Reinsurance
Insurance for insurers — ceding part of the risk, including the mandatory GIC Re cession, to cap exposure on any single event.
Why you care
No insurer can carry a whole port, a whole factory, or a whole city's flood risk alone. Reinsurance is how it passes part of that exposure to a bigger balance sheet, so one catastrophe can't sink it. In India, a slice of every general-insurance risk must go to GIC Re by law.
Run the numbers
An insurer writes ₹120 cr of premium but cedes ₹15 cr to reinsurers — part voluntary, part the obligatory GIC Re cession (illustrative, verify current %). It keeps less premium, but also less risk: a single ₹50 cr fire claim is now largely the reinsurer's problem.
Where this goes
Ceding premium is exactly what pulls the gross figure down to net earned premium — the reinsurer's share leaves with the risk. And because ceding risk lifts liability off the books, it frees capital and eases the required solvency margin, which is why reinsurance is a capital tool as much as a safety one.
Why you care
Reinsurance is insurance that insurers buy for themselves. An insurer cedes part of the risk it has taken on — and part of the premium that came with it — to a reinsurer. In exchange, the reinsurer pays its share when a claim hits. It is how a company with a ₹5,000 crore balance sheet can safely stand behind a ₹500 crore refinery or a monsoon that floods a whole district.
The core idea is that some risks are too big or too lumpy for one insurer to hold alone. A single major fire, a cyclone, or a jumbo group-health account could wipe out a year's profit if it sat entirely on one book. Reinsurance spreads that tail to players built to absorb it. In India there's a second, structural reason it matters: IRDAI requires every general insurer to cede a fixed share of its business — the obligatory cession — to the national reinsurer, GIC Re. That percentage is set by the regulator and revised from time to time — it has been in the low single digits in recent years, around 4%. It's a live number to check rather than memorise.
Run the numbers
Return to the insurer writing ₹120 crore of GWP. Its reinsurance sits in two layers:
- Obligatory cession to GIC Re. A regulator-set slice of the premium goes to GIC Re automatically. On ₹120 crore, a ~4% obligatory cession is roughly ₹5 crore (illustrative — confirm the current rate).
- Voluntary / treaty reinsurance. On top of that, the insurer cedes more to cap single-event exposure — say another ₹10 crore of premium.
Total ceded: about ₹15 crore, which is exactly the reinsurance line that took ₹120 crore of GWP down to ₹105 crore of net written premium in the NEP walk. In return, when a ₹50 crore fire claim lands, the bulk is recovered from reinsurers and only the retained slice hits this insurer's own loss ratio. It gave up premium to buy a ceiling on how bad any single year can get.
Where this goes
Reinsurance is the mechanism behind the first haircut to the top line: ceded premium leaves with ceded risk, taking gross premium down toward net earned premium. Its second effect is on capital — by moving liability off the balance sheet, ceding risk reduces the required solvency margin the insurer must hold. That dual role, less premium but also less capital tied up, is why reinsurance decisions are made by the finance and underwriting sides together, not just as a safety purchase.