Definition of reinsurance:
What is meant by reinsurance?
Reinsurance means that the relationship between the insurer and the direct insurance company only, and the direct insurer remains fully responsible for the entire amount of insurance in front of the trustee, and the insurance company assigns part of the risk to a company or several other companies in exchange for assigning part of the insurance premium and reinsurance companies bear In return for that its share of losses that occurred.
Importance of reinsurance:
The insurance companies calculate insurance rates on technical and statistical bases that take into account all safety factors. However, in practice, insurance companies cannot rely on this and keep for themselves all the risks that they accept insurance for. This is due to several reasons, including:
1. The exceptional circumstances that Sometimes it leads to a deviation of the rate of losses from the rate shown by the statistics.
2. The enormity of the danger unit, for example ships, airplanes, huge factories, oil refineries.
3. The accumulation of dangers, for example, the insured cargo on one ship, and the same ship may be insured by the same company, insurance on the plane’s body and its crew, liability to passengers and their luggage and other responsibilities, as well as an accident for more than one plane at one airport or more than one ship in One port secured by the company and other conditions.
For these and other reasons, wisdom requires distributing one risk to more than one insurance organization, and this is done in several ways, including:
Methods of distributing risks in insurance
First: Subscription to insurance:
This means the participation of more than one company in covering a specific risk, and the trustee is aware of this, and each company is responsible for its share directly before the trustee.
Second: Insurance complexes:
According to this method, several companies agree to form a reinsurance pool, each of which assigns all or part of the risks it has accepted in a specific insurance, and the companies share the result of this pool’s work, each in the proportion of his share agreed upon in advance, with a commission set for the company that received the operation .
An independent office supervises the pool, and one of its most important functions is to prepare a general account for all operations within the pool’s scope, explaining the collected premiums, outstanding claims and administrative expenses, and also preparing a special account for each company within the group’s scope explaining its money in installments and commissions and its expenses and compensations. Note that each member company in Majmaah is only liable for its share without any solidarity with the rest of Majma’s members.
We note that the collector method is suitable in the case of new dangers or high-value dangers in which there is no element of expertise, such as the dangers of nuclear plants, and it can also be included as a method of reinsurance, as some consider it to be one of the most recent reinsurance methods.
Insurance companies become forced to establish insurance complexes because reinsurance companies refuse to accept the risk from some markets because they fear it because of the high value of risk compensation in these markets or when the possibilities of realizing the risk are high or because of the state’s desire to insure a large segment of the population or professions such as Insurance for individual workers who work on a daily basis or insurance for army officers against death in war and terrorist operations.
Advantages of insurance complexes:
1. Member companies get a percentage of the operations of a particular branch of different companies and markets, thus achieving a better spread and balance of their acceptable portfolio of operations.
2. Increase the capacity to absorb the huge risks within the scope of the existing and specialized insurance markets, as in the case of aviation reinsurance or construction work responsibilities in some Arab markets with experience in this field.
3. In the markets of developing countries and as a result of the recent experience of insurance companies in them, the reinsurance complexes work to collect the insurance premiums in the region to meet the needs of the complex and to provide the necessary expertise to determine the premiums at a rate commensurate with the insurance risks by preparing the premiums and compensation statistics for the insurance operations assigned to them on a wide The insurance market.
Disadvantages of insurance complexes:
1. Member insurance companies incur additional expenses as a result of the establishment of an intermediary body in the reinsurance process and the required records, employees and other expenses of complex management.
2. Despite all the measures that the group may take to protect its portfolio of operations, there are great possibilities for the accumulation of risks assigned to them, especially in fire insurance, when a number of members stadium risks of high value or a large degree of danger that constitute accumulation in a certain area.
3. There is a possibility of accepting a certain risk through the pool that was previously rejected by the member company in the pool, while it was accepted by one or more companies that are members of the pool. Therefore, it is better that the insurance underwriters who work in the member companies are aware of the experiences and capabilities of their colleagues subscribing to other companies who are members of the pool in particular. In the regional councils, so that they will not be forced to accept them through the shares assigned to them from the pool in which they participate.
In this case, the relationship between the insured and the direct insurance company is only, and the direct insurer remains fully responsible for the entire amount of the insurance in front of the trustee, and the insurance company assigns part of the risk to a company or several other companies in exchange for waiving part of the insurance premium and the reinsurance companies bear a fee That is its share of the losses that occurred.
Reinsurance performs several main functions for the original insurer, the most important of which are:
1. Increasing the insured’s absorptive capacity to accept risks greater than the risks he can accept without reinsurance.
2. The reinsurance process helps to stabilize the loss rate, as it avoids sudden anomalies in the loss rate.
3. The exchange of reinsurance operations provides an opportunity to apply the law of large numbers, and thus various large losses can be avoided in exchange for a small certain loss.
4. The reinsurance process helps the insured to solve the problem of discrepancy between the retained risk values without losing any of his clients.
5. The reinsurance process performs a financing function for the assigned company, in terms of the low provision for withheld risks and the fact that it receives the issued reinsurance commission.
6. It is possible, through reinsurance, to study the field of production in a geographical area or country, by identifying the results of reinsurance operations in this area and their characteristics, and studying these results before entering the field of production there.
The emergence and development of reinsurance:
The first reinsurance policy was known in the year 1370 CE, as the direct insurance companies found in reinsurance a way to get rid of the excess limit in accepting risks, but it was not carried out in accordance with correct youthful principles and principles.
With the beginning of the nineteenth century, the idea of reinsurance began its way to clarity and stability and took the form of the technical service provided to help direct insurance companies to increase their absorptive capacity and support economic expansion, and the main activity of these companies was initially limited to exchanging reinsurance among themselves within the local markets to cover risks. Local.
In the middle of the nineteenth century, companies specialized in reinsurance appeared. In 1846 the first reinsurance company was established in Germany (the Cologne Reinsurance Company), then in 1863 the Swiss Reinsurance Company was established, then in 1883 the Munich Reinsurance Company was established, and after that many companies specialized in reinsurance emerged.
It has been a series of huge fires in some countries of Europe at the end of the nineteenth century. A significant impact on the expansion of the scope of international reinsurance operations, and the importance of reinsurance emerged to support and stabilize the financial position of direct insurance companies.
Reinsurance in world:
In the past, reinsurance operations were practiced by branches of agencies of foreign companies and through their main centers abroad, and on September 7, 1957, a decision was issued to establish the first national reinsurance company, the world Company for Reinsurance, with a capital of half a million pounds, in which all national insurance companies subscribed and began to engage in business. Its activity in some branches of reinsurance since January 1, 8 H19, and has continued the practice of other branches since January 1, 9 H19.
In order for this company to stand up to international competition from well-established companies, the state strengthened it by re-insuring a mandatory share of all direct operations held by local insurance companies, and this share is 30% of all operations.
The world Reinsurance Company has a wide activity abroad, as it exchanges business with a large number of insurance and reinsurance companies. The objectives for which this company was established can be summarized as follows:
1. Avoidance of national economic losses that result from reinsurance abroad.
2. Covering the risks received from abroad and received by the company, either by way of exchange or without exchange.
3. Maintaining the largest amount of incoming operations from home and abroad without endangering the national economy.
4. Limiting the exit of foreign currencies abroad and introducing as many of these currencies as possible as a result of accepting incoming transactions from abroad.
There are several methods of reinsurance, and we will discuss in some detail the most important of these methods in this article.
Terms of reinsurance: –
Before we deal in some detail with the different methods of reinsurance, it is necessary to go through some important definitions in the reinsurance process, which are:
1. The reinsurance
contract : A reinsurance contract is defined as a contract through which the insurer gets rid of all or some of the risks that he had previously assumed by returning them To other believers.
2. The original insurer:
is the insurer who accepts the risk from the insured and who considers him alone as responsible towards the policyholder for the obligations specified therein and is called the “direct insurer”.
3. The assigned insurer:
is the insurer who contracts for reinsurance with another insurer or a reinsurer.
4. Reinsurer: The
insurer who accepts reinsurance from the assigned insurer.
5. Assigned share: It
is the amount reinsured and therefore that which the reinsurer accepts.
It is part of the risk that he keeps to his assigned insured account.
These are insurance operations that the reinsurer offers to the assigned insurer in exchange for the operations he accepts from him.
8. Reinsurance: It
is the reinsurance of a portion of the acceptable reinsurance quota when the reinsurer wishes to reduce its liability for the operations that have been accepted.
Reinsurer : Is the insurer or reinsurer who accepts the reinsurance share from the reinsurer who wishes to reduce his commitment from the share assigned to him.
10. Reinsurance commission: It
is the commission that the reinsurer pays to the assigned insurer in exchange for the premiums assigned to him. It is calculated to include the original commission given to the product and an additional commission for part of the expenses of the assigned insurer.
11. Profit commission:
It is a percentage of the profits achieved by the reinsurer, which he agrees to return to the original insurer in exchange for the profits achieved by the reinsurance process, which is considered a result of the skill that the original insurer follows in accepting insurance operations.
12. Reinsurance brokers or brokers:
They are the people who contract reinsurance covers, organize and distribute reinsurance covers of all kinds, and bring the two reinsurance parties closer together.
The different methods of reinsurance – Types of reinsurance :
The following is a presentation of the different methods of reinsurance:
First – mandatory reinsurance:
It is the one that is carried out according to a law, whereby a law is issued to compel insurance companies in the state to return part of their operations with the specialized reinsurance company in this country, and the purpose of that is to support the specialized reinsurance company and reduce as much as possible the leakage of funds abroad, and this does not mean that The specialized reinsurance company will keep the entire share assigned to it, but it will, in turn, return a part of it abroad.
Second – Optional Reinsurance:
This method is considered one of the oldest reinsurance methods that are still practiced at the present time and it is considered the most appropriate practical way to re-insure certain types of insurance branches (aviation insurance) and also cases in which the insurance amount exceeds the available agreements.
Under this method, part of each insurance process is reinsured separately in an optional way, which gives the right to the re-insurer (the company that has a part of the insurance process) to accept or reject the operation, and the acceptance or rejection process depends on the previous results of this type of risks and the position of the direct insurer (The parent company), its reputation in the insurance market, its experience in accepting operations and other technical considerations of the interrelationship between insurance companies.
of the Supervision and Control Law No. 10 of 1981 stipulated that insurance and reinsurance companies licensed to operate in world shall be given priority in assigning voluntary reinsurance operations outside the scope of their agreements to other world companies licensed to operate in the Arab Republic of world. world to subscribe to according to its capacity.
In the event that the re-subscribing insurer accepts part or all of the risk presented to him, he shall make a coverage notice signed by him. From the date of signing, his commitment begins, then the coverage notice is sent to the direct insurer to prepare the reinsurance contract and specify the conditions and the reinsurance commission.
The optional reinsurance method is used in cases where the insurance companies do not have many regular operations that require the work of a continuous agreement with other companies and also in the case of whether the limit of retaining the outcome of a particular agreement is large so that the direct insurer resorts to reinsuring part of it.
Advantages of Optional Reinsurance:
1. This method allows the reinsurer to decide on his own to subscribe to the operations presented to him by the assigned insurer.
2. This method gives the original believer freedom to maintain good operations.
3. It helps the original insurer to get rid of some of the inappropriate risks that he is forced to accept according to certain agreements or that may be excluded from its issued agreements.
4. It helps the original insurer to reduce the impact of large risks of high values by contracting optional reinsurance covers to absorb such serious risks.
Disadvantages of Optional Reinsurance:
1. The large number of procedures and the great administrative effort that each of the assigning company undertakes when presenting its operations, assigning each risk separately, and the reinsurer who will examine and accept these offers separately and the consequent processes of preparing documents and separate accounts for each assignment separately. For this reason, the reinsurance commission paid by the reinsurer for the optional operations is a transfer from the commissions awarded in other reinsurance methods.
2. This method does not allow the insured to grant automatic coverage to the insured for any risk that exceeds the limits of his absorptive capacity (the retention limit plus automatic reinsurance, whether mandatory or the agreement), as he must first obtain the approval of the reinsurers without being sure of the risk value It is required to completely re-secure it.
3. There is a possibility of an oversight from the specialist for the reinsurance department in the assigning company, which entails the absence of reinsurance coverage for the ceding company in a timely manner.
4. In the event of the completion of the contract between the original company and the insurer, the company may bear the results in full alone, in the event that no other company accepts the underwriting due to its high degree of risk, or in the event that the risk is realized before signing by the Reinsurance Authority on the coverage notice, which is the date on which It begins with the obligation of the reinsurance authority
5. Increase in expenses as a result of contacting each coverage separately.
Third – Contractual Reinsurance:
The agreement reinsurance method is considered the most widespread method of reinsurance due to its suitability for all types of insurance and the abundance in the amount of administrative and office work that it requires, and the general principles of the various agreements are unified as the agreement is a written agreement between the direct insurer and one or more reinsurers through this agreement. The original insurer undertakes to collect specific insurance shares to the reinsurer who agrees to accept them in accordance with agreed limits.
Therefore, we find that the original insurer is obligated to assign the agreement first before carrying out any coverage outside its scope, unlike any compulsory reinsurance share that he may commit to granting it according to the law, and at the same time, the reinsurer according to this method cannot refuse to accept any shares that fall within the scope of the agreement.
Advantages of consensual reinsurance:
1. The lack of procedures and the amount of administrative and office work, and thus the savings in expenses, effort and time compared to optional reinsurance.
2. Ensuring continuous operations for both parties to the agreement in accordance with the law of large numbers, and thus the risks are good in the medium and allows managers of branches and agencies to accept coverage without the need to return to the head office.
3. The commitment of the Insurance Authority starts from the date of the original commitment of the insurer without need to the date of signing a notice, as in the case of voluntary reinsurance.
Disadvantages of contractual reinsurance:
1. Depriving the original insurer from maintaining good operations as long as he is within the scope of the agreement.
2. Not giving freedom to reinsurers to refuse high-risk operations.
a. Agreement on relative basis reinsurance (risk sharing):
1. Quota Agreements:
This method requires that the original insurer stadium a specific percentage of all his insurance operations in a particular branch and that the reinsurer accepts the same percentage from these operations and for this reason the reinsurer receives his agreed relative share of the total premiums of the insured company for all the operations covered by the agreement and pays his relative share of the compensation value And the expenses, as the reinsurers allow the company assigned with the reinsurance commission for the premiums assigned to it to meet the cost borne by the assigned company to carry out the original operations, and this commission usually takes the form of a percentage of the premiums. Profits commission, and accounts are usually settled for every quarter, half or year.
In most cases, the terms of the agreement specify a maximum amount of the insurance that will be returned to the reinsurers for any risk, for example the percentage is determined on the basis of 5% and a maximum of 10,000 pounds for each risk, and therefore the risk whose value exceeds this maximum needs to be reinsured again. In addition to the quota agreement. We note that the existence of this cap is one of the main guarantees for the reinsurer in relation to bad risks.
We note that this type of agreement is mainly suitable for small startups, as it gives them a large absorptive capacity that is not available to them in the early years of their inception, as they do not have a sufficient portfolio of operations. Some companies also resorted to this type of coverage upon starting to subscribe to certain risks for the first time, as they did not have sufficient experience and information about these risks.
2. Surplus Agreements:
According to this method, the assigning company re-insures the sums that it does not want to keep for its account, as the assigned company keeps for itself a certain amount for each risk and returns the rest to the reinsurance companies at an agreed maximum also, and often the retention amounts vary according to the degree of risk, as well as the returned amounts differ .
According to this method, the assigned body keeps a certain amount of the insurance amount for a single risk called a line, and the surplus agreement covers more than that up to a certain number of lines (20 errors, for example). This means that any risk whose insurance amount does not exceed the retention line, part of it is not reinsured. If the insurance amount exceeds the retention line, then the increase above the retention line will be the subject of the judge’s agreement, and if the coverage value exceeds the maximum liability of the first surplus, a second and third agreement can be made, and so on until the coverage is completed or the assigned company resorts to reinsuring it voluntarily. We have explained the optional reinsurance. Above.
The retention line is the basis on which the surplus agreement is built, as the maximum limits of the liability of reinsurers are linked to the number of times the retention line, and the higher the limit or the retention line of the assigned company, the higher the liability limits for the reinsurers and vice versa.
To illustrate this, we will give the following example:
If the recovering company retains a certain amount of 10,000 foreigners for the risk and the first surplus agreement is made up of twenty errors, then in this case no more than 20 * 10,000 = 200,000 pounds is assigned to this agreement from the security amount.
If the risk covered by the agreement of the judge reaches his insurance amount to 100,000 pounds, then in the case of this twenty-year-old agreement, we find that what the assigned company retains is 10,000 pounds and the agreement is assigned to 90,000 pounds, but if the original insurance amount is 300,000 pounds, what the assigning company keeps is 10,000 pounds and is assigned The surplus agreement has twenty lines, i.e. 200,000 pounds, and the remaining 90,000 pounds are not covered by the first surplus agreement, but rather it is included in the second surplus agreement, if any, or reinsured in another way.
Consequently, we find that the surplus agreement is based mainly on the retention line of the assigned company. Therefore, companies classify risks according to the different degree of risk to help them determine the limit of their retention for each type of risk and usually specify a high retention limit for the risks of low risk and a lower limit of retention in the risks of the degree of risk Highest and so on.
(B) Consensual reinsurance on a proportional basis:
1. Agreements of increasing losses:
Under this method, the company assigned to the reinsurer covers more than a specified amount of one accident compensation or a group of accidents arising from one incident, and what is more than that is to be borne by the coverage agreement to increase losses up to its maximum limit. That is, this agreement is usually concluded by the company to protect its retention, as the agreement guarantees the assigning company compensation for the amounts of compensation in which the net share of the company exceeds a certain amount for each accident separately, this after deducting the mandatory reinsurance shares or according to other agreements, but at a maximum as well, That is, if the compensation exceeds this maximum, the liability reverts to the assigning company again.
For example, if the assigning company determines the amount that it bears (priority) at 10,000 pounds and the maximum coverage for the increase in losses is 90,000 pounds, it is noticed that if the loss is less than 10,000 pounds, then the assigning company bears it in full and the reinsurer does not bear anything, but if the loss is 40,000 pounds, then The assigned company bears 10,000 pounds and the reinsurer bears 30,000 pounds, but if the loss is 150,000 pounds, then the assigned company bears first 10,000 pounds, then the reinsurer bears 90,000 pounds, which is the maximum loss agreement and what is more than that, which is 50,000 pounds, the assigning company also bears.
This type of reinsurance is distinguished by its simplicity of procedures and ease of application, and its importance has emerged especially in recent years with regard to reinsurance of accidents, liabilities and aviation.
2. Stop Loss Agreements:
These agreements focus on the rate of compensation of the company assigned to a particular branch during a certain period (a year, for example). That is, the assigning company bears all losses until it reaches a certain percentage of the total premiums, while the responsibility of the reinsurer for losses that exceeds that percentage begins until another certain percentage.
For example, if the specific percentage that the assigning company bears from losses is 80% of the total net premiums in the agreed upon insurance branch, and these premiums are 100,000 pounds, then the assigning company bears all losses until they reach 80,000 pounds, then the responsibility of the reinsurer for more than this begins The amount, and a maximum limit for the losses that the reinsurer will bear, for example, is set at 125% of the net premiums, and therefore every loss in excess of this last percentage shall be borne by the assigning company.
Such agreements are considered one of the modern methods of non-proportional reinsurance and is also known as overcompensation rate. In practice, restoring stop-loss agreements is usually used in some types of private insurance such as frost insurance and some forest insurance in Australia.
C. Certain risks reinsurance:
According to this method, certain risks are re-insured from within the scope of coverage according to the document concluded with the assigning company, and this method is valid in both general and life insurances, for example in general insurance if we have a fire insurance policy that covers the risk of fire and explosion, it is possible that the assigned company By re-insurance the risk of explosion and its consequences only, and the original insurer bears the losses and consequences of the fire, noting that the assigned company remains responsible to the insured to cover the risks of fire and explosion.
Also in life insurance, assuming that we have a mixed insurance policy, it is possible for the assigned company to re-insure the risk of death only, i.e. the stadium is made on the basis of the risk premium for death and therefore the reinsurer is not responsible for any amounts related to liquidation or entitlement, and his agent is responsible only for the amounts. Due in case of death. Noting that the assigning company remains responsible to the insured to cover the risks of death and life.
It is the value of the insurance that the insurance company decides to keep for itself in covering any of the previous risk units or in the insurances of a specific geographical area, and besides calling it the retention limit, it is called the net capacity, and it represents the difference between the total ability and the ability to reinsure.
The insurance company must clearly define the previous three limits in its insurance policy before practicing it in practice, and the net capacity depends on the financial ability of the company in terms of capital and other capital reserves it has, and then the company determines its ability to reinsure, which depends on the company’s reputation in the market and finally determines The company’s total capacity must be equal to the insured’s retention capacity plus his ability to reinsure. This total capacity is originally determined according to the insured’s productive and administrative capacity in the local market.
Since the definition of risk from the viewpoint of the insurance company is the amount of the increase in the actual loss over the loss on which the premium is calculated. Therefore, it is natural to see that reinsurance is a strategy to manage the risks faced by insurance companies and it is logical for commercial and industrial establishments to think of the same way of thinking of insurance companies As establishments specialized in bearing the risks of others and managing their risks, that is, commercial and industrial establishments must determine their retaining capacity first and before purchasing insurance on the amount of the expected loss and exceeding its retaining capacity.