Kathmandu. In the insurance and reinsurance sector, the terms of the agreement are not just a legal formality. They directly determine the financial stability of the company and the extent of claim payment. Recently, CA Chandrasekaran Ramakrishnan, a veteran of the Indian insurance sector and the founding CEO of Himalayan Reinsurance of Nepal, presented an important technical analytical article on the meaning of a risk and its impact on reinsurance agreements.
The correct identification, understanding and use of a risk is considered very relevant for hydropower projects, large industrial structures and the Nepalese insurance market where there is a high risk of natural calamities. In this context, the definition and analysis of the technical terminology covered by Ramakrishnan’s article are included here.
ca Chandrasekaran Ramakrishnan’s main points of analysis
1) Why is any one risk financially important?
Excess of Loss In a reinsurance system, the reinsurer pays the damages above the limit borne by the insurer. For example, suppose a contract is worth Rs. 90 crores plus losses and one risk of Rs. 10 crores is reinsured. If there is a loss of Rs. 25 crores in one of the risks, the primary insurer bears Rs. 10 crores and the remaining Rs. 15 crores is borne by the reinsurer. But when the same event or claim involves multiple assets, policies, or locations, the situation becomes complicated.
Separate Risks: If the damaged buildings are treated as separate risks, the primary insurer will have to bear the loss of Rs. 10 crores at the rate of Rs. 10 crores.
Same risk: If the entire premises are treated as one risk, then the primary insurer will bear Rs. 10 crores as self-retention only once and the remaining loss amount can be claimed from the reinsurer.
2) Myths and realities in the insurance sector
There are two common but inaccurate assumptions made in reinsurance practice. An insurance policy is a risk, but this concept is not always applicable. A single insurance policy can cover many structures or risks located in different geographical locations.
One place is one risk: Different people or businesses within the same premises or location may have different policies.
The operating clause of the contract often mentions “each and all losses, any one risk”. Therefore, the definition of the contract, the nature of the asset and the business structure should be considered as the main basis for determining the unit of risk.
3) The difference between a risk and an event
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Treating these two concepts as the same can be a big mistake in a reinsurance claim.
A single risk refers to the unit of property or liability on which the self-sustaining limit and indemnity limit apply. A single event refers to the cause or event of the damage. Such as a flood, earthquake, or fire, which can affect more than one risk at once.
A single event can affect multiple risks. Therefore, whether there is a risk-based or incident-based arrangement in the contract makes a big difference in the amount of the claim.
4) Practical Tips for Insurance Professionals and Technicians
CA Ramakrishnan offers the following practical tips to avoid disputes and legal complications that may arise during the claim.
a) Clear Definition: Ensure that the contract has a clear definition of one of the risks.
b) Aggregation: Review the provisions mentioned in the reinsurance agreement: Carefully study how it applies in the case of damage caused by calamity or common cause.
c) Analysis of the nature of the asset: Be clear about the actual risk unit in the case of industrial risks involving large infrastructure or multi-location.
d) Comprehensive study of the agreement: The reinsurance treaty schedule, definition, exceptions and endorsements should be read in an integrated manner and not separately.
Non-life insurance companies in Nepal bear a huge risk in hydropower projects, large industries, and areas that are affected by natural disasters. As CA Chandrasekaran Ramakrishnan has noted, it is much better to bring clarity at the contract preparation stage than to dispute after a claim has been made.
For insurance companies, reinsurers, brokers and regulatory bodies, it is imperative to conduct a thorough analysis of such technical terms in reinsurance agreements from the point of view of financial security and long-term stability.
