1 / 35

‘Reinsurance Bad Debt’ By Peter Matthews & Paul Murray CAS Reserving Seminar September 18th 2000

‘Reinsurance Bad Debt’ By Peter Matthews & Paul Murray CAS Reserving Seminar September 18th 2000. Reinsurance Bad Debt. Reserve for the risk of non-realisation of the full value of current and projected reinsurance recoveries. Security Risks. Slow payments Disputes Liquidations

collison
Download Presentation

‘Reinsurance Bad Debt’ By Peter Matthews & Paul Murray CAS Reserving Seminar September 18th 2000

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. ‘Reinsurance Bad Debt’ By Peter Matthews & Paul Murray CAS Reserving Seminar September 18th 2000

  2. ReinsuranceBad Debt Reserve for the risk of non-realisation of the full value of current and projected reinsurance recoveries

  3. Security Risks • Slow payments • Disputes • Liquidations • Run-offs • Inadequate commutation receipts • Non-payment by intermediaries

  4. USA Insolvencies v Combined Loss Ratios Source: A.M.Best-Insolvencies / Swiss Re - Loss Ratios

  5. Historical USA Insolvency Rate Source: A.M.Best

  6. Broad Brush Approach 1 Bad Debt = % of Future R/I Recoveries + Ledger Unpaid Balance Write-Off

  7. Broad Brush Approach 2 • Assume X% future annual default rate (say 1%) • Discount future R/I recoveries at X% p.a. (PV1) • Bad Debt =Undiscounted Future R/I Recoveries -PV1 + Ledger Unpaid Balance Write-Off

  8. Easy to calculate and explain No need to understand R/I program Not reinsurer specific Difficult to justify No use of R/I structure No use of agency security ratings (AM Best, S&P, Moody’s) Cannot measure or change influence of any one individual reinsurer Cannot react to individual large loss scenarios Cannot be used for commutation purposes Broad Brush ApproachAdvantagesDisadvantages

  9. A More Detailed Approach • Understand outwards programs • Estimate ultimate outwards claims recoveries • Identify the reinsurers behind each outwards contract • Allocate security risk factor to each reinsurer • Sum over all reinsurers and contracts

  10. Whole Account XL General XL Marine Casualty QS Property QS Aviation Property XL Casualty XL Casualty Property Structure of Outwards Reinsurance Program

  11. Casualty Account - 1997 Evented Losses 1.00 xs 8.50 Cover Remaining 8.1 1.00 xs 7.50 1.00 xs 6.50 1.00 xs 6.50 6.4 Loss 1 1.00 xs 5.50 1.00 xs 5.50 4.9 1.50 xs 4.00 1.50 xs 4.00 Loss 2 3.6 1.50 xs 2.50 1.50 xs 2.50 Loss 3 US Dollars 2.5 (Millions) Loss 4 1.50 xs 1.00 1.6 Loss 5 0.9 0.75 xs 0.25 0.4 Loss 6 0.1 Loss 7 0.0 0.0 1.0 2.0 3.0 4.0 5.0 Reinstatements

  12. Loss Types • Projected Events – Hurricanes, Earthquakes, Air Disasters • Aggregate Losses – Asbestos by Insured • Evented Losses not individually projected • Attritional Losses – Quota Share

  13. Projected events Aggregate losses Other evented losses Attritional losses Review results - Apply Class Incurred to Ultimate Factors and present to R/I Program - Apply Class Incurred to Ultimate Factors and present to Proportional R/I Program Estimate R/I Recoveries }Present to R/I Program

  14. Most Recent R/I Years • Review earlier years experience • Apply expected recovery loss ratios • Discuss and review results with underwriters

  15. Calculate R/I Reserve • For each R/I contract calculate: Reserve = (O/S + IBNR) less Future Reinstatement Premiums equals R/I Reserve

  16. Basic Summary of Agency Rating Categories

  17. Allocate Security Levels

  18. Casualty Account - All Years Reinsurer Security 20.4 16.4 12.8 9.6 6.8 US Dollars (Millions) 4.4 2.4 1.2 0.4 0.0 1988 1990 1992 1994 1996 1998 Disasterous Very Weak Weak Marginal Good Strong Very Strong Extremely Strong Unknown

  19. Sample Default Rates (%) Source: Standard & Poor's

  20. Sample Class Bad Debt Default %s

  21. Calculate Bad Debt • Select the bad debt factor for each reinsurer appropriate to each class of business. • Apply the bad debt factor for each respective reinsurer to the reinsurance reserves within each contract. • Sum over all contracts, all programs and all years.

  22. Casualty Account - All Years Estimated Recoveries and Bad Debt 20.4 Cover Remaining 16.4 12.8 Paid 9.6 6.8 US Dollars Good Debt (Millions) 4.4 2.4 1.2 0.4 0.0 1988 1990 1992 1994 1996 1998 Bad Debt

  23. Sensitivity of Bad Debt to Rating Selection

  24. Closer to reality Better understanding of R/I program Auditable Allocation by reinsurer Principal to principal set-off Better feedback to Underwriters and Management Better actuarial advice w.r.t. processing and purchasing of reinsurance Observe aging of bad debt Time and effort Detailed ApproachAdvantagesDisadvantages

  25. Future Developments • Use in DFA models • Test a wide variety of scenarios and stochastic parameters • Interact with underwriting cycle and catastrophe expectations • Optimisation and pricing of future reinsurance programs

  26. Conclusion “Winning is not about doing one thing 100% better, but doing 100 things 1% better” Dennis Conner

More Related