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News ic 85 - reinsurance pdf the better part

WG University - Reinsurance 101

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The development of a reinsurance market took a rockier road. Reinsurance of marine risks is thought to be is old as commercial insurance, but it was not until that the practice in the UK was legalised and the ban on marine reinsurance was removed. Previously, reinsurance had been considered as a form of gambling. As reinsurance of fire business appeared unattractive to UK insurers, coinsurance remained a more common way of spreading the risk.

Insurers wishing to spread their risks then had to turn to the continental merchant banks for their reinsurance protection. It was in continental Europe, in the early 1 SOPs, that automatic treaty reinsurance was first developed and there are numerous examples on record of facultative and treaty reinsurance arrangements at that time.

However, it took until for the first independent reinsurance company to be established, and that company was the Ruchversicherrungs Gesellschaft of Cologne. Several German companies, including the Aachener Ruck, followed suit, proving themselves to he as productive as their forerunner.

Unfortunately, British reinsurers who decided to enter the field found that their initial experiences were not so fortuitous. In the 1 s, quite soon after setting up, a number of UK reinsurance companies went into liquidation. Ike reasons for heir lack of success are not altogether clear, but the UK retained its role as a modest reinsurance market.

It is in that we find the earliest trace of excess of loss reinsurance, as established by Mr Cuthbert Heath of Lloyds, and nor until do we find the establishment of Britains oldest and longest operating reinsurance company, the Mercantile and General. Then came the First World War, which brought with it a curtailment in trading relationships between the UK and its primary reinsurance markets.

This forced companies to look within their own national boundary for cover and Lloyds, a late entrant to the reinsurance market, began to take a more active role, attracting a large volume of business from the United States of America. By the end of the Second World War London had successfully established itself at the heart of the international reinsurance market.

The City of London had become the centre for reinsurance capacity and expertise, with capital provided by British and overseas companies and also those many individuals who were members at Lloyds.

Other reinsurance markets overseas, particularly in Germany and the United States, continued to develop their major domestic reinsurance markets. Reinsurance is a means by which an insurance company can protect itself against the risk of losses with other insurance companies. Individuals and corporations obtain insurance policies to provide protection for various risks hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.

Reinsurers, in turn, provide insurance to insurance companies Reinsurance helps primary insurers to reduce their capital costs and raise their underwriting capacity since major risks are transferred to reinsurers; the primary insurer no longer needs to retain capital on its balance sheet to cover them. Reinsurance thus serves the primary insurer as an equity substitute and provides additional underwriting capacity. This indirect capital is cheaper for the primary insurer than borrowing equity, since reinsurers can offer to assume risks at more favorable rates thanks to their superior risk diversification.

The additional underwriting capacity permits the primary insurers to assume additional risks which without reinsurance they would either have to refuse or which would compel them to provide a lot more of their own capital. In a globalized world, in which potential financial claims are steadily rising and in which the limits of insurability are being constantly extended, reinsurance thus assumes a major significance for the whole economy.

Types of reinsurance Treaty and Facultative Reinsurance The two basic types of reinsurance arrangements are treaty and facultative reinsurance. In treaty reinsurance, the ceding company is contractually bound to cede and the reinsurer is bound to assume a specified portion of a type or category of risks insured by the ceding company. Treaty reinsurers, including the SCOR Group, do not separately evaluate each of the individual risks assumed under their treaties and, consequently, after a review of the ceding company's underwriting practices, are dependent on the original risk underwriting decisions made by the ceding primary policy writers.

Such dependence subjects reinsurers in general, including SCOR, to the possibility that the ceding companies have not adequately evaluated the risks to be reinsured and, therefore, that the premiums ceded in connection therewith may not adequately compensate the reinsurer for the risk assumed. The reinsurer's evaluation of the ceding company's risk management and underwriting practices as well as claims settlement practices and procedures, therefore, will usually impact the pricing of the treaty.

In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk assumed by a particular specified insurance policy. Facultative reinsurance is negotiated separately for each insurance contract that is reinsured. Facultative reinsurance normally is purchased by. Underwriting expenses and, in particular, personnel costs, are higher relative to premiums written on facultative business because each risk is individually underwritten and administered.

The ability to separately evaluate each risk reinsured, however, increases the probability that the underwriter can price the contract to more accurately reflect the risks involved. No individual risk scrutiny by the reinsurer Obligatory acceptance by the reinsurer of covered business A long-term relationship in which the reinsurers profitability is expected, but measured and adjusted over an extended period of time Less costly than per risk. A profit is expected by the reinsurer in the short and long term, and depends primarily on the reinsurers risk selection process Adapts to short-term ceding philosophy of the insurer o o.

Proprotional And Non-Propoertional Reinsurance Both treaty and facultative reinsurance can be written on a proportional, or pro rata, basis or a non-proportional, or excess of loss or stop loss, basis. This means that the reinsurer will receive that stated percentage of each dollar of premiums and will pay that percentage of each dollar of losses. In addition, the reinsurer will allow a "ceding commission" to the insurer to compensate the insurer for the costs of writing and administering the business agents' commissions, modeling, paperwork, etc.

The insurer may seek such coverage for several reasons. First, the insurer may not have sufficient capital to prudently retain all of the exposure that it is capable of producing. Insurance to Insurers Premiums and losses are then shared on a pro rata basis. The other form of proportional reinsurance is surplus share or surplus of line treaty. Surplus treaties are also known as variable quota shares.

Non-proportional Non-proportional reinsurance only responds if the loss suffered by the insurer exceeds a certain amount, called the retention or priority. The main forms of. In per risk, the cedants insurance policy limits are greater than the reinsurance retention. In catastrophe excess of loss, the cedants per risk retention is usually less than the cat reinsurance retention this is not important as these contracts usually contain a 2 risk warranty i. In that case, the insurance company would only recover from reinsurers in the event of multiple policy losses in one event i.

Aggregate XL afford a frequency protection to the reinsured.

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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" or annual aggregate XL. Reinsurance companies themselves also purchase reinsurance and this is known as a retrocession.

They purchase this reinsurance from other reinsurance companies. The reinsurance company who sells the reinsurance in this scenario are known as retrocessionaires.

The reinsurance company that purchases the reinsurance is known as the retrocedent. It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. For example, a reinsurer that provides proportional, or pro rata, reinsurance capacity to insurance companies may wish to protect its own exposure to catastrophes by buying excess of loss protection.

Another situation would be that a reinsurer which provides excess of loss reinsurance protection may wish to protect itself against an accumulation of losses in different branches of business which may all become affected by the same catastrophe.

This may happen when a windstorm causes damage to property, automobiles, boats, aircraft and loss of life, for example. This process can sometimes continue until the original reinsurance company unknowingly gets some of its own business and therefore its own liabilities back. This is known as a spiral and was common in some specialty lines of business such as marine and aviation.

Sophisticated reinsurance companies are aware of this danger and through careful underwriting attempt to avoid it. Well-written software can either detect reinsurance spirals, or poor software will ignore it, with the latter amplifying the effect of spiraling. In the s, the London market was badly affected by the creation of reinsurance spirals. This resulted in the same loss going around the market.

The LMX spiral as it was called has been stopped by excluding retrocessional business from reinsurance covers protecting direct insurance accounts. It is important to note that the insurance company is obliged to indemnify its policyholder for the loss under the insurance policy whether or not the reinsurer reimburses the insurer.

Many insurance companies have experienced difficulties by purchasing reinsurance from companies that did not or could not pay their share of the loss these unpaid claims are known as uncollectibles. This is particularly important on long-tail lines of business where the claims may arise many years after the premium is paid.

Treaty To overcome the high administration costs and uncertainty of reinsuring large numbers of individual risks on a facultative basis, the reinsurance treaty came into being Proportional treaties include quota shares, various levels of surpluses and facultative obligatory treaties.

Non proportional treaties include risk excess of losses, catastrophe excess of losses, stop losses and aggregate excesses. A proportional treaty may he referred to as a pro-rata or surplus lines or excess lines treaty. The party passing on liability may be termed the cedant, insured, reinsured or retrocedant and the party accepting the liability may be termed the reinsurer or retrocessionaire.

Apart from the term cedant, which can be Reinsurance: Financial reinsurance Financial Reinsurance, also known as 'fin re', is a form of reinsurance which is focused more on capital management than on risk transfer. In the non-life segment of the insurance industry this class of transactions is often referred to as finite reinsurance.

One of the particular difficulties of running an insurance company is that its financial results - and hence its profitability - tend to be uneven from one year to the next.

Since insurance companies generally want to produce consistent results, they may be attracted to ways of hoarding this year's profit to pay for next year's possible losses within the constraints of the applicable standards for financial reporting.

Financial reinsurance is one means by which insurance companies can "smooth" their results. A pure 'fin re' contract for a non-life insurer tends to cover a multi-year period, during which the premium is held and invested by the reinsurer. It is returned to the ceding company - minus a pre-determined profit-margin for the reinsurer - either when the period has elapsed, or when the ceding company suffers a loss.

In the life insurance segment, fin re is more usually used as a way for the reinsurer to provide financing to a life company, much like a loan except that the reinsurer accepts some risk on the portfolio of business reinsured under the fin re contract.

Repayment of the fin re is usually linked to the profit profile of the business reinsured and therefore typically takes a. Fin re is used in preference to a plain loan because repayment is conditional on the future profitable performance of the business reinsured such that, in some regimes, it does not need to be recognised as a liability for published solvency reporting.

These deals were legal and approved by the UK tax-authorities. However they fell into disrepute after some years, partly because their tax-avoiding motivation became obvious, and partly because of a few cases where the overseas funds were siphoned-off or simply stolen.

More recently, the high-profile bankruptcy of the HIH group of insurance companies in Australia revealed that highly questionable transactions had been propping-up the balance-sheet for some years prior to failure. To be clear, although fin re contracts were involved, it was the fraudulent accounting for those contracts - and not the actual use of fin re - which was the problem.

As of JuneGeneral Re and others are being sued by the HIH liquidator in connection with the fraudulent practices. Basis of Insurance and Need for Reinsurance General insurance business is still largely untouched by the discipline of a mathematical base. It is obvious that insurance operates on the law of probability.

The risk premium should represent the sum total expected value of loss during a year using the probability of occurrence of losses of different magnitudes affecting the risk.

In practice, this estimation is derived from the observed incidence of losses on the insured portfolio. Even if an accurate mathematical determination of the expected value of loss be possible, the actual observed losses will be different from this figure. The extent of variation will depend on the size of the insured portfolio. The financial impact of such variation must be kept within the sustaining reason for limiting exposure to loss on one risk according to a schedule of retentions.

Since a large number of risks offered insurance in practice exceed the retention capacity of a company, reinsurance becomes essential for any companys operation. Good Reinsurance Management Optimization of a companys profits and growth prospects involve optimization of its retention and designing of its reinsurance program to best advantage. Reinsurance should not be limited to getting rid of the portion of risk that cannot be retained.

It should contribute more positively to the companys prosperity. Since the nature of a companys portfolio is generally not static, the reinsurance arrangements have to be kept under review continuously.

Hence, the concept of dynamic reinsurance management is important. The objectives of a good reinsurance program are as follows: Progressive increase in retention without disruption of arrangements should be possible. Such minimization should be equitable and should not be entirely subject to forces.

Reinsurers who will willingly and readily honour their obligations, who will take a long-term view and stand by the company. Such business will help to improve the spread and balance the net retained account and should help to increase net premium and profits. Proper Retention Policy Reinsurance is not the means to get-rid-of bad business. Automatic reinsurance arrangements are like products manufactured by an industrial company. Similar attention to quality of product and the reputation of the company is necessary.

When there was easy availability of reinsurance which may not continue for ever some companies have been able to expand premium volume without attention to quality and have produced good net results by keeping very low retentions and reinsuring out. However, this is a dangerous management policy and exposes the entire future of the company to the operation of market forces.

The reinsurance program should be based on a sound retention policy. The schedule of retentions is based on the following factors: Retaining much lower than justified by these factors can insulate the company from the effects of bad underwriting and encourage a reckless development policy. High profitability cannot justify retaining much more than technically feasible. However, in respect of a portfolio of profitable business with normal exposure of losses, it is possible to increase the net retention to a higher figure based on the spread ov2r a period of five years with a suitable working excess of loss protection.

Working excess of loss reinsurance is also the more appropriate method of keeping a reasonable. However, it can cause reduction of net retained profits in some circumstances for business such as marine hull. Linked with determination of the size of retention is the decision pattern of reinsurance protection. It could either be the normal method of proportional reinsurance with only catastrophe protection for the net account or it could be an enlarged retention with excess of loss protection and proportional reinsurance beyond the retention or it could be primarily excess of loss protection with some control on exposure through proportional reinsurance.

Selection of the most appropriate system of reinsurance depends on the nature of the portfolio, its pattern of exposure and losses. It could be said that there is really only one reinsurance market that is the worldwide market.

The reinsurance market s operate in a constantly changing environment. What makes a risk attractive to reinsurers today, may make it unattractive tomorrow and tax regulations, accounting and legal processes all have an effect on reinsurers attitude to risk.

As one market contracts, another expands, taking up the surplus capacity which over-spills and, with the current harmonising of EU insurance and reinsurance regulations, this may also bring about further changes which will influence reinsurers future business strategies. The United Kingdom London is an international centre for the placing of protections for insurance and reinsurance companies throughout the world.

It has a reputation for the strength of its security and its innovative style of underwriting, leading the way in electronic risk placement and electronic claim advice and settlement systems. The London Markets underwriting resources are produced by Lloyds and the company market, and in the total market generated a gross premium income of approximately L The uniqueness of the Lloyds operation and the position of the surrounding reinsurance companies is considered to have made London the major reinsurance centre it is today.

The Continent of Europe There is a vast amount of reinsurance capacity available from the large number of insurance and reinsurance companies operating on the Continent. In Germany the market is dominated by the largest reinsurance company in the world, the Munich Re.

The Winterthur Group is based there too. Many continental companies, particularly in Germany, have developed their reinsurance accounts through strong domestic insurance portfolios. Some of the direct accounts were built up through links with particular sections of industry and commerce, e. Companies based in countries such as Switzerland, with a relatively small domestic market, developed with the help of a widely spread international network of offices. Many major continental companies have also set up UK registered companies, which accept business in the London market.

Reinsurers receive offers of reinsurance direct from cedants and from domestic and international brokers. In addition, risk placement via electronic networks should also be available to continental based underwriters when URZvIAs European market strategy comes to fruition.

The United States of America The United States is mainly a domestic reinsurance market and the largest market of its kind in the world. The high volume of domestic business and the continental spread of risk has encouraged this development, and the amount which is reinsured internationally, especially with Lloyds and London companies, is substantial. The comparatively small volume of business which it accepts from outside its boundaries is continuing to grow.

Its top two reinsurers, Employers Re and General Re, are among the top 10 largest global reinsurance companies in the world. Insurance legislation is mainly a matter for the individual state, with the Federal government taking a role in broader constitutional matters. Reinsurance operations can be divided into admitted and non-admitted reinsurers. Admitted reinsurers are licensed in at least one state and include alien, or non-US, companies and Lloyds underwriters. Non-admitted reinsurers are not licensed in any state, but operate subject to compliance with various requirements imposed by the insurance departments within each state.

All states are members of the National Association of Insurance Commission which is a forum for discussing aspects of insurance regulations, including securities valuation and accounting practices. Its standards form the basis for many state regulations. Business throughout the US can be conducted direct with reinsurance professionals, through reciprocal exchanges or through domestic and international brokers.

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Over the years a number of American brokers have developed into large international organisations, mainly through company mergers and acquisitions. The two main associations representing the American reinsurance market are BRM. The Far East The main insurance centres in the Far East are situated in Japan and Hong Kong and, although their international reinsurance markets are still relatively small, they are considered to have considerable growth potential. Japan is one of the most highly regulated insurance markets in the world and all its domestic insurers accept both insurance and reinsurance business.

Quota shares of marketwide pools and reciprocal exchanges of business have ensured a well-spread domestic account for insurers. There are only two professional reinsurance companies, the Toa and Japan Earthquake Re, the latter accepting only domestic earthquake business. It was through reciprocal exchanges on their proportional treaty business that Japan first entered the international markets.

Non-reciprocal business, particularly catastrophe excess of loss protection, is now freely placed and although there is considerable reinsurance capacity in Tokyo, international reinsurance has not proved to be particularly attractive to Japanese companies. Reinsurance brokers feature heavily in servicing the Japanese market. Hong Kong has established itself as a regional insurance centre for the Asia Pacific Rim and in there were authorised insurers.

There are approximately 10 reinsurance companies based in Hong Kong, which have traditionally serviced northern Asia, China, Korea, Taiwan, the Philippines and Thailand. Offshore markets A large, and growing number of governments around the world have set up international financial centres or havens, with the purpose of encouraging, through tax incentives and other financial benefits, captive insurance companies and reinsurance operations into their country. A captive insurance company is owned by a company, or companies, not primarily engaged in the business of insurance, and all, or a major portion of the risks accepted by the captive relate to the risks of its parent and affiliated companies.

The rapid growth of the captive insurance industry is relatively recent and in there were approximately 3, captives worldwide. The rise in popularity of establishing captives in offshore domiciles can be attributable to the less restrictive insurance regulations, freedom from exchange control, and the absence or low rates of taxation which apply.

The major offshore centres arc situated in: Bermuda is the largest of the offshore markets, housing over captives. It is heavily supported by the US and it is estimated that two-thirds of all US foreign reinsurance flows through the island.

The island has also become a major reinsurance market and has attracted a number of highly capitalised reinsurance companies with high levels of international reinsurance capacity.

Other financial centres, which may be included in the ever-lengthening list of offshore domiciles, are situated in: Dublin Luxembourg. Reinsurance Contracts The relationship between the insurer and reinsurer rests upon the wordings of the contracts, which consist of important ingredients such as premium, commission, retention and limit.

The key lies in clarity while drafting the contract, the absence of which, results in a dispute later on. The negotiating process plays an important role while drafting the contract. Therefore, senior executives of both the parties should take a lead role in the process and identify the loopholes in the contract and leave no communication gap. Reinsurance generally operates under the same legal principles as insurance, and reinsurance agreements, as with any legally binding contract, must satisfy fundamental criteria to ensure that a valid contract is formed.

In order to decide whether a contract has been entered into, it is necessary to establish that the basic elements of offer, acceptance and an intention to form a legal relationship are present.

A further essential element in establishing a contract is consideration, which in insurance and reinsurance contracts equates to the premium.

Exposure rating method considers the insured risks, i. Overall, exposure rating aims at a premium rate or price based on portfolio analysis rather than on actual loss experience. All specialty and liability products and property damage covers beyond certain sums-insured use this rating approach to arrive at the premium rate.

Objective of the exposure rating method is to estimate proportion of the loss for the underlying policy that is expected in the entire portfolio. The primary reason for going for this type of rating approach is the general lack of credible risk data of exposures, premiums and claims with the insurer or in the entire market. To circumvent this limitation on a logical and systematic basis, the rating approach tries to correlate and extrapolate the data of similar risks for arriving at the rate.

Exposure rating and experience rating may be applied while rating renewals by adding weights to each using credibility rating. It is mostly used in cases where there is no or insufficient representative claims experience available to calculate the burning cost.

In such a case the insurer uses exposure rating to look back at the claims experience of another portfolio of the same kind. This means that the claims experience we are missing can be derived from a reference portfolio whose claims experience is sufficiently well supported statistically.

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However, care should be taken to ensure that while comparing portfolios, the portfolio which is similar and the nearest possible to the portfolio under study should be selected. In order to be able to use the claims experience of a different portfolio, the portfolio in question has to be put into a suitable form and represented as a loss distribution. This presentation of loss distribution in graphical form, in the form of curves, is known as exposure curve, which is based on distribution models of claims sizes.

Insurers use this method to arrive at the appropriate premium using these curves. These curves determine the premium that the insurer ought to charge, to cover expected losses. The exposure curves are built using factors like loss degree vs. A general insurer wishes to launch a health insurance policy targeted towards the general population between the age groups of 3 and 60 years.

However, as a new company, it does not have any statistical data or supportive evidence towards the likely losses for arriving at the premium to be charged. In such a scenario: The insurer, using this data, has prepared premium rating for the proposed health cover in the following manner which is a good example of Exposure rating. However, it has come to the notice of the insurer through the consultant that as per an independent study conducted in India, the occurrence is between and The insurer has taken a figure of as justified taking the least and the highest between the two studies and rounding off to the nearest hundred conservatively.

This gives a figure of 60 cases per 1,00, persons approximately. Hence, for arriving at the appropriate level of premium to suffice the likely claims and in order to avoid adverse selection, the premium based on the above factors is taken by the insurer as applicable to the youngest age bracket and the same premium is gradually loaded for increase of age in bands. The insurer works out the premium per Rs. To this the insurer has to provide expenses towards his Marketing cost, margin for profit, Administrative costs and overheads and he estimates them as:.

The technical claims incidence rate is 0. This illustration shows how the exposure rating is arrived at based on the facts related to the loss experience of general population, applying it to the likely incidence of claims and the cost of premium thereof.

However, there are several methodologies and techniques in exposure rating for calculation of premium rates but the example helps to understand as to how this operates. Overall, whatever may be the method of arriving at the appropriate premium rate, the main aim and objective in the whole process is to ensure that all losses are paid out from the premium collected, leaving at least a minimum amount towards profit margin.

In order to achieve this and to choose the appropriate method of rating for the risk s covered it is imperative to involve the Appointed Actuary right from beginning of the exercise of deciding rates, terms and conditions. These are: In loss ratio method, premium is adjusted on the basis of actual loss experience of the insurance company. Under which rating approach, the premium rate is determined by an evaluation of the exposure to loss in respect of the risk concerned, independent of the actual claims.

Customised products include on-life products that are specially designed to suit the specific needs of clients. In exposure rating method, the premium rate is determined by an evaluation of the exposure to loss in respect of the risk concerned, independent of the actual claims. List the goals of market conduct supervision for insurance business. Insurance regulation has been promoted worldwide with a view to ensure that there are inbuilt safeguards so that any tendency of the insurer towards market failure is corrected in a timely manner.

Failures can arise from rash or inefficient financial conduct or unprofessional market conduct which includes behaviour of the insurers towards customers. As a measure to ensure that policyholders are given equitable treatment, competition is introduced in insurance markets so as to serve consumer interests. However, over-competitiveness and unfair competitive practices can in turn destabilise markets and eventually lead to insolvencies.

In order to ensure stability in the market performance, the regulator supervises the market conduct of insurers. To achieve the above goals, the regulator should be cognizant of competitive forces and take actions that foster a healthy marketplace. The regulator must be alert for any possible unfair and discriminatory rating and underwriting practices as well as overly restrictive policy provisions.

Describe the procedures for filing of rates and policy forms for regulatory review. Fundamentally, policy forms need to be filed with the regulator to conform to maintenance of basic standards which include compliance with laws and regulations, proper pricing, acceptable customary practices etc.

While it is essential to ascertain that the policy wordings are sufficiently sound to protect the insurer from excessive liabilities that may lead to solvency failure, there should be equity and fairness towards the interests of the policyholders.

Similarly, the pricing should not be very high or very low, but be commensurate with the risks, leaving a reasonable profit margin for the insurer. Some of the international practices that are being adopted in this regard are briefly stated below:. In developed insurance markets, there may be many players with products ranging from a single specialist area e.

In many of these territories, there is no requirement to file rates or policy wordings as the regulator relies on market competition to act as a self-regulating mechanism preventing insurers from over-pricing or dominating the market. Under these circumstances, the regulator relies on the competitive forces to determine the rates based on the market one example would be the U.

K insurance market. Prior approval: Under prior approval systems, policy forms and rates must be filed and approval obtained by the state insurance department before they can be used in the market.

The regulators assess the reasonableness of the documents filed against the standard benchmarks. In case there are any policy provisions which do not comply with the regulatory requirements, or other regulations in force, or the product does not appear to be creating the desired value to meet the specific needs of each entity in the value chain, the regulator returns the documents and advises the insurers to modify it.

It is essential for insurers to receive approval for their rates and forms before they go into effect. However, the regulator has the authority to comment on the rates before they are used, or can disapprove the rates. The product would be deemed to be approved if the regulator does not respond to the insurer within the set time limit.

Use and File: But, the rates must be filed within a specific period after they have been put to use. Flex rating regulation: It is a law prevailing in the US insurance market under which insurers are required to obtain prior approval for rates that exceed a certain percentage above or below the rates previously filed. Here, floor rates can be fixed based on Minimum Loss Ratio requirements.

In developed insurance markets, there would be a number of players offering a wide range of products with complex rate filings. Prevalence of competition prevents insurers from over-pricing or gaining control over the market. In such cases, there is no need to file rates or policy forms, and in some jurisdictions, certain lines and rates are exempted from filing or approval requirement.

In these cases, the regulator relies on the competitive forces to determine the rates based on the market. Whatever may be the mode of regulation, the objective is to maintain a healthy balance between the market goals and adequate policyholder protection. Which of the following systems represents a compromise between the prior approval system and the no-file system? Explain the basic components in evaluating insurance products.

An insurance product can be defined as an insurance policy contract, where there is acceptance of specified risks by the insurer against a predetermined price called premium obtained from the client. It includes any plan of insurance designed to meet the insurance requirements of a client or class of clients. The contingencies insured under the product should be clear and provide transparent cover which is of value to the insured. Product design is the process by which insurance companies develop their insurance policies as per requirements of the policyholders.

Based on the prevailing practices, the policy document consists of Preamble, Recital Clause, Schedule, Operative Clause, Terms and conditions and Exclusions etc. Pricing is the process by which the insurers determine the premium to be charged from the insured for accepting a particular risk under the insurance contract.

Pricing of insurance products plays an important role in design and development of the product. There are three important methods of rating viz. Failure to incorporate experience shall result in either loss of business, in case of good experience, or underwriting losses in case of a bad experience. At times, where the quantum of probable losses is very high or risk is heavy, the rates are driven by reinsurance markets, as the primary insurer is not in a position to underwrite the risks in his own capacity and needs support from the reinsurance market.

In which of the following is the regulator NOT concerned when considering product evaluation? Briefly explain the stage of insurance market in India. However, perfect competition also requires adequate knowledge of the product and its intricacies. In the Indian context, the insurance market is in an ascent stage.

The level of financial literacy is poor in the country, and the awareness levels of insurance products among the general public are not satisfactory. In an attempt to increase competition for overall development of the market, the general insurance sector was opened up by removing tariffs with effect from 1st January, The de-tariffing was contemplated to be done in a phased manner to ensure that there is a logical sequence to follow in opening up of the competition.

To begin with, insurers were not allowed to vary the coverage, terms and conditions, wordings, warranties, clauses and endorsements in respect of erstwhile tariff. Understand IRDA requirements for consideration and review of insurance products.

Prudent underwriting The product design and rating must always be on sound and prudent underwriting basis. Prudent underwriting means that the insurer should only offer insurance of risks that are quantifiable and manageable and where the premium can be properly assessed. Simplified language All literature relating to the product should be in simple language and easily understandable by the public at large.

As far as possible, a similar sequence of presentation may be followed. All technical terms should be stated in simple language for the benefit of the insured. There should be no effort to mislead the policyholder to assume that the product is offering protection that it really does not, or that it offers such protection subject to limitations and conditions that are not easily apparent. The limitations and conditions should be easily capable of compliance. Consistency of terminology As far as possible, similar wordings for describing the same cover or the same requirement should be used by insurers across all the products.

For example, clauses on renewal of insurance, basis of insurance, due diligence, cancellation, arbitration etc. The policy should provide simple dispute resolution procedures and also state in simple language the process of arbitration of disputes. The product should be a genuine insurance product of an insurable risk with a real risk transfer.

See also Chapter Policies which are normally expected to be renewed e. In case of adverse claim experience, the insurance company can renew the policy with higher premium or higher deductible within the range filed and approved by IRDA. However, when a renewal is refused, there is always a duty to inform the insured in writing of the reasons for refusal well in advance of the expiry to enable the insured to find an alternative. The rates filed by every insurer will be reviewed by IRDA based on supporting evidence.

The pricing of products should be based on appropriate data and with technical justification. But, where no statistical basis is available, arbitrary variation of rates will not be acceptable. The terms and conditions of cover shall be fair between the insurer and the insured. The conditions and warranties should be reasonable and capable of compliance. The exclusions should not limit cover to an extent that the value of insurance is lost.

The time allowed for reporting of claims should be reasonable. The policyholder should not be required to do things that are onerous after a claim to maintain his eligibility for protection nor should the policyholder be prevented from resuming his business expeditiously by the claims process. Margins built into rates shall be consistent with the experience of the insurer in respect of commission, management expenses, contingencies and profit.

Insurers will not be arbitrarily allowed to design products at very low margins merely to beat competition. The margin for commission built into the rates should be at a level at which commission or brokerage will be paid. The commission margin should not be unreasonably low because it will distort the sales process and there will be an incentive to hide payments to agents and brokers under different heads.

Expenses of management will generally reflect the overall expense ratio of the insurer in the recent past. However, it is possible to design products at a different margin for expenses where the insurer can demonstrate that the expenses of management for that particular product will be different either because of the characteristics of the potential market or the sales mechanism or administration of that type of insurance.

Necessary steps should be taken by insurers to ensure that competition will not lead to unprincipled rate cutting and other improper underwriting practices. Although this is a statement of the obvious, the fact that an insurer has to provide such a confirmation should act as an indirect deterrent to improper practices.

In such a case, the insurers can explore the possibility of filing sum insured bands as basis of rating between an individually rated product and a class rated product. All rule based underwriting products fall into this category.

These are standard products that can be sold by any offices of the insurer with the rates, terms and conditions of cover, including choice of deductible where applicable, as set out in an internal guide tariff designed by the insurance company.


Some of the examples of Class rated products are: These are products specially designed for an individual client or class of clients, in terms of scope of cover, basis of insurance, deductibles, rates, terms and conditions of cover. Actual claims experience of the concerned insured and his requirements determine the designing of the experience rated products, rates, terms and conditions of cover. These will typically be insurance with a high frequency but low intensity of loss occurrence.

These are products where the rates, terms and conditions of cover are determined by an evaluation of the exposure to loss in respect of the risk concerned, independent of the actual claims experience of that risk. Some examples are insurance for earthquake risk, Public Liability insurance for high hazard occupancies and so on. Typically, these will be risks where the occurrence of a loss is an uncommon event or where there are very few risks of that class to develop a statistically supported rating basis.

The exposure rating may derive from rates for similar risks in other markets or be based on hazard evaluation done for other reasons such as for risk management. These are typically insurance that is designed for individual, large clients and where the rates, terms and conditions of cover may be determined by reference to the international markets.

Insurance for a total sum insured of Rs. However, a product cannot be placed under this category by merely referring to a reinsurer for the rates and terms. It should genuinely relate to risks that are not within the underwriting or rating capability of Indian insurers.

However, where insurance covers properties at several locations and one of those locations qualifies as large risk, insurance of all the locations covered under that policy can be treated as large risk provided that all the properties are under the ownership of a single insured and are covered under one policy. Reinsurance is expected to be placed abroad solely on a need basis and only after satisfaction of the national retention capacity.

This is the category of risks that is the most susceptible to pressures of competition and where insurers may take a rather bold stand purely because their own stake in the risk may be small with most of it being reinsured. It is expected that in respect of such products, the insurer will quote terms in line with the terms quoted by reinsurers including the extent of cover and deductibles or claims conditions. If the insurer varies the terms quoted by the reinsurers while quoting the terms to the proposer, such variation of terms and any increased retention that results from it shall be consistent with the underwriting policy and reinsurance policy approved by the Board for underwriting of business and also for retention and reinsurance.

The insurer shall charge an additional premium over the rates secured from the international market that is commensurate with the additional risk carried by it. Such additional premium charged should have the concurrence of the officer designated by the Board for this purpose. The underwriter has to ensure that all aspects of the regulations are implemented in letter and spirit.

This is important as the Indian market is gradually getting adjusted to competition and the freeing of rates and terms. Once the market learns to work with competition in prices, variation in the terms and conditions can follow and thereafter, competition would be in terms of servicing parameters.

This will nevertheless mean that any widening in scope of cover should be adequately priced. Violations of the regulatory guidelines can lead to market.

Regulatory intervention is thus felt needed in all markets to avoid market failures, to correct deviations in time and if not, to minimise the negative effects and improve efficiency of the market. Within the Class rated Products, which of the following will be considered a package policy? Framework Description State Mandated Rates determined by the insurance regulator.

Insurers Rates must use the rate or may file a deviation to charge a rate below the published rate. Prior Approval Rates must be filed with and approved by the insurance regulator before they can be used. Flex Rating Prior approval of rates required only if they exceed a certain percentage above and sometimes below the previously filed rates, otherwise a file and use provision applies.

File and Use Rates must be filed with the insurance regulator prior Waiting Period to their use. A waiting period applies before the rates can be used. Specific approval is not required but the regulator retains the right of subsequent disapproval. The rates may be used immediately. Period Specific approval is not required but the regulator retains the right of subsequent disapproval.

Use and File Rates must be filed with the insurance regulator within a specified period after they have been placed in use. Informational Rates must be filed with the insurance regulator for File informational purposes.

No formal review of the rates occurs and no supporting documentation is required. No File Rates are not required to be filed with or approved by the insurance regulator. However, the company must maintain records of experience and other information used in developing the rates and make these available to the commissioner upon request. All the given statements are the goals of market conduct supervision for insurance business.

File and Use laws represent a compromise between the prior approval system and no-file system. Statement ii is incorrect as in the case of rates being based on non-insurance technical data, the insurer should be able to defend the logic underlying the establishment of the estimated claims costs from which the rates are derived. In a certain state, all insurance rates must be approved by the state insurance department before the rates can be used.

This type of rating law is called:.

Insurance companies are subject to many laws and regulations. Under the flex rating system, a range is established for insurance rates and insurers are permitted to change their rates in both upward and downward directions within the established range in response to market conditions.

The rating law described is a prior-approval law. Under prior-approval, state regulators must approve the rates before they can be used. The number of policies sold is not regulated. State regulators will, however, consider the ability of the insurer to discharge any liabilities that may arise from the policies sold.

All rule-based underwriting products fall into the category of internal tariff products. The regulator is not interested in appointing an actuary. The insurer is not permitted to offer any product for sale until all queries pertaining to the product have been satisfactorily resolved after filing and IRDA confirms in writing that it has no further queries in respect of that product.

This requirement will also apply to cases where the underwriting policy under which the products are designed needs to be filed instead of filing of particulars of individual product.

The insurer needs to justify the rates, terms and conditions of insurance offered to a particular client or to a class of clients or for a particular product while filing the product with IRDA. Explain the role of the Board in relation to the underwriting policy.

The Board approved Underwriting Policy is required to be filed with the Regulator. Product design, rating, terms and conditions of cover and underwriting activity shall be consistent with the approved underwriting policy of the Board. In case of any subsequent changes made from time to time with the approval of the Board, the same should be filed with the IRDA without delay. In case the Board delegates the authority to define and execute the underwriting policy to the management, it should only be done on the basis of a clearly defined statement of underwriting policy approved by the Board and the management should work within the scope of such policy.

Design and filing of products should only be done in conformity with the underwriting policy approved by the Board. It is necessary that the Underwriting Policy is placed before the whole Board and not just a Committee of the Board. The policy should not give unfettered discretion to the management to quote untenable rates or make inadequate reinsurance arrangements in respect of large accounts. All important decisions must require at least two senior executives who are not directly one above the other in the line of authority, to approve the decision.

Underwriting policy The underwriting policy placed before the Board should cover the following:. The Board needs to be conscious of the likely need to further strengthen the capital of the insurer if underwriting losses continue. The margins must have a relationship to the actual operating ratios of the insurer.

The reporting forms must be detailed enough to highlight any emerging problems at an early stage and enable the Board of Directors to monitor the profitability and spread of business on an ongoing basis. Responsibility for the overall compliance vests with the Chief Executive Officer. Briefly explain the role of: The Appointed Actuary or the Chief Financial Officer or the Financial Adviser is brought in as a moderator to ensure that the insurer does not act improperly under the pressure of competition.

The Board in this regard can consider the appointment of the Appointed Actuary or Financial Adviser or the Chief Financial Officer or any other top management executive who does not have any responsibility for business development, to act as the moderator of rates and terms that are quoted on individually rated risks that fall under large risks as defined in the guidelines.

The insurer needs to demonstrate to the regulator that the rates and terms in any particular case are determined in conformity with the guidelines and underwriting philosophy. Moreover, in respect of insurance of reinsurance-driven large risks where the insurer quotes terms to the client that are different from those obtained from the international markets, the rates, terms and conditions of cover quoted to the insured needs to have the concurrence of the Moderator which should state that the rate is based on sound technical reasons.

In such cases, the role of moderator is to ensure that the terms are determined on a sound technical basis and not merely to meet competition in pricing regardless of logic. The Compliance Officer shall not be an officer who also holds responsibility for underwriting. The Compliance Officer should be sufficiently senior in the organisation to be able to enforce cooperation of the heads of underwriting in all classes of business. The Compliance Officer shall be responsible: The Appointed Actuary is a qualified actuary who is appointed or retained by the Board of Directors of the company to prepare the statement of actuarial opinion.

The Appointed Actuary, in consultation with the underwriters of the insurer, shall determine the requirements for compilation and analysis of data of sums insured, premiums and claims at the stage of product design itself and ensures that such data is captured at the stage of effecting insurance, on claims intimation and on all claims payments. In respect of long-term insurance products, the Appointed Actuary should also state the basis on which the reserve for unexpired risk will be calculated.

In health insurance for example, the occurrence of a disease is not a random event and the actuary may develop mathematical models to determine the likely exposure to certain diseases following a stated number of disease-free years or following other diseases. These will then influence reserving requirements. Analysis of data should enable review of rates, loadings and discounts for every rating factor used in the determination of premium rates and for rating risks on first loss basis.

The Appointed Actuary, in consultation with the underwriters of the insurer, should compile various first loss rating schedules and schedules of discounts for higher deductibles or franchise, for different products based on statistical data. Such schedules shall form the basis for rating risks on first loss basis or without condition of average in respect of those classes of business that are normally underwritten on full sum insured basis and where condition of average applies and also for allowing discounts for higher deductibles or franchise.

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This is to ensure that when the insurer moves on to a different basis of insurance it does so on a sound mathematical basis. While filing the product, a certificate by the Appointed Actuary should accompany every product stating the rating factors for which data will be captured and that adequate capabilities have been put in place for collection, compilation and analysis of such data.

This is considered an important requirement by the regulator. The periodicity of review of emerging claims experience to determine any changes needed in rates, terms and conditions of cover should also be stated in the certificate. Where an insurer designs or quotes for new products without reference to adequate statistical data support for the rates, terms and conditions, the basis of rating such products shall be recorded in detail and such basis shall be based on sound and prudent considerations.

In such cases, the Appointed Actuary can act as a moderator and review the product design, rates and terms from the point of view of logic and reasonableness. The advocate plays an important role in ensuring that the product documents are written in clear unambiguous language that properly explains the nature and scope of cover, the exceptions and limitations, the duties and obligations of the insured and the effect of non-disclosure of material facts.

For example while certifying the proposal form, the advocate should ensure that the proposal form secures information on all matters that are material to the contract and that it highlights the importance of the proposer providing all information relevant to the contract and the consequences of suppression or non- disclosure of material facts.

Further, he has to state in his certificate viz. The Department has the responsibility of bringing in self-discipline in underwriting. The department should have audits as per the direction of the Board and the reports of the Technical Audit shall be placed before the Board of Directors. In respect of products classified under individually rated risks, the insurer should file a statement of underwriting policy that was approved by the Board and should provide the information in Form A.

Fire, Marine, and Motor, Miscellaneous etc. In case any product is withdrawn from the market, the same name should not be used for a subsequently designed product. If the changes are insignificant, the reason for making the revision should be enquired into.

The covers should not be of exotic nature or covering contingencies not related to the interests of the insured under the policy. Indirect insurance products such as insurance covers in the nature of derivatives may not be allowed. This is because in addition to issues stated earlier, the basis of reserving for all such covers cannot be as per the traditional method of calculating reserve for unexpired risks. Benefit Payment Basis: Indemnity Basis with Deduction for Depreciation: Reinstatement Value Basis for the Property Insured: Marketing 9 Target Market: One basis of comparison will be the acquisition costs used by other insurers for similar products.

However, this can be lower than the maximum permitted by the law or regulations. Where the authority is centralized, one should enquire into any possible delays in processing and settlement of claims arising from such centralization. It is reasonable to expect authority to be delegated based on claim amount, to various levels of officers in the organization.

The instructions given should be consistent with good underwriting and claims practices. The insurer should also have sufficient solvency margin to absorb such strain. If not, the insurer must state how the data to validate the premium loadings or discounts related to those risk factors will be generated and how the experience by those risk factors should be monitored.

As soon as a claim is intimated the Claims module should be able to draw the relevant information about the risk from the underwriting database, and also keep track of all subsequent movements in the claims processing.

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Analysis should be annual or more frequent. The proper reserving basis can be a mathematical formula that takes into account the intensity of loss exposure over the period of insurance and any factors related to discounting of premium to take note of investment income.

The simplest formula in respect of a long-term policy with uniform exposure to loss over the duration of the policy may be, to provide that portion of the premium as the period of risk beyond the balance sheet date bears to the total period of insurance. If new rating factors are to be introduced, their relevance should be demonstrated. If some of the rating factors are to be dropped, the rates should sufficiently reward favorable hazard features.

For the purpose of checking variation in rates proposed, comparison should be made with rates as per earlier classification and the proposed rates for those categories. This is intended to prevent arbitrary changes in rates especially to meet competition. The variations in rates for inclusion or exclusion should be reasonable. This is the discretionary part of the rating formula. The authority to vary the rates should rest with persons responsible for underwriting and not with persons responsible for business development.

Changes in rates should be for objective criteria and not merely to match the rates of a competitor. The discount scales for deductibles should also be actuarially determined.

As there are similar individual products, it would be required to outline the variations that will be made and the basis of rating such variations. Any other basis need to be properly justified with technical support.

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The levels of rates for each of the insurance elements in the package should be taken into consideration. There should be adequate premium for the risks covered. Generally, a product designed for a class of clients will carry an internal tariff. If so, the suitability and adequacy of the rating basis and rate levels should be assessed. The level at which rating decisions would normally be at a reasonably high management level and there should be a reasonable logical basis defined for deriving the rates quoted.

The target claim ratio is considered and fixed by the Board of the insurer. The management level should reflect sufficient maturity and also should exclude persons responsible for business development. This should be a fairly senior level decision because it may involve underwriting business at a known underwriting loss.

The system should automatically capture underwriting and claims information and the analysis should be annual or more frequent. Data should also include sums insured. Resend OTP. Select Your City Type your city name. Thanks but Your Mobile Number is not Verified! Verified Ads get more genuine responses To verify, Give a Missed Call to the below number Its completely free! Quikr will call you shortly to verify the Mobile Number entered by you Please wait for our Call. Coming soon. Stay Tuned!

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