PRACTICE OF REINSURANCE IN BANGLADESH 19th November 2016

Basic Functions of Reinsurance Arising out of the fact that an insurance company’s risk assumption capacity is limited by its financial standing and resources, Reinsurance is a fundamental requirement of Insurance business

The nature of Risks A Policy A Risk Accumulated exposure

Managing a portfolio of Risks

Managing a portfolio of Risks Assuming that the Insurance Company’s retention is Taka 5,000,000 per risk and that it has a 4 lines Surplus treaty with a capacity of Taka 20,000,000

The functions of Reinsurance Definition : Reinsurance is insurance of insurance Risk Transfer to Reinsurer Enlargement of the direct insurer’s underwriting capacity Flexibility to insurers by creating a condition which enables them to accept a risk beyond their financial capacity or resources Effective handling of Risks accumulation– per bottom and port accumulation in Marine insurance; conflagration risks in Fire insurance Reducing the probability of an Insurance company’s ruin by assuming its catastrophic Risks.

The functions of Reinsurance Stabilizing an Insurance Company’s balance sheet by assuming a part of its risk of random fluctuation, risk of change and risk of error Improves the balance of the direct insurer’s portfolio by covering large sums insured and highly exposed risks Increases the amount of capital effectively available to the direct insurer by freeing equity that was tied up to cover risks.

The functions of Reinsurance Cash loss provision represent stand by liquidity in the case of large losses, enabling primary insurer to plan their cash flow, invest a greater part of their funds which helps to maximize investment income. Reinsurance can provide relief in case of solvency margin requirements by Regulators. Enhances effectiveness of a direct insurer’s operations by providing many kinds of services such as advices in underwriting, marketing, risk management, pricing, loss prevention, claims handling and reserving, actuarial, investment, IT related as well training of Cedant’s staff.

How Reinsurance benefits the direct insurer Facultative reinsurance reduces commitments on large individual risks and protects insurer against large liability exposures whose extent often cannot be properly estimated before a loss occurs Non-proportional reinsurance provides cover for catastrophic risks such as earthquake, flood and windstorm. Proportional treaty reinsurance finds protection against major deviations in the loss experience of entire portfolio (risk of random fluctuations, or risk of change due to economic cycles or new laws or regulations or social changes). Financial reinsurances, e.g. ART, Finite Risk cover provide covers for difficult to insure or marginally insurable individual risks or portfolios in order to guarantee liquidity and income.

Role of Sadharan Bima Corporation Insurance Corporation Act 1973 Sec 23A: Reinsurance 1) Every insurer registered and carrying on insurance business in Bangladesh shall reinsure, on generally acceptable terms and conditions, such portion of his insurance business as he cannot retain on his own account. 2) Fifty percent of the re-insurable general insurance business shall be reinsured with Sadharan Bima Corporation and the remaining fifty percent of such business may be reinsured either with the Corporation or with any other insurer whether in or outside Bangladesh

Role of Sadharan Bima Corporation SBC is the national Reinsurer of Bangladesh Although the existing law allows placement of 50% Reinsurance with overseas Reinsurers, in practice, except for the top insurance companies, SBC is catering to 100% of reinsurance requirements of most of the non-life insurance companies in Bangladesh. SBC needs to run its affairs like a professional reinsurer and provide efficient services, guidance and technical expertise to its Reinsureds.

Issues relating to placement or Reinsurance overseas Generally, foreign Reinsurers have somewhat negative perception towards Bangladesh market due to: It being a small insurance market generating unbalanced books of reinsurance business. Consequently, pay back period following a large loss is much longer than in other markets It is a catastrophe exposed region. No catastrophe modelling has so far been done. Lack of sufficient technical information to assess Risk for facultative R/I. Much detailed and wider information is required for placement of Treaty reinsurance, than what the local companies are prepared to provide. Adverse publicity generated by news report of large losses, particularly related to textile and garment sectors

Buyers and Sellers of Reinsurance Buyers are: Insurance companies, Reinsurance companies, Lloyds syndicates, captive insurers, Pools and underwriting agencies. Sellers are: Reinsurance companies, Lloyds syndicates, insurance companies, captive reinsurers, Reinsurance pools, reinsurance underwriting agencies. The role of Reinsurance brokers is to advise their clients on the best type of reinsurance programme and capacity based upon their experience and knowledge of available markets and then places the resultant programme with secure markets at competitive price or terms. Lloyds of London can only be approached by accredited Lloyds broker.

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