1 / 17

Risk Measures

Risk Measures. CARE Meeting Hamilton, Bermuda June 6-7, 2005. Paul Kneuer, FCAS MAAA, Holborn Corporation Susan Patschak, FCAS MAAA, Endurance Specialty. Risk Measures. Why do different reinsurers often make different decisions when it comes to pricing the same risk?

blake-holloway
Download Presentation

Risk Measures

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Risk Measures CARE Meeting Hamilton, Bermuda June 6-7, 2005 Paul Kneuer, FCAS MAAA, Holborn Corporation Susan Patschak, FCAS MAAA, Endurance Specialty

  2. Risk Measures • Why do different reinsurers often make different decisions when it comes to pricing the same risk? • Different reinsurers have different measures of profitability. 2

  3. Risk Measures • Possible measures • Contract Profit/Contract Premium • Contract Profit/Contract Standard Deviation • Contract Profit/Contribution to Portfolio Std Dev • Contract Profit/Contract TCE or TVar • Contract Profit/Contract PML • Contract Profit/Contribution to Portfolio PML 3

  4. Risk Measures The following four contracts will be used to compare different risk measures: • Net Account Quota Share • Umbrella Cessions Facility • Catastrophe XOL • Catastrophe XOL in a Peak Zone 4

  5. Risk Measures Risk Measures used for the first two contracts • Risk Measure: Contract Profit/Contract Premium • Used by companies constrained by premium-to-surplus ratios • Analogous measures: Combined ratio, Operating ratio • Risk Measure: Contract Profit/Contract Standard Deviation • Used by companies that are constrained by operating volatility, and that cannot give contracts credit for diversification — due to correlation or large contract size. • Analogous Measures: Rate on-line, Value at Risk 5

  6. Risk Measures Net Account Quota Share • Terms • $50Mn expected ceded premium • $1Mn occurrence cap • Expected profit of $2Mn, after sliding scale commission. (Remember them?) • Standard Deviation of returns is $4Mn 6

  7. Risk Measures Net Account Quota Share • Risk Measure: Contract Profit/Contract Premium $2Mn/$50Mn = 4% Conclusion: Well below average. Should decline. • Risk Measure: Contract Profit/Contract Std Dev $2Mn/$4Mn = 50% Conclusion: Well above average. Should write. 7

  8. Risk Measures Umbrella Cessions Facility • Terms • $5Mn expected ceded premium • $10Mn per policy limit • Expected profit of $2Mn, after PC • Standard Deviation of returns is $20Mn 8

  9. Risk Measures Umbrella Cessions Facility • Risk Measure: Contract Profit/Contract Premium $2Mn/$5Mn = 40% Conclusion: Well above average. Should accept. • Risk Measure: Contract Profit/Contract Std Dev $2Mn/$20Mn = 10% Conclusion: Well below average. Should decline. 9

  10. Risk Measures Risk Measures used for the next two contracts • Risk Measure: Contract profit/Consumption of allocated capital = return on allocated capital (ROAC), or = risk adjusted return on capital (RAROC) • Risk Measure: Contract Profit/Contract ROL • Risk Measure: Contract Profit/Contract CR • Company A: uses RM 1 & 3 • Company B: uses RM 2 & 3 10

  11. Risk Measures Catastrophe XOL • Terms • Ceded premium = $390,000 • Limit = $8.2 million • Losses and Expenses = $318,000 • Profit = $ 72,000 • Allocated capital = $101,000 11

  12. Risk Measures Catastrophe XOL • ROAC = 71.3% • ROL = 4.7% • Combined Ratio = 81.5% • What decision does Company A make versus Company B? Why? 12

  13. Risk Measures Catastrophe XOL in Peak Zone • Terms • Ceded premium = $335,000 • Limit = $1.675 million • Losses and Expenses = $235,000 • Profit = $100,000 • Allocated capital = $1 million 13

  14. Risk Measures Catastrophe XOL in Peak Zone (e.g. Japan, Florida, UK) • ROAC = 10% • ROL = 20% • Combined Ratio = 70% • What decision does Company A make versus Company B? Why? 14

  15. Risk Measures What else needs consideration? • Standalone? • Perils? • Claims department vs. Independent claims adjusters? • Resolution quality of exposure data? • ITV undervaluation? • Client relationship to producers? 15

  16. Risk Measures Catastrophe Quota Share • Attritional loss ratio • Catastrophe load factor • Client operations/structure • Data quality both exposure and experience 16

  17. Risk Measures ObservationsUnderwriters’ Preferences by Risk Measure • Profit/Allocated Capital • Contracts withoutinuring protections • Excess • High layers • Catastrophe Coverage • Profit/SD • Net placements • Pro-Rata • Low layers • Working Coverage 17

More Related