ri group ass
TRANSCRIPT
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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THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS
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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THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS
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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THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS
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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THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS
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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THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS
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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THE ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS
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 ROLE OF REINSURANCE IN THE WORLD TRADE CENTER ATTACKS
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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