Page 191 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes Recently, the Government of India made the four non-life insurance companies which were
previously under General Insurance Corporation (GIC) Of India as independent and autonomous
bodies and converted the GIC of India into a reinsurance company. The IRDA has also laid down
the procedure to be followed in reinsurance agreements.
Reinsurance is an entirely new contract distinct from the original insurance contract entered
into by the ceding company and the re-insurer. The original insured is not a party to the reinsurance
contract and hence, has no rights against the reinsurer.

The general principles of the law of contracts and the special principles that govern direct
insurance contracts also apply to reinsurance contracts. The principle of utmost good faith
demands from the ceding company to make full disclosure of material facts. Material alternations
if made are also required to be specifically stated to the reinsurers.
The ceding company acquires insurable interest in the risk underwritten in direct business
accepted by it. An occurrence of a loss will result in financial loss. Hence, it is legally entitled to
reinsure the risk. However, the insurable interest is limited to the extent of liability arising
under the original contract of insurance. If the ceding company is not liable for a certain thing
under the original policy, the reinsurer is also not liable under the reinsurance contract. Just as
direct policies are contracts of indemnity against pecuniary losses, same is the case with
reinsurance contracts.

A company which accepts business from public may also accept reinsurance business from other
insurance companies if allowed by the statutes of the country. Professional reinsurers, however,
do not accept direct insurance from the public but only reinsurance business from the insurance
companies. The Swiss Reinsurance (Swiss Re) and Munich Reinsurance (Munich Re) are among
the leading reinsurance companies in the world.
Under reinsurance arrangements, the ceding company receives commissions from the reinsurer
at a rate higher than the original commissions paid by the ceding company. This is so because
the cost of acquiring direct business is higher than the cost of obtaining business by way of
reinsurance. Also the underwriting and administrative expenses of the ceding company are far
more than those of the reinsurers.

10.5.1 Peculiar Features of Reinsurance Business

You must remember the peculiar features of reinsurance business. Following are some of the
peculiar features of re-insurance:
1. Reinsurance business is inescapably intermediary (Brokers) driven on account of
geographical remoteness and the inevitable ignorance about the potential counter-party.
Brokers are in great demand. Even in a number of cases, they become surrogate insurers.
2. Brokers also handle funds on behalf of both side parties which make them powerful as
well as susceptible to frailties.

3. For reinsurance, unlike direct insurance, the real price for cost of protection is the Rate of
Commission (including profit commission) granted by the reinsurer to the direct insurer
i.e. net premium (which is Net of commission) rather than Gross Premium cessions.
4. Reinsurers do not have the benefit of upfront assured cash flows like the direct insurer.
5. Reinsurer does not have the benefit of first-hand knowledge of exposure, peril, hazard
and loss assessment.
6. Reinsurer is always a secondary insurer and his underwriting is only guided by information
furnished (sometimes filtered/garbled) either by brokers.

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