{"id":200,"date":"2018-12-17T11:37:26","date_gmt":"2018-12-17T11:37:26","guid":{"rendered":"http:\/\/www.malayaleebazaar.com\/ecostar\/?p=200"},"modified":"2018-12-17T11:37:26","modified_gmt":"2018-12-17T11:37:26","slug":"reinsurance-writing-a-growth-story-where-the-secret-of-success-lies","status":"publish","type":"post","link":"https:\/\/dazzling-chebyshev.103-73-189-254.plesk.page\/?p=200","title":{"rendered":"Reinsurance: Writing a growth story, where the secret of success lies\u2026"},"content":{"rendered":"\n

Life business in Indiais three and half times more than the size of non-life business in terms ofpremium, a starring contrast to the global trend. This indicates a huge legroom for non-life to grow as the penetration is gaining momentum, to reach closerto the world average ratio of life and non-life business. Non-life business isthe biggest contributor to the reinsurance business that accounted for as highas 95 per cent of the total premium ceded. This obviously shows that thereinsurance business is in for a boom as non-life business is set to grow morerapidly in tune with the economic growth and industrialization. In the boom,GIC Re, the biggest reinsurer with proven track record of four and halfdecades, is set to be one of the major beneficiaries. GIC Re is the world\u2019sfastest growing reinsurer known for retaining attractive combined ratioconsistent over years, a yardstick to ascertain the efficiency of a reinsurer: Ecostar Business team presents a study reporton Reinsurance: A Business that is set to thrive on India\u2019s rapid economicgrowth<\/em>.<\/em>    <\/strong><\/p>\n\n\n\n

Reinsurance Definition:<\/strong> <\/p>\n\n\n\n

\u201cReinsurance achieves to the utmost extent the technical\nideal of every branch of insurance, which is actually to effect (1) the\natomization, (2) the distribution and (3) the homogeneity of risk. Reinsurance\nis becoming more and more the essential element of each of the related\ninsurance branches. It spreads risks so widely and effectively that even the\nlargest risk can be accommodated without unduly burdening any individual.\u201d –  Edwin Kopf, FCAS<\/em>,<\/strong> in his 1929 paper Notes on Origin and Development of\nReinsurance<\/em><\/p>\n\n\n\n

History of Insurance and evolution of Reinsurance <\/strong><\/p>\n\n\n\n

Thousands of years ago, Chinese merchants used to share their sea-shipment\nrisks among the concerned merchants so that one was not solely misfortunate\nabout a probable loss or vulnerable to any kind of loss alone under any unforeseen\ncircumstance. Later, Babylonians, Rhodes, Greeks and Romans shaped up their\nsystems to render reliefs to merchants against their losses in various ways. Centuries\nlater, as the system had undergone massive changes, the concept of insurance took\na different shape. It was in the 14th<\/sup> Century a formal agreement\nthat embodied the facets of reinsurance came into existence. But it took many\ndecades thereafter to bring in place any state law that dealt with specific\npremiums for insurance risk, the first being an ordinance passed in Barelona in\n1435.  More than two decades later \u2013 that\nwas said to be in 1457 – the term called reinsurance appeared first time in the\nhistory of the insurance business.  <\/em><\/p>\n\n\n\n

In 1842, Hamburg was hit by a horrendous fire that destroyed a\nquarter of the city, rendering around 20,000 people roofless. The city took\nmore than four decades to rebuild from the ashes. The London conflagration in\n1665 had forced Hamburg to constitute what was known as City Fire Fund in 1667.\nBut the massive Hamburg fire depleted the fund and a number of German insurers were\nhit badly after the claim.  Embarrassed\nwith the loss, a German insurer tried to reinsure a portion of its portfolio\nwith a French company. When negotiations back-fired, it decided to offer the\nreinsurance to its own shareholders. The shareholders were willing to take up\nthe risk rather than relinquishing one-third of their business to another one.\nThat led to the formation of a reinsurance subsidiary. Many other insurers subsequently\nfollowed this method. <\/em><\/p>\n\n\n\n

Fire and other catastrophes loomed throughout the history. Devastating\nnatural calamities, man-made disasters like wars, etc made many insurers unable\nto pay claims, while some showed their reputation in settling the claims they\nhad underwritten at their own cost. In fact, natural calamities and other risks\nused to make insurers and reinsurers sick. However, these taught insurers and\nre-insurers how they should determine the premium and manage their future\nrisks, though some were unpredictable. Riskier the coverage is, higher the\npremium for underwriting has been.<\/em><\/p>\n\n\n\n

Cologne Re was the first professionally run independent\nreinsurance company that was founded in 1842. Nineteen years later, another\ngreat fire of Glarus re-emphasized the necessity for insurance and reinsurance.\nThis led to the founding of the Swiss Re in 1863 by Helvetia General Insurance,\nCredit Suisse and Basler Handelsbank. Various reports then had shown foreign\ncompanies were also keen to do business with Swiss Re. As a result, treaties\nwith companies in Germany, Italy, France, Austria, England, Belgium and Russia\nhad come up. The subsequent years saw emergence of many reinsurance companies,\nas well as disappearance of some on the other side and also consolidation. The\nrapid rise of trade and commerce as well as the development of the city-states\nalso contributed to the evolution of insurance and its expansion through the\ncenturies.<\/em><\/p>\n\n\n\n

Evolution continued. Broader and deeper thought processes took\nplace to ensure balance between what is coming in, essentially premium and what\nis going out, that is the compensation of losses. Risk management on one side\nand management of the fund that comes by way of net premium on the other side;\nthe areas of underwriting have broadened. Insurers have found new geographies,\nnew areas for underwriting and new methods to safeguard themselves. In all\nthese, skill and expertise played key roles. <\/em><\/em><\/p>\n\n\n\n

With the proliferation of industrial\nactivities and the consequent economic progress, the world became increasingly conscious\nabout risks of various natures and the essentiality of preventing losses\nemanating from any unforeseen eventuality. Unpreventable catastrophe or loss of\nasset or material loss should not displace a business; loss of one\u2019s life\nshould not throw his\/her dependent in to a disarray; drought or flood should\nnot land farmers in distress and sickness of a family member should not make\nthe family bankrupt. This consciousness, precaution and fear have made people\nseek an appropriate safety net. Be it an industrial complex, crops and agricultural\nfield, health of individuals and families, individual life or properties, being\nthem vulnerable to risks and unpredictability, insurance comes to cover the risks.\nLogically, insurance is a safety solution and a tool for peace of mind, as the\nworld has embraced this model. The modern world has realized this fact and made\nit increasingly inevitable and acceptable. Naturally, as the economy thrives,\ninsurance too does.<\/p>\n\n\n\n

Today, it is a multi-trillion dollar business in the\nworld, growing fast in tune with the progress of human world. The aggregate\npremium mobilization by life and non-life businesses around the world stands\naround $6 trillion. The growth focus is now being shifted from increasingly saturated\nand tough western economy to the fast developing and thriving economies like\nIndia. In fact, India is considered one of the fastest growing insurance\nmarkets in the world owing to its fast-paced industrial activities, consequent\neconomic progress, huge population density and huge space for insurance\npenetration existing in the country. <\/p>\n\n\n\n

As direct insurance business grows, reinsurance business\nalso grows. Larger the volume and more wide-spread is the footprint, more\ndiversified and manageable is the risk. As the world\u2019s most successful\ninvestor, Warren Buffet sees, it is that insurance which tends\nto take the longest amount of time to pay out claims — a concept known as\n“long-tail” insurance business is more impressive. That is obviously\nthe reinsurance. It is known to be in reinsurance he made his biggest bet on\nwith his group\u2019s insurance portfolio.\nNow,\nBerkshire’s best-known insurance operation, GEICO has only a small part of the\ngroup\u2019s insurance business and the majority is in reinsurance business. That is said to have made sense for him,\nbecause to avoid excessive losses upon a natural catastrophe, a\nproperty-casualty insurer might purchase a reinsurance policy that covers\nlosses above a fixed sum. In fact, reinsurance will thrive on the growth of\ninsurance which is imminent as the economy grows and insurers\u2019 fear of larger\nsize claims. <\/p>\n\n\n\n

Every financial business is risky deed, that becomes\nriskier for those who refuse to innovate and explore healthy business. In\nreinsurance, what are essential for being strong in business are the presence\nin wider geography, strong presence in flourishing economies, diverse nature of\nbusiness, management quality, etc. What would determine health of the company\nin this business are combined ratio and capital. As far as an experienced\nplayer is concerned these strengths are built over the years, out of their deep\nknowledge and experience. GIC Re, a public sector reinsurer has all these\nstrengths, reassuring it a strong place high level of credibility in the\nbusiness.  <\/p>\n\n\n\n

Under Section 101A of the Insurance Act 1938 every Indian\ninsurer had to cede a certain percentage of the sum assured on each policy for\ndifferent classes of insurance written in India to GIC Re.  Although Indian insurers must cede at least\nthe mandatory percentage as prescribed, in practice, an offer must be made to\nthe GIC Re and the GIC Re may accept the offer in whole or in part.<\/p>\n\n\n\n

But the Insurance Laws (Amendment) Act 2015, which\nbrought about extensive amendments to the Insurance Act, permitted setting up\nof foreign reinsurer branches in India giving green signal to foreign\nreinsurers. In the period between 2015 and 2016 the Insurance Regulatory and Development\nAuthority of India (IRDAI) brought about many amendments to deregulate some of\nthe old norms to allow foreign reinsurers to set up branches in India. By December\n2016 IRDAI granted certificates of registration to five foreign reinsurer\nbranches under the Branch Office Regulations and also for one Indian company ITI\nReinsurance Limited. Lloyd’s was in the process of forming an India branch,\nalong with various other foreign reinsurers which would explore opportunities\nin reinsurance business through service companies set up in India under the\nLloyd’s India Regulations. <\/p>\n\n\n\n

Earlier European reinsurers had concerns\nabout India\u2019s gesture of protection of the domestic industry and holding back\nrivals from seeking to enter the world\u2019s most potential reinsurance market,\nthough which was an incorrect notion. But later, Insurance Europe, a European\nreinsurance federation with representatives from 35 European countries welcomed\nthe national Insurance Bill in March 2015 that resulted in some of the European\nreinsurers entry into India. But that hasn\u2019t been an adversity to the Indian\nplayer like GIC Re as IREDAI\u2019s Regulation made Indian insurers cede their\nbusiness to reinsurers according to a prescribed order of preference. Similar\npreferences are present in other regimes too by way of an additional capital\ncharge on outward business and collateral stipulation. <\/p>\n\n\n\n

The regulatory authority also had set up a Reinsurance\nExpert Committee (REC), with industry experts as members in it to review the\nreinsurance regulatory framework, including the order of preference\nregulations. The report had many positive recommendations to improve and\nstreamline the ability of cross-border reinsurers to quote and participate in\nreinsurance cessions. The Committee also proposed certain specialised lines\nlike aviation, marine hull, life insurance, oil and energy and larger\ninfrastructure projects, be exempt from the order of preference. But on January\n5, 2018, IRDAI released Draft Reinsurance Regulations to amend the order of\npreference setting aside REC\u2019s proposals. The draft regulations retained the\nfirst right of refusal for GIC Re and kept the same order in which Indian\ncedants*<\/strong> must seek terms and make offers for\nparticipation. <\/p>\n\n\n\n

In fact, until recently, the General Insurance\nCorporation of India (GIC), which has more than four and half decades of\nexperience in this business, was India’s sole reinsurer.  In 2015 the reinsurance sector was opened for\nprivate Indian and foreign players\u2019 entry. Warren Buffett\u2019s Hathaway considers\nIndian reinsurance market as one of the important markets in the world. With\nthe anticipation of a boom in reinsurance business in India, General Re, a unit\nof Warren Buffett\u2019s Berkshire Hathaway which entered the country wining a\nlicense to open an Indian office in May 2017. It is reportedly seeking a larger\nslice of what is termed as the world\u2019s fastest-growing reinsurance market.\nOther foreign players followed General Re\u2019s way are Munich Re, Swiss Re AG,\nLloyd\u2019s and SCOR SE. GIC Re hasn\u2019t found the entry of other players in the\nsector where it has strong domain knowledge and commands brand respect as\nworrisome. \u201cNew reinsurers entering into India provide\nadditional capacity in the Indian market and bring with them international\nexpertise. Cedants get access to new and innovative products. All these\nadvantages have the potential to accelerate increase in insurance penetration\nin India,\u201d said Mrs Alice G Vaidyan, Chairman-cum-Managing Director of GIC Re\nat an Insurance Seminar.<\/p>\n\n\n\n

Global reinsurance market has a size of around $240\nbillion in terms of premium with the non-life constituting more than two-thirds\nof the size. CRISIL Research study pointed out that the reinsurance industry\nhas been in a deep soft market cycle since 2013. The weak underlying demand\ngrowth, low interest rates and the expansion of alternative capital impacted\nthe global reinsurance market over the past few years. With the supply of\ncapital far exceeding the demand, the market has been extremely soft, CRISIL\nReport pointed out. <\/p>\n\n\n\n

The growth of reinsurance business has been rapid in the\nlast 10 years with an estimated 15 per cent CAGR. According to CRISIL study, in\nfiscal 2017, premiums ceded to reinsurers increased by 73 per cent, as non-life\ninsurance premiums grew 32 per cent on-year \u2013on basis and retention ratios\ndeclined close to nine per cent. Non-life risk dominates the Indian reinsurance\nmarket with 95% of the total premium ceded in Fiscal 2017. This is said to be mainly\nbecause of the better geographical spread of life policies compared to non-life\nand also the insured amounts are typically smaller and reinsurance need is\ncorrespondingly lower.<\/p>\n\n\n\n

In life business, India is the 10th<\/sup> largest\nand fifteenth in non-life business in the world in terms of total premium. Life\nbusiness in India is three and half times more than the size of non-life\nbusiness, a reverse to the global trend, indicating a huge leg room for\nnon-life to grow to reach closer to the world average ratio of life and\nnon-life business. Non-life business is the biggest contributor to the\nreinsurance business in India that accounted for as high as 95 per cent of the\ntotal premium ceded. This obviously shows that the reinsurance business is in\nfor a boom as non-life business is set to grow more rapidly in tune with the\neconomic growth and industrialization. The growth in India\u2019s reinsurance as\nseen since last year was mainly because of rapid increase in crop insurance.\nThis indicates the fact that the growth from the industrial segment, which is\nimminent as India is attracting massive foreign direct investments, is yet to\nreflect in the growth trajectory. Currently, other than GIC Re ITI Reinsurance\nLimited, a privately owned firm is only Indian reinsurance company.<\/p>\n\n\n\n

Highlights<\/strong><\/p>\n\n\n\n