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CARE Presentation – Ceding Company Considerations

CARE Presentation – Ceding Company Considerations. David Flitman, FCAS, MAAA, ASA Chief Actuary June 1, 2006. Reinsurer Risk Management. Use and Appropriateness of PMLS Three methods of tracking exposure Limits

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CARE Presentation – Ceding Company Considerations

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  1. CARE Presentation – Ceding Company Considerations David Flitman, FCAS, MAAA, ASA Chief Actuary June 1, 2006

  2. Reinsurer Risk Management • Use and Appropriateness of PMLS • Three methods of tracking exposure • Limits • Per occurrence PML – variants (Scenario Based vs. probabilistic) Realistic Disaster Scenarios (Lloyds) • Aggregate Loss Modeling (Simulation, Closed Form, distribution dependent (Poisson vs Negative Binomial) • Implication of using each • Limits appear overly conservative and tend to shift capacity toward higher rate on line business • Per Occurrence PMLs – tend to create bridging problems in between quantifying order of events (first event vs. second event pmls) • How to translate to overall risk metrics for example AM Best’s company weathering two events vs. S&P aggregate 250 return period. • Aggregate appears most attractive yet additional assumptions about frequency variability need to be better incorporated. • Serial dependency. SSTs and other basin wide effects

  3. Reinsurer Risk Management • Model Changes • The modeling companies have instituted massive changes in the last release • RMS 75% Personal Lines and 120% commercial Lines where 45% is frequency • AIR has similar frequency increases also increasing Demand Surge caps to 40% from 30% • Correct Model Usage • Are the dials all correctly selected. • Demand Surge • Storm Surge • Secondary Uncertainty • Fire Following • ALAE Loads • Miscellaneous loads – Exposure, Vulnerability, etc… • Quantifying Unmodeled Risk • Models work on binary correlation - need to translate risk into event set schemes • Completeness of Portfolio • Adding proxy portfolios for unmodeled business. • Other correlated business – WC Cat, A&H Cat, Crop/Hail

  4. Retrocession Capacity • Market Changes: • Changes in the Traditional Market • M&A and rating downgrades • Product Changes • Less Comprehensive e.g. exclusion of Marine/Energy • More Zonal Focused – Primary Companies towers of coverage • Price Advantages • With the significant shifts in the market can reinsurerers arbitrage their risks? • Recent losses illustrate that we don’t model credit properly. • Capital Markets

  5. Markets Changes • Capital Markets • Cat Bonds • Side car facilities • ILWs • Greater volume/More trading opportunities • More Basis Risk • Shifting away from UNL covers to: • ILW triggers • Parametric triggers • Model Losses

  6. Credit Default Modeling • Reinsurance (Retrocession) Traditionally modeled via a credit default ratio associated with their rating: • Fails to identify significant correlation. • PML analysis tends to show complete recoveries at all high return periods. • Estimate Correlation via Proxy Portfolios like ILWs or even replicats/sub portfolios of the cedant. • Pattern could be a lot steeper except for counter trend toward more securitization.

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