Caliento Steve Moran - NAMIC · – Tail / ERP coverage – Designated events, locations, jobsites,...

Anne Caliento

Steve Moran

Anti‐Trust PolicyBefore we begin our meeting, please keep in mind that numerous state and Federal laws absolutely prohibit the exchange of information among competitors regarding price, refusals to deal, or agreements to proceed in certain anti‐competitive respects, and that no such exchange of this information is either sanctioned by NAMIC or will be permitted during our meeting. This is a very serious matter and your cooperation will be appreciated.

Although the McCarran‐Ferguson Act has given a limited exemption to the insurance industry from certain otherwise prohibited activities, board members should realize that the exemption provided companies has definite limits and that NAMIC itself, as a trade association, has no such exemption. Activities, both in and out of the meeting room, are exempt only if they: a) involve the business of insurance; b) are regulated by state law; and c) do not constitute an agreement to boycott, coerce and/or intimidate or an act to further any of the three. Please note that legislative activities are protected by the 1st Amendment and are generally not subject to anti‐trust laws.

Conviction for certain violations of the anti‐trust laws (Sherman Act, Clayton Act, FTC Act and Robinson‐Patman Act) often result in jail sentences, fines or both, even for first offenders who are otherwise leaders in their communities.

Beside discussions involving any possible insurance market boycott, coercion and/or intimidation, which are never protected under any circumstances, here are some practices which you should not initiate nor participate in as they may expose you, your company, and NAMIC to possible anti‐trust investigation and/or prosecution by any state or the FTC or Justice Department. Discussing, sharing data or “signaling” with the purpose of agreeing to proceed in anti‐competitive respects in any of the following areas:

• Price, profits, commission, credit, or other terms or conditions of any products to be offered for sale.

• Reinsurance, salaries, or any other cost components and elements.• Underwriting criteria with an eye toward standardizing.• A market division plan without a state law covering the plan, including

discussions of type or products to be offered, customers to whom insurance products may be sold or the territories in which they may be sold.

• Rates, the stabilizing of rates, or future rate plans including actuarial projections.

• “Fair” profit levels or developing “standards” for company operations.• Keeping access to NAMIC membership unduly restrictive or denying unique

services of NAMIC to nonmembers.• Matters that would adversely affect availability of insurance or services to the

public.• Dealing or refusing to deal with certain customers or suppliers; business bidding

practices; or dealings with any agency/ broker or other insurance market participant.

• Current or future company market place reactions to legislation or regulations.

If any of the above occurs, you should object, have your objection noted in the minutes of any meeting and, if the discussion or practice continues, leave the room. Further, the prohibitions apply to discussions in an informal or social setting, not just regularly scheduled meetings.

If you see any prohibited practices occurring in any NAMIC meeting or social event, please mention your concern to an officer of the Association.

2017 NAMIC Underwriting Series - Module 14 of 23

Asking Questions

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Understanding Facultative Reinsurance

Presented by:Anne Caliento & Steve Moran


The material contained in this presentation has been prepared solely for informational purposes by Gen Re. The material is based on sources believed to be reliable and/or from proprietary data developed by Gen Re, but we do not represent as to its accuracy or its completeness. The content of this presentation is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Proprietary Notice

A Little About Us

Anne

• Started with GPF in Chicago in 1989

• Boston Branch Underwriter since 1991

• Graduated from Hope College in MI with a BA in Business

• Prior to Gen Re worked for the Four Seasons Hotel in Chicago

• Team Leader for REGIONAL Client Segment – Property

Steve

• Started with GCF in Kansas City in 2001

• Casualty Branch Manager since 2009

• Graduated from Westmar College in Iowa with a BA in Business Management

• Prior to Gen Re worked in Des Moines and Omaha with Travelers and ERC in KC

• Team Leader for REGIONAL Client SegmentCasualty


Agenda

• Reinsurance Products

• Fac or Fiction

• Prop Fac

• Cas Fac

• Premium Distribution Scales

• Facultative Purchasing Examples

• Programs / Bundled Fac

• Takeaways

Spectrum of Reinsurance Products

Major Types of Reinsurance Treaty

• Certain group or class of business reinsured under a single contract

• While in force, neither party has an option to ceding and assuming risk related to the business covered under the contract

Facultative

• Separate reinsurance contract negotiated on each risk

• The ceding company retains the right (faculty) to purchase reinsurance on an individual risk

FACULTATIVE PROGRAMS TREATY

Pro Rata Excess of Loss


Fac or Fiction

• Facultative is only used by Stock Companies

• Using Facultative creates extra work for underwriters

• Facultative is additional cost and expense

• Facultative can turn a bad risk into a good risk

• Facultative is only useful for high excess capacity

• Facultative is only bought on fire perils

What do YOU think of when you hear the word “Fac?”Fac or Fiction

Polling Time!


Fac or Fiction

A. Facultative is a tool to help you grow your Business?

B. The best layer to buy Facultative is the frequency layer.

C. To help you retain your Business, you can buy facultative?

D. Facultative coverage never pay claims?

E. Facultative can help improve your underwriting?

Can Facultative be a useful TOOL?Fac or Fiction

Which of the following is True? List all that apply

Motivations For Purchasing Facultative

Grow

• Tough piece of otherwise acceptable account (carve out)

• Cover the “gap” between Treaty and net risk appetite

• New line of business• Accommodation business for

an important agent

Improve Underwriting

• We see a wide scope of risks• Underwriting expertise and

second opinion • Emerging issues

Retain

• Treaty exclusion• Treaty protection• Good risk with new severity

exposures• Good risk with recent large

losses• New / Difficult jurisdiction


Fac or Fiction (I need a low quote)

Property Coverages

Perils

• All Risk

• Named Perils and EC

• Flood

• Wind

• Earthquake

• DIC

• Other

Coverages

• Building, Personal Property, Business Income / Business Interruption

• Boiler and Machinery / Equipment Breakdown

• Inland Marine

• Service Interruption

• Contingent Time Element

• Other


Property – Classes of Business

• Residential / Homeowners• Retail and Service • Manufacturing / Processing • Warehousing / Storage• Auto Physical Damage

From Homeowners to Petrochemical – The Good, The Bad, The Ugly• Agricultural• Vacant Properties • Petrochemical, Pulp and paper, Semiconductor• Fidelity and Crime• Inland Marine Coverage

Property Facultative – Carve Out Examples

• Spot location – That one unique risk on a schedule• Nat Cat Perils – Flood, EQ, Wind, etc.• Unprotected risks • Impaired risks • Builders risks• Dealer’s Open Lot • Jewelry and fine arts (schedules and individual items) • High-valued vehicles• Transit Exposures (single trip and annual floaters)• DIC• Contractors Equipment

FAC Helps You Reduce Volatility and Unknowns


Casualty - The Basics

The Common Stuff• Auto• GL• Products• Premises• Umbrella• Excess• Liquor Liability• OCP/RRP• WC…

Specialty Lines• EPLI• Product Recall• Med Mal• E&O• D&O• LPL

> Normal attachment is 500K > Up to 5M in capacity

Casualty: Real Life Examples

• Workers Comp– Regular– Carve outs

• Industrial Aid Aircraft• Transportation, Scuba divers, pit crews

• Auto– UM only (perhaps in a certain state)– Poor driver(s) (MVR) (Age)– Carve-out of any and every vehicle type (Bus,

limo, LHTT, 15 passenger van, etc.)

• GL– Discontinued Products– Tail / ERP coverage– Designated events, locations, jobsites, states

(NYLL)• Umbrella – Carve out auto or GL only,

PERSONAL!• Unique Risk …or just near or related to what

is unique for your appetite.


Casualty Risk Information

Provide your Reinsurance underwriter with the following:

• Name Insured and Location (city and state)

• Type of reinsurance needed ( AL, GL, WC, Umbrella)

• Limits you need quoted always think policy limit and layer reinsured ( Umbrella vs GL or both)

• Description of operations

• Exposures: Receipts, payroll, number of employees, fleet breakdown.

• Historical Loss experience ( currently valued)

Casualty – Premium Development Basics

Your reinsurance underwriter will need the following:• Provide the underlying premium for the line of coverage you want quoted:

• Auto $1M CSL $15,000 net or gross

• GL $1M/$1M/$2m/$2M $35,000 net or gross.

• Net means no commission - it is NOT included!

• Calculating for commission:Example If you get a net quote and want it to include commission.Auto $7,500 net and divided by .80 (20% commission) = $9,375 gross @ 20% cedent commissionTo net a Gross number down take the gross premium $9,375 x .80 = $7,500 net.


Casualty Rating Methods and Layering

• Reinsurance Underwriters use multiple methods to develop a quote.

• Manual Excess / Exposure Rating / Loss Rating / Layer Rating

• Each method has some credibility and judgment involved

• What Umbrella layers could look like:– 1M xs Primary $35,000 – 1x2 $21,000– 1x3 $12.600– 1x4 $7,500– 1x5 $5,000– 5x5xP $12,500 or $2,500 per million– 5x20xp $5,000 or $1,000 per million

SCALES (Property)

A Tool to Distribute Premium

Advantages:-Simple to use -“Accepted” by the market

Disadvantages:-Don’t take into account individual risk characteristics -Don’t allow discount or loading of premium based on underwriting information-Makes no consideration for $ amount attachment.-Some scales are not statistically based.


Common Scales

• Lloyds Scales• US Broker (Guy Carpenter) Scales• Worldwide (Munich Re) Low Loss/High Loss Scales• Ruth E Salzmann Scales (Ruthie)• Ludwig Scales• There are a myriad of other scales available

Excess Layer Percentage across the different Scales


Excess Layer Percentage across the different Scales

0

10

20

30

40

50

60

70

80

90

100

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Prem

. Dis

tribu

tion

Retention

M.HgHaz

RB

RA

Lloyds

M.LowHaz

Guy Carp.

SCALES

• Office/Apartments Vs Warehouses

• Sprinklered Risks• Construction• PML Risks

No individual Risk fits a scaleSummary

• Scales are used for Premium distribution• Scales are not individually risk based• Scales assume generic risk characteristics• Scales can make a good guide for premium distribution• Scales do not replace the individual underwriter

Underwriting & Risk analysis is the key!!!!!


Premium Distribution

# of losses

Error in PML

PML

Normal Loss Expectancy

Frequency

CatastrophesPremium $

Premium $$$$$

4M

4M

4M

4M

4M


Ground up Rate (GUR) = Rate for 100% of the TIV$40,000 ÷ $20,000,000 (per hundred)

= .20 GUR

$40,000 Total Premium

20M TIV

$13,046

$6,440

$2,920

$1,040

32.6%

16.1%

7.3%

2.6%80%

60%

40%

20%


4M

4M

4M

4M

4M


Excess Rate = Rate for 100% of the Reinsurance Layer$1,040 Rein. Premium ÷ $4,000,000 (per hundred) Layer

= .026 ($260 Net Per Mil)

$40,000 Total Premium

20M TIV

Premium = $26,960Xs Rate = .674



4M xs 4M

4M xs 8M

4M xs 12M

4M xs 16M



Multi Building Facultative Reinsurance Purchase

• I would like to discuss a multi building, residential property risk and the considerations an underwriter might want to take when buying facultative fire reinsurance.

Questions I get asked a lot when a client has a multi building risk:- How much spread should there be between buildings?- Should I buy over all the buildings or just what I think are exposed?- What if I don’t buy enough?

Reinsurers should be able to help their client companies with these answers on a per-risk basis as really, each and every risk is different.


Multi Building Reinsurance Examples

Example 1 – 10 Buildings with a maximum of 30 feet between each building

Example 2 – 10 Buildings - 4 buildings with 30 feet between and then a spread of 200 feet and the other 6 buildings with 30 feet between maximum

Example 3 – 10 Buildings with 150 feet between each building

Each building in our example is $1,000,000 and is of frame construction and non-sprinklered. We are not in a brush or high wind area and shrubbery is normal. I say these disclaimers as a slight change in any of these areas could change our examples. For our purposes here we are focusing on the peril of fire only.

In our example the client company retains 3,000,000.

Example 1

Example 1 –TIV of all 10 Buildings is $10,000,000. There is 30 feet between each frame building.

Most would recommend treating this as 1 amount subject and buying up to the TIV.

Building 1

Building 2

Building3

Building 4

Building5

Building 6

Building7

Building 8

Building9

Building10

30 Ft Separation

1 Amount Subject

Example 1: Ground up premium is $15,000 (.15 x $10M)Layer is $7,000,000 xs $3,000,000Attachment is 30% - Lloyds says 21.9% goes to the reinsurance Premium is $3285


Example 2

Example 2 –TIV of all 10 buildings is $10,000,000 however there is 200 feet of separation between 4 blgsand 6 blgs. The clusters still only have 30 feet of separation between them.

200 feet of separation for most companies is sufficient to consider this 2 amount subjects.

AS 1 is 4,000,000 and AS 2 is 6,000,000.

Building 1

Building 2

Building 3

Building 4

Building 6

Building 9

Building 8

Building 7

Building 5

Building 10

200 Ft Separation

30Ft

Se

para

tion

30Ft Separation

1 A

mou

nt

Subj

ect

Example 2: Example 2: Ground up premium is $15,000Layer is 3,000,000 xs 3,000,000AS 1 of $4M we are attaching at 75%. Lloyds says 10% goes to the reinsurer = $600AS 2 of $6M we are attaching at 50%. Lloyds says 15% goes to the reinsurer = $1350Total premium is $1950

30Ft Separation

Example 3

Example 3 –TIV of all buildings is $10M and there is 150 feet of separation between each.

150 feet of separation for most companies is sufficient to consider these all separate amount subjects from a fire point of view.

Company would buy No Fac.

Building 1

Building 2

Building3

Building 4

Building5

Building 6

Building7

Building 8

Building9

Building10

150 Ft Separation


Programs

FACULTATIVE PROGRAMS TREATY

Pro Rata Excess of Loss

What is a Facultative Program?

Individual underwriting and pricing approach of Facultative reinsurance

Guaranteed capacity and transactional efficiency of a Treaty

Combines the Elements of


Benefits of a Facultative Program

• Easy to Use – Internet based, company and program specific,

• Instantaneous Response – Ability to quote, bind and endorse via the application

• Automatic access to guaranteed capacity for all risks within agreed parameters

• Customized specifically for your portfolio and needs

• Cost-effective, competitive pricing

• Efficient processing, expense savings

• Agreements are mutually reviewed each year

Facultative Terminology Review

• What is a layer of reinsurance. The amount you want the reinsurer to quote.(Auto 500,000 xs 500,000 / Umbrella $5M xs $10m xs Primary/ Property all risk 5M xs 5M)

• What is a carve out, spot or lazar quote? Coverage for a specific exposure, not the entire risk.(Elderly driver, IAA, pool, liquor, product or premises, delivery units, Flood, EQ, Wind, single location)

• Terms and conditions ( these are the exclusions, limitations or specifics of coverage )

• Buffer Layer (aka working layer means the limit within the primary policy)(Your policy limit is $1M CSL and the 500k xs 500k is the working layer quote request. You have a TIV of 20M but the PML is 10 and you buy a 5 xs 5 )

• Direct Reinsurance – You will deal direct with the underwriter that will quote the account

• Cedent – A ceding company (ABC Mutual) who cedes liability to a reinsurer.


Takeaways

Facultative can help you GROW your business.

Facultative’s DIRECT distribution model ensures the highest quality underwriting interactions.

Facultative PROGRAMS are an effective and efficient solution to guaranteed capacity and pricing.

Facultative Certificates can be purchased for a VARIETY of risk transfer needs. (Grow/Retain/Improved)

SCALES can be a helpful guide in helping you distribute facultative reinsurance premium.

A facultative reinsurer is a great SECOND HEAD for pricing discussion in a changing marketplace.

There are many ways to effectively PURCHASE facultative reinsurance and facultative underwriters are greatresources to help you.

Reinsurance Symposium 2016

Thank you!Anne Caliento / 617 728 3803 / [email protected] Moran / 913 661 6924 / [email protected]


Asking Questions

Upcoming Webinars:

• June 13, 2017| Emerging Farm Technology• June 15, 2017 | Equipment Breakdown: Who Needs It?• June 20, 2017 | Closing the Gap in Home‐Based Business Coverage• July 12, 2017| The Importance of Insurance to Value in Building Cost Trends

For more information, visit: http://www.namic.org/seminars/calendar.asp#virtual


More webinars are coming soon

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Caliento Steve Moran - NAMIC · – Tail / ERP coverage – Designated events, locations, jobsites,...

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