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Chapter 1 Purpose of and the parties involved in reinsurance 1/13 Chapter

Question 1.4 1
Why might small or medium-sized direct insurers prefer to employ underwriting agents to control and manage their
inwards reinsurance business?

D4 State reinsurance companies
The governments of many countries, particularly those with emerging economies and insurance
industries, have formed State reinsurance corporations to meet the reinsurance needs for local insurers.
Some of these corporations may derive their reinsurance business from compulsory cessions from the
local insurers. Many of them also write international reinsurance business.
These corporations need to pass on amounts of their liabilities to the international reinsurance markets.
Sometimes, this is done in the form of reciprocal exchanges. However, the development of an
international account remains an objective for many such companies and the establishment of branch or
contact offices in one or more of the existing international markets is an option that a number of these
organisations have taken in recent years.

D5 ReTakaful companies

Reinforce
Before learning about reTakaful companies, remind yourself of the nature of Takaful insurance which we looked at in
section B5.

ReTakaful or Islamic reinsurance is a risk acceptance method in which the Takaful ceding company
resorts to a reTakaful operator to lay off part of an original risk if the risk happens to be above its normal
underwriting limit. The ‘operator’ manages, in a Shariah-compliant manner, the reTakaful fund, including
claims handling, accounting, reserving of policy liabilities and risk management. In return for carrying
out its duties and responsibilities, the operator receives a fee and a share of investment income evolving
from the managed fund. Reference copy for CII Face to Face Training
The fund represents contributions received from participating Takaful insurers out of which claims,
commissions, retrocession costs and other related expenses are paid. The contributions are for the
collective benefit of participating insurers who give up their right over the contributions in favour of a
collective right of compensation against the covered events within the conditions of the respective
Takaful contracts. Where claims exceed the value of the reTakaful fund additional payments will be made
from the reTakaful operator’s shareholders’ equity and carried forward to its extinction by future
surpluses.

D6 Reinsurance pools
Reinsurance pools comprise a number of insurance and/or reinsurance companies operating in a
particular country or region to accept local or regional reinsurance business, sometimes of a specialist
nature, with the business accepted being shared among the participants of the pool.

D7 Sidecars
So-called ‘sidecars’ provide additional capacity to a sponsoring (re)insurer through a typically fully Sidecars are
covered in
collateralised quota share arrangement. Third-party investors, such as hedge funds and private equity chapter 2,
funds, provide these extra resources by being offered debt in the sidecar. Sidecars are often targeted at section C1D
specific lines of business and tend to have a short lifespan although some are permanently structured to
underwrite new business at each renewal season.

It is generally accepted that sidecars are opportunistic since the supporting capital markets wish to take
advantage of increased rates available to a sponsor that often follow major catastrophes. Such
arrangements are accepted by financial regulators, tax authorities and rating agencies.