Life Reinsurance and Retention
Keep what you can afford to lose, cede the rest: how life insurers share large risks.
A life insurer that writes a ₹10 crore term policy on one person cannot sensibly carry the whole amount itself. One death would wipe out years of profit on that block of business. Reinsurance lets the insurer keep the part it can afford to lose (its retention) and pass the rest to a reinsurer, who takes a share of the premium and pays the same share of any claim.
For the underwriter, reinsurance is not just a finance matter. The reinsurer's manual often supplies the ratings used in-house, large or unusual cases are referred to the reinsurer for its view, and the treaty sets the limits within which the insurer can accept cases on its own authority.
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Why Life Insurers Reinsure
- check_circleCapacity: accept sums assured far larger than the insurer could carry alone.
- check_circleStability: smooth out the year-to-year swing in claims caused by a few large deaths.
- check_circleCatastrophe protection: limit the loss when one event (an accident, a disaster) kills many policyholders at once.
- check_circleUnderwriting support: use the reinsurer's manuals, mortality data and advice on difficult cases and new products.
- check_circleFinancial support: some arrangements help a growing insurer meet the cost of writing new business, though IRDAI regulates such structures closely.
Key Terms
- Retention
- The portion of a risk an insurer keeps for its own account. IRDAI's regulations use exactly this definition.
- Retention limit
- The largest sum at risk the insurer will keep on any one life. It depends on the insurer's capital, the size of its portfolio and its claims experience, and is often lower for older ages and rated lives.
- Sum at risk
- The amount the insurer would lose on a death today: the sum assured less the reserve already held for the policy. For term cover it is close to the full sum assured.
- Cedant (ceding company)
- The insurer passing part of the risk to the reinsurer.
- Retrocession
- A reinsurer passing part of the risk it has accepted on to another reinsurer.
- Facultative reinsurance
- Each risk offered and accepted individually; the reinsurer may decline. Used for very large or unusual cases.
- Treaty reinsurance
- An agreement under which all risks within its terms are ceded and accepted automatically, up to the treaty's limits.
Non-Proportional Covers
These pay only when losses pass a set amount, instead of sharing every claim.
| Cover | When it pays |
|---|---|
| Excess of loss per life | A single claim exceeds the insurer's retention; the reinsurer pays the excess up to a limit |
| Catastrophe excess of loss | One event causes several deaths and the total exceeds the retention; protects against accidents and disasters |
| Stop loss | The insurer's total claims over a period exceed a set amount or ratio; the reinsurer pays the excess up to a limit |
What IRDAI Requires
Reinsurance by Indian insurers is governed by the IRDAI (Re-insurance) Regulations, 2018, in force from 1 January 2019 and amended up to 23 August 2023. IRDAI published the consolidated text on 31 May 2024.
Every insurer must keep the maximum possible retention consistent with its financial strength, quality of risks and volume of business, and must have a segment-wise retention policy approved by its Board. A life insurer must retain at least 25% of the sum at risk on its pure protection portfolio and at least 50% on the rest of its life portfolio. These are portfolio-level floors, not a cap on how much of any one policy can be ceded. The insurer files its Board-approved reinsurance programme and retention policy with IRDAI each year, and must offer reinsurance business in the regulations' order of preference, which starts with Indian re-insurers.
Check for Later Changes
IRDAI amends reinsurance rules from time to time and has consulted on further changes. Confirm the current text on irdai.gov.in or policyholder.gov.in before relying on any figure above. The IC-22 courseware may also describe older retention rules.
FAQs
What is a retention limit in life insurance?expand_more
The largest sum at risk an insurer keeps on any one life. Anything above it is passed to a reinsurer. The limit reflects the insurer's capital, portfolio size and experience.
What is the difference between quota share and surplus reinsurance?expand_more
Quota share cedes the same fixed percentage of every policy. Surplus cedes only the amount above the insurer's retention, so small policies are kept in full and the ceded share grows with the size of the policy.
How much must an Indian life insurer retain?expand_more
Under the IRDAI (Re-insurance) Regulations, 2018 as amended, at least 25% of the sum at risk on its pure protection portfolio and at least 50% on its other life portfolio.
What is facultative reinsurance?expand_more
Reinsurance arranged for one risk at a time, which the reinsurer may accept or decline. It is used for cases above treaty limits or outside treaty terms.
What does a 9-line surplus treaty mean?expand_more
The reinsurer accepts up to 9 times the insurer's retention on a life. With a ₹50 lakh retention, the treaty takes up to ₹4.5 crore, so the insurer can accept ₹5 crore in total.
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