Learning Center for General Insurance - PT. Asuransi Samsung Tugu

Insurer’s business model

Profit = earned premium + investment income - incurred loss - underwriting expenses.

Insurers make money in two ways: (1) through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks and (2) by investing the premiums they collect from insureds.

The most difficult aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Of course, from the insurer's perspective, some policies are winners (i.e., the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are losers (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income).

An insurer's underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss.

Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out.

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. Naturally, the “float” method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards. So a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the "underwriting" or insurance cycle. ^[6]

Property and casualty insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally, property losses in the US, due to natural catastrophes, have exacerbated this trend.

Finally, claims and loss handling is the materialized utility of insurance. In managing the claims-handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome.

Insurable Interest

Konsep insurable interest
Tidak semua resiko dapat diasuransikan. Resiko yang dapat diasuransikan (insurable risk) harus memenuhi karakteristik:
- nilainya dapat diukur secara finansial (financial measurement)
- pure risk
- particular & fundamental risk
- fortuitous
- homogenous exposure
- reasonable premium
- not against public policy
- insurable interest
Insurable interest adalah salah satu syarat agar suatu resiko dapat dikategorikan sebagai insurable risk. Apabila tidak ada insurable interest, maka tertanggung tidak dapat mengasuransikan.
Subject matter of insurance
Subject matter of insurance dapat berbentuk barang (property) atau kejadian yang secara hukum dapat menimbulkan kerugian (loss of a legal right) atau tanggung jawab hukum (a legal liability).
Contoh:
Subject matter of insurance dalam polis kebakaran : gedung, barang dagangan atau mesin.
Subject matter of insurance dalam polis liability : tanggung jawab hukum seseorang atas kecelakaan atau kerusakan
Subject matter of insurance dalam polis marine : kapal, muatannya atau bisa juga tanggung jawab pemilik kapal atas kecelakaan atau kerugian yang menimpa pihak ketiga.
Untuk menentukan insurable interest, dalam kontrak asuransi, yang diasuransikan bukannya bangunan, kapal, mesin atau tanggung jawab hukum pada pihak ketiga, melainkan kepentingan keuangan tertanggung (pecuniary interest of the insured) atas rumah, kapal, mesin, atau atas kepentingan keuangan tertanggung terhadap orang yang diasuransikan.
Subject matter of contract
Subject matter of contract adalah suatu nama yang diberikan pada kepentingan keuangan yang dimiliki seseorang dalam subject matter of insurance.
Dasar hukum : Castellain preston (1883)
Apa yang dipertanggungkan dalam asuransi kebakaran?
Bukan batu atau material yang dipakai dalam bangunan tetapi kepentingan tertanggung pada objek pertanggungan tersebut.
Definisi insurable interest:
Insurable interest merupakan "the legal right to insure arising out of a financial relationship, recognized at law, between the insured and the subject matter of insurance"
Essentials of insurable interest
Unsur-unsur pokok dari insurable interest adalah:
- harus ada benda, hak, kepentingan, jiwa, tanggung jawab yang dapat diasuransikan
- benda, hak, kepentingan dan sebagainya harus merupakan objek yang diasuransikan (subject matter of insurance)
- tertanggung harus mempunyai hubungan dengan objek yang dipertanggungkan di mana dia memperoleh manfaat atas keutuhannya, dan mengalami kerugian atas rusaknya atau hilangnya subject matter of insurance
- hubungan antara tertanggung dan subject matter of insurance harus diakui/sah secara hukum
Tambahan keempat unsur tersebut timbul dari sengketa antara Macaura v. Northern Assurance Company (1925).
Macaura memiliki polis kebakaran untuk sejumlah kayu di pekarangannya. Ia telah menjual kayu tersebut kepada perusahaan, di mana ia sebagai pemegang saham perusahaan tersebut. Kayu tersebut kemudian terbakar dan klaim kepada perusahaan asuransi ditolak, atas dasar bahwa Macaura tidak lagi memiliki kepentingan asuransi atas kayu yang telah menjadi asset perusahaannya, walaupun ia adalah pemegang sahamnya. Perusahaan milik dia, adalah sebuah badan hukum yang terpisah dari pemiliknya. Dari kasus tersebut Macaura dinyatakan bahwa secara hukum ia tidak lagi ada hubungan kepentingan keuangan dengan kerusakan kayu. Kepentingan keuangan Macaura terhadap perusahaannya terbatas pada sejumlah sahamnya saja dan tidak memiliki kepentingan asuransi atas kekayaan perusahaan.

Pengawasan Asuransi

Usaha asuransi tergolong sebagai ‘the most regulated business’

A. Alasan Pengawasan

Solvency
Penanggung harus menanggung resiko pertanggungannya yang timbul secara tidak terduga. Jadi penanggung harus selalu siap dan solvent membayar klaim yang bisa timbul setiap saat. Biasanya aktiva penanggung berupa aktiva likuid.
Aturan dan pengawasan atas tingkat solvency:
KMK No 224/93 pasal 2
Solvency margin = Admitted Assets – Liabilities – Modal disetor ? 10% premi netto
Equally
Baik penanggung maupun tertanggung harus bersikap fair, reasonable dan wajar.
Perumusan polis dilakukan secara sepihak yaitu oleh penanggung Pihak tertanggung harus menjelaskan keadaan sebenarnya dari objek asuransi, sebaliknya penanggung juga harus menjelaskan secara rinci apa yang ia tanggung. Perlu ada pengawasan agar kedua belah pihak tidak dirugikan akibat kontrak asuransi tersebut.
Insurable Interest
Insurable interest harus ditegakkan karena insurable interest membuat asuransi berbeda dengan perjudian.
Pihak yang tidak mempunyai insurable interest harus dicegah untuk melakukan kontrak asuransi.
Competence
Transaksi asuransi merupakan transaksi yang bersifat intangible, di mana tertanggung membeli janji indemnity atas kejadian yang tidak pasti. Karena itu penanggung harus kompeten dan ini ditunjukkan dengan adanya izin pemerintah.
Compulsory insurance
Mewajibkan masyarakat untuk melakukan asuransi tertentu dengan maskud dan tujuan tertentu. Asuransi wajib ini harus diawasi agar pelaksanaannya tidak melenceng dari maksud dan tujuan tersebut.
Social Insurance
Asuransi dapat digunakan sebagai sarana untuk menumbuhkan kesejahteraan masyarakat, oleh karenanya campur tangan pemerintah adalah mutlak.
Contoh : Astek, Jasa Raharja

B. Maksud dan Tujuan Pengawasan

Tujuan Mikro
- Menghasilkan individu perusahaan yang prudential
- Menghasilkan perusahaan yang punya kemampuan keuangan yang kuat
- Supaya perusahaan mengijinkan praktek usaha yang fair
Tujuan Makro:
- Dinamisator pembangunan:
  - pengumpulan dana masyarakat
  - merangsang perluasan usaha
  - penyediaan lapangan kerja
- Stabilisator pembangunan:
  - penyediaan indemnity
  - pencegahan resiko
  - pengendalian resiko
  - menghindari pengangguran

C. Bentuk-Bentuk Pengawasan

Bentuk Pengawasan Statutory (Statutory Control)
- Judicial Control
  Merupakan pengawasan yang didasarkan pada keputusan lembaga judikatif dalam bentuk:
  - penyelesaian akhir sengketa melalui badan peradilan
  - penafsiran hukum dan perundang-undangan oleh lembaga judikatif
  - yurisprudensi yang menjadi doktrin/prinsip asuransi
  contoh: 6 prinsip asuransi
- Legislative Control
  Merupakan pengawasan/pengaturan dalam bentuk UU yang ditetapkan oleh lembaga legislatif dan biasanya:
  - berisi pokok-pokoknya/ umum saja
  - rincian /teknis dilimpahkan kepada peraturan yang lebih rendah tingkatannya
  alasannya supaya fleksibel dan karena anggota legislatif umumnya tidak mempunyai background asuransi
  Contoh :
  UU No 2 th 1992, KUHD
  MIA 1982, ICA 1982
- Administrative Control
  Merupakan pengawasan/pengaturan yang ditetapkan oleh pemerintah
  Ciri:
  - merupakan rincian teknis asuransi
  - merupakan petunjuk pelaksanaan UU (Legislative Control)
  - merupakan petunjuk yang tidak berdasarkan UU bila memang belum ada UU tentang hal tersebut
  - mudah dan cepat disesuaikan dengan perkembangan
  Contoh :
  PP No 73/1992
  KMK No 224/1993
  Pakdes 1988 -> tidak dari UU
Bentuk Pengawasan Non Statutory (Non Statutory Control)
Pengawasan yang dilakukan oleh pelaku/asosiasi asuransi, biasanya meliputi:
- standardisasi polis (contoh PSKI)
- tarif (contoh: tarif premi asuransi kendaraan bermotor)
- penyelesaian klaim (contoh Knock for Knock Agreement)
Kelebihan dari Non Statutory Control:
a. mudah dan cepat dibuat
b. mudah dan cepat disesuaikan
c. pengaturan timbul dari kesadaran
d. kepatuhan atas kemauan sendiri
Kelemahan dari Non Statutory Control:
a. sanksi tidak mempunyai kekuatan hukum
b. mudah terjadi pelanggaran
c. penyelesaian sengketa kurang objektif
d. tidak melindungi konsumen

Fungsi Asuransi

Fungsi asuransi dapat digolongkan dalam 3 fungsi, yaitu primary function, subsidiary function dan other related function

Primary function (fungsi primer)

Risk Transfer
Asuransi adalah mekanisme pengalihan resiko, di mana perorangan atau badan usaha dapat mengalihkan sesuatu yang tidak pasti kepada pihak lain, dengan sejumlah premi yang relatif kecil dibandingkan dengan kemungkinan kerugian, ketidakpastian kerugian itu diahlihkan kepada asuransi.
Common Pool
Pada awal timbulnya marine insurance, para pedagang waktu itu bersepakat untuk memberikan kontribusi terhadap kerugian (karena resiko laut) yang dialami oleh seseorang di antara mereka. Praktek demikian tidak sepenuhnya mengalihkan resiko tetapi hanya mengurangi resiko.
Dalam perkembangannya kontribusi itu ditetapkan pada awal sebelum timbul kerugian, sehingga masing-masing sudah bisa mengetahui pasti beban kontribusi, yaitu membayar apa yang disebut premi. Premi tersebut diterima dan dikumpulkan dalam suatu fund atau pool serta dikembangkan untuk menanggulangi klaim yang terjadi.
Equitable premiums
Dengan asumsi bahwa pengalihan resiko telah dilakukan melalui common pool, fungsi utama yang ketiga adalah kontribusi yang harus dibayar oleh masing-masing peserta harus fair.
Tingkat resiko yang dialami oleh setiap peserta bisa berbeda, misalnya untuk bangunan yang terbuat dari kayu memiliki tingkat resiko yang lebih tinggi dibandingkan dengan bangunan dari batu. Pengemudi yang berumur 18 tahun lebih tinggi resikonya dibandingkan dengan pengemudi yang berumur 50 tahun. Demikian juga nilai barang yang dipertanggungkan tidak selalu sama. Perbedaan mengenai tingkat hazard dan nilai itu akan membawa konsekuensi besarnya kontribusi (premi) yang dibebankan. Hal-hal semacam ini yang sekarang menjadi dasar para underwriter dalam menetapkan tingkat premi.

Subsidiary function (fungsi subsider)

Stimulus to business enterprise
Fungsi sebagai pendorong usaha tergambar dalam kegiatan asuransi melakukan investasi yang berasal dari dana asuransi. Selain itu dengan asuransi dapat memberikan keberanian para investor untuk membangun usaha baru atau mengembangkan usahanya.
Loss prevention
Tenaga surveyor asuransi banyak memperoleh pelatihan dan pengalaman dalam melakukan identifikasi suatu resiko menjadikan dirinya memiliki kemampuan untuk memberikan saran pencegahan kerugian.
Fungsi sebagai loss prevention tergambar dalam saran yang direkomendir oleh surveyor asuransi untuk melakukan hal-hal yang dapat mencegah terjadinya kerugian.
Surveyor asuransi pencurian dapat memberikan saran adanya pemasangan alat detektor yang dapat mencegah atau menghambat pencuri.
Surveyor asuransi liability (liaiblity insurance) dapat memberikan saran dalam pencegahan tuntutan publik akibat kondisi kerja atau produksi
Loss control
Rekomendasi dari surveyor asuransi bukan saja terbatas pada pencegahan kerugian tetapi juga memberikan rekomendasi cara untuk mengurangi kerugian. Saran memenuhi persyaratan konstruksi bangunan, pemasangan sprinkler, alarm, merupakan upaya untuk mengendalikan kerugian apabila resiko terjadi.
Surveyor tidak mungkin dapat mencegah pencuri masuk, tetapi surveyor dapat menyarankan sesuatu yang dapat membatasi, mempersulit, menghambat, atau memperlambat langkah pencuri.
Manfaat social (social benefits)
Klaim yang dibayarkan oleh asuransi memungkinkan pengusaha dapat membangun kembali pabrik/usahanya, sehingga dapat menghindari adanya pemutusan hubungan kerja akibat pabrik terbakar.
Kegiatan asuransi itu sendiri menciptakan lapangan kerja.
Melalui asuransi, dapat disediakan dana untuk mengatasi masalah sosial, misalnya satuanan orang cacat, janda, yatim.
Tabungan (savings)
Dalam produk asuransi jiwa khususnya endowment insurance menjamin pembayaran baik meninggal atau hidup di akhir kontrak, pembayaran yang diterima tertanggung pada akhir kontrak pada dasarnya merupakan akumulasi premi ditambah dengan bunga.

Other related function

Dana investasi (investment of funds)
Himpunan dana asuransi (premi) yang disediakan untuk membayar klaim, merupakan sumber dana investasi yang menimbulkan kegiatan investasi dalam pasar uang dan pasar modal.
Pendapatan jasa (invisible earnings)
Transaksi asuransi dan reasuransi terjadi dalam jangkauan yang luas antar negara.
Suatu negara yang banyak menerima pendapatan premi dari negara lain merupakan penghasilan negara yang bersangkutan dari perdagangan jasa.
Di Indonesia yang terjadi adalah sebaliknya. Perusahaan asuransi di Indonesia banyak yang menempatkan reasuransi di luar negeri, sehingga neraca perdagangan kita defisit karena pembayaran premi merupakan penerimaan bagi luar negeri dan pengeluaran bagi Indonesia.
Sebabnya antara lain:
- lack of technology dan knowledge
- tidak adanya integritas pengusaha asuransi
  Perusahaan asuransi di Indonesia membayar klaim dari hasil reasuransi di luar negeri sehingga fungsi perusahaan asuransi hanya sebagai agen/broker saja.
- konsumen masih luar negeri minded (lack of nationalism), sehingga memilih perusahaan asuransi luar negeri.

History of Insurance

History of insurance refers to the development of a modern laws and market in insurance against risks. In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours will not receive help in the future.

Ancient world

Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen.

Achaemenian monarchs were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.

The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."[1]

A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.

Early modern

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.

Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.

Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, "The Fire Office," to insure brick and frame homes. The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.

The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.

Industrial revolution

Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system for insurance similar to that which oversees state banks and national banks.

Principles of Insurance

Commercially insurable risks typically share seven common characteristics.[1]

A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurers appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.

Reinsurance

Reinsurance is a means by which an insurance company can protect itself against the risk of losses with other insurance companies. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.). Reinsurers, in turn, provide insurance to insurance companies.

Functions of reinsurance
There are many reasons why an insurance company would choose to reinsure as part of its responsibility to manage a portfolio of risks for the benefit of its policyholders and investors :

Risk transfer
The main use of any insurer that might practice reinsurance is to allow the company to assume greater individual risks than its size would otherwise allow, and to protect a company against losses. Reinsurance allows an insurance company to offer higher limits of protection to a policyholder than its own assets would allow. For example, if the principal insurance company can write only $10 million in limits on any given policy, it can reinsure (or cede) the amount of the limits in excess of $10 million.
Reinsurance’s highly refined uses in recent years include applications where reinsurance was used as part of a carefully planned hedge strategy.
Income smoothing
Reinsurance can help to make an insurance company’s results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage.
Surplus relief
An insurance company's writings are limited by its balance sheet (this test is known as the solvency margin). When that limit is reached, an insurer can either stop writing new business, increase its capital or buy "surplus relief" reinsurance. The latter is usually done on a quota share basis and is an efficient way of not having to turn clients away or raise additional capital.
Arbitrage
The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than what they charge the insured for the underlying risk.

Types of reinsurance

Proportional
Proportional reinsurance (the types of which are quota share & surplus reinsurance) involves one or more reinsurers taking a stated percent share of each policy that an insurer produces ("writes"). This means that the reinsurer will receive that stated percentage of each dollar of premiums and will pay that percentage of each dollar of losses. In addition, the reinsurer will allow a "ceding commission" to the insurer to compensate the insurer for the costs of writing and administering the business (agents' commissions, modeling, paperwork, etc.).
The insurer may seek such coverage for several reasons. First, the insurer may not have sufficient capital to prudently retain all of the exposure that it is capable of producing. For example, it may only be able to offer $1 million in coverage, but by purchasing proportional reinsurance it might double or triple that limit. Premiums and losses are then shared on a pro rata basis. For example, an insurance company might purchase a 50% quota share treaty; in this case they would share half of all premium and losses with the reinsurer. In a 75% quota share, they would share (cede) 3/4 of all premiums and losses.
The other form of proportional reinsurance is surplus share or surplus of line treaty. In this case, a retained “line” is defined as the ceding company's retention - say $100,000. In a 9 line surplus treaty the reinsurer would then accept up to $900,000 (9 lines). So if the insurance company issues a policy for $100,000, they would keep all of the premiums and losses from that policy. If they issue a $200,000 policy, they would give (cede) half of the premiums and losses to the reinsurer (1 line each). The maximum underwriting capacity of the cedant would be $ 1,000,000 in this example. Surplus treaties are also known as variable quota shares.
Non-proportional
Non-proportional reinsurance only responds if the loss suffered by the insurer exceeds a certain amount, which is called the "retention" or "priority." An example of this form of reinsurance is where the insurer is prepared to accept a loss of $1 million for any loss which may occur and they purchase a layer of reinsurance of $4 million in excess of $1 million. If a loss of $3 million occurs, the insurer pays the $3 million to the insured, and then recovers $2 million from its reinsurer(s). In this example, the reinsured will retain any loss exceeding $5 million unless they have purchased a further excess layer (second layer) of say $10 million excess of $5 million.
The main forms of non-proportional reinsurance are excess of loss and stop loss.
Excess of loss reinsurance can have three forms - "Per Risk XL" (Working XL), "Per Occurrence or Per Event XL" (Catastrophe or Cat XL), and "Aggregate XL". In per risk, the cedant’s insurance policy limits are greater than the reinsurance retention. For example, an insurance company might insure commercial property risks with policy limits up to $10 million, and then buy per risk reinsurance of $5 million in excess of $5 million. In this case a loss of $6 million on that policy will result in the recovery of $1 million from the reinsurer.
In catastrophe excess of loss, the cedant’s per risk retention is usually less than the cat reinsurance retention (this is not important as these contracts usually contain a 2 risk warranty i.e. they are designed to protect the reinsured against catastrophic events that involve more than 1 policy). For example, an insurance company issues homeowner's policies with limits of up to $500,000 and then buys catastrophe reinsurance of $22,000,000 in excess of $3,000,000. In that case, the insurance company would only recover from reinsurers in the event of multiple policy losses in one event (i.e., hurricane, earthquake, flood, etc.).
Aggregate XL afford a frequency protection to the reinsured. For instance if the company retains $1 million net any one vessel, the cover $10 million in the aggregate excess $5 million in the aggregate would equate to 10 total losses in excess of 5 total losses (or more partial losses). Aggregate covers can also be linked to the cedant's gross premium income during a 12 month period, with limit and deductible expressed as percentages and amounts. Such covers are then known as "Stop Loss" or annual aggregate XL.

Contracts

Most of the above examples concern reinsurance contracts that cover more than one policy (treaty). Reinsurance can also be purchased on a per policy basis, in which case it is known as facultative reinsurance. Facultative reinsurance can be written on either a quota share or excess of loss basis. Facultative reinsurance is commonly used for large or unusual risks that do not fit within standard reinsurance treaties due to their exclusions. The term of a facultative agreement coincides with the term of the policy. Facultative reinsurance is usually purchased by the insurance underwriter who underwrote the original insurance policy, whereas treaty reinsurance is typically purchased by a senior executive at the insurance company.

Reinsurance treaties can either be written on a “continuous” or “term” basis. A continuous contract continues indefinitely, but generally has a “notice” period whereby either party can give its intent to cancel or amend the treaty within 90 days. A term agreement has a built-in expiration date. It is common for insurers and reinsurers to have long term relationships that span many years.

Markets

Most reinsurance placements are not placed with a single reinsurer but are shared between a number of reinsurers. For example a $30,000,000 xs of $20,000,000 layer may be shared by 30 or more reinsurers. The reinsurer who sets the terms (premium and contract conditions) for the reinsurance contract is called the lead reinsurer; the other companies subscribing to the contract are called following reinsurers.

About half of all reinsurance is handled by reinsurance brokers who then place business with reinsurance companies. The other half is with “direct writing” reinsurers who have their own production staff and thus reinsure insurance companies directly. In Europe reinsurers write both direct and brokered accounts.

Using game-theoretic modeling, Professors Michael R. Powers (Temple University) and Martin Shubik (Yale University) have argued that the number of active reinsurers in a given national market should be approximately equal to the square-root of the number of primary insurers active in the same market.[1] Econometric analysis has provided empirical support for the Powers-Shubik rule.[2]

Reinsureds tend to choose their reinsurers with great care as they are exchanging insurance risk for credit risk. Risk managers monitor reinsurers' financial ratings (S&P, A.M. Best, etc.) and aggregated exposures regularly.

Top Reinsurers

Münchener Rück - Germany (31,4 in m.USD Gross Written Premiums)
Swiss Re- Switzerland (30,3)
Berkshire Hathaway / General Re - USA (n.a.)
Hannover Rück - Germany (12)
SCOR – France (6,9)
RGA – USA (n.a.)
Transatlantic Re – USA (4,2)
Everest Re – Bermuda (4,0)
Partner Re – Bermuda (3,8)
Transatlantic Re – USA (3,7)
XL Re – Bermuda (3,4)

(Based on the last company figures)

Retrocession

Reinsurance companies themselves also purchase reinsurance and this is known as a retrocession. They purchase this reinsurance from other reinsurance companies. The reinsurance company who sells the reinsurance in this scenario are known as “retrocessionaires.” The reinsurance company that purchases the reinsurance is known as the “retrocedent.”

It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. For example, a reinsurer that provides proportional, or pro rata, reinsurance capacity to insurance companies may wish to protect its own exposure to catastrophes by buying excess of loss protection. Another situation would be that a reinsurer which provides excess of loss reinsurance protection may wish to protect itself against an accumulation of losses in different branches of business which may all become affected by the same catastrophe. This may happen when a windstorm causes damage to property, automobiles, boats, aircraft and loss of life, for example.

This process can sometimes continue until the original reinsurance company unknowingly gets some of its own business (and therefore its own liabilities) back. This is known as a “spiral” and was common in some specialty lines of business such as marine and aviation. Sophisticated reinsurance companies are aware of this danger and through careful underwriting attempt to avoid it.

In the 1980s, the London market was badly affected by the creation of reinsurance spirals. This resulted in the same loss going around the market thereby artificially inflating market loss figures of big claims (such as the Piper Alpha oil rig). The LMX spiral (as it was called) has been stopped by excluding retrocessional business from reinsurance covers protecting direct insurance accounts.

It is important to note that the insurance company is obliged to indemnify its policyholder for the loss under the insurance policy whether or not the reinsurer reimburses the insurer. Many insurance companies have experienced difficulties by purchasing reinsurance from companies that did not or could not pay their share of the loss (these unpaid claims are known as uncollectibles). This is particularly important on long-tail lines of business where the claims may arise many years after the premium is paid.

Insurance Companies

Insurance companies may be classified into two groups:

Life insurance companies, which sell life insurance, annuities and pensions products.
Non-life or general insurance companies, which sell other types of insurance.

General insurance companies can be further divided into these sub categories.

Standard Lines
Excess Lines

In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.

Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they are not required to file rates and forms as do the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them. State laws generally require insurance placed with surplus line agents and brokers to not be available through standard licensed insurers.

Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks and Lloyds organizations.

Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.

Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.

Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100 percent subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.

The types of risk that a captive can underwrite for their parents include property damage, public and products liability, professional indemnity, employee benefits, employer’s liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.

Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

heavy and increasing premium costs in almost every line of coverage;
difficulties in insuring certain types of fortuitous risk;
differential coverage standards in various parts of the world;
rating structures which reflect market trends rather than individual loss experience;
Insufficient credit for deductibles and/or loss control efforts.

There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.

Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.

The financial stability and strength of an insurance company should be a major consideration when purchasing an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies, such as Best's, Fitch, Standard & Poor's, and Moody's Investors Service, provide information and rate the financial viability of insurance companies.

Captive Insurance

Captive insurance companies are limited purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups, they sometimes also insure risks of the parent company's customers. In the simplest terms, it is an in-house self-insurance vehicle. Captives usually represent commercial, economic and tax advantages to their sponsors due to the cost reductions they help create, the ease for insurance risk management and the flexibility for cash flows they generate. Additionally, they provide coverage for risks that are neither available nor offered in the traditional insurance market at reasonable prices, and allow the relevant group direct access to reinsurance markets.

The administration of a captive is usually outsourced to a specialised captive manager, who is often located in an offshore jurisdiction.

Types of Captive
There are several types of insurance captives, the most common are defined below:

Single Parent Captive - is an insurance or reinsurance company formed primarily to insure the risks of its non-insurance parent or affiliates.
Association Captive - is a company owned by a trade, industry or service group for the benefit of its members.
Group Captive - is a company, jointly owned by a number of companies, created to provide a vehicle to meet a common insurance need.
Agency Captive - is a company owned by an insurance agency or brokerage firm so they may reinsure a portion of their clients risks through that company.
Rent-a-Captive - is a company that provides 'captive' facilities to others for a fee, while protecting itself from losses under individual programs, which are also isolated from losses under other programs within the same company. This facility is often used for programs that are too small to justify establishing their own captive.

Two other types of insurance companies which have developed recently are special purpose vehicles (SPV) and segregated portfolio companies (SPC):

SPV - Although used extensively in the past for various financing arrangements, recently they have been used for catastrophe bonds and reinsurance sidecars.
SPC - SPCs can be formed as a rent-a-captive facility to enable those companies who lack sufficient insurance premium volume, or who are averse to establishing their own insurance subsidiary, access to many of the benefits associated with an offshore captive.

Underwriting Proses

A. Underwriter

Apabila suatu resiko ditawarkan kepada Lloyd’s atau perusahaan asuransi, seseorang atas nama penanggung harus memutuskan apakah resiko dimaksud dapat diterima atau tidak.
Jika dapat diterima, underwriter harus memutuskan rate premi yang akan dikenakan serta syarat dan kondisi yang akan dibebankan
Di Lloyd’s slip dicap dan ditandatangani menunjukkan keikutsertaan (dalam persentase). Seseorang yang menandatangani slip dimaksud disebut “underwriter”
Proses menilai syarat dan kondisi yang dibebankan pada kontrak asuransi diketahui sebagai underwriting asuransi.

B. Peranan Underwriter

Underwriter harus berusaha menetapkan terms dan conditions dan tarifnya
Terms and conditions harus pantas terhadap resiko dan harus wajar agar perusahaan dapat menarik bisnis baru dan agar keuntungan yang wajar dapat diharapkan.
Underwriter menilai dua aspek hazard, yaitu phisik dan moral.

C. Physical Hazard

Physical hazard berhubungan dengan aspek phisik atau aspek yang nyata dari subject matter of insurance
Dapat mempengaruhi terjadinya dan/atau beratnya kerugian
Aspek physik ini dapat diketahui melalui:
- material facts yang diungkapkan sehubungan dengan prinsip utmost good faith
- informasi yang didapat oleh surveyor penanggung
- pengetahuan underwriter tentang perniagaan
Physical hazard dapat dipertimbangkan dalam dua langkah:
- aspek resiko apa yang mungkin menyebabkan terjadinya kerugian, misal bagaimana timbulnya resiko
- bila kerugian terjadi, aspek resiko apa yang mungkin membuatnya kerugian menjadi serius.
- pengalaman underwriter tentang asuransi tersebut
Berguna dalam asuransi kebakaran dan asuransi property bila faktor-faktor tersebut relevan dengan rating
Timbulnya resiko dapat dikurangi dengan manajemen yang baik dan housekeeping yang baik
Sehubungan dengan hal tersebut, point (a) berhubungan dengan loss prevention dan (b) loss control
Physical Hazard By berdasarkan class asuransi
1. Fire Insurance
  Contoh ciri-ciri phisik yang dapat menimbulkan kebakaran:
  - instalasi listrik dalam kondisi buruk atau adanya kabel yang sudah tua
  - sumber panas, alat pemanas, merokok dekat dengna benda-benda yang mudah terbakar
  - tempat penyimpanan benda-benda yang buruk
  - dinding kayu atau atap jerami
  - penyimpanan benda-benda yang mudah terbakar atau minyak
  - Ciri-ciri phisik tertentu dapat membuat resiko lebih baik, misal dinding bata, pintu tahan api, pemisahan benda-benda yang berbahaya, automatic sprinkler protection.
2. Theft Insurance
  - Bangunan dengna konstruksi dinding atau atap yang ringan, misal kayu, asbes atau kunci jendela/pintu yang normal akan sedikit memberikan ketahanan terhadap potensial intruder.
  - Bila isi bangunan menarik buat pencuri, misal, prehiasan dapat dianggap mempunyai physical hazard yang besar
  - Bila bangunannya berkonstruksi buruk, maka resiko ini tidak dapat diasuransikan, co. dinding batako yang gampang rubuh.
  - Konstruksi bangunan yang lemah, kunci-kunci pengaman dan adanya alarm system untuk intruder dapat mempengaruhi resiko phisik.
3. Motor Insurance
  - Penggunaan kendaraan di area kepadatan lalu lintas tinggi, misal di Jakarta dan di kota-kota besar lainnya akan meningkatkan kemungkinan kecelakaan.
  - Penggunaan kendaraan untuk perniagaan yang sebagian besar berada di jalanan, misalnya taksi
  - Mobil yang harga perbaikannya cukup mahal, misal Rolls Royce, Mercedes dapat dianggap mempunyai extra hazard.
  - Pengemudi di bawah 25 tahun dan mobil sport dianggap mempunyai resiko phisik yang buruk tetapi lebih tepat dianggap sebagai moral hazard yang tinggi.
4. Liabilility Insurance
  - Penggunaan bahan-bahan kimia, minyak dan adanya abu dan asap pada proses produksi di industri menghadirkan physical hazard kepada karyawan
  - Dapat dikurangi dengan pakaian pelindung, kaca mata dan topeng
  - Potensial liability akan meningkat bila pekerjaannya dilakukan di rumah pelanggan, khususnya bila api digunakan, misal memotong dan melas dengna menggunakan alat bakar gas.
5. Marine Insurance
  Contoh physical hazard yang buruk:
  - Penggunaan peralatan dan perawatan kapal yang buruk
  - Penyimpanan barang muatan di geladak dan buruknya pengepakan
6. Life and Personal Accident Insurance
  - Riwayat penyakit, pekerjaan yang beresiko tinggi, misal tambang batu bara, penyelam di laut yang dalam.

D. Moral Hazard

Kebiasaan dan tingkah laku seseorang. Dalam asuransi, moral hazard akan diutamakan pada tingkah laku tertanggung.
Tingkah laku karyawan dan masyarakat bebas mempnyai pengaruh yang besar dalam menilai moral hazard
Moral hazard sama pentingnya dengan physical hazard
1. Tertanggung
  - Contoh buruknya moral hazard di pihak tertanggung adalah seseorang yang menyerahkan klaim palsu atau klaim dibesar-besarkan.
  - Contoh lain bila informasi yang penting untuk meng-underwrite resiko disembunyikan atau salah disajikan baik sengaja maupun tidak sengaja.
  - Contoh umum buruknya moral hazard adalah kecerobohan. Misal, tertanggung gagal mencegah kerugian atau kerusakan benda miliknya, atau untuk keselamatan dan kesejahteraan karyawannya.
  - Timbul karena tekanan permasalahan atau tertanggung tidak mengetahui bahwa tingkah lakunya dapat meningkatkan kemungkinan kerugian
  - Cara yang dapat memperbaiki moral hazard adalah memberi pengetahuan kepada tertanggung tentang bahaya-bahaya yang potensial dan bagaimana cara megurangi bahaya tersebut.
  - Contoh terakhir buruknya moral hazard di pihak tertanggung adalah angkuh dan kaku.
2. Karyawan
  - Hubungan antara manajemen dan karyawan buruk
  - Tingkat upah sangat rendah
3. Masyarakat
  - Kebiasaan masyarakat luas

E. Surveyor

Untuk memastikan resiko yang sedang diajukan secara terinci perlu dilakukan survey. Surveyor akan membuat:

Laporan dengan merinci bermacam-macam segi phisik dan moral resiko
Rekomendasi untuk memperbaiki resiko. Penerimaan proposal dapat bersyarat di pihak tertanggung melakukan perbaikan-perbaikan.
Laporan atas resiko property termasuk PML dan EML yang digunakan untuk menetapkan proporsi resiko yang dapat diterima.
Laporan juga berisikan premium rate yang dapat diaplikasikan terhadap resiko
Dalam hal asuransi jiwa, bila proposal melebihi jumlah tertentu atau bila proposer mempunyai masalah kesehatan yang ditemukan di dalam SPA, proposer diwajibkan untuk menjalani pemeriksaan kesehatannya kepada dokter. Umumnya biaya pemeriksaan kesehatan ini ditanggung oleh perusahaan.