CAS 2003 Seminar on Reinsurance Pricing Techniques - Casualty Lines

1. CAS 2003 Seminar on ReinsurancePricing Techniques - Casualty Lines Given by: Peter W. Wildman June 2003

2. CAS 2003 Seminar on Reinsurance Pitfalls in Pricing Reinsurance Coverage • Aggregate Excess of Loss • Loss Portfolio Transfers (Includes Adverse Development Covers)

3. CAS 2003 Seminar on Reinsurance General Issues to Consider (Quantitative and Qualitative) • Motivation of Buyer/Seller • Risk Reward/Tradeoff Desired • Mix of Business • Payout Patterns (correlation to Ultimate Loss Picks) • Parameter Risk/Process Risk • Data Issues • Terms & Conditions of Reinsurance Agreement • Claims Handling

4. CAS 2003 Seminar on Reinsurance Case Study #1 Prospective Accident Year Stop Loss Stabilization of results and reduction of reinsurance costs.

5. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Company Information

6. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss • Provide reinsurance protection at a low cost • Stabilize results • Reduce/manage total reinsurance costs • Protect earnings and surplus • Maintain expense ratio • Maintain or improve AM Best rating • Incorporate sufficient risk transfer (timing & u/w risk) for accounting approval Objectives - Motivations

7. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Stop Loss Terms Type: Aggregate Excess of Loss Term: Single Accident Year Subject Business: Whole Account SNEP: $500 million Attachment: 60.0% (U/W neutral) Limit: $100 million (20% of SNEP)

8. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Stop Loss Terms Minimum & Deposit: 6.0% of SNEP (est. $30 million) Additional Premium: 57.5% of UNL xs of 70.0% L/R Maximum Premium: (est. $58.75 million) Reinsurer Margin: 5% of All Premium

9. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Stop Loss Terms • All other reinsurance purchased inures to the benefit of this cover. • Funds Withheld - F/W. • F/W balance is credited a contractual rate of 5.0% effective annually. • Profit Commission of 100%.

10. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Accounting Results 1)Expected - Company meets plan loss ratio SNEP = $500M Subject Losses = $330M (66% L/R) Calculations: Attachment = 60.0% x $500M= 300.0M Limit = 20% x 500M= 100.0M Ceded Losses = 330M - 300M= 30.0M Net Ceded Premium = 6.0%x500M= 300.0M Underwriting Income = 30M - 30M= 0.0M Potential PV Cost = 5.0% x 30M= 1.5M

11. CAS 2003 Seminar on Reinsurance Scenario #1Prospective Accident Year Stop Loss Expected Payout (All Extra Losses Prorated) Reinsurer’s Results

12. CAS 2003 Seminar on Reinsurance Scenario #2Prospective Accident Year Stop Loss Accelerated Payout Pattern Reinsurer’s Results

13. CAS 2003 Seminar on Reinsurance Scenario #3 Prospective Accident Year Stop Loss Expected Payout (All Extra Losses to Line 1) Reinsurer’s Results

14. CAS 2003 Seminar on Reinsurance Scenario #4 Prospective Accident Year Stop Loss Expected Payout (All Extra Losses to Line 2) Reinsurer’s Results

15. CAS 2003 Seminar on Reinsurance Prospective Accident Year Stop Loss (000) Line 1Line 2Total Premium 250,000 250,000 500,000 Expected Losses 155,000 175,000 330,000 Expected Loss Ratio 62.0% 70.0% 66.0% Payout Pattern (Expected) Year Line 1Line 2Total 1 42.3% 10.0% 25.2%  5 89.2% 50.0% 68.5%  10 97.0% 75.0% 85.4%  20 100.0% 100.0% 100.0%

16. CAS 2003 Seminar on Reinsurance

17. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Data Issues - Reinsurer’s Analysis • Client Assessment - Published Rating • Senior Management to communicate objectives • Client Data Requirements • Historic subject base premiums ((5-10 years) larger if available) • Indication of any discontinued lines and corresponding premiums • Historical Rate Change, Rate Mods, by line, state, etc., Schedule Credits/Debits • Loss triangulations for past 5-10 U/W years, including the following:

18. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Reinsurer’s Analysis • Client Data Requirements (continued) • Incurred or outstanding indemnity; LAE, Combined • Paid indemnity, Claim Count Triangulations? (Depends on Line); Paid LAE • Policy limit(s) shift over time • Historical Reinsurance Retentions • Draft Placement Slip • Treatment of unique exposures

19. CAS 2003 Seminar on Reinsurance Case Study #1Prospective Accident Year Stop Loss Reinsurer’s Analysis • Supplementary Data • Industry Losses • Industry Payout Patterns (What is the Tail?) • Other client information • Press releases

20. CAS 2003 Seminar on Reinsurance Case Study #2 Loss Portfolio Transfers Type: Adverse Development Cover Subject Business: Whole Account Subject Losses: $500M of carried reserves Premium: To be negotiated Attachment: $250M (= $500M - $250M) Limit: $400M Reporting: Quarterly 60 days in arrears Settlements: Quarterly 75 days in arrears

21. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Pricing Considerations • Probability of Cover being used (Contingent, attachment relative to held reserves) • Who wants or is a natural buyer of Old Years’ Reserves? (lots of Sellers) • Insurance is easy business to enter, very difficult to exit. • Run-off Costs (How much Management time re: Actuarial, Claims, Financial, Ceded Reinsurance, etc.) • Motivations for Loss Portfolio Transfer

22. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Motivations of Buyer/Seller • Sale of Company • Exit particular line of business/state of operation • Economic Risk Transfer • Financial Management

23. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Data Analysis • Due Diligence (Internal or Third Party) • House Purchase Analogy (Who cares more about potential defects, buyer or home inspector?) • Ask any and all questions! • Any segments not reviewed

24. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Data Issues - Reinsurer’s Analysis • Client Assessment - Published Rating • Client Data Requirements • Independent Actuarial Review • Internal Actuarial Projections • Confidence Intervals • Incurred Loss Triangles (Gross and Net) • Paid Loss Triangles (Gross and Net)

25. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Data Issues - Reinsurer’s Analysis • Client Data Requirements (continued) • Historical pricing of business • Historical inuring reinsurances • Claims audits • Reserving policies • Changes to claims handling

26. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Data Issues - Reinsurer’s Analysis • Supplementary Data • Industry Losses • Industry Payout Patterns • Peer company information • Press releases

27. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Claims Handling • Claims Audit - Access to Claim Files - Where are the Claim Files - Number of Open Claims • Adequacy of Held Reserves • Reconcile Claims Handling Philosophies

28. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Claims Handling • Format of Claim Data (i.e, Electronic or Hard Copies) • Complete Claims History • Number of Years of History • Transferring Data from Buyer to Seller • Systems Compatibility/Reporting Responsibility

29. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Claims Handling/Run Off Costs • Staffing Requirement • Intellectual Capital • Additional TPA Costs • Less attention paid to than Actuarial/Financial evaluation

30. CAS 2003 Seminar on Reinsurance Loss Portfolio Transfers Terms and Conditions of Reinsurance Agreement • Expected Results based upon actuarial projected probabilities • Upside to downside relationship • Return on Equity (Capital allocation) LOC usage • Underwriting constraints • Relationship implications - historical/prospective • Subject Loss Limitations (Asbestos/EIL)