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THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS

INS659

REINSURANCE

GROUP ASSIGNMENT

(THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS)

PREPARED BY :

ASMA LIYANA JA’AFAR 2012241896

NURUL NABILA RUSLEN 2012417916

NUR FATEHAH AB RAZAK 2012255522

IZZATI NATASHA BINTI AZIZ 2012414032

PREPARED FOR : PUAN AINON BASAR

SUBMITTED ON : 25TH NOVEMBER 2013

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EXECUTIVE SUMMARY

Insurance is the financial protection provided by the insurers. How insurers can make a

profit? Insurers can make a profit through underwriting profit. Whereby, total premium paid will

be deducted with all the expenses such as claims, management expenses, legal fees and etc.

Reinsurance can be defined as the act of transferring a part from the liability owed by the insurer

to another insurance company, in consideration for paying the premium of reinsurance.

Reinsurance generally involved in settling or resolving the large amount of claims with a certain

limit. This report is conducted in order to find out how reinsurance managing the risk and

protecting the insurer against insolvency. This report basically will reveal how reinsurance works

as to cover the losses suffered by the most well-known tower in New York City, World Trade

Centre Tower during 2001. Unfortunately, the incident had caused catastrophic losses due to one

event and affected the business operation very badly. Thus, this report will show how the

affected companies can survive and recover from the incident due to the function and role of

reinsurance.

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INTRODUCTION OF REINSURANCE

Reinsurance is the practice of insurers transferring portions of risk portfolios to other

parties by some form of agreement in order to reduce the probability of having to pay a large

obligation resulting from an insurance claim. The aim of reinsurance is for an insurance

company to reduce the risks associated with underwritten policies by spreading risks across

alternative institutions.

Types of Reinsurance:

1. Facultative Coverage

This type of policy protects an insurance provider only for an individual, or a specified

risk, or contract. If there are several risks or contracts that needed to be reinsured, each

one must be negotiated separately. The reinsurer has all the right to accept or reject a

facultative reinsurance proposal.

2. Reinsurance Treaty

Unlike a facultative policy, a treaty type of coverage is in effect for a specified period of

time, rather than on a per risk, or contract basis. For the duration of the contract, the

reinsurer agrees to cover all or a portion of the risks that may be incurred by the

insurance company being covered.

3. Proportional Reinsurance

Under this type of coverage, the reinsurer will received a prorated share of the premiums

of all the policies sold by the insurance company being covered. Consequently, when

claims are made, the reinsurer will also bear a portion of the losses. The proportion of the

premiums and losses that will be shared by the reinsurer will be based on an agreed

percentage. In a proportional coverage, the reinsurance company will also reimburse the

insurance company for all processing, business acquisition and writing costs. Also known

as ceding commission, such costs may be paid to the insurance company upfront.

4. Non-proportional Reinsurance

In a non-proportional type of coverage, the reinsurer will only get involved if the

insurance company’s losses exceed a specified amount, which is referred to as priority or

retention limit. Hence, the reinsurer does not have a proportional share in the premiums

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and losses of the insurance provider. The priority or retention limit may be based on a

single type of risk or an entire business category.

5. Excess of Loss Reinsurance

This is basically a form of non-proportional type of coverage. The reinsurer will only

cover the losses that exceed the insurance company’s retained limit. However, what

makes this type of contract unique is that it is typically applied to catastrophic events. It

can cover the insurance company either on a per occurrence basis or for all the

cumulative losses within a specified period.

6. Risk Attaching Reinsurance

All policy claims that are established during the effective period of the reinsurance

coverage will be covered, regardless of whether the losses occurred outside the coverage

period. Conversely, no coverage will be given on claims that originate outside the

coverage period, even if the losses occurred while the reinsurance contract is in effect.

7. Loss Occurring Coverage

This is a type of treaty coverage where the insurance company can claim all the losses

that occur during the reinsurance contract period. The important factor to consider is

when the losses have occurred and not when the claims have been made.

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SEPTEMBER 11 ATTACKS

On 11 September 2001, at 8.45a.m on a clear Tuesday morning, an American Airlines

Boeing 767 loaded with 20,000 gallons of jet fuels crashed into the north tower of the World

Trade Center in New York City. In that incident, close to 3,000 people died in the World Trade

Center and its vicinity, including a staggering 343 firefighters and paramedics, 23 New York

City police officers and 37 Port Authority police officers who were struggling to complete an

evacuation of the buildings and save the office workers trapped on higher floors.

The structural steel of the skyscraper, built to withstand winds in excess of 200 miles per

hour and a large conventional fire, could not withstand the tremendous heat generated by the

burning jet fuel. At 10.30a.m, the other Trade Center tower collapsed. Then, 18 minutes after the

first plane hit, a second Boeing 767 (United Airlines Flight 175) appeared out of the sky, turned

sharply toward the World Trade Center and sliced into the south tower near the 60th floor.

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MAIN BODY

Reinsurance is transacted on the basis of one insurance company, the ‘Reinsurer’, agreeing to

indemnify another insurance company, the ‘Reinsured’ for all or part of the insurance risks

underwritten by the reinsured. The insurance-buying public is not aware of its existence, since

the reinsurance transaction takes place entirely between insurance organizations.

The corporate insurance buyers in the World Trade Center are responsible for purchasing many

millions of Dollars of insurance coverage and are exposed to various types of reinsurance which

are treaty and facultative reinsurance, as well as the reinsurance methods, pro-rata and excess of

loss.

The primary insurers (ceding company) provide direct insurance coverage for specific insured’s

in the World Trade Center gross up their capacity to a single amount of coverage that the

policyholder sees, but behind that the gross amount can be automatic capacity for one limit, as

well as facultative reinsurance capacity on an excess of loss basis for another limit.

PRIMARY INSURANCE POLICY FOR PROPERTY COVERAGE

Insurance company provided $25 million of property coverage

1st treaty reinsurer – 100% of $4 million excess $1 million

2nd group of 5 treaty reinsurers - $1 million part of $5 million in excess of $5 million

excess of loss

The first $10 million of loss on $25 million gross policy is going to be a primary

insurer and 6 treaty reinsurers.

WORLD TRADE CENTER LOSS

The next $15 million on $25 million policy is purchased by primary insurer purchasing

property facultative reinsurance

This can be arranged in increments of $5 million

So, $5 million P/O $15m million in excesses of $10 million any one property loss.

INITIAL OUTCOME

Primary reinsurer can say that they had a $25 million gross loss in World Trade Center

catastrophe, but after reinsurance it was $1 million

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Catastrophe can be defined as some specific, unexpected, sudden, shocking and external

happening. It can be located in time and place and is the proximate cause of each and

every loss. The catastrophe must also be peril that is covered by the treaty

The reinsurer providing the first $4 million in excess of $1 million, purchased

retrocessional protection behind $4 million from London and the European market

Hence, reinsurance industry needs protection, reinsurers buy in for of

retrocession’s which provide them reinsurance capacity

RETROCESSION PROTECTION

This protection can be purchased on excess of loss basis or pro-rata basis

E.g.: $4 million provided by reinsurer to insurer was reinsured by reinsurer

Thus, each primary insurer has to collect from its reinsurer and reinsurers have to

collect from retrocessionaire’s

Insurance contract Reinsurance contract

CONCLUSION

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Insured Primary insurer Reinsurer Retrocessionaire


The business of reinsurance is a comparatively small but integral part of the overall

insurance industry. Simply defined, reinsurance is transacted on the basis of one insurance

company (reinsurer), agreeing to indemnify another insurance company (reinsured) for all or part

of the insurance risks underwritten by the reinsured. The aim of reinsurance is for an insurance

company to reduce the risks associated with underwritten policies by spreading risks across

alternative institutions.

On 11 September 2001, an American Airlines Boeing 767 crashed into the north tower of

the World Trade Center in New York City. Initial estimates of insured loss at $25 billion, and

property damage alone could reach $10 billion.

The primary insurers providing direct insurance coverage for specific insured in the

World Trade Center gross up their capacity to a single amount of coverage that the policyholder

sees, but behind that gross amount can be automatic or treaty reinsurance capacity for one limit,

as well as facultative reinsurance capacity on an excess of loss basis for another limit.

Reinsurance is intended to provide legitimate economic benefits to ceding insurers. Those

benefits include managing volatility of underwriting, credit, investment, timing and other risks,

capital financing through surplus relief, reduced volatility of financial results, and increased

underwriting capacity.

Current GAAP and SAP accounting guidance provides an appropriate framework to

evaluate the economic substance of reinsurance transactions and the appropriate framework for

establishing the proper financial accounting and reporting disclosures to address the needs of a

broad user base. If insurance regulators, the FASB or others decide that further prospective

evolution of the SAP or GAAP accounting, disclosure or risk transfer rules is necessary, then

regulators, insurers and reinsurers should work cooperatively to effect that change.

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