In reinsurance, the reinsurer acts as a new insurer, with the primary

insurer effectively becoming the policyholder - the contractual relationship

is between the insurer and reinsurer. The insured retains the original

relationship with the insurer. The particular significance here is that IF the

reinsurer is justified in declining the reinsurance responsibility in any

claim, then the FULL amount falls on the insurer. The insured does not

have any direct relationship with the reinsurelater

Lead Underwriter - Reinsurance : We have seen a definition of lead and

follow companies relating to co-insurance. There are similar terms that

apply in reinsurance. When a borker takes a risk to the market (details are

on a note called a 'broker slip') he will approach an acknowledged expert

in the particular field (a Lead Underwriter). The Lead Underwriter will

examine the slip and detail the rate to be charged along with the percentage

of the risk he will underwrite. The other underwriters (Follow

Underwriters) will then place their respective percentages on the slip,

subject to being satisfied with the rate. The broker will move around the

market until he has 100% or more (over-subscribed) of the risk covered.

Over-subscription is frequently done as there may be an underwriter who

later
Risk is the doubt concerning the outcome of a situation. Risk is

unpredictability. Risk is uncertainty as to the outcome of a loss. Risk is the

chance of a loss.

Risk register: This is a centrally held in hard or soft form register of all the

identified risks accepted by the company. They will be a number of entries

against each risk under such headings as follows:

Underwriting income and investment income are the two main sources of

income for an insurer.

Insurance underwriters evaluate the risk and exposures of potential clients.

The underwriting process consists of receipt, evaluation,

acceptance of risk, determining policy terms and conditions, pricing and

exposure management. The insurer cannot retain everything on his account

and needs to examine risk sharing options of coinsurance and reinsurance.

Reinsurance has two types - facultative (one off) and treaty (protfolio

management)
Risk management involves 5 steps: identify, assess, evaluate, mange and

transfer.

Underwriting process involves decision on risk acceptance.

An excess is another word for deductible. Many insurance policies have

stated excesses or deductibles - the amount the policyholder must

contribute towards a claim. This may be relatively low for a household

policy e.g. a few hundreds of rupees, or could be hundreds of thousands of

dollars for a large professional indemnity policy.

The insured has a direct relationship with the insurer and no relationship

at all with the re-insurer.

Excess of loss covers are known as non-proportional type of reinsurance

Retention is the maximum amount an insurer will want to hold

Financial, physical and moral are the three hazards

When looking for reinsurance, the underwriter works at two levels - one is

at risk level and the other is portfolio level.

Stop Loss covers are related to the total amount of claims in a year over

and above a particular limit or loss ratio.

The two ways of measuring risk within a risk register are probability and

severity.

Pure premium rating method: This approach reflects the expected losses. It

is a calculation of the pure cost of, say, property or liability insurance

protection. This is without any loading for the insurance company's

expenses, premium taxes, contingencies and profit margins. The pure

premium is calculated as follows : Pure Premium = Total Amount of Losses

Incurred per Year / Number of Units of Exposure

Exposure is the measurement of how big a risk is. For example in Property

insurance : The Sum Insured on the Building or Contents, in Employer's

Liability or

Workmen's Compensation: The wage roll on a particular trade

classification, in

Products Liability Insurance: Turnover on the relevant product line. The

exposure and the benefits may not always be the same e.g. in Products

Liability the turnover

may be the best form or exposure measurement but the benefit will be

based on the Limit of Lidiscounting

Pricing is critical to the success of any insurance venture. Underwriting

profits should be a consistent target.

Basic pricing - premiums in : claims out - leads to pure premium

Pure premium needs adjustment for all the working expenses and normal

outgoing of any insurer

Technical rate and book rate are critical for long term underwriting profit

Operational premium issues include rating, catastrophe loading and

commercial discounting

Investment income does not form part of the book price formula

Soft Market - When insurance companies undercut each other to grab

market share by reducing premium it is known as soft market.

In a 'hard market', insurance companies will often increase premiums and

take back some of the coverage enhancements, they provided during the

soft market.

Pure Premium = Total Amount of Claims Incurred per Year divided by the

number of exposure units.

The claims loading applied to a policy is known as Claims Malus.

Claim: a claim is a notification to an insurance company for

compensation for loss on the happening of an insured event, under

the terms of the policy.

Write-off is also used in vehicle insurance to describe a vehicle, which is

cheaper to replace than to repair, sometimes colloquially referred to as

being 'totalled' (a total loss).

Leakage is the term for any additional costs incurred by the insurer beyond

those necessary to fulfil its claim obligations under the insurance contract,

excluding fraud. Thus, it covers any inefficiencies or errors in the handling

or settling of the
claim, failures of service or replacement goods suppliers to act efficiently or

according to their service contract, or any other unnecessary cost.

Claims handling is the most important service an insurer can give, as

regards customer service.

At the same time, poor claims handling can also hit the company's bottom

line and shareholder profits.

A claim can be very simple or very complex to handle but in any case, it's

crucial the insured follows the claims conditions in the policy.

Claim process is relatively consistent in big and small claims - initial

intimation, gathering of facts, investigating the claim, declinature of claim,

negotiation, settlement and the closure.

Correct classification of the claim details is very important for

management information and managing the portfolios.

Leakage is a serious issue with any insurer. Leakage refers to where the

claims team forgets to recover all that is owed to it i.e. recovering the

excess, exercising its subrogation rights against a third party, obtaining

contribution from another insured or obtaining cash against salvage items.

The sharing of a claim between two insurers is called contribution.

The onus of proving a claim rests with the insured.

The insurer recovers amounts (claim) from the Third Party and / or Third

Party's insurers, under subrogation.

An ex-gratia payment relates to the event when the claim is not covered but

for business reasons, payment is made to the insured as a goodwill gesture.

Ex-gratia payments are totally a matter of grace on the part of the insurer,

as there is no legal obligation under the contract. Ex-gratia payment

decision is taken at a senior management level

Arson is the criminal offence of burning ones own property (usually to

defraud)
Leakage relates to the losses a company has every right to recover but does

not i.e. contribution, subrogation etc.

Technical reserves: the assets that an insurance company maintains to meet

future claims for losses. The technical reserves required can be classified as

follows: Reserves for unexpired risks, Reserves for incurred but

unreported claims, Reserves for outstanding claims, Fluctuation reserves

Modern Portfolio Theory (MPT): The fundamental concept behind MPT is

that the assets in an investment portfolio should not be selected

individually, each on their own merits. Rather, it is important to consider

how each asset changes in price, relative to how every other asset in the

portfolio changes in price.

Investing is a trade-off between risk and expected return. In general, assets

with higher expected returns are riskier. For a given amount of risk, MPT

describes how to select a portfolio with the highest possible expected

return. Or, for a given expected return, MPT explains how to select a

portfolio with the lowest possible risk(the targeted expected return cannot

be more than the highest-returning available security, of course, unless

negative holdings of assets are possible.)

MPT is, therefore, a form of diversification. Under certain assumptions

and for specific quantitative definitions of risk and return, MPT explains

how to find the best possible diversification strategy.

Arguments against MPT - (i) financial returns do not follow a symmetric

distribution. (ii) correlation between asset classes is not fixed but can vary

depending on external events (especially in crises). (iii) growing evidence

that investors are not rational and markets are not efficient.

Asset-liability management basically refers to the process, by which an

institution manages its balance sheet, in order to allow for alternative

interest rate and liquidity scenarios. Banks and other financial institutions

provide services, which expose them to various kinds of risks like credit

risk, and liquidity risk. Asset liability management is an approach that

provides institutions with protection that makes such risks acceptable.

Accurate claims reserving is critical for continuing profitability of an

insurer

There are two main sets of Reserves - premium (unearned premium and

unexpired risk) and claims (open claims reserve and IBNR).

The process of claims reserving is at operational level and its accuracy is

critical.

Insurance companies follow two basic investment theories -

Modern Portfolio Theory and Asset Liability Management.

Insurance Accounting - basically the same as other industries but with

some differences in view of the way insurance sector works. Reserves for

unexpired risks comes under the Technical Reserves heading. Every

insurer will have claims that, for some reason or other, have not yet been

reported and the insurer does not know about. Such claims are called as -

IBNR (Incurred But Not Reported)

The Chain Ladder format is also known as Triangulation. The

Triangulation or Chain Ladder technique is a simple operation to give an

idea of the claims development in a risk or sub-class over a number of

years.

Insurers follow two premium insurance styles : Asset Liability

Management and Modern Portfolio Theory

General Accounting must be in line with Accounting Standards issued by

ICAI.
Stakeholders in an Insurance Business - Government / Regulator,

Shareholders, Underwriters, Insurance Company Management. The

policyholder is not directly a stakeholder.

As per premium investment guidelines by IRDA, investment in Central

Government Securities should not be less than 2Hazard As per premium
investment guidelines by IRDA, investment in State Government securities
and other Guaranteed