The end of the year is approaching. Things are hectic and busy, so I continue with the terminology to refresh the memory and provide support to colleagues.
Reinsurance is literally the act of an insurance company reinsuring a part of the sum insured by another insurance company against a loss that may arise in the future. It is usually described as “insuring the insurer”.
Facultative reinsurance is a form of voluntary reinsurance. Depending on the size or type of the risk, insurance companies may not take on some risks completely, in which case they sometimes seek support from the local or global insurance or reinsurance market. This process, which we call reinsurance, is usually mediated by experienced reinsurance brokers. The broker procures the reinsurance capacity, presents it to the insurance company, the company evaluates it within its own acceptance criteria and issues the policy if appropriate. Facultative reinsurance may come from the insurance company to the broker, or the broker may bring the reinsurance capacity it finds for its own insured to the insurance company.
We will see a lot of facultative reinsurance and shareholder policies this year. Insurance companies generally resort to facultative reinsurance for risks that fall outside treaty reinsurance. The industry continues negotiations to finalize the 2024 treaties. What does treaty mean? You can refer to my article on terminology.
For those who are interested in reinsurance or those who want to consolidate and advance their knowledge in this field, let's take a look at the terms we encounter in reinsurance processes:
Underwriter (UW)- Professionals who assess and analyze the risks involved in underwriting and assume the risk of an agreed future event and set the price and premium in return for a commitment to reimburse the insured in the event of a loss. They have the final say as they are the actual risk bearers.
Indication - A non-binding, indicative estimate of the premium/price of a risk, based on some basic information, when the full details of a risk have not yet been communicated. Brokers with strong market knowledge can give indications themselves based on their own experience and market practice, but it has become very difficult to give indications, especially in these volatile and volatile days. Hence the name "non-binding very rough indication".
Quote - After all the necessary information about the risk has been shared, the insurance offer shows how much of the risk UW accepts and under what conditions. It includes details on which coverages will be offered if the insured continues with the policy transaction. It is prepared from the perspective of one or two UWs until the risk information is clarified and the collateral structure is finalized, and desk quote studies are also carried out by the broker before the offer is prepared.
Capacity - This refers to how much of a risk is underwritten by a single insurer. It can be 100%, 10%-50%, or a specific limit/amount (e.g. up to USD 10 M), where we often see a combination of these.
Placement - This term refers to the sale of risk to the insurance and reinsurance market. Placement brokers present a reinsurance slip and base wording to the UW with information about the risk and collect capacity or quotations. For large placements, quota share or layered placements or combinations of them are combined in a placement table and the reinsurance premium for the capacity achieved by the insurance policy is calculated. The broker's skill comes into play at the placement stage. In shared placements, not only the price but also many other criteria such as deductibles, collateral and special conditions are negotiated and discussed at the same time.
Wording - The terms and conditions and definitions of the insurance coverage as written in the insurance policy. There are internationally accepted wording in many insurance fields. For example LMA3030 Terrorism Insurance Physical Loss or Physical Damage Wording, Munich Re Construction All Risks Wording. Any ambiguity in an insurer's proposal form or policy wording is interpreted against the insurer.
Reinsurance slips - as you may know, reinsurance companies do not issue policies. They issue reinsurance slips that specify the conditions on which the policies are based. These documents include the subject of the insurance, to whom it is issued, the dates it is effective, the underlying wording, limits, deductibles, special conditions, claim processes, payment terms, information about the intermediary and the capacity provided. Risk information and claim data are added. In the approved reinsurance slip, UW confirms the capacity provided in the relevant part of the slip with its notes and signature stamp. In reinsurance slips, handwritten additions such as notes, erasures, cross-outs and additions made by UWs are taken into consideration. These are called “scratches”.
Fronting - Since Turkish insurance laws do not allow non-admitted policies except for a few types of insurance, the capacity and protections provided through reinsurance are converted into policies through fronting.
Insurance Law (click here to review the law)
ARTICLE 15 - (1) Residents in Turkey are obliged to have their insurable interests in Turkey insured in Turkey and by insurance companies operating in Türkiye.
Therefore, capacities purchased from abroad are fronted in Türkiye on the basis of the reinsurance slips prepared. The insurance company that will perform the fronting process is called Fronter, Cedant or Assured. The insurance company in Türkiye checks certain information before fronting, such as the financial strength of the reinsurer (rating), the clauses in the reinsurance slip, policy premium/insurance company capital reserve analysis. Before the policy is issued, they require the reinsurer to accept certain clauses, some of which I have given below as examples.
Jurisdiction Clause
Claims Control Clause
Sanction Clause
Cut-Through Clause
Fronting is a task that needs to be done with utmost attention. The insurance company issuing the policy is legally responsible to the insured in Türkiye. Therefore, they carefully evaluate both the quality of the reinsurer and the coverage. Insurance companies charge a fee for this process, which is called a “fronting fee” and is added to the final premium by a certain percentage (it seems that a minimum of 5% will be applied in 2024).
Fronting requires both the broker and the insurance company to carry out different operations together. It has its own operations such as premium collections, accounting, claim file follow-ups, claim payments and provisions.
Commission - In reinsured business, the broker's commission is added to the net to UW (the premium UW will receive) premium requested by the UW; if there is an agent in the interim, the agent's commission and the insurance company's fronting fee amount are added to obtain the final premium. In some large placements, the parties may also request a fixed fee instead of a commission so that the commissions added on top of each other do not increase the premium too much.
Taxes - The most common tax on insurance policies is BITT (Bank Insurance Transaction Tax) Insurance transactions are subject to a 5% tax in accordance with Article 33, subparagraph F of the Expense Tax Law No. 6802. With the decision dated 12.8.1991 and numbered 91/2072 published in the Official Gazette dated 16.8.1991 and numbered 20962, the BITT rate was determined as 5%. BITT is applied to the net premium of the policy. According to Law No. 6802 on Expense Taxes, some insurance policies are exempt from BITT (Article 29/l).
Contracts and policies in pension contracts and life insurances (including contracts in which personal accident, disability as a result of illness and dangerous diseases guarantees are also provided as additional guarantees in life insurances)
- Health insurance
- Contracts and policies in export transportation insurance
- Contracts and policies for the insurances made within the scope of housing finance as defined in the first paragraph of Article 38/A of the Capital Markets Law No. 2499
- Agricultural insurances taken out for all kinds of agricultural crops that have not been harvested or harvested and agricultural animals
- Insurance against nuclear risks
- Premiums and commissions received for duplicate insurance transactions and retrocession transactions
Furthermore, Article 5 of the Decree Law No. 587 regulating the compulsory earthquake insurance (TCIP) exempted the earthquake insurance premium from all taxes, duties and charges, thus excluding it from the scope of the BMSV (BITT-Bank Insurance Transaction Tax).
Another tax that we encounter is the FIT (Fire Insurance Tax) on fixed asset insurances. The FIT applies only to the fire, lightning and explosion (FLI) premium. The rate is 10% and is paid to the relevant municipality. Let's make a quick note here, in the past, the FIT would not have attracted attention because the FIT premiums were very low, but in the new period, there is talk that the FIT premium will not be lower than 35% of the total policy premium, in this case, the FIT will also have a serious impact on policy costs. Note to keep in mind.
In summary, these are the basic terms of the highly dynamic and vibrant reinsurance world. As I mentioned at the beginning, we will hear the word reinsurance very often this year. Many agencies that follow the market conditions well and do not want to cause embarrassment to their policyholders are aware of this situation, which is why the reinsurance brokers' corridor attracted a lot of attention at the IInd International Insurance Fair this year.
Today is a very cold, stormy, rainy and even snowy day. I wish everyone a nice Sunday and a good weekend rest.
#pazar #reasurans #yangin #underwriter #sigorta #insurance #slip #vergi #prim # fronting
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