INDIAN REINSURER
By D Sengupta,Chairman,General Insurance Corporation of India

Introduction
Insurance is in the nature of trust. Policyholders pay insurance premium to purchase an insurance policy, which would absorb the pecuniary loss/damage to life and property upon occurrence of accidents/perils/calamities. In the interest of the policyholders, the funds collected by way of premium are to be managed with caution. It is important that the funds are managed most efficiently. The insurers must take risk responsibly, whether it is underwriting risk or investment risk, for the safety of the policyholders as well as themselves.

Insurance is based on the principle of spreading the risk and sharing of losses among many to reduce the financial burden of an individual. Insurance companies retain only that part of the risk assumed by them which can safely by borne by them out of their own funds and reinsure balance risk with other insurers.

Reinsurance, which is the insurance of an insurer, is the ultimate spreading of the risk basket of the insurer in the international market. Hence, reinsurance support is the backbone of insurance business. Reinsurance provides a better spread of risk, allows the primary insurers to accept much larger risks beyond their own capacity, settle accumulated losses arising from catastrophic events and maintain their stability in financial results.

In this context, the purpose of reinsurance is to :

• Protect the insurer from the results of many large losses due to calamities.
• Increase the underwriting capacity of the insurer by providing a forum, to which the insurer can transfer risk underwritten beyond its own capacity of retention.
• Enable an insurer to underwrite novel and prototype risks - especially in respect of new insurance like aerospace activity, financial market risk exposures etc. - with technical and experience input from reinsurers.
• Enable insurers gather global and hence more reliable experience on various risks through the under-writing experience of the reinsurers operating worldwide.
• Enrich insurers with the research and development of the reinsurers.

Thus reinsurance in necessary. A reinsurer is a friend, philosopher and guide to the insurer.

The history of reinsurance dates back to the 14th century. It has undergone a lot of evolution since, in reaching its present form. Earlier the focus of reinsurance was on the standard Marine and Fire business. During the last century, however, it has reached out to encompass the entire palette of insurance products.

General Insurance Corporation (GIC) as the Indian Reinsurer
After nationalisation of general insurance business, reinsurance played a crucial role in the growth of the Indian insurance industry. General Insurance Corporation of India mainly transacted aviation and reinsurance business, while its four subsidiary companies dealt with general insurance business related to Fire, Marine and Miscellaneous insurance. GIC insured the fleets of Air India and Indian Airlines and also covered their allied risks. The premium income of GIC came mainly from premiums ceded by the four subsidiary companies under obligatory cessions and other inward reinsurance acceptance. The reinsurance programme of the general insurance industry always aimed at optimum retention of insurance premium within the country whilst securing maximum reinsurance coverage at an optimum cost. Considering the increase in net worth and growth in premium volume, the spreading of risk within the country was optimised for all classes of business. During the financial year, 1999-2000, 91% of the risk was spread between GIC and the four companies resulting in the utilisation of the funds, amounting to Rs.8665 crores approximately, generated by way of insurance premium within the country.

The insurance sector in India has been opened for private participation. Licenses have been issued to some who want to set up shop here in India. Several international and Indian companies are getting ready to spread their own network in Indian soil. Therefore, in the coming years the insurance market in India will become more competitive and only the fittest will survive.

The Government of India has opened the Indian insurance sector as per its commitment to the World Trade Organization. The Insurance Regulatory and Development Authority (IRDA) Act, 1999 has been enacted mainly to protect the interests of holders of insurance policies and to regulate, promote and ensure orderly growth of the insurance industry in India.

As of November 7,2000 under the instructions of the Government of India, GIC has ceased handling matters pertaining to personnel, investment and insurance of the four public sector insurance companies. The existing insurance companies viz. The New India Assurance Company Ltd., National Insurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd., have been given freedom in many areas. An association called General Insurers (Public Sector) Association (GIPSA) has been formed to adopt a uniform approach on matters of common interest.The Government of India has re-notified GIC as "Indian Reinsurer" under the Insurance Act 1938, for carrying on reinsurance business exclusively. As a consequence, GIC has ceased underwriting direct Aviation insurance business, and taken steps to emerge as a reinsurer of adequate capacity and strength.

GIC's primary role towards the Indian market would be to focus on accepting reinsurance business within India and to assist IRDA in ensuring the objective of maximizing retention of premium within the country. GIC's reinsurance programme shall continue to be guided by IRDA's objectives of maximizing retention of premium within the country, developing adequate capacity, securing the best possible protection at an optimum cost.

As per IRDA directives, GIC would receive obligatory cessions from all insurance companies in India and retrocede** 50% of the obligatory cessions received by it, to the ceding companies after protecting the portfolio by suitable Excess of Loss covers. In the Indian market, GIC would work as a consultant for pricing, product knowledge, market information, services of risk inspection, training etc.

GIC has drawn up plans to undertake the following activities in the context of its role as the "Indian Reinsurer".

• Manage obligatory cessions, their excess of loss protection and retrocession
• Organize and manage Market Pools*** for Fire. Marine Hull and other classes and arrange for their excess of loss protection
• Accept treaty and facultative business from Indian companies
• Assist IRDA in maintaining Market Retention at 1999-2000 level and ensuring that business will not be ceded outside India without fully utilizing the Indian market capacity
• Organize training/seminars for the Indian and overseas client
• Develop automatic reinsurance capacities for products and lines of business, including new ones to be introduced

Global Business
Hon'ble Finance Minister, Mr. Yashwant Sinha, has visualized India's potential to become the hub for reinsurance activities in the Asian continent. GIC will leverage its strengths to achieve this vision. GIC has a long-term objective of emerging as the preferred reinsurer in the Afro-Asian region. The Near and the far east Asian region, Middle East, SAARC and African and East European countries including Russia and CIS, have been identified as having growth potential. GIC would try to acquire quality inward business from these target markets with a view to earn valuable foreign exchange for the country. A premium of US$ 500 million is being targeted to be achieved within the next 2-3 years. Towards this goal, GIC would soon embark upon a very well devised marketing strategy. GIC's first representative office outside India is being set up in London very soon. It proposes to enter into strategic agreements with large insurance companies in the targeted region.

GIC aims to benchmark its standard of services and business quality with the world leaders. AM Best, the agency for exclusively rating insurance companies world-wide, has rated GIC as "A" Excellent. With its inherent strengths such as skill and expertise in reinsurance, quality manpower, strong financials and asset base, and good rating, there is no doubt that GIC would emerge as a major reinsurer in the Afro-Asian region within a few years.

Cessions* - The process of spreading a portion of risk and the corresponding premium to the reinsurer.
Retrocede** - To spread a portion of risk and corresponding premium by the reinsurer to another insurer/reinsurer.
Pools*** - A joint underwriting operation of insurance or reinsurance in which the participants assume a predetermined and fixed in all business written.