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Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part I)

Reinsurance and Risk Management Functions in Insurance

Updated 11 October 2026 · Fact-checked

Reinsurance is insurance for insurers. An insurer keeps part of a risk (retention) and passes the rest (cession) to a reinsurer for a share of premium. It protects solvency and spreads large risks. Under Section 101A of the Insurance Act, 1938, insurers must reinsure a notified percentage, capped at 30%, with Indian re-insurers.

Understand Reinsurance and Risk Management Functions

Every insurer takes on risk. One large fire or a cluster of claims can wipe out its capital. Reinsurance solves this. The insurer that issued the policy (the cedant or direct insurer) transfers part of the risk to another insurer (the reinsurer) and pays it a share of the premium.

Two terms matter. Retention is the part of the risk the insurer keeps on its own account. Cession is the part passed to the reinsurer. The policyholder deals only with the direct insurer. The reinsurance contract is separate and the policyholder has no claim on the reinsurer.

The two main forms are proportional and non-proportional. In proportional reinsurance (quota share, surplus) the reinsurer takes an agreed share of premium and of each claim. In non-proportional reinsurance (excess of loss, stop loss) the reinsurer pays only when a loss crosses a set limit. Reinsurance can also be facultative (each risk offered and accepted separately) or by treaty (a standing agreement covering a whole class of business).

Reinsurance is different from coinsurance. In coinsurance, several insurers share one risk directly and each issues its own policy or takes a stated share on the same policy. In reinsurance, one insurer issues the policy and then lays off risk behind the scenes.

As a risk management function, reinsurance sits with underwriting, claims, actuarial and investment work. It stabilises results, increases the capacity to write large risks, and spreads risk across insurers and countries. The law adds compliance duties: Section 101A requires compulsory cession to Indian re-insurers, and the insurer must report on reinsurance and expenses to the Authority.

Key rules to remember

Compulsory reinsurance (Section 101A(1))
Every insurer must re-insure with Indian re-insurers the percentage of sum assured on each policy specified by the Authority
The percentage is set under sub-section (2), with previous approval of the Central Government.
Ceiling on the percentage (Section 101A(2)(a))
Specified percentage ≤ 30% of the sum assured on the policy
Different percentages may be set for different classes of insurance. The Authority also specifies how the percentage is shared among Indian re-insurers.
Fire insurance alternative (Section 101A(3))
Premiums paid on re-insurance in a year ≥ specified % × premium income of that business (before reinsurance ceded or accepted)
A fire insurer may reinsure out of the first surplus instead, if the total premium meets this floor.
Excess beyond the percentage (Section 101A(7))
Insurer may re-insure the whole sum assured or any portion above the specified percentage
Reinsurance beyond the compulsory share is allowed, with any Indian re-insurer or other insurer.
Quota share cession
Ceded claim = Claim × cession %; Retained claim = Claim × (1 − cession %)
Premium is shared in the same proportion, usually less a ceding commission.
Excess of loss recovery
Recovery = Loss − Retention, limited to the cover limit, and zero if Loss ≤ Retention
Retention here means the deductible the insurer bears on each loss.

How to solve Reinsurance and Risk Management Functions questions

Use this order for any theory or case question on reinsurance and risk management.

  1. 1Identify the facts: the class of business, sum assured, retention and who the parties are (direct insurer, reinsurer, policyholder).
  2. 2State the concept in one or two lines: reinsurance, retention, cession, and the type involved (proportional, non-proportional, facultative, treaty).
  3. 3Name the provision. For compulsory cession, cite Section 101A and state the rule in plain words.
  4. 4Apply the rule to the facts. Check the percentage cap of 30%, the Indian re-insurer requirement, and the fire insurance alternative where relevant.
  5. 5If numbers are given, compute the ceded and retained shares or the excess of loss recovery, step by step.
  6. 6Add the compliance and drafting point: notification, reporting to the Authority, or advice to the board.
  7. 7Conclude clearly: what the insurer must do, or whether the arrangement is compliant.

Quickest way: Retention-cession check in four lines

When to use it: Use this when the question gives amounts and asks who bears what, or whether a cession is valid.

  1. Write the sum assured or loss.
  2. Find the cession share: percentage for proportional, or loss above retention for excess of loss.
  3. Compute ceded = share; retained = total − ceded.
  4. Check the legal test: is the compulsory percentage within 30% and placed with Indian re-insurers?

Common mistakes in Reinsurance and Risk Management Functions

  • Treating reinsurance and coinsurance as the same thing.

    Both involve sharing risk between insurers.

    Fix: Remember: in coinsurance insurers share a risk directly with the insured. In reinsurance one insurer issues the policy and passes risk to another, and the policyholder has no claim on the reinsurer.

  • Saying the Act fixes the compulsory cession at 30%.

    Students remember the number and drop the wording.

    Fix: Write that the Authority specifies the percentage by notification and that it cannot exceed 30% of the sum assured on a policy.

  • Forgetting that Section 101A cession is to Indian re-insurers.

    Reinsurance is thought of as an international market.

    Fix: State that the compulsory share goes to Indian re-insurers, defined as Indian insurance companies registered to carry on exclusively reinsurance business.

  • Applying Section 101A to life policies or to reinsurance policies.

    The word 'every insurer' looks general.

    Fix: Section 101A defines 'policy' as one issued or renewed on or after 1 April 1961 for general insurance business in India, excluding re-insurance policies.

  • Confusing retention with cession in calculations.

    Both terms sound like 'what the insurer keeps'.

    Fix: Retention is kept; cession is passed on. Write both labels in each calculation.

  • Saying the policyholder can sue the reinsurer.

    Students link all insurers in the chain.

    Fix: State that the reinsurance contract is between insurer and reinsurer; the policyholder claims only against the direct insurer.

Worked examples

Example 1

Aarav General Insurance Ltd issues a fire policy with a sum assured of ₹20,00,00,000. The Authority has specified compulsory cession of 20% of sum assured to Indian re-insurers for this class. (a) How much must be ceded? (b) Can the insurer reinsure more? (c) What is the maximum percentage the Authority may specify?

Show the solution
  1. Compulsory cession = 20% × ₹20,00,00,000 = ₹4,00,00,000.
  2. Retained before any extra reinsurance = ₹20,00,00,000 − ₹4,00,00,000 = ₹16,00,00,000.
  3. Section 101A(7) says nothing prevents the insurer from reinsuring the whole sum assured or any portion above the specified percentage, with an Indian re-insurer or another insurer.
  4. Section 101A(2)(a) caps the specified percentage at 30% of the sum assured.

Answer: (a) ₹4,00,00,000 must be ceded to Indian re-insurers. (b) Yes, the insurer may reinsure more, up to the whole sum assured. (c) The percentage cannot exceed 30% of the sum assured.

Example 2

Meridian Insurance Co. has a quota share treaty ceding 40% of each claim, and an excess of loss cover that pays loss above ₹50,00,000 per event up to ₹1,00,00,000. Explain how each works for (i) a ₹80,00,000 claim under the quota share, and (ii) a ₹1,20,00,000 event loss under the excess of loss cover.

Show the solution
  1. Quota share: ceded = 40% × ₹80,00,000 = ₹32,00,000.
  2. Retained = ₹80,00,000 − ₹32,00,000 = ₹48,00,000.
  3. Excess of loss: loss above retention = ₹1,20,00,000 − ₹50,00,000 = ₹70,00,000.
  4. The cover limit is ₹1,00,00,000, and ₹70,00,000 is below it, so the full ₹70,00,000 is recovered.
  5. Insurer bears the retention of ₹50,00,000.

Answer: (i) The reinsurer bears ₹32,00,000 and the insurer ₹48,00,000. (ii) The reinsurer pays ₹70,00,000 and the insurer bears ₹50,00,000.

Exam tips

  • Quote Section 101A accurately: Authority specifies the percentage, Central Government approval, cap of 30%, Indian re-insurers.
  • For case questions, follow provision, analysis, conclusion. Show the calculation line by line.
  • Keep a one-line contrast ready for reinsurance versus coinsurance; it is a favourite short question.
  • Mention practical compliance: board-approved reinsurance programme, reporting to the Authority, and the role of the Company Secretary.

Practice questions from Functions in Insurance and Compliance related thereto (Part I)

Reinsurance and Risk Management Functions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Reinsurance and Risk Management Functions: frequently asked questions

What is the difference between reinsurance and coinsurance?

In coinsurance, two or more insurers share one risk directly with the insured. In reinsurance, one insurer issues the policy and passes part of the risk to a reinsurer. The policyholder deals only with the direct insurer.

What does Section 101A of the Insurance Act, 1938 say?

Every insurer must reinsure with Indian re-insurers the percentage of sum assured on each policy that the Authority specifies. The percentage cannot exceed 30% and the Authority acts with the Central Government's previous approval. Fire insurers have an alternative based on premium.

What are retention and cession?

Retention is the part of the risk an insurer keeps on its own account. Cession is the part it transfers to a reinsurer. Together they make up the whole risk.

How does reinsurance help risk management?

It limits the loss an insurer bears from a single large claim or a cluster of claims. It also lets the insurer write bigger risks and spreads risk among several insurers.