Aggregation and Other Reinsurance IssuesReinsurance IssuesAndrew Guarnori

IMC PI Forum, Cambridge – July 2, 2013

Agenda

� Aggregation

� Dependencies� Dependencies

� Divergence

� Key Take Aways

� Questions?

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AggregationAggregation

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� Source of numerous disagreements over the years at both Insurance and

Reinsurance level:

Aggregation situation today

– Conflicts of interest can exist between the positions taken by the original

Insured, Insurer and Reinsurer

– Contract language typically not robust enough to respond to every eventuality

– Language doesn't always have a clear and universal interpretation in all

jurisdictions/territories

– Expectations are not always clear/realistic (on both sides) – hindsight adjusting!

– Pure "Risk" reinsurance covers will tend to rely on the original "per insured"

interpretation

IMC PII Conference | Reinsurance Issues | Andrew Guarnori - July 2, 2013

interpretation

– "Event" or other broader reinsurance covers present additional challenges

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� Attempted solutions have included:

– "Bolt-on" approaches

Solutions

– Concoction of new phrases which don't have existing legal meaning/precedent

– Use of set "Scenarios" to illustrate intended application of coverage

– Extremes such as use of "sole judge" and "follow fortune" provisions

� Reaction to these have been very mixed from both Insurers and

Reinsurers

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� Aggregations arise from a number of angles:

– Single "Risk" accumulations

Core issues around aggregation

– Visible (target risks)

– Invisible (unexpected)

– Multiple "Event" accumulations

– Clash of Insured or Clash of coverage situations

– Localised events (same issue effecting numerous insureds such as a

corporate failure or mis-selling scandal)

– "Systemic" accumulations

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– "Systemic" accumulations

– Global systemic events (financial crisis, cyber-virus, etc.)

– Macro economic trends (interest rates, inflation, etc.)

� Reinsurers must also deal with the further complications of inter-

reinsured accumulations

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Typical reinsurance aggregation language

� The definition of "Loss Occurrence" under reinsurance contracts is not

standard and contracts can offer widely different language around their

treatment of aggregation:treatment of aggregation:

– Event

– Common Cause

– Originating Cause

– Related Loss

– Causative Agency

– Business Disaster

Generic/common use

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– Business Disaster

– Claims Made Casualty Catastrophe

– Broad/Enhanced Trigger

– Integrated Occurrence

– Sole Judge, etc.

Proprietary/less common

use

Loose

Aggregate

XoL / Stop

Loss

Related

Loss

Typical Reinsurer risk appetite

Sp

ace

& T

ime

Common

Cause

Originating

Cause

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Tight

Scope of AggregationNarrow Broad

Event

Why can Property do it?- Some fundamentals

Attribute Property Casualty/PI

Time Sudden Sudden or gradual

Duration Limited Limited

or Extended

Space Localised Localised

or Global

Perils Named

or Physically Tangible

Legal Liability

or economic

Exposure Known values (TIV)

Known limits

Unknown values

Known limits

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Known limits Known limits

Modelling Commercially available

Sophisticated

Tested

PML calculable

Proprietary

Variable

Insufficiently tested

PML's unreliable

Advisor

1

Investor 1

Investor 2

Investor 3

Investor 4

Investor 5…

Investment A

Investment B

Investment C

Investment D

Investment E…

How hard can it be?Simplified exposure map – 1 Fund

Investment Fund

Advisor

2

Advisor

3

Investor 6

Investor 7

Investor 8

Investor 9

Investor 10…

Investor 11

Investor 12

Investor 13

Investor 14

Investment E…

D&O's

Auditors

Broker

1

Broker

2.....n

Lawyers

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Advisor

4.....n

Investor 14

Investor 15…

Investor 16

Investor 17

Investor 18

Investor 19

Investor 20…

Investment F

Investment G

Investment H

Investment I

Investment J…

Auditors Lawyers

� Expect far more interest/products in this area

� Industry and regulators increasingly aware of issues

So What Next?

� Industry and regulators increasingly aware of issues

– Limited benefit for traditional covers under Solvency II proposals

� New products are emerging in this area which try to meet "essential"

requirements;

– Predict/Model

– Quantify/Contain

– Know/Respond

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DependenciesDependencies

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� Reinsurers can have a high degree of dependency on a sometimes

lengthy chain of counter-parties:

Dependencies

� This goes much further than just usual notification issues

� Need to obtain adequate information and regular updates

� Market performance has been very variable in this area

Original Insured

BrokerPrimary Insurer

BrokerExcess Insurer

Broker Reinsurer

Time

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� Market performance has been very variable in this area

� It's challenging to predict development patterns or assess IBNR if there's

nothing there!

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DivergenceDivergence

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� Diversification of exposure is normally good – it usually reduces risk

� Divergence of interests normally isn't – it can lead to conflicts

Divergence

� Divergence of interests normally isn't – it can lead to conflicts

� Insurers are tending to retain more

� Over-riders and ancillary income can present conflicts to alignment of

interest

� Business ceded to Reinsurers is increasingly diverging from business

retained:

– Small limits business is usually retained: Tends to be mostly stable/safer

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– High limits business is usually ceded: Tends to be more volatile/peak risks

� Overall presents fundamental challenges to insurer/reinsurer

partnerships

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Divergence: "Picture of Perfection Ins Co"

Assume client buys layer of

£15M x/s £10M

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£15M x/s £10M

Take AwaysTake Aways

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Take Aways

Securing adequate Reinsurance coverage for aggregations is increasingly important as aggregations is increasingly important as Insurers retain more exposure "per risk"

Dependencies present threats to the ability of the market as a whole to accurately

assess and reserve for PI losses

Divergence is putting increasing pressure on

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Divergence is putting increasing pressure on traditional partnerships

Questions? & Thank you& Thank you

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