INTRODUCTION TO REINSURANCE NOLAN ASCH CAS RATEMAKING SEMINAR MARCH 10-11, 2005 INT-6.
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Transcript of INTRODUCTION TO REINSURANCE NOLAN ASCH CAS RATEMAKING SEMINAR MARCH 10-11, 2005 INT-6.
INTRODUCTION TO INTRODUCTION TO REINSURANCEREINSURANCE
NOLAN ASCHNOLAN ASCH
CAS RATEMAKING SEMINARCAS RATEMAKING SEMINAR
MARCH 10-11, 2005MARCH 10-11, 2005
INT-6INT-6
INSURANCEINSURANCE
The insurer insures the individual or The insurer insures the individual or the corporationthe corporation
REINSURANCEREINSURANCE
The REINSURER insures the The REINSURER insures the insurance companyinsurance company
REINSURANCE REINSURANCE PLACEMENT MECHANISMSPLACEMENT MECHANISMS
DIRECTDIRECT BROKERBROKER
INSURANCEINSURANCE vs. vs.
REINSURANCE REINSURANCE BOTH concerned with future contingenciesBOTH concerned with future contingencies BOTH require underwriting skills (risk)BOTH require underwriting skills (risk) BOTH involve transfer of riskBOTH involve transfer of risk BOTH require payment of premiumBOTH require payment of premium BOTH provide protectionBOTH provide protection BOTH subject to (some) regulationBOTH subject to (some) regulation
REINSURANCEREINSURANCE
Buyers assumed to be knowledgeableBuyers assumed to be knowledgeable Responds to actual lossResponds to actual loss Provides indemnification onlyProvides indemnification only Reimburses for payments already madeReimburses for payments already made Usually GlobalUsually Global
FUNCTIONS OF FUNCTIONS OF REINSURANCEREINSURANCE
CAPACITYCAPACITY
CAPACITYCAPACITY
Single Risk (Fac - Sears Tower)Single Risk (Fac - Sears Tower) PORTFOLIO (Treaty)PORTFOLIO (Treaty)
CAPACITY MECHANISMSCAPACITY MECHANISMS
Excess-of-LossExcess-of-Loss Quota ShareQuota Share
FUNCTIONS OF REINSURANCEFUNCTIONS OF REINSURANCE
CAPACITYCAPACITY CATASTROPHECATASTROPHE
CATASTROPHECATASTROPHE
QUOTA SHAREQUOTA SHARE EXCESS OF LOSSEXCESS OF LOSS SECURITIZATIONSECURITIZATION
FUNCTIONS OF REINSURANCEFUNCTIONS OF REINSURANCE
CAPACITYCAPACITY CATASTROPHECATASTROPHE STABILIZATIONSTABILIZATION
STABILIZATIONSTABILIZATION
Reduction in Variance (swings)Reduction in Variance (swings)
STABILIZATIONSTABILIZATION
Extreme contractual caseExtreme contractual case
““STOP-LOSS”STOP-LOSS”
Aggregate ExcessAggregate Excess
FUNCTIONS OF REINSURANCEFUNCTIONS OF REINSURANCE
CAPACITYCAPACITY CATASTROPHECATASTROPHE STABILIZATIONSTABILIZATION FINANCINGFINANCING
FINANCINGFINANCINGReducing LiabilitiesReducing Liabilities
Ceding CommissionsCeding Commissions
““Overrides”Overrides”
FINANCINGFINANCING
May increase PHS due to transactionMay increase PHS due to transaction
FINANCINGFINANCING
Finite Reinsurance......Finite Reinsurance......Pre-Elliott SpitzerPre-Elliott Spitzer
ALL Reinsurance is FinancialALL Reinsurance is FinancialPost Elliott SpitzerPost Elliott SpitzerI don’t think so….I don’t think so….
FUNCTIONS OF FUNCTIONS OF REINSURANCEREINSURANCE
CAPACITYCAPACITY CATASTROPHECATASTROPHE STABILIZATIONSTABILIZATION FINANCINGFINANCING ENTER AND EXIT ENTER AND EXIT
MARKETSMARKETS
ENTER OR EXIT MARKETSENTER OR EXIT MARKETS
Lessens risk as you learnLessens risk as you learn
With 100% Q/S you exitWith 100% Q/S you exit
FUNCTIONS OF REINSURANCEFUNCTIONS OF REINSURANCE
CAPACITYCAPACITY CATASTROPHECATASTROPHE STABILIZATIONSTABILIZATION FINANCINGFINANCING ENTER AND EXIT MARKETSENTER AND EXIT MARKETS UTILIZE REINSURER EXPERTISEUTILIZE REINSURER EXPERTISE
USING REINSURER USING REINSURER EXPERTISEEXPERTISE
Large or unusual claimsLarge or unusual claims Large or unusual risksLarge or unusual risks Special relationships and/or Special relationships and/or
knowledgeknowledge
LIMITATIONS OF LIMITATIONS OF REINSURANCEREINSURANCE
Will NOT make bad business profitableWill NOT make bad business profitable Transaction CostsTransaction Costs Rating Agency Impacts (Gross/Net)Rating Agency Impacts (Gross/Net)
How Reinsurance Is PricedHow Reinsurance Is Pricedin Practicein Practice
HypotheticalHypothetical
ExamplesExamples
NO PRICE REGULATIONNO PRICE REGULATION
(virtually)(virtually)
CASE BY CASECASE BY CASE
NEGOTIATIONNEGOTIATION
FLEXIBILITY IN STRUCTUREFLEXIBILITY IN STRUCTUREContractualContractual
EXCESS OF LOSSEXCESS OF LOSS
LAYERINGLAYERING
$19.75 Mill xs $0.25 Mill$19.75 Mill xs $0.25 Mill
(sounds like a wide layer)(sounds like a wide layer)
TYPICAL LAYERINGTYPICAL LAYERING10M xs 10M10M xs 10M
5M xs 5M5M xs 5M
3M xs 2M3M xs 2M
1M xs 1M1M xs 1M
500 xs 500500 xs 500
250 xs 250250 xs 250
Price BPrice BPrice APrice A
Price CPrice CPrice DPrice DPrice EPrice EPrice FPrice F
High Frequency/ Low SeverityHigh Frequency/ Low Severity
Buffer layersBuffer layers
ie 250 xs 250ie 250 xs 250
250 xs 250250 xs 250
Price APrice A
Capacity LayersCapacity Layers
i.e. 10m xs 10mi.e. 10m xs 10m
10M xs 10M10M xs 10M
Price FPrice F
Low Frequency/ High SeverityLow Frequency/ High Severity
CLIENT/BROKERCLIENT/BROKERNEGOTIATIONNEGOTIATION
Change or re-subdivideChange or re-subdivide
the layeringthe layering
LAYER TRAPLAYER TRAPMANY PERMUTATIONSMANY PERMUTATIONS
Pricing for 500 xs 500Pricing for 500 xs 500
Later, request the 250xs 250Later, request the 250xs 250
LAYER TRAPLAYER TRAP
at “last minute” at “last minute”
Ask for 150 xs 100Ask for 150 xs 100
--Requires more data--Requires more data
PRICING TRAPSPRICING TRAPS
AGGREGATE ANNUAL DEDUCTIBLESAGGREGATE ANNUAL DEDUCTIBLES
ASSUME A 10% RATEASSUME A 10% RATE
Request a 1% AADRequest a 1% AAD Request a 2% AADRequest a 2% AAD Request an 8% AADRequest an 8% AAD NOW the risk/variance NOW the risk/variance becomes LARGE vs a 2% ratebecomes LARGE vs a 2% rate
INFORMATION FOR PRICINGINFORMATION FOR PRICING
NO standardsNO standards
WHAT THE REINSURER WHAT THE REINSURER WANTSWANTS
EVERYTHINGEVERYTHING
WHAT THE BROKER/CLIENTWHAT THE BROKER/CLIENTMAY WISH TO SUPPLYMAY WISH TO SUPPLY
NOTHINGNOTHING
POSSIBLEPOSSIBLEOUTCOMESOUTCOMES
GIGOGIGO
Garbage-InGarbage-In
Garbage-outGarbage-out
EL NIÑO EL NIÑO
NINONINO
Nothing-inNothing-in
Nothing-outNothing-out
EXPERIENCE RATINGEXPERIENCE RATING
Using losses of the riskUsing losses of the risk
to price the risk.to price the risk.
STANDARDSTANDARD
All losses at half theAll losses at half the
attachment point & upattachment point & up
ACTUARIAL APPROACHACTUARIAL APPROACH
DETRENDED LOSSESDETRENDED LOSSES
Varies with age of claimVaries with age of claim
BEGINS to show ACTUALBEGINS to show ACTUAL
CLAIMS as a sample outcomeCLAIMS as a sample outcome
EXPOSURE RATINGEXPOSURE RATINGAttempt to rate Reinsurance based upon the Attempt to rate Reinsurance based upon the
TRUE underlying exposures TRUE underlying exposures
Proxies for TRUE exposures:Proxies for TRUE exposures:Limits Profiles = Subject Premium by policy limit Limits Profiles = Subject Premium by policy limit Exposures by policy limit (still not the TRUE exposure)Exposures by policy limit (still not the TRUE exposure)
LIMITS PROFILELIMITS PROFILE$100,000 Policy Limit$100,000 Policy Limit
Yr 1997 10% of exposures at $100,000Yr 1997 10% of exposures at $100,000 Yr 1998 25% of exposures at $100,000Yr 1998 25% of exposures at $100,000 Yr 2002 90% of exposures at $100,000Yr 2002 90% of exposures at $100,000
loss was atypical in 1997loss was atypical in 1997 layer is effective 7/1/04layer is effective 7/1/04
Include ‘97 and ‘98 losses at $100,000Include ‘97 and ‘98 losses at $100,000
LIMIT LOSSLIMIT LOSS
limit loss to 1997 policy limitslimit loss to 1997 policy limits
oror
trend and develop losstrend and develop loss
beyond policy limitsbeyond policy limits
““WE DON’T DO THIS WE DON’T DO THIS ANYMORE”ANYMORE”
““Throw out “ claims fromThrow out “ claims from
MGA’s, classes or statesMGA’s, classes or states
we no longer writewe no longer write
QUOTA SHARE ISSUESQUOTA SHARE ISSUES
Moral hazard and Retention - 1% netMoral hazard and Retention - 1% net Ceding CommissionCeding Commission OverridesOverrides Sliding ScalesSliding Scales Loss CorridorsLoss Corridors