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Reinsurance Counterparty Risk Life Ceding Company Perspective

Reinsurance Counterparty Risk Life Ceding Company Perspective. John L. Shaw, FSA, MAAA Consulting Actuary Milliman USA. Guiding Principles of Risk Management. Control Function Risk Engineering Maximize Risk-Adjusted Return. Control Function. Goals and Objectives Measurable Monitoring.

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Reinsurance Counterparty Risk Life Ceding Company Perspective

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  1. Reinsurance Counterparty RiskLife Ceding Company Perspective John L. Shaw, FSA, MAAA Consulting Actuary Milliman USA

  2. Guiding Principles of Risk Management • Control Function • Risk Engineering • Maximize Risk-Adjusted Return

  3. Control Function • Goals and Objectives • Measurable • Monitoring

  4. Risk Engineering • Techniques used to “trim” or reduce the risk • What is your “comfort” level with the risk? • Reinsurance • ALM • Hedging

  5. Our Focus is on Reinsurance • The ceding company is “trimming” its risk • Retention • Evaluating costs • Evaluating extreme risks

  6. Reinsurance Counterparty Risks • Ceding company still responsible for claim payment • Tend to assume reinsurance is collectible • Reinsurance company losses reported recently

  7. Ceding Company Risk Issues • Concentration of business with a reinsurer • Use of unauthorized reinsurers and letters of credit • Is the reinsurer’s risk diversified? • Program complete

  8. What can a ceding company do? • Perform Due Diligence • Treaty language to make sure the two parties are on the same risk • Perform cash-flow testing GROSS of reinsurance • Greater Diversification of Pools • Communicate with the Reinsurers

  9. Review Financial Statements Ratings Reviews Analyst Calls On-site visits and audits Insurance Press Review Cash Flow Testing Stress Tests (what-ifs) Retro Counterparty Risk Risk Concentration of Reinsurer Perform Due Diligence

  10. Treaty Language • Reflects the RISK! • Provisions • Financial Protection Provisions • Recapture Provisions • Due Diligence Requirements & Recapture • Reinsurer’s Insolvency • May want to write your own treaty

  11. Cash-flow Testing • Include Reinsurance • Scenarios where the claim isn’t paid

  12. Diversification of Pools • Place more Reinsurers on the Risk • Use Reinsurers that meet your criteria and objectives • Limit the Amount of Risk per Reinsurer

  13. Communicate • Executive Management Discussions • Pricing • New Markets • Risks of the Reinsurer • Reduction in Misunderstandings • May avoid arbitration

  14. Conclusion • Reinsurance Risk Management Goals can be set & measured • Tools that help you “trim” your Reinsurance Counterparty Risk

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