Reinsurance Session 3. Reinsurance CATASTROPHE (RE)INSURANCE 2 Examples from Caribbean Region:...
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Transcript of Reinsurance Session 3. Reinsurance CATASTROPHE (RE)INSURANCE 2 Examples from Caribbean Region:...
Reinsurance
Session 3
Reinsurance
CATASTROPHE (RE)INSURANCE
2 Examples from Caribbean Region:
•Monoline Property Insurer
•Multi-line Non-life insurer
Reinsurance
CATASTROPHE (RE)INSURANCE
1. Aggregate Exposures
• Total sums insured by line of business & location.
2. Assess likely loss scenario
• Must be plausibly severe
• Preferably modeled by a reputable modeling agency
3. Does capital and reinsurance cover the loss scenario?
• The real issue for supervisors!
Reinsurance – Catastrophe Reinsurance
A Caribbean Insurer Ltd. Aggregate Property Exposures – Y.E. March 31,
2008.
A Caribbean Insurer Ltd.
Abridged Balance Sheet – Y.E. March 31, 2007.
3,759,666,987Aggregate Property Exposures
847,027,808USVI160,551,133Turks & Caicos
325,000Trinidad & Tobago6,158,620St. Vincent
70,676,148St. Maarten6,779,389St. Nevis
22,141,125St. Kitts36,008,407St. Lucia91,490,811Jamaica29,952,188Grenada21,762,939Dominica10,298,520Curacao
1,177,224,951Cayman1,645,250BVI1,648,750Belize
655,535,718Barbados513,572,642Bahamas82,534,118Antigua24,333,470Anguilla
US$ (net of fac)
33,391,454Shareholders Equity
3,747,124Retained Profits29,644,330Share Capital
33,391,454Net Asset Value
31,779,228Total Liabilities11,271,860Other Liabilities20,507,368Insurance Liabilities
65,170,682Total Assets63,194,128Other Assets1,976,554Fixed Assets
US$
US$3.8 billion risk backed by US$33.4 million assets
Catastrophe Reinsurance
Aggregate Exposures Probable Maximum Loss
PML – Reinsurance Cover – Capital ≥ Zero
The Critical Business Process
1. Assess severity of probable loss
2. Inputs include sophisticated models & management’s judgment
3. Control underwriting based on PML - RI
Catastrophe ReinsuranceAggregate Exposures
Analyze into cat-exposed portfolios (US$):
3,702,634,896880,380,0522,822,254,844Total
1,708,468,3391,708,468,339Other
845,057,308290,795,370554,261,938USVI
1,149,109,249589,584,682559,524,567Cayman Is
Total
Commercial & Construction
Homeowner /Residential
Apply PML assumptions to these numbers
Catastrophe ReinsuranceAggregate Exposures to Probable Maximum Loss
Cay
man
US
VI
Oth
er C
arib
bea
n I
s.
Cay
man
US
VI
Oth
er
$1.7B
$845M
$1.2B
Aggregate Exposures
PMLs
Business
Assumptions
Underwriting
Discipline
Further Reading:
1. A Probable Maximum Loss Study of Critical Infrastructure in Three Caribbean Island States
Caribbean Disaster Mitigation Projecthttp://www.oas.org/cdmp/document/pml/pml.htm#executive
2. Natural Catastrophe Probable Maximum Loss
Woo. British Actuarial Journal 2002.
1. Severity of Loss Scenario for year
Modeled Scenario:1yr. in 50; 1yr. In 100 etc.
2. Underwriting Selection Criteria
Windstorm
Distance from shoreline
Elevation above sea level
Topography
Retrofitting of buildings
Quake
Location, Location, Location
Retrofitting of buildings
Non-life ReinsuranceTypes of Contract – A reminder
Non-Proportional
Excess of Loss•Specified limit e.g. $65m.
•Specified deductible e.g. $5m.
•Specified line of business coverage•Specified number of reinstatements.
Proportional
Quota share•Traditionally, shares premiums and claims in the same proportions•Specified line of business coverageBUT:•Aggregate cession limits•Event limits•Risk limits
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008
• All layers 100% placed.• 3 Reinstatements.• 2 Reinstatements.• 1 Reinstatement.• 1 Reinstatement.
•All territories•All territories•All territories•Cayman Is only
Property Per Risk•US$350k XS US$150k•US$500k XS US$500k•US$4million XS US$1million•US$2.5million XS US$5million
(Kicks in after all other reinsurances)(Reinsured decides what constitutes a
risk)
•100% placed.•1 Reinstatement.
All territories.Umbrella Property CatastropheUS$110million XS
1.US$70m Residential,2. US$35M Commercial, and3. QS Event & Cession limits
•100% placed.•1 Reinstatement.
All territories.Residential Excess of LossUS$65million XS US$5million
•100% placed.•1 Reinstatement.
All territories.Commercial Excess of LossUS$30million XS US$5million
•52% placed. (That is 39% r/i cover)• Event limit is 15% of aggregate exposure, or 100% of PML.• Cession limits US$4m per risk, but aggregate cession limit varies by territory.
All territories excl. Cayman & USVI.
75% Quota ShareMax. single risk limit US$4m of which 75% is ceded & 25% retained.
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008
75% Quota ShareMax. single risk limit US$4m of which 75% is ceded & 25% retained.
All territories excl. Cayman & USVI.
• 52% placed. (That is 39% insurance cover)• Event limit is 15% of aggregate exposure, or 100% of PML.• Cession limits US$4m per risk, but aggregate limit varies by territory.
Commercial Excess of LossUS$30million XS US$5million
All territories. • 100% placed.•1 Reinstatement.
Residential Excess of LossUS$65million XS US$5million
All territories. • 100% placed.•1 Reinstatement.
Umbrella Property CatastropheUS$110million XS
1.US$70m Residential,2. US$35M Commercial, and3. QS Event & Cession limits
All territories. • 100% placed.•1 Reinstatement.
Property Per Risk•US$350k XS US$150k•US$500k XS US$500k•US$4million XS US$1million•US$2.5million XS US$5million
(Kicks in after all other reinsurances)(Reinsured decides what constitutes one
risk)
•All territories•All territories•All territories•Cayman Is only
• All layers 100% placed.• 3 Reinstatements.• 2 Reinstatements.• 1 Reinstatement.• 1 Reinstatement.
•Aggregate limits per cover note:
Northern Caribbean: $312m
Southern Caribbean: $183m
•Compare to aggregate exposure (slide 5) of $1.7billion for non Cayman & USVI risk.
•The underwriting has overshot the cession limits, so reinsurance cover is “averaged” down in proportion (say by 1/3rd).
Reinsured decides what constitutes one risk.
That is, they can decide whether to aggregate it if its part of a catastrophe, or not.
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008
US$5m
US$35m
US$70m
Residential XL, $65m xs $5m
& 1 Reinstatement
Commercial XL, $30m xs $5m
& 1 Reinstatement
Quota Share. Max of US$0.79m per risk
Umbrella Property Catastrophe $110m XS:
1. $70m Residential
2. $35m Commercial
3. QS Event Limits (15% Agg. Exp.)
& 1 Reinstatement
15% Max. Agg. Exp. Zone B $27.45m
US$180m
Per risk XL $7.5m XS $150k
Other RI to be used first.
$4m per risk limit is reduced:
1. Contract is only 59% placed.
2. Averaged down by a factor of 3.
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008
US$5m
US$35m
US$70m
Residential XL, $65m xs $5m
& 1 Reinstatement
Commercial XL, $30m xs $5m
& 1 Reinstatement
Quota Share. Max of US$0.79m per risk
Umbrella Property Catastrophe $110m XS:
1. $70m Residential
2. $35m Commercial
3. QS Event Limits (15% Agg. Exp.)
& 1 Reinstatement
US$180m
Per risk XL $7.5m XS $150k
Other RI to be used first.
Loss Scenario
Assume 3 hurricanes causing losses to residential book of business: 2 losses of $75m & 1 loss of $35m to the insurer.
Gross incurred
QS Recovery
XL Recovery
Risk XL Recovery
Net Incurred
1st Hurricane
$75m $0.79m $70m $4.21m
2nd Hurricane
$75m $0.79m $70m $4.21m
3rd Hurricane
$30m $7.35m $22.65m
$31.07m
Compare to Net Asset Value $33.4m
Net premium income for 2007 was US$22million, which improves the above outcome.
Non-Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008
US$5m
US$35m
US$70m
Residential XL, $65m xs $5m
& 1 Reinstatement
Commercial XL, $30m xs $5m
& 1 Reinstatement
Quota Share. Max of US$0.79m per risk
Umbrella Property Catastrophe $110m XS:
1. $70m Residential
2. $35m Commercial
3. QS Event Limits (15% Agg. Exp.)
& 1 Reinstatement
US$180m
Per risk XL $7.5m XS $150k
Other RI to be used first.
Net premium income for 2007 was US$22million. Doesn’t help that much when you add in the attritional non-cat losses!
Non-Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008
US$5m
US$35m
US$70m
Residential XL, $65m xs $5m
& 1 Reinstatement
Commercial XL, $30m xs $5m
& 1 Reinstatement
Quota Share. Max of US$0.79m per risk
Umbrella Property Catastrophe $110m XS:
1. $70m Residential
2. $35m Commercial
3. QS Event Limits (15% Agg. Exp.)
& 1 Reinstatement
US$180m
Per risk XL $7.5m XS $150k
Other RI to be used first.
•Catastrophe losses have appropriate RI cover, but limited to two events
•Beware of attritional claims not covered by RI
•Don’t forget about net premium income
Non-Catastrophe Reinsurance
• The example was a monoline property insurer.
• Diversified insurer – reinsurance is usually designed to respond to a variety of business lines.
• PMLs & Loss Scenarios for all lines must be covered by reinsurance and capital.
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009
1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.
All classes of business.
Motor, Workers Comp., Employers Liability, Third Party and CAR Liability.
$500k XS 500k(Annual aggregate limit: $6.0m)
$4.0m XS $1.0m(Annual aggregate limit: $12.0m)$2.5m XS $5.0m(Annual aggregate limit: $7.5m)
Motor XL
1. 100% placed: Lloyd’s (Chaucer)Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).
$7.5m XS $750k.1 Reinstatement
Catastrophe XL
1. Aggregate cession limit of $600m. Quake & Windstorm2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.3. 100% placed: Everest Re.
A)Property, Business Interruption, CAR (material damage).
B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.
A)Cession limit: $4m any one risk
B) Cession limit: $1m any one risk
90% Quota Share(non-obligatory)
CommentsBusiness coveredCover
Summary of Reinsurance Cover Notes
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009
1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.
All classes of business.
Motor, Workers Comp., Employers Liability, Third Party and CAR Liability.
$500k XS 500k(Annual aggregate limit: $6.0m)
$4.0m XS $1.0m(Annual aggregate limit: $12.0m)$2.5m XS $5.0m(Annual aggregate limit: $7.5m)
Motor XL
1. 100% placed: Lloyd’s (Chaucer)Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).
$7.5m XS $750k.1 Reinstatement
Catastrophe XL
1. Aggregate cession limit of $600m. Quake & Windstorm2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.3. 100% placed: Everest Re.
A)Property, Business Interruption, CAR (material damage).
B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.
A)Cession limit: $4m any one risk
B) Cession limit: $1m any one risk
90% Quota Share(non-obligatory)
CommentsBusiness coveredCover
Summary of Reinsurance Cover Notes
•Aggregate sums insured are $550 million
- within the cession limit.
•Note the event limit
- if no other claims, responds to 6 events
•Per risk limits split by line of business
- $4m per risk for property
- $1m per risk for other LOBs
•Non-obligatory QS
1m-
2m-
3m-
4m-
5m-
6m-
7m-
8m-
“Motor XL” “Catastrophe XL”
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009
1m-
2m-
3m-
4m-
5m-
6m-
7m-
8m-
“Motor XL” “Catastrophe XL”
$6.5m xs $1m
Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability
$500k xs $500k
All lines of business
90% QS, $1m per risk limit
Burglary, PA, Marine Cargo, Fidelity
$7.5m xs $750k + 1 Reinstatement
Fire, Homeowners, Motor, Business Interruption, CAR-material damage
90% QS, $4m per risk limit
Property, Business Interruption, CAR-material damage
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009
1m-
2m-
3m-
4m-
5m-
6m-
7m-
8m-
“Motor XL” “Catastrophe XL”
$6.5m xs $1m
Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability
$500k xs $500k
All lines of business
90% QS, $1m per risk limit
Burglary, PA, Marine Cargo, Fidelity
$7.5m xs $750k + 1 Reinstatement
Fire, Homeowners, Motor, Business Interruption, CAR-material damage
90% QS, $4m per risk limit
Property, Business Interruption, CAR-material damage
Interaction Between Contracts
Reading all the contract wordings reveals:
1. Use Quota Share before XL
2. Use Motor XL before Catastrophe XL
3. CAT XL
“Two Risk Warranty” for all covered lines of business. Two losses from one event are necessary before making a recovery. A Hurricane or Quake are not necessary.
4. Motor XL
Motor (own physical damage) is only covered for hurricane / quake
All other lines are covered on an “each & every loss” basis
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009
1m-
2m-
3m-
4m-
5m-
6m-
7m-
8m-
“Motor XL” “Catastrophe XL”
$6.5m xs $1m
Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability
$500k xs $500k
All lines of business
90% QS, $1m per risk limit
Burglary, PA, Marine Cargo, Fidelity
$7.5m xs $750k + 1 Reinstatement
Fire, Homeowners, Motor, Business Interruption, CAR-material damage
90% QS, $4m per risk limit
Property, Business Interruption, CAR-material damage
1
3
1
2
Two risk warranty
e.e.l. except motor damage
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009
Cover Business covered Comments
90% Quota Share
A)Cession limit: $4m any one risk
B) Cession limit: $1m any one risk
A)Property, Business Interruption, CAR (material damage).
B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.
1. Aggregate cession limit of $600m. Quake & Windstorm2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.3. 100% placed: Everest Re.
Catastrophe XL $7.5m XS $750k.1 Reinstatement
Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).
1. 100% placed: Lloyd’s (Chaucer)
Motor XL $500k XS 500k(Annual aggregate limit: $6.0m)
$4.0m XS $1.0m(Annual aggregate limit: $12.0m)$2.5m XS $5.0m(Annual aggregate limit: $7.5m)
All classes of business.
Motor, Workers Comp., Employers Liability, Third Party and CAR Liability.
1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.
Assume a catastrophe loss of $75million
Gross loss $75m
Quota Share recovery – 90% ($67.5m)
Cat XL recovery ($7.5m)
Net loss ZERO
to Motor XL does not cover property.
(assume 500 xs 500 is used up)
A single claim recovery can be split into 90% QS & 10% XL.
Within event limit of $90m.
The reinsured can determine what constitutes a risk under QS.
If justifiable, it can of adjust its recovery under the QS to take maximum advantage of the XL.
QS is NON-OBLIGATORY
1 3
Non-life Supervisory Assessment
Capital + Reinsurance cover > Loss scenario
Summarize the reinsurance cover notes
Catastrophe business:
1. Get aggregate exposures
2. Understand & assess PML assumptions
3. PML assumptions consistent with underwriting guidelines
4. Onsite walkthrough test underwriting
Non-catastrophe business:
1. Compare loss ratio to prior years and market experience
2. Ensure that improved loss ratios are consistent with stricter underwriting
3. Onsite walkthrough test underwriting
Reinsurance
CASE STUDY – ROUND 2
Contract Wordings
Read the wording:
•Identify areas where clarification is required
•What questions would you ask the insurer?
•What suggestions do you have to improve the wording?