PARA 13.2 IC 78, Miscellaneous Insurance One Liner, Chapter-11: Reinsurance
Insurance exams offered by the Insurance Institute of India (III), consist of various papers either in Life or Non Life or Combined. Here we are providing ONE LINER IC 78, Misc Insurance Chapter 11: Reinsurance for para 13.2 and III exam . These questions will be very helpful for upcoming promotional exam in 2020.
IC 90, Human Resource Management is a very important topic in insurance promotional exam. This IC 78, miscellaneous insurance paper comes in all GIPSA exams which makes it very important.
♦CHAPTER 11: REINSURANCE
1.Reinsurance serves to underwrite the risk/liability of an insurer more or less in the same way as insurance serves to indemnify the insured with respect to his interest
2.Reinsurance fulfils this purpose by allowing the insurer to so restrict the size of his commitment as to limit his maximum loss on the risk to an amount which he can pay without seriously disturbing his financial structure.
3.The maximum amount of risk which the insurer retains on his books varies from risk to risk and is called retention of the insurer with respect to the risk.
- The factors which govern the determination of this limit are as under:
- The nature of the risk
- Location of the risk
- The nature of the perils covered
- The insurer’s capacity to bear the loss to the limit of retention without seriously jeopardising his financial position
- Whether the number of risks identical to the risk under consideration is sufficiently large so as to allow for the play of the law of large number
- Reinsurance agreements can be classified as
- Facultative reinsurance: Under Facutative Reinsurance, each risk is proposed separately and individually to the reinsurer and the reinsurer decides whether to accept the same or not.
- In facultative reinsurance it is not obligatory for the ceding company to cede to any particular accepting company nor is it obligatory for the accepting company to accept the ceding company’s each and every offer.
- Treaty reinsurance: In terms of the agreement the ceding company is bound to cede and the reinsurers are bound to accept each and every cession which falls within the scope of the treaty.
- This latest development in the administration of treaty reinsurances has resulted in the treaty being termed as “blind treaty” in technical parlance.
- The different types of treaty reinsurances which are transacted are as under
- Quota share basis
- Surplus basis
- Pool basis
Non proportional type:
- Excess of loss
- Stop loss basis
- Quota share treaty method
- Under the quota share treaty the risks are shared by the ceding company and its reinsurers in some predetermined proportion
- Administration involves pro-rata cessions of premium and pro-rata recoveries on claims.
- Surplus treaty method: the surplus basis reinsurance is the most common form of treaty reinsurance.
- Under this arrangement the ceding company reinsures with the treaty reinsurers surpluses over and above its retention in terms, and within the size of, the treaty.
- The size or capacity of a treaty is expressed in integral multiples of the ceding company’s line, (i.e. retention)
- Example: A treaty of 19 line size or capacity means that the treaty reinsurers will
automatically be interested on the risk surpluses beyond the ceding company’s retention up to a maximum of 19 lines.
- There may be more than one surplus treaty depending on the size of the risks the ceding company may have and the facility that they may require.
- These treaties are known as First surplus, Second surplus, and Third surplus and so on.
- Pool basis: In this kind of reinsurance, Companies cede a particular percentage of their premium to a pool formed by a Group of Companies or by the regulators, for better management of risk. E.g. Terrorism pool, Motor TP Pool etc.
- Excess of loss reinsurance: Here the ceding company bears up to a fixed sum of losses in respect of a claim or claims arising out of a single event in a particular class of business.
20.This limit up to which the ceding company bears losses arising out of single event is called the “loss” or “underlying net” retention of the ceding company.
21.Any loss beyond the ceding company’s loss retention is to be borne by the excess of loss treaty reinsures.
22.Under the excess of loss arrangement it is usual not to provide for any agency commission terms.
- This arrangement of reinsuring on the excess of loss cover is found to be of particular advantage in motor insurance, public liability insurance and other classes of miscellaneous accident insurances involving liability insurance.
- Stop loss reinsurance: the ceding company can so protect itself that its net claim ratio for any one accounting year does not exceed a predetermined percentage.
- Example If the pre-determined percentage is set down at 80% the reinsurers share the losses in such a way as to restrict the ceding company’s net loss ratio to 80%.
- This arrangement of reinsurance is called the stop loss arrangement, since as the name indicates the net losses of the ceding company are stopped at a particular level.
- Upper limits for reinsurance: Under the excess of loss cover it is usual to fix an upper limit to the liability of the excess of loss reinsurer.
- Once this limit is reached the balance, if any, of the losses in anyone event will fall back on to the ceding company.
- Reinsurance programme in India: Under the provision of the Insurance Act 1938 (as amended) a fixed percentage of each and every risk underwritten in India has to be compulsorily reinsured with the G.I.C. of India.
- This percentage was 20% and later reduced to 10 % and is called ‘Statutory Cessions”. (now 5% as per IRDAI guidelines)
- The reinsurance arrangements are as per the IRDA regulations.
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