Reinsurance: A Review

The article Reinsurance is about the process of reinsurance by insurance company owners, who buy insurance to pay for their insurances, in terms of insurance payment.

Primary insurers and reinsurers both share the premiums and losses, or reinsurers may bear the primary company’s losses above a certain dollar limit for a fee. 

Risks of various kinds of natural disasters, are being sold by insurers and reinsurers to institutional investors in the form of catastrophe bonds and other alternative risk-spreading mechanisms, which was not available earlier.

 

Important insights of Reinsurance:

One main insight into the insurance business that Reinsurance provides is to ensure it will be able to pay all potential future claims related to the policies it issues. 

Although By this requirement insurers protect consumers, it limits the amount of business an insurer can take on. Therefore, if the insurer can reduce its responsibility, or liability, for these claims by transferring a part of the liability to another insurer, it can lower the amount of capital it must maintain to satisfy regulators that it is in good financial health and will be able to pay the claims of its policyholders. 

The important thing is, capital freed up in this way can support more or larger insurance policies. 

The primary insurer, the company that issues insurance, is ceded by a secondary insurer, a company that assumes liability from the primary insurer, and is known as the reinsurer. Primary companies are said to “cede” business to a reinsurer.

The two insurance types, Treaty and Facultative are the main types of insurance. The treaty type of insurance is agreed upon by the two groups and the insurer covers pretty much all the aspects that ate stated in the treaty. 

Facultative insurance is issued by reinsurance company, and it can agree or reject different coverages the insurer initially offers. If the reinsurance company observes any attitudinal or methodical discrepancies in observing safety and precaution, it has liberty to reject if the company finds any objectionable or malpractices. 

Insurance coverage can be pro-rata or non-proportional. Pro-rata coverage usually is covered by both primary insurer and reinsurance company, by sharing both losses as well as premiums. 

Excess of loss or non- proportional insurance is covered to an extent by the primary insurer and above that, possible losses are covered by reinsurer, who is paid premiums by the primary insurance.  Example of such losses are are hurricane and other such disasters.

This aspect is very much similar to what we discussed in the class, about the coverage of insurance, even after the deductibles are paid by the person or company or property insured by the owner, the reinsurance company can reimburse the amount paid as deductibles. 

Reinsurance has come to be regularized since the mid to late 80s. Insurers submit financial statements to regulators who monitor their financial health. "Financial health includes assuming prudent risk or liability for future claims. The principal value of reinsurance to a ceding company (the purchaser of reinsurance) for regulatory purposes is the recognition on the ceding company's financial statement of a reduction in its liabilities in terms of two accounts: its unearned premium reserve and its loss reserve. 

The unearned premium reserve is the amount of premiums equal to the unexpired portion of insurance policies, i.e., insurance protection that is still "owed" to the policyholder and for which funds would have to be returned to the policyholder should the policyholder cancel the policy before it expired. 

The loss reserve is made up of funds set aside to pay future claims. The transfer of part of the insurance company’s business to the reinsurer reduces its liability for future claims and for return of the unexpired portion of the policy. 

The reduction in these two accounts is commensurate with the payments that can be recovered from reinsurers, known as recoverables. The insurer’s financial statement recognizes as assets on the balance sheet any payments that are due from the reinsurer for coverage paid for by the ceding company."

This is a very important element in understanding how reinsurance is regulated as well as executed. Losses are covered to the extent the primary insurance company agrees, and what the reinsurance company either follows by the treaty or deems it as necessary loss to be covered. The unearned premium of the insurance coverage will be returned to the policy holder, should they decide to close, while it is still unexpired. This and the loss reserve forms the recoverables from the reinsurers.

After observing complications that arose after the 80s and 90s, in order to enable regulators, policyholders and investors to assess a company's financial condition more accurately, the NAIC requires insurance companies to deduct 20 percent of anticipated reinsurance recoverables from their policyholders’ surplus on their financial statements—surplus is roughly equivalent to capital—when amounts are overdue by more than 90 days. The rule helps regulators identify problem reinsurers for regulatory actions and encourages insurers to purchase reinsurance from companies that are willing and able to pay reinsured losses promptly

Hurricane Andrew and Katrina and other catastrophes have generated development in the insurance industry, to rely on reinsurance and the industry is also regulated to avoid risks and irregularities and cover losses and minimize overpayment.

The article is identifying reinsurance, regulation, problems faced by studying over a period of more than twenty years. A catastrophe bond, resulting, "is a specialized security that increases insurers’ ability to provide insurance protection by transferring the risk to bond investors. Commercial banks and other lenders have been securitizing mortgages for years, freeing up capital to expand their mortgage business. Insurers and reinsurers issue catastrophe bonds to the securities market through an issuer known as a special purpose reinsurance vehicle (SPRV) set up specifically for this purpose. These bonds have complicated structures and are typically created offshore, where tax and regulatory treatment may be more favorable. SPRVs collect the premium from the insurance or reinsurance company and the principal from investors and hold them in a trust in the form of U.S. Treasuries or other highly rated assets, using the investment income to pay interest on the principal. Catastrophe bonds pay high interest rates but if the trigger event occurs, investors lose the interest and sometimes the principal, depending on the structure of the bond, both of which may be used to cover the insurer’s disaster losses. Bonds may be issued for a one-year term or multiple years, often three."

In addition to catastrophe bonds, other options were also introduced, but they could not take off. 

Natural disasters, wars, terroristic activities that were not available for insurance are now managed and risk spread out and reduced due to reinsurance coverage. 

Article also throws light on nine-eleven of September, 2001and later problems faced by large scale of people and companies. 

Globalization is spreading the geographic regions that needs to be covered by reinsurance, owing to the fact that, there are companies in more vulnerable parts of the world in different countries. 

Insurance to different items like what has happened in New Delhi in 2013, and other places, where women are raped, tortured and left to die, and honor deaths, should be available and also, precautionary measures available, where self-help trainings, awareness camps, overseeing authorities, should also be developed, in addition to offering of insurance by may be privatized companies or government bodies, in the global arena, and also provide security to women being trafficked to different countries and cultures. 

This is one dark side in the society, where no one is willing to act upon, as it is not conducted by one person but is an organized crime. Funds from States and Unions should be allocated to protect these as well as those people who are losing their people in wars, and calamities and due to starvation and negligence. This may outrightly seem out of the boundary of insurance, but I am foreseeing a future, where not only insurance companies, regulators but also law and order, non profit organizations may act in tandem. 

References:

"Reinsurance" from Insurance Information Institute, November, 2014.

The Essential Guide to Reinsurance: Solutions to 21st Century Challenges. Swiss Re, 2012. A guide to the concepts of reinsurance and its contributions to the economy and society.

"Reinsurance: Fundamentals and New Challenges," Insurance Information Institute, 2004.

A Question of Sales in the Local Shops, in a Global Economy, and a Cultural, Social and Patriarchal Outlook, and Some Confusion!

Jiji was relaxing in the living room when she heard her old classmate call her,late in the afternoon. She was trying to share one experience with her friend that day. 

"Jiji, last Saturday, i went to a local shop in fashion and jewelry from ethnic styles, to purchase some pooja items for oncoming Shravan masam poojalu. I did not plan to spend a lot. I just took some four pieces, although I only needed one or two, of one yard pooja cloths which are made from rayon or other art stuff. They were together billed for 25 USD or so. However, The shop owner, was not happy, if I was doing a small purchase. He went on showing all stuff, using all his tactics, saying that I do not have to buy if I do not want to, and spreading a bunch of goods to be purchased, for vayanalu, (gifts) ammavaru alankarana, etc. I ended up spending $150.00 for some 10-11 pieces of small gift items, a bunch of art jewelry for the Goddess, etc, he would say I must buy one gram gold jewelry also, because it is gold and went on saying I should buy two of them for the festival coming up, because they are on deal. I did not have to spend more than $10-$15 .00 but he uses all his marketing strategies by hiking up prices, and pretending to be selling for almost throw away prices. I used my cc to do the transactions, as it was quite a bit, and in summer, we do not get any classes, so my funds were quite limited. 
All the while he did not say anything about return policies, but I remember, once when I had to return something, I did get my money back some 26 dollars or so.. 
This morning I sent a message that i would like to return some of the items, he says,I can only exchange for goods, even the the card was still saying transaction was pending, and the items are just lying in the bag, untouched, after I returned home on Saturday evening, past 8:00 PM.
Their policy of posing in the benefit of the best interest of the customer, to force them psychologically to buy products not required, and irregular prices, I do not think is a winning answer to a business..." She paused.  She said, she posted it on social media too.. For which she received likes from some people, who value, regardless. She went on telling that it is not

 just that, the shop owner was even trying to talk about the number of times he sold her  the sarees on short term credit, earlier, with trust, and was sounding like threatening. He would leave her a message on the answering machine, saying,' lets RESOLVE.' He was angry that, she did not take his permission to post it on the social media, (duh) and he went on calling, one too many times, leaving her text messages, that his method of business and marketing practices were great. Where as it appeared they were more like pinching out of ones savings," she said.

Jiji smiled at her friend. All she said was, "next time, you should remember not to fall for sweet talk, instead concentrate on the things, that you need. It is an open market, you should know, when not to fall trap for such wasteful expenditures."

"However, the shop owner would further, lose his businesses, if that is the attitude he has." Said Jiji, and continued, "this is a free country, no body needs to threaten anyone. If anyone threatens or behaves rudely, they could be inviting trouble for themselves. " 

Jiji also said, on learning, how her close members and associates behaved as a result of the posting on social media, "it is natural in a patriarchal society, to snub the women, and not let them express their opinion, even with public interest." She learnt that her friend, eventually deleted some of the postings she made on social media, because her husband, went on expressing his disagreement, that she should not post about such a business as they know the person as a salesman, outside their showroom too. She also found some third parties express their displeasure about the situation, and silent treatment, by posting and sharing things like, 'only incapable people try to express disapproval or disagreement. Others would support them, etc.'

Now, the question is who is considered to be right, each person has their own vested interest also, as they all purchase items of culture and traditions, from this growing capitalist, monopolizing the community, who wants to hike up prices as and how he pleases, and also exploit the situation, because, no one else would cater to supplying all the ethnic, cultural and social needs..! If any sensible guy is reading, they would understand that it is only fair for the society to bring out a competitor! In fact across the next neighborhood, there are some others, who have started their business, but they are not much different from any of the guys around the local areas. It is true they are catering to specific cultural groups, keeping up the traditions, but it is also, exorbitant, outside, in the open market, to buy something that crosses seven seas before coming into the market!

This is where, Global economy plays a role by reaching to the consumer, by networking, and communicating by all media and also using all the tools, such as face to face, interpersonal, word of mouth, publicity and advertising, about their businesses and services, increasing economy and a self sustainable society. Music lessons, art forms, socialising, you name it, all are possible in a global society to reach audience in any corner of the society. Greatness!

Jiji was thinking further, and looking at the irony in the situation! It is true, her friend did not want to hurt her husband, by letting him think,

 that she did not listen to his advise to delete the postings, and so deleted every one of them that were possible to delete! Oh yes she also made sure, she copied the information before deleting and saving it to share in a different form. She knows, those words, would remind her of a quotation Dr. Chitra Divakaruni shares! It was about, being careful with a writer, because, if they are not, their words and their actions would find a place in the write ups, and let the world be aware of how things are going on. Yes, each word will reach the world and more.. And more!

Aah, the social expectations about how women should behave, even when they perceive incongruence, inequality, and biases; they are expected to just take it..(sic) yeah, right baby! Jiji thought, because women are not dumb, if any, and know how to share knowledge, information, and shine! Don't you all agree! Duh. Haha! However, Jiji was considering, there must be an error, because the shop her friend was referring to was run by a gentleman, an ardent devotee. There must be a mistake definitely. 

It was not too long, before she heard back from her friend again. "Jiji, " her friend called, "I think there was an error my friend,"she said. "I need to apologise, you know the shop owner of the art jewelry and other artifacts and ethnic fashion clothe store owner, is decent. He is a gentleman, with good business skills. In fact the art jewelry he recommended sits on the Archa murthy idols so perfect, I am going to recommend his work to everyone. Specially, my husband was so pleased, looking at the garlands, jewelry, fitting perfectly to the God's idols, that the entire Altar was shining with brilliance. I recommend his customer relation to all! He is a nice person, takes good care of his customers, goes extra mile to provide the goods that they need for any or all ethnic and cultural activities. He is a respectable gentleman, with good business skills. There is a mistake, as there is no reason for one to complain. I take back the complaint I had, as it is only fair that we respect such a great entity, and the person who is going extra mile to make all the stuff available, even in a different nation, away from homeland! " she paused. 

Jiji, heard it all, and said, "my dear, it is always good to wait before you flare up and express your opinion, that could be negative, after consideration. Are you seeing your doctor, and therapist regularly!" 

"Oh, yeah, I am. In fact, I think I am improving pretty much and staying balanced!" Sara, her friend said. 

Jiji knew, she is telling truth, but there may definitely have been a mistake, when she flared up so much..."my dear, please take good care of your health. Not all times are easy to recorrect. Be well." 

Jiji was thinking, it is important to know truth from untruth, before delivering any message. 

***.   ****   ****

"Sara," called Jiji on phone, just so she could talk to her. 

"What is it, Jiji?" asked Sara.

"Well, just checkin' to see, how ya doin'?"

"I am ok, Jiji"replied Sara.

"Sara, tell me whats going on, you sound rather dull." Said Jiji.

"You know, Jiji, in fact I am" 

"Oh yea? Why so?" Asked Jiji.

"I was just thinking, the message I posted in a certain group mail.. It is not so much that what I told was fiction or imagination. I did not want someone to suffer consequences, because of something I pointed out. In fact, transactions in business are not always carved in stone. However, the shop owner requested that I remove it, so, I took it upon me. Instead, I should have just said, that I am not interested in proceeding further in this direction, and left it there." Sara replied.

Jiji smiled again, "O Sara, don't worry! You are not the person running the world, remember, the world has its own life. People are wise and can make their own judgments! You do not control their thought processes! They can see for themselves, what is right, and what is different! I would not worry about it. All I care right now is that, you are ok, and you are not hurting. It is just fine, my dear. If any one is doing right, no amount of saying otherwise would blemish anything they do. It is not upto you, how the world goes. I would have a fresh cup of tea, relax and wish everyone well!"

Jiji, was pouring herself some hot tea from her favorite orange kettle in her tall, flowery mug from Whole Food Stores, and remembered, how it went in different parts, with that food store chain, just a few months back... as her lips curved in a smile..!

Action and Inaction

Words of Wisdom..need to be always taken up by action.

About action and inaction: 

आलस्यं हि मनुष्याणां शरीरस्थो महान् रिपुः ।

नास्त्युद्यमसमो बन्धुः कुर्वाणो नावसीदति ॥

-नीतिशतक

aalasyaM hi manuShyaaNaaM sharIrastho mahaan ripuH |

naastyudyamasamo bandhuH kurvaaNo naavasIdati ||

-nItishataka

"Laziness present in one's body, is the biggest enemy of humans.

There is no kin parallel to zeal and the person who is zealous never perishes."

This quotation has been passed on from generations to generations, and holds true even today. Jiji was impressed by that quote, and repeatedly working on understanding the meaning and relevance

She was debating and analyzing: A person has ability to imagine, design, plan and execute and propagate any activity.

How they chose to do it is entirely dependent on their awareness, knowledge, and culture, both material and nonmaterial. 

Sometimes, we think, we have to accomplish somethings, that we dream about and willing to spend the required, time and money.

Occasionally it may backfire or not fire, if not attempted well.

Jiji, was thinking, as she was brooding over a thought for that day, submitted to her by the literary world of the city she was in.

For sometime, Jiji was passing through a phase of inaction and was wondering if the fire in her stomach is gone.

That is when, she heard various responses, of which, this particular saying captured her attention as it was downright challenging, anything to do with lazyness.

As Jiji was coming from the market, buying some groceries, she saw something, that caught her eyes.

In one corner she saw an old woman, weak, and fragile, sitting near the curb, spreading out some home grown vegetables for sale.

She was touched by the scenario,

It was like, at the same time, she was sad as well as happy.

She was happy to see a very senior citizen, in good health and vigor, and doing her own chores. 

On the other hand, seeing a eighty year old woman, staying on the side of the curb, and waiting for buyers to come buy, makes it an awful site to look at, and the dearth of tears in those sad dried eyes is even more poignant.

What is the plight of this woman, whose children left her to manage her life, by herself.

She stopped by, and bought some vegetables from her, that she found useful. 

She also told about her to the womens' cooperative store, across the street, who can send her some customers, looking to buy vegetables.

She cleared the way for the elderly "amma" to prosper a little as the people also get good, quality  fresh vegetables.

Amma comes each day from 8:00 AM to 10:00 AM, and goes back to lead her life, staying in shade during red hot summer days.

Customers line up when her hours are open, and tell her what they want next day, so she can bring get them good bargains.

Is Jiji, cool or what?

No, Jiji just acted, when there was a need and did not let laziness take her time away.

She also guided the customers, market forces, and resources, to network effectively and efficiently, establishing a functioning supply chain. 

About couple of weeks later, she found on that lane, it is not Amma alone who sits during market hours, but also other local vendors who sell eggs, herbs, spices, fish, all of them licensed to trade and keep the market clean.

Well, is that a resourceful neighborhood or what?