INTRODUCTION TO REINSURANCE

1. INTRODUCTION TO REINSURANCE NOLAN ASCH CAS RATEMAKING SEMINAR MARCH 8-9, 2007 INT-4

2. INSURANCE The insurer insures the individual or the corporation

3. REINSURANCE The REINSURER insures the insurance company

4. REINSURANCE PLACEMENT MECHANISMS • BROKER DIRECT

5. INSURANCE vs. REINSURANCE • BOTH concerned with future contingencies • BOTH require underwriting skills (risk) • BOTH involve transfer of risk • BOTH require payment of premium • BOTH provide protection • BOTH subject to (some) regulation

6. REINSURANCE • Buyers assumed to be knowledgeable • Responds to actual loss • Provides indemnification only • Reimburses for payments already made • Usually Global

7. FUNCTIONS OF REINSURANCE • CAPACITY

8. CAPACITY • Single Risk (Fac - Sears Tower) • PORTFOLIO (Treaty)

9. CAPACITY MECHANISMS • Excess-of-Loss • Quota Share

10. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE

11. CATASTROPHE • QUOTA SHARE • EXCESS OF LOSS • SECURITIZATION

12. CATASTROPHE • They are Cat Models not magic • Was AIR client #4 in 1987 • User tips

13. CATASTROPHE • Outputs are probabilistic • The “1 in 100 year event” • Is really a scenario with a 1% chance of occurring in any calendar year. • Look at the range of loss outcomes.

14. CATASTROPHEGIGO Garbage-In Garbage-out Cat Models NEED VERY detailed and accurate data input

15. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION

16. STABILIZATION Reduction in Variance (swings)

17. STABILIZATION Extreme contractual case “STOP-LOSS” Aggregate Excess

18. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING

19. FINANCINGReducing Liabilities Ceding Commissions “Overrides”

20. FINANCING May increase PHS due to transaction

21. FINANCING Finite Reinsurance...... Pre-Elliott Spitzer ALL Reinsurance is Financial Post Elliott Spitzer I don’t think so….

22. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING • ENTER AND EXIT MARKETS

23. ENTER OR EXIT MARKETS Lessens risk as you learn With 100% Q/S you exit

24. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING • ENTER AND EXIT MARKETS • UTILIZE REINSURER EXPERTISE

25. USING REINSURER EXPERTISE Large or unusual claims Large or unusual risks Special relationships and/or knowledge

26. LIMITATIONS OF REINSURANCE • Will NOT make bad business profitable • Transaction Costs • Rating Agency Impacts (Gross/Net)

27. How Reinsurance Is Pricedin Practice Hypothetical Examples

28. NO PRICE REGULATION • (virtually)

29. CASE BY CASE

30. NEGOTIATION

31. FLEXIBILITY IN STRUCTUREContractual

32. EXCESS OF LOSS LAYERING

33. $19.75 Mill xs $0.25 Mill (sounds like a wide layer)

34. TYPICAL LAYERING 10M xs 10M Price F 5M xs 5M Price E 3M xs 2M Price D Price C 1M xs 1M Price B Price A 500 xs 500 250 xs 250

35. High Frequency/ Low Severity Buffer layers ie 250 xs 250 Price A 250 xs 250

36. Low Frequency/ High Severity 10M xs 10M Price F Capacity Layers i.e. 10m xs 10m

37. CLIENT/BROKERNEGOTIATION Change or re-subdivide the layering

38. Pricing for 500 xs 500 Later, request the 250 xs 250 LAYER TRAPMANY PERMUTATIONS

39. at “last minute” Ask for 150 xs 100 --Requires more data LAYER TRAP

40. PRICING TRAPS • AGGREGATE ANNUAL DEDUCTIBLES

41. ASSUME A 10% RATE • Request a 1% AAD • Request a 2% AAD • Request an 8% AAD • NOW the risk/variance • becomes LARGE vs a 2% rate

42. INFORMATION FOR PRICING NO standards

43. WHAT THE REINSURER WANTS EVERYTHING

44. WHAT THE BROKER/CLIENTMAY WISH TO SUPPLY NOTHING

45. POSSIBLEOUTCOMES

46. GIGO Garbage-In Garbage-out

47. NINO Nothing-in Nothing-out

48. EXPERIENCE RATING Using losses of the risk to price the risk.

49. HISTORIC STANDARD All losses at half the attachment point & up

50. ACTUARIAL APPROACH DETRENDED LOSSES Varies with age of claim BEGINS to show ACTUAL CLAIMS as a sample outcome