INTODUCTION TO REINSURANCE

1. INTODUCTION TO REINSURANCE NOLAN ASCH CAS RATEMAKING SEMINAR INT-7

2. INSURANCE The insurer insures the individual or the corporation

3. REINSURANCE The REINSURER insures the insurance company

4. REINSURANCE PLACEMENT MECHANISMS DIRECT BROKER

5. INSURANCE vs. REINSURANCE • BOTH concerned with future contingencies • BOTH require underwriting skills (risk) • BOTH involve transfer of risk • BOTH require payment of premium • BOTH provide protection • BOTH subject to (some) regulation

6. REINSURANCE • Buyers assumed to be knowledgeable • Responds to actual loss • Provides indemnification only • Reimburses for payments already made • Usually Global

7. FUNCTIONS OF REINSURANCE • CAPACITY

8. CAPACITY • Single Risk (FAC WTC) • PORTFOLIO (TREATY)

9. CAPACITY MECHANISMS • Excess-of-Loss • Quota Share

10. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE

11. CATASTROPHE • QUOTA SHARE • EXCESS OF LOSS • SECURITIZATION

12. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION

13. STABILIZATION Reduction in Variance (swings)

14. STABILIZATION Extreme contractual case “STOP-LOSS” Aggregate Excess

15. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING

16. FINANCINGReducing Liabilities Ceding Commissions “Overrides”

17. FINANCING May increase PHS due to transaction

18. FINANCING Finite Reinsurance...... but ALL Reinsurance is Financial

19. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING • ENTER AND EXIT MARKETS

20. ENTER OR EXIT MARKETS Lessens risk as you learn With 100% Q/S you exit

21. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING • ENTER AND EXIT MARKETS • UTILIZE REINSURER EXPERTISE

22. USING REINSURER EXPERTISE Large or unusual claims Large or unusual risks Special relationships and/or knowledge

23. LIMITATIONS OF REINSURANCE • Will NOT make bad business profitable • Transaction Costs • Rating Agency Impacts (Gross/Net)

24. How Reinsurance Is Pricedin Practice Hypothetical Examples

25. NO PRICE REGULATION • (virtually)

26. CASE BY CASE

27. NEGOTIATION

28. FLEXIBILITY IN STRUCTUREContractual

29. EXCESS OF LOSS

30. LAYERING

31. $19.75 Mill xs $0.25 Mill (sounds like a wide layer)

32. 250 xs 250 500 xs 500 1M xs 1M 3M xs 2M 5M xs 5M 10M xs 10M Price A Price B Price C Price D Price E Price F TYPICAL LAYERING

33. High Frequency/ Low Severity Buffer layers ie 250 xs 250

34. LOW FREQUENCYHIGH SEVERITY Capacity Layers ie 10m xs 10m

35. CLIENT/BROKERNEGOTIATION Change or resubdivide the layering

36. Pricing for 500 xs 500 Later, request the 250xs 250 LAYER TRAPMANY PERMUTATIONS

37. at “last minute” Ask for 150 xs 100 --Requires more data LAYER TRAP

38. PRICING TRAPS • AGGREGATE ANNUAL DEDUCTIBLES

39. ASSUME A 10% RATE • Request a 1% AAD • Request a 2% AAD • Request an 8% AAD • NOW the risk/variance • becomes LARGE vs a 2% rate

40. INFORMATION FOR PRICING NO standards

41. WHAT THE REINSURER WANTS EVERYTHING

42. WHAT THE BROKER/CLIENTMAY WISH TO SUPPLY NOTHING

43. POSSIBLEOUTCOMES

44. GIGO Garbage-In Garbage-out

45. EL NIÑO

46. NINO Nothing-in Nothing-out

47. EXPERIENCE RATING Using losses of the risk to price the risk.

48. STANDARD All losses at half the attachment point & up

49. ACTUARIAL APPROACH DETRENDED LOSSES Varies with age of claim BEGINS to show ACTUAL CLAIMS as a sample outcome

50. EXPOSURE RATINGAttempt to rate Reinsurance based upon the TRUE underlying exposures Proxies for TRUE exposures: Limits Profiles = Subject Premium by policy limit Exposures by policy limit ( still not the TRUE exposure)