Reinsurance

History of Reinsurance

the first traces of practices more than of contracts, comparable to the technique of transfer of the risk and control of the risk with the help of the payment of a premium is found around 3.000 years before Jesus-Christ in Eastern China where commercial rich person made distribute the values of the goods transported between various vessels belonging to the ones and the others, while contregarantissant part of their goods by the emission of payable titles by the purchasers in the event of supervening of the risk which in this case could be only the total loss of the building. In the case of the good arrival with destination the guarantor preserved the issue premium. These practices of mutualisation between the takers of risks were developed by the Mediterranean people for the guarantee of the maritime transport, that it is by the phenicians where well Greeks as in Rhodos.

Even if the first relative laws with the insurance go back to the Code of Hammourabi in Babylon at XVIIIe century A.J, the insurance in its modern and contractual form appears only with the rise of the rich person city-State of Italy of North and Flandres following the maritime, commercial development and financier of those. Thus in 1310, the Duke of Flandres makes publish a charter for the creation of a room of the insurance in Bruges whose function was to publish guarantees of insurance intended for the protection of the maritime risk and to support thus the trade already very prosperous in Flandres. Reinsurance takes existence shortly after this revival of the insurance: In 1370, two Venetian insurers then ensured the goods of a boat carrying out the connection between the wearing of Genoa and the town of Sluys the Netherlands. They decided to yield the risk to a third insurer on the riskiest part of the voyage, starting from the Straits of Gibraltar at the time of the stopover in Cadiz in Spain and this until the passage of the Bay of Biscay. One found since contracts of reinsurance in Italy, France and in the United Kingdom. But those remain limited to some specific transfers and are especially present in the maritime trade.

It is in London in the United Kingdom that the first modern organization of insurance was born in the form of “Hand-in-Hand Fire Office” created in 1696 in answer to the fire of large London of 1666. In London always, the first insurance company created in 1710 under the name of Sun Fire. Very quickly, from the insurance companies will appear and develop in all the Western countries, especially in the United Kingdom, in Germany and France.

modern reinsurance and with large scales appeared in Germany towards the end of the XIXe century, following the Industrial revolution of this country. The German insurance companies had more and more evil to cover immense factories and other industrial complexes, especially in the event of Incendie. They thus called upon contracts of reinsurance and the techniques of reinsurance were refined during time. Dice 1852, Koelnische Rueck was created in Germany to meet the needs for capacity of the German industrial sector under development strong.

Consequently of many specialized companies only in reinsurance emerged and reinsurance started to cover about all the branches on all the world markets of insurance. However supply and demand of reinsurance remain much more strongly established in the developed Pays, the offer of reinsurance coming primarily from some Western countries (Germany historically, Switzerland, the United Kingdom, the United States, France).

After the Andrew cyclone which has occurred in August 1992 touching very strongly Florida, and because of an imperative need for capacity of protection of reinsurance against the natural phenomena which was the consequence in the USA, appeared in Bermuda several new reinsurers, the market bermudien having been dice the years 1970 a market of prisoners of insurance mainly to industrial calling and tax goal and a source of reinsurance for stage to the crisis of the civil responsibility in the United States in the years 1980. Since 1993, this market was used to provide yielding them American in capacities reinsurance damage catastrophes (property cat), then dice mid-90, these reinsurers sought a better balance of their world exposures (aggregates) while developing mainly in Japan then Asia, and finally in Europe. Today these companies are with majority multibranched and much of them have offices or subsidiary companies in Europe or in Asia, they all are among signal 10 of the classifications in term of CA and capitalization (XL Group, Partner Re, Axis, Renaissance Re, etc).

Principles of Reinsurance

the Principle of reinsurance is as simple as that of the insurance. The German commercial law stipulates in its article devoteds to with reinsurance that “the reinsurer is the insurer of the insurer”. It is a question for the insurance company (yielding it) of yielding to a specialized company (the reinsurer) a random risk (the consequences of a disaster sets fire to, of death, an earthquake, a shipwreck) against the payment of a premium of reinsurance corresponding to the risk transferred and the mode from transfer envisaged in the contract of reinsurance (the treaty). The insurance company is then called the yielding (or primary education insurer) and it carries out a transfer near one or several reinsurers (the secondary insurer) by a contract of reinsurance (or program ). A contract of reinsurance exists in many forms and can cover a period given or not, although the majority of the contracts of reinsurance have one period of validity one year.

Here a very simplified example which describes this principle:

The private individuals Mr. X and Mrs. Z want to ensure their real goods near the insurer has who agrees to cover them. Mr. X signed a police force for a guarantee of 1.000.000 € in exchange of a premium which it will have to pour of 400 €. Mrs. Z has as for it subscribes a police force which guarantees 2.000.000 € against a premium of 800 €. The insurer has thus receives a total premium for his wallet damage with the goods of 400 + 800 = 1.200 €. On the other hand, the entire amount of its concerned guarantee is of 1.000.000 + 2.000.000 = 3.000.000 €. This amount of guarantee can appear if for example the goods of Mr. X and Mrs. Z are in a crisis by the same storm or the same fire. The insurer has having only 2.500.000 € equities, it decides to be made reinsure near the reinsurer R to avoid any bankruptcy. With and R agree for a contract of reinsurance relating to a guarantee of 500.000 € which would intervene on a disaster or a catastrophe exceeding 2.500.000 €. For this cover, the reinsurer R will request 1% of the premium of the wallet damage from the goods of the insurer has, that is to say 1% * 1.200 = 12 €.

In reality, the wallets yielded to the reinsurers can relate to hundreds of thousands, even of the million private individuals, and the guarantees can rise to hundreds of million, even of the billion euros.

the contract of reinsurance binds juridically only yielding it to its reinsurer. Thus, yielding it will have to refund its policy-holder disaster victim even if the reinsurer refuses to pay yielding it (e.g different interpretation of the Clauses of the contract of reinsurance) or if it cannot regulate it (e.g insolvency) it is thus juriquement Ducroire engagements which it contracted near his policy-holders. The private individual or the company assured is not in theory with the current of the existence of a contract of reinsurance and they do not have any contact with (S) the reinsurer (S). This in general explains the ignorance of the public for the reinsurance, put aside when the media evoke reinsurance at the time of great catastrophes like the attacks of the World Trade Center. Jurisprudence in the United States as regards reinsurance makes exception to this reality in what judges already condemned directly the reinsurers of one yielding insolvent (cut-through), even if these cases remain marginal, they belong to the thing judged in the USA and any reinsurer must know that it is exposed to this kind of jurisprudence by accepting American businesses.

Formerly limited to some specific businesses, reinsurance became today an important actor of the sector of the Insurance where she plays an increasing influence there. This rise of the role of the reinsurers is due to several factors:

reinsurance makes it possible yielding to face the exceptional peaks of Sinistralité of the type Tempête Lothar of 1999 or attacks of the World Trade Center. Thus reinsurance helps to prevent the bankruptcy of an insurer who does not have the cash in hand in the event of very great catastrophe.

While being reinsured, yielding it has a greater capacity and financial safety and can thus subscribe more businesses than it could not if it did not have reinsurers and that its equities.

reinsurance makes it possible to smooth the assessments and financial results of yielding one year on the other while intervening the years when there exist many disasters at yielding. Thus yielding it a greater financial stability has on means and long run.

Lastly, pressure of the lawful authorities, the agencies of ratings or even of the shareholders who push the insurance companies to be reinsured in certain branches.

the reinsurers in general cover risks with very important guarantees. They thus test the need to atomize their risks even more than the insurers. The reinsurers often have an international wallet very , burst on many countries, and very varied in many branches (Life, Not-Life, Aviation, Dommages with the Goods, Crédit and Guarantee, etc). In the same way, a reinsurer will pay more attention to the control of his office plurality (e.g. All its coverings of damage risks on the West coast of the United States). One often uses the English expression synonymous with Aggregates to speak about these office pluralities.

On the same program (or contract) of reinsurance, there exists that only one yielding (more possibly its subsidiary companies) and in general several reinsurers (often in the order from 4 to 10 but until more than thirty). The reinsurer who with the greatest part of the total transfer is called the reinsurer aperitor (Leader): This one can enjoy certain privileges compared to the others, and in general it is only with him that yielding it will discuss a possible modification of the contract or to include special businesses . Other reinsurers having to follow the décison of these discussions.

the limit of the system is that of the Main risk extended to large scales which would generate unbearable costs for all the system of insurance. The disasters which the reinsurers fear are of the events of major the natural disaster type to large scales (rising from the Seine in Paris for example), serious pandemia grippale or terrorist acts serious, likely to generate long trading losses by rupture of the economic continuity which could require billion euros of compensation. Various clauses in the majority of the contracts protect the insurers against part of these risks. Certain states also took themselves of the legislative measures not to cover risks of major the nuclear accident type.

Operation of reinsurance

One distinguishes several branches and subbranches in the reinsurance (Life, Non Life, Dommages with the goods, Civil responsibility, etc) which are declined in three great types or modes of reinsurance (Obligatory, Facultatives and Optional-Obligatory) which can themselves be combined in four great forms of contracts of reinsurance (excess of loss, surplus the full ones, stop loss, quota).

the majority of the contracts last one year with for date of effect on January 1st. Each year the contracts of reinsurance are renewed during the period of renewal (Renewal) which traditionally marks the peak of activity in the réasseurs, the brokers of reinsurance and the department transfer of yielding.

During the renewal yielding it and/or its broker generally makes an invitation to tender of reinsurance with a type of contract and pre-selected conditions (sometimes in agreement with the reinsurer aperitor) described on a note of cover (Slipway). The reinsurers propose then either only or successively, the price (a rate on the plate of premium of the wallet) and the share which it wish to take part in this contract or programs reinsurance (sometimes the rate of transfer/retention). Yielding then a rate of premium will choose then will allocate the shares with each reinsurer in their sending a note of final cover. Later it will send the contractual document to them (Wording) which defines more in detail the rules and conditions of the contract of reinsurance, that each part will sign.

Branches and Subbranches of Reinsurance

the various types of reinsurance follow in broad outlines those of the insurances. He is thus exerted a first difference between:

the reinsurance life (English Life)
the reinsurance not life , or known as of damage (Not Life)

reinsurance not life divides then between:

the reinsurance of people (Health)
the reinsurance of civil responsibility (Casualty)
the reinsurance of goods (Property)

the financial reinsurance (Financial, or Finite) can be regarded as a type of reinsurance to share (see following chapter).

There exists also the reinsurance called in Programme Business which covers risks related to the large companies and which exists especially in the United States.

Types or Modes of Reinsurance

the three modes of reinsurance per order of volume of premiums obligatory reinsurance are carried out by Traités (Treaties) which cover all the wallet of one yielding in a subbranch, like the Automobile wallet or Sets fire to for example. Then comes optional reinsurance by carried out by Facultatives (Optional) which cover one or more risks or police forces specific of yielding and which is explicitly described. Finally much rarer, the optional-obligatory reinsurance which carries out a mixture of the two preceding modes. By definition, reinsurance in Treaty covers sums much more important and the reinsurer must agree to cover all the risks of the subbranch of yielding, whereas reinsurance into Optional covers only one or some risks chosen by the two parts. She thus claims a more important expertise and approaches the subscription in insurance. In optional-obligatory reinsurance, yielding it selected which are its risks which will be to yield to the reinsurer who must agree to cover all these risks.

Forms of Reinsurance

the reinsurance proportional : Participation proportional of the reinsurer to the profits (Premiums) and losses (sinister) of yielding:

Quota or QP (Share Quota or QS)

Surplus Full or XP (Share Surplus)

the non-proportional reinsurance : The reinsurer does not intervene whom certain a threshold of disaster or loss of yielding has. The reinsurer will touch for that a percentage of the premium. The fate of yielding and the reinsurer are much bound, thus during a working year, has could be in loss, but not inevitably R, which should have been the case within the framework of a contract in quota.

Excess of Loss or XS (Excess off Loss or XL)

Stop loss , generally written in its English form Stop-Loss, or SSL

Lastly, nontraditional reinsurance proposes other types of more complex covers with tools financial (e.g. Spread-Loss, XL Aggregate, etc)

Traditional and NonTraditional reinsurance

These last years nontraditional reinsurance saw its share in world reinsurance increasing gradually, even if it remains marginal. One gathers in nontraditional reinsurance the various forms of nontraditional transfer of risk like financial reinsurance or the alternative transfer of risk. The general idea of these products is to offer solutions as well as possible adapted on a case-by-case basis. At the origin very directed towards the smoothing of assessment of the insurance companies, financial reinsurance moved away from this type of financial transaction after in particular the vexations of American giant AIG and the pressure of the American controlling authorities to prevent these embellishments or fakings of assessment of the companies. Today, nontraditional reinsurance approached the more traditional activities of reinsurance but by proposing more flexible and better adapted ad hoc solutions than the traditional forms of reinsurance. The alternative transfer of the risk or Alternate Risk Transfer (ART) corresponds as for him to a transfer of the risk on the financial markets. The products thus proposed on the markets of capital can be operations of securitization (Cat Bonds), protections with frankness from gone disaster (MLF/Market Loss frankness, ILW/Industry Loss warranty), from the notional releases (portfolio sample trigger), from the options and the subordinated swaps, the climatic derivatives (weather derivative), from the indicielles covers, etc the other forms of reinsurance nontraditional (for example: securitization, MLF, options and swaps subordinates) will be able however to continue to exist subject to their compatibility with the international or statutory payments of accountancy (IFRS, US GAAP, French GAAP, SAP, etc…).

The acronyms D, or English Re

the acronyms D (insurance) or Re (insurance) in English accompany the name by the majority of the companies of reinsurance, as a symbol of membership of the branch. Thus the old branch of reinsurance of AXA was called AXA Ré in France, or AXA Re for the other nonFrench-speaking countries. It is called now Paris Ré.

Market of reinsurance

According to the data 2004 of FFSA, the market of the world insurance represents CA of approximately 2.100 Billion € and that reinsurance 135 Billion € (either 6,5% of the insurance) including 100 Billion available on the international market reinsurance (4,7%).

In France, 5th worldwide market, the market of the insurance represents in 2004 CA of 158 Billion €, that is to say more than 7% of the world insurance. The Market of reinsurance would represent there CA of about 8 Billion € including 5 available on the competitive market.

Whereas the market of the insurance is divided into 57% Vie branch and 43% Non Life, that of reinsurance is to 20% Life and 80% Non Life. That comes owing to the fact that the great disasters are in Not Life, of or the greatest requirement in reinsurance.

the market of reinsurance is concentrated even more than that of the insurance and the 20 larger world reinsurers account for 74% of the market in 2004 (39% in 1990) and the five first 45% (21% in 1990).

In 2004 the petitioning countries of reinsurance were the the United States (42%), followed by the Germany (17%), the the United Kingdom (11%) and the France (6%).

On the side of the offer of reinsurance, Germany is placed at the head in 2004 with 26%, followed by the United States (19%), the Bermuda (17%) and the Suisse (16%).

the 12 principal world reinsurers at the 12/31/06 were in the decreasing order (Source: Annual reports of the companies):

1. Munich Re - Germany (Ca USD 28,3 Billion emitted premiums)
2. Swiss Re - Switzerland (25,9)
3. Lloyd' S - The U.K. (11)
4. Berkshire Hathaway/General Re - the United States (10,7)
5. Hannover Re - Germany (9,5)
6. SCOR - France (3,6 + 2 because of resumption of Converium 07/07)
7. Reinsurance Group off America (RGA) - the USA (4,3)
8. Everest Re - Bermuda (3,8)
9. Allianz Re - Germany (3,7)
10. Partner Re - Bermuda (3,7)
11. Transatlantic Re - The United States (3,7)
12. XL - Bermuda (2,6)

There do not exist figures published for the whole of the French market but the most important reinsurers are there Swiss Re, Hannover Re, Munich Re and the Central Case of Reinsurance (JRC), the reinsurer of the French State.

the 3 larger French reinsurers in the world at the 12/31/06 are (Source: Annual reports of the companies) (Ca in USD Billion emitted premiums):

1. SCOR (3,6 + 2 because of resumption of Converium 07/07)
2. JRC (1,5)
3. Paris Re (1,2)

Brokers of Reinsurance

As for the insurance, there exist brokers of reinsurance which advise and assist their customers, in this case of the companies or mutual insurances. The broker of reinsurance (reinsurance broker) is also charged by his customer, yielding it, to negotiate and place his programmes of reinsurance near the companies of reinsurance. Even if the broker is not interdependent of engagements of the reinsurer near yielding, there remains held by a duty of council towards this one on the credit risk and of failure of the reinsurers.

On the French market, the majority of yielding call upon a broker who will place to them (S) programme (S) of reinsurance near several reinsurers. In other countries as in the United States, the reinsurers must choose to work on line exclusively or by broker exclusively (direct market gold broker market). The leader of the broking of reinsurance in France east Aon Réassurance which holds approximately the two-thirds of the market.

the 5 larger brokers of reinsurance were in 2003 (Source: Insurance business):

1. Aon Re - The United States (CA: 945 d'€ Million) - Also leader in the management of the Captive
2. Guy Carpenter - the United States (850)
3. Willis Re - The United Kingdom (513)
4. Benfield - the United Kingdom (491)
5. Towers Perrin - the United States (135)

Rating of the Reinsurers

the disasters being able to have developments very long over several decades (e.g of civil responsibility) it is important for yielding that its reinsurer is present and solvent for still of many years. The financial safety of a reinsurer is thus one of the most important choices of yielding to choose its or its reinsurers. It can in theory excavate in the assessments and other reports/ratios of company of each reinsurer but this work is long, tiresome, perpetual and requires a true know-how of reinsurance. This is why the majority of yielding trust different the ratings presented by neutral and specialized agencies which revise their analysis regularly.

the agency of Rating which is taken of authority on the market of reinsurance is Standard & Poor' S (S&P). The credit rating agencies AM Best and Fitch are also largely recognized by the profession.

Plus the rating of a reinsurer will be high, and more it is capable being considered sure financially near yielding and thus to garner businesses, although there exist several other important criteria.

Combined ratio of the Reinsurers

the ratio combined (Combined Ratio) is one of the means simplest and used to compare the performances of the reinsurers between them like with the passing of years.

the combined ratio is the relationship between the paid disasters or to pay more the costs administrative on the acquired premiums. It is in fact the ratio of the disasters ( Loss Ratio ) which holds account in addition to the administrative expenditure.

the combined ratio is expressed as a percentage premium acquired by the reinsurer. If this ratio is higher than 100%, the reinsurer is technically in loss before the profit carried out by his investments. Thus, the average combined ratio of the market was of about a 130% in 2001 (Year of the attack of the World Trade Center) to go down again to 97% in 2004, its best result since 1990.

Retrocession and Recoverables

It often arrives that a reinsurer reinsures itself near other reinsurers. That is called the retrocession . The reinsurer will then be called reassigning and it reassigns whole or part of its risk near a assignee .

In practice, the assignees are also reinsurers. One could thus speak about Co-reinsurance or about a pool of reinsurance in the event of transfer proportional. Protections of reinsurance intervening in form nonproportional cad with a frankness to load from yielding preserve in all the cases of name the “retro one” (or protection XS on wallet of accepted reinsurance. NB: not to confuse with the specific retrocessions which consist in yielding part of businesses of reinsurance given and it-only. The assignees reinsure sometimes themselves, and rings it insurance/reinsurance can continue on several levels, and several financial years. One then speaks about a spiral . In London this spiral was largely maintained during years through acceptances retrocessions L.M.X. (london market XL).

As well choices of reinsurance as of retrocession are scanned more and more by the agencies of Rating which especially seek to analyze the quantity and the quality of the credits on reinsurers of each yielding or reassigning, i.e. their credit risk on accounts of third, this factor entering the scoring leading to the notation of the analyzed company. The credits on accounts of third reinsurers, or recoverables in English, are in fact the money which is due to the reinsurers by their assignees for disasters paid or put in reserve.

Regulation of Reinsurance

In France, the reinsurers are subjected just like the insurers to the directives of the Controlling authority of the Insurances and Mutual insurances ( ACAM ). Fact particular to France and some other countries in the world, the insurers are incited to ask the reinsurers to deposit funds or to secure by the guarantee vouchers of the commitments which they undertake in their connection. Thus, in the event of failure of the reinsurer, the insurer with the guarantee to recover his credits. This characteristic could however disappear with the new rules of solvency envisaged on a European scale by 2010 (Solvency II).

In spite of that, the sector of reinsurance remains generally less regulated than that of the insurance in Europe. The European Parliament concentrated recently on this variation of treatment for better framing reinsurance: the tests of solvency of the reinsurers life and not-life could in particular apply as to those into force in the insurance. The relative laws with reinsurance which were voted by the European Parliament will enter into force however that a few years.

Specific trades of Reinsurance

the actuary (Actuary) studies the probabilistic risks, while using inter alia modeling, to establish general tariffings (premiums of insurance).

the broker of reinsurance (Reinsurance Broker) is charged by yielding finding the contracts best adapted to them and/or at the best cost near the companies of reinsurance.

the subscriber to reinsurance (Underwriter) is charged to subscribe or not a business (a risk) which is proposed to him by one yielding.

External bonds

Audit Board of the Insurances, the Mutual insurance companies and the Institutes of Precaution
APREF Association of the Professionals of Reinsurance in France
http://www.largusdelassurance.com/GlobalVisuels/editorial/argus/classement_leader_rea_sept2006.pdf ten leaders in France (2006)]

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