Page 192 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 10: Fire Insurance

7. Reinsurance business is transacted on the basis of international market usage, custom and Notes
conventions rather than on regulated prescriptions. Virtually, everything is contractual
and mutually agreed on unlike tariffed direct insurance.
8. Reinsurance contract is between two professional insurers standing on equal footing
needing less regulatory interventions.

9. Their relationship is sustained by long standing, enduring reciprocal understanding: a
kind of matrimonial sacrament. Both in times of prosperity and adversity, the insurer and
reinsure must coexist. This is the hallmark of reinsurance relationships.
10. Reinsurance requires a higher level of capital i.e. twice that of direct insurer.
11. Hypersensitivity to rating status: downgrades/unstable/on watch list, as reinsurers are
high value risk carriers.
12. Reinsurance commission rates are much higher than that of direct insurance – part financing
of costs of direct insurers.

Self Assessment

Fill in the blanks:
13. Reinsurance is also a contract of ………………………………….
14. The principle of utmost good faith demands from the ceding company to make full
………………………… of material facts.

Case Study Navi Mumbai Fire: Insurers take ` 100 cr hit

Following is an excerpt of a case of fire insurance dated Nov 14, 2006 in Navi Mumbai:
Insurance companies are expected to take a collective knock of ` 100 crore on their books
on account of an inferno that destroyed most of a cold storage plant and its contents in
Navi Mumbai last week.
Insurers said that they were not in a position to assess the loss because the situation at
Savla Foods and Cold Storage in Turbhe is still not under control.
The damage caused by the blaze, which was initially estimated to have caused damages of
close to ` 200 crore, is one of the biggest fire losses in Mumbai in recent years. However,
after an initial assessment, the total loss is expected to be contained at within ` 100 crore.
Most of the goods stored at Savla consist of huge stocks of spices and pulses belonging to
traders from places lacking in proper storage facilities. Many of the small traders have not
insured their holdings.
Unlike large losses in the past where the claims bill was ultimately settled by the reinsurer,
industry sources said that losses are likely to be taken by companies on their own books.
This is because the contents of the warehouse belonged to a large number of traders who
had insured their holdings with several insurance companies. Typically, an insurance
company buys specific reinsurance protection when the company writes large risks in one
location. But here, since the insurance was distributed among various companies, many
have taken them on their own books.
Contd...

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