Page 281 - Ebook health insurance IC27

Sashi Publications

Another dimension to the usefulness of Reinsurance is the fact that reinsurers
provide technical assistance for pricing and underwriting complex risks, especially
in nascent markets or de-tariffed markets, where old pricing structure is no longer
valid. The final and most important dimension of Reinsurance is linked to the fact,
that in many markets, the use ofreinsurance helps an insurancecompany to optimize
the capital it has to hold solvency purposes. This works as follows :
(i) Reinsurance means the transfer of risk fully or partially to the reinsurer.
(ii) ForanInsurer, theamount ofcapital to bemaintainedis linked to theamount of

business that it has written. So when business is reinsured, the insurer has the
recourseto areinsurerforclaimpayments. Thatmeans, intheory, theinsurance
company does not need to hold capital to the extent of reinsured business. In
practice, marketregulations limittheextenttowhich an insurancecompanycan
take this capital credit. For e.g, in India , for Health Insurance, the prevailing
regulations allow an insurer to get partial credit for reinsured business.
(iii) The capital credit argument is important as the shareholders of the insurance
company always want to reduce the amount of capital used, to maximize
the returns.

To understand how an insurance company will design and use its reinsurance
program, the following grid can be used:

High >10% p.a

Claim Frequency D. STOP LOSS C. QUOTA SHARE
AND STOP LOSS

A. NOT REINSURED B. QUOTA SHARE
OR SURPLUS
Low <1% p.a

Low <50,000 Claim Severity Low >50,000

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