Reinsurance. R. L. Carter. Springer-Science+Business Media, B.V. Second edition

Transcription

1 Reinsurance

2 Reinsurance R. L. Carter Second edition Springer-Science+Business Media, B.V.

3 ISBN ISBN (ebook) DOI / Springer Science+Business Media Dordrecht 1983 Originally published by The Mercantile and General Reinsurance Company pic in 1983 All rights reserved. No part of this publication may be reproduced in any form or by any means without the prior pennission of the publishers.

4 To Rita

5 Contents Page Foreword by Julius A. S. Neave Preface to the second edition Preface to the first edition ix xi Xlll The role and development of reinsurance 2 Reinsurance markets 3 Principles and practice of reinsurance 4 Legal principles applying to reinsurance contracts 5 Forms of reinsurance 6 Facultative reinsurance 7 Proportional reinsurance treaties 8 Non-proportional treaties 9 Fixing retentions 10 Fire reinsurance 11 Accident reinsurance 12 Marine and aviation reinsurances 13 Life reassurance 14 Technical accounting and statistics 15 Financial accounting and management 16 International practice and problems Bibliography Index vii

6 Foreword There may be some readers of this book who are expecting a sort of Mrs Beeton of reinsurance, whose indications if carefully followed will ensure the satisfactory outcome of any reinsurance operation undertaken. They will, I fear, be disappointed for reinsurance is first and foremost a commercial enterprise, whose successful conduct depends upon so much that cannot be written in books or committed to paper. Above all else, it depends upon people and on the personalities of people as much as on their technical skills. Most reinsurers are born and only some are made, but none the less for either sort this book will be of inestimable benefit as a guide to the principles that lie behind the transaction of a business at once as complex and widespread as reinsurance is by its very nature. One of the main characteristics of this highly specialized business is the infinite variety of situations to which the reinsurer is called upon to adapt his business methods making any standardization of practice possible only on a broad, as opposed to a detailed, basis. This renders any attempt to encompass in one book all the practical alternatives and differences in approach to technical reinsurance problems a virtual impossibility. But the reader of that which follows will find a mine of essential basic information that ranges over the whole subject and will provide not only a very thorough introduction to the subject for students and serious practitioners but will also act as a sheet anchor to which the well established reinsurer will return when needing to refresh his memory on techniques, abstruse or straightforward. This book is the outcome of a joint endeavour between practitioner and academic; the latter in the guise of Professor Carter who as conductor has orchestrate"d the score as well as conducting the performance. The practical experience of a team of specialists in the Mercantile and General Reinsurance under a dedicated leader has provided the instrumentalists of the orchestra who, by careful study, have adapted the score to everyday commercial practice. Together they have completed the recording. Whilst it is for the reader to judge the performance, there can be no doubt that what has been produced is a ix

7 major contribution to the reinsurance profession and worthy of the immense amount of hard and dedicated work that has gone into its production. JULIUS A.S. NEA VE, CBE, IP x

8 Preface to the second edition Since the publication of Reinsurance I have been delighted to receive from readers a number of very helpful criticisms and comments. In particular during the meticulous translation of the book into Japanese by the Toa Fire and Marine Reinsurance Company Limited the translators made several suggestions which have been incorporated in the Japanese edition and which are now included in this revised edition. The opportunity has also been taken to make other additions to the original text. The major change is the substantial expansion and division into two separate chapters of the section dealing with accounting and financial management. Chapter 9 dealing with retentions has been expanded too. The alterations to other chapters include bringing statistical data up to date and modifying some of the examples, hopefully to make them even more helpful to an understanding of the principles. Once again I would like to express my gratitude to many of my friends at Mercantile and General Reinsurance for their help and advice. In particular the new chapters 14 and 15 owe much to the help which I received from the accountants at the Cheltenham head office. I hope that all who have helped, including Eric Witt, who kindly acted as coordinator in London, will feel that their efforts have not been in vain. Responsibility for any errors lies with me. R.L. CARTER xi

9 Preface to the first edition The layman can be excused for regarding insurance as a mystery but many insurance practitioners themselves view reinsurance in a similar light. Yet without reinsurance many classes of insurance could not be conducted on their present-day scale, or at least any attempt to do so would seriously undermine the degree of security insurers can provide for policyholders. The mobilization of underwriting capacity on an international scale is necessary to provide the amount of insurance cover required for many of today's very large industrial and transport risks, and the world-wide spreading of catastrophe losses, especially those caused by natural disasters, contributes to international economic stability. It is hoped that this book will provide readers with an understanding of the role of reinsurance, and the first three chapters are concerned with that task. Besides covering the basic function of reinsurance they also deal with reinsurance markets and practices. The aim, however, has not been to write a textbook dealing only with the theoretical aspects of reinsurance. Mainly it is intended for use by insurance and reinsurance practitioners, and indeed I must acknowledge the example set by the late Dr Golding with his internationally known work, The Law and Practice of Reinsurance. Therefore the remainder of the book is concerned with the very practical aspects of reinsurance business. Chapters 4 to 9 inclusive deal with matters of general application to all classes of insurance and reinsurance business-the law relating to reinsurance contracts, the advantages and disadvantages of the various forms of reinsurance, the placing of reinsurances facultatively and by treaty, the form and operation of such contracts, and the fixing of retentions. Chapters 10 to 13 comprise the third part of the book. They deal with the features of the individual classes of reinsurance. The final two chapters then cover the financial and international aspects of reinsurance operations. There are four points I should like to make about the contents of this work. First, although it is far longer than originally envisaged, it has not been possible to cover in detail every nuance of reinsurance practice, xiii

10 REINSURANCE which in any case is not static. Therefore, although experts in individual classes of reinsurance may be able to point out many exceptions to the practices discussed, it is hoped that nevertheless readers will obtain a good insight into the general principles and practice of each class of business. Secondly, although it is inevitable that the subject-matter of a book has to be presented sequentially, neither buyers nor sellers of reinsurance can afford to ignore all of the elements that enter into the financial results of a reinsurance contract. The arrangements regarding the preparation and settlement of accounts, the rate of interest payable.on deposits, foreign exchange controls applying to remittances, and so forth, can be just as important as the technical aspects of a treaty. Therefore, anyone dealing with reinsurance must have at least some grasp of the legal and financial aspects of the business, and of the constraints imposed by governments. Thirdly, like other forms of insurance business, in response to changing risk conditions reinsurance practice is becoming far more complex and sophisticated. There will always remain a lot of room for SUbjective judgment-the so-called 'underwriting flair'-but today's underwriter needs more mathematical and statistical skill than his predecessor. Of course he can always turn to an actuary or statistician for expert advice but at least he should be aware of what is required and of the techniques that are available. In a very simple way, an attempt has been made to frame some of the principles and problems in a mathematical form and to provide references for further reading. Fourthly, although the basic principles of the subject are universal, practice in various markets throughout the world is conditioned by local market organization, supervisory regulations, and so forth. It would be impossible within the scope of one book to deal with those differences, and any list of, say, supervisory or exchange control regulations would rapidly become out of date. Therefore, the practices described are those to be found on the London market but some reference is made to differences which may be encountered elsewhere. The idea of writing this book arose out of a discussion I had with the President of the Reinsurance Offices' Association, Mr Julius Neave of The Mercantile and General Reinsurance Company Limited. We both felt that the time was ripe for a new book on the subject but as an academic I knew that I did not possess a sufficient knowledge of reinsurance practice. JUlius Neave generously offered to provide that expertise from among his own colleagues. The result was a team of Mercantile and General advisers; although they modestly wish to remain anonymous I must record the great debt that lowe to them. They have supplied information, explained tricky points, read and criticized drafts xiv

11 PREFACE TO THE FIRST EDITION and when all else has failed have written parts themselves. Although I must reluctantly respect their wish to remain anonymous I feel compelled to name Philip Flint who has acted as coordinator, adviser, friend and at times father confessor. The Mercantile and General have offered more than advice. Julius Neave also provided the financial support which has made the work possible. To Julius Neave, Philip Flint and their many colleagues I am deeply grateful. If the work is not worthy of the help they have given, or if any errors remain, the fault is mine alone. I should also like to record my gratitude to Miss Margaret Roys. She must be thoroughly tired of the subject by now, but without her secretarial help and typing I should have been lost. She has deciphered my notes, typed endless drafts and given her help uncomplainingly. Finally, my wife and family who for two years have lived with 'the book'. Even the dog has suffered from having fewer and shorter walks than usual! I thank my wife Rita for her patience, encouragement and forbearance. R.L. CARTER xv