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A Buyer’s Perspective

Finite Reinsurance Discussion and Demonstration. A Buyer’s Perspective. Finite/Blended Risk Transfer – A Buyer’s Perspective Overview. Risk-Transfer Spectrum. Full Risk-transfer. Probability Weighted Economic Cost. Structured. Blended. Finite. Reduction in Economic Volatility.

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A Buyer’s Perspective

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  1. Finite Reinsurance Discussion and Demonstration A Buyer’s Perspective

  2. Finite/Blended Risk Transfer – A Buyer’s PerspectiveOverview Risk-Transfer Spectrum Full Risk-transfer Probability Weighted Economic Cost Structured Blended Finite Reduction in Economic Volatility

  3. Finite/Blended Risk Transfer – A Buyer’s PerspectiveOverview • Evolved because traditional reinsurance does not work for all levels of coverage, capacity, and pricing • More conducive to frequency/working layers than severity/excess layers • More effective with long-tailed exposures and favorable interest rate environment • Less risk-transfer involved than traditional reinsurance • Designed to meet financial objectives • Desire to smooth results over multiple years

  4. Finite/Blended Risk Transfer – A Buyer’s PerspectiveProgram Features • Customized risk transfer • Increased flexibility and innovation • Experience account • Funds transferred • Funds withheld • Upside/Downside • Additional premiums • Profit Commissions

  5. Finite/Blended Risk Transfer – A Buyer’s PerspectiveExamples of Programs • Aggregate Stop Loss Cover • Increase Confidence in Projected Earnings • Customize level/amount of risk transfer • LPT/Adverse Development Covers • Management of net leverage • Release capital from operations • Wall off results of continuing operations from discontinuing operations

  6. Finite/Blended Risk Transfer – A Buyer’s PerspectiveAggregate Stop Loss Example Plan Loss Ratio Used to Reduce Volatility Incremental Probability Coverage Loss Ratio

  7. Finite/Blended Risk Transfer – A Buyer’s PerspectiveAggregate Stop Loss Example • A company writes $500 million of casualty business at a planned 100% combined ratio. • The planned loss ratio is 65%, with CV of 22%. • The objective is to reduce the variability of the actual combined ratio, in the event of adverse experience. • Features of the proposed structure: • Attachment point of 65%, Limit of 85% • Net premium equal to 55% of ceded losses • Funds withheld at a 4.5% interest credit • Premiums grossed up for a 40% ceding commission

  8. Finite/Blended Risk Transfer – A Buyer’s PerspectiveAggregate Stop Loss Example • Proposed structure provides a nearly 4% reduction to combined ratio at plan +10%. Pre-Aggregate Post-Aggregate Combined Expected Cover Ceded Cover Ratio Underwriting PV Profit Income Scenario Combined Ratio Premium Losses Expenses Combined Ratio Benefit Benefit Commission (Loss) Plan+10% 110.0% 45,833 50,000 18,333 106.1% 3.9% 22,500 5,132 2,750 Plan +11% 111.0% 50,417 55,000 20,167 106.7% 4.3% 24,750 5,187 3,025 Plan +12% 112.0% 55,000 60,000 22,000 107.4% 4.6% 27,000 5,242 3,300 Plan +15% 115.0% 68,750 75,000 27,500 109.6% 5.4% 33,750 5,405 4,125 Plan + 20% 120.0% 91,667 100,000 36,667 113.5% 6.5% 45,000 5,228 5,500 91,667 45,000 Plan + 30% 130.0% 100,000 36,667 125.7% 4.3% 0 (9,370)

  9. Finite/Blended Risk Transfer – A Buyer’s PerspectiveSummary • Alternative Reinsurance • Designed to achieve various financial statement objectives • Complement traditional reinsurance programs • Reduces financial risks such as credit, investment and timing risks

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