolio of fire or marine class of business, written by the insurance company and which operates on an automatic basis hence known as Treaty.

Transaction Process Flow

- A proposal is first received by the department through a broker/insurer.

- The proposal is processed in line with the underwriting guidelines and the Financial Standing Order (FSO) issued every year.

- The acceptance conveyed is known as the written line, for example, we may want to participate with 5% share on a risk or a treaty. However, depending on the demand supply of reinsurance we may get the full 5% or less just like an IPO issue. The confirmation of our written line is known as the signed line, which can be equal to or less than the written line.

- After the signed line comes in, the transaction is entered into the system, which for GIC is the SAP system.

- Documentation is concluded with the execution of the slip, which is the evidence of the reinsurance contract.

- Accounting documents showing premium dues are received from the broker, booked in the system followed by remittances.

- In case of claim brokers advise us the estimates of loss.

- When insurers make the payment, they recover from reinsurers as per contract terms through broker.

- Claims department follow their own set of claims guidelines and FSO.

In reinsurance foreign business, most of the business is through brokers. This is usual for all reinsurance companies. Further, diversification is achieved through placements done with huge number of reinsurers across the globe and this creates huge administrative work in terms of correspondence, co-ordination and accounting and remittance handling in multiple currencies and hence the role of broker is very important. It is pertinent to note here that the buyer chooses the broker and the seller has no say on this aspect.

The author is General Manager, General Insurance Corporation of India