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Learn about A.M. Best’s Rating Philosophy, Financial Evaluation of Catastrophe Risk, and Catastrophe Management Strategies for insurers facing natural disasters, Y2K, tobacco liability, asbestos, and more. Explore key evaluation components and risk management solutions.
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Capital Considerations of Insurers with Catastrophe Exposure October 22, 1998 Jeanne H. Dunleavy Senior Vice President Risk Management
Catastrophes • Natural Disasters • Y2K • Tobacco Liability • Asbestos & Environmental • Man-made Catastrophes
Discussion Outline • Best’s Rating Philosophy • Catastrophe Exposure Trends • Financial & Strategic Evaluation • Catastrophe Management Strategies
A.M. Best’s Rating Evaluation —Key Components Financial Strength Operating Performance Market Profile Best’s Rating
Best’s Rating Philosophy —Catastrophe Risk • Extensive PML analysis • Cat modeling standardization issues • Secure insurers must survive reasonable PMLs • Gross PML leverage • < 100% for superior insurers • Concern over opportunistic players in cat-prone areas
Compiling Information — Best’s Supplemental Rating Questionnaire • Gross & net PML • 50-, 100-, 250- & 500-year return periods • Catastrophe models • Modeler & version • Key assumptions • Liquidity profile • Historical experience
Gross Catastrophe Leverage By Severity Source: A.M. Best Co.
Net Catastrophe Leverage By Severity Source: A.M. Best Co.
Catastrophe Reinsurance Dependence Source: A.M. Best Co.
A.M. Best’s Financial Evaluation — Catastrophe Risk • Capitalization • Liquidity • Profitability • Financial Flexibility
Cat Risk Financial Evaluation — Capitalization • Best’s Capital Adequacy Model (BCAR) • Net after tax PML - higher of: • Hurricane 100-year return period • Earthquake 250-year return period
Cat Risk Financial Evaluation — Liquidity • Liquid assets • Liquidity stress test • Pro forma 120 basis point rise in interest rates • Bond securities with unrealized losses
Cat Risk Financial Evaluation — Profitability • Earnings volatility/earnings drag • Frequency as well as severity • Costly reinsurance coverage
Cat Risk Financial Evaluation —Flexibility • Reinsurance utilization • Access to capital markets • Debt capacity • Parental resources
Capitalization Sensitivity AnalysisGross & Net PML Leverage Liquidity Liquid Asset ProfileCash Flow Stress Test Profitability Earnings Volatility & Drag Financial Flexibility Access to CapitalReinsurance UsageDebt CapacityParental Support Catastrophe Risk — Financial Evaluation
Cash FlowInvestor ViewBest’s Rating Risk AppetiteSurplus / SolvencyEarnings Volatility Risk Retention Strategies Exposure Caps Exposure Elimination Loss Mitigation Reinsure/Risk Financing Regulatory Constraints Parental Commitment Strategic FitGoals & Objectives Corrective Timelines Catastrophe Risk — Strategic Evaluation
Emerging Catastrophe Management Strategies • Risk retention/containment • Risk mitigation • Risk transfer • Risk financing
Issues Excessive Florida cat exposure Difficult regulatory environment Solution Create separately capitalized Florida subsidiary to segregate exposures and demonstrate need for increased rates Risk Containment — Example: Allstate
Nationwide Increased cat losses Farmers Substantial CA EQ exposure Linking CA law for HO & EQ Tighten U/W criteria Prem discounts for enforced bldg codes State Farm Limited/non-renewal business Nationwide Farmers Implemented new mini-policy pre-CEA State Farm Promote rating bldg codes’ effectiveness Risk Mitigation — Examples: Nationwide, Farmers, State Farm Issues Solutions
Issues Farmers Substantial CA EQ exposure Linking CA law for HO & EQ Solutions Farmers Implemented new mini-policy pre-CEA Risk Mitigation — Example: Farmers
Issues High cost of reinsurance Access to capital markets/add. capital Solutions Non-affiliated, special purpose reinsurer Issued reinsurance contract/cat-linked bonds tied to East Coast hurricane losses ($500 mil XS $1 bil layer) Risk Transfer — Example: USAA
Issues Large commercial property cat exposure Augment traditional program with cost-effective alternative Access capacity in capital markets & avoid market risk of issuing securities after major event Solutions Catastrophe Put Option Pre-negotiated sale of $50 mil convertible preferred securities to Centre Re if losses exceed RLI’s cat reinsurance protection Risk Transfer — Example: RLI/Centre Re - Contingent Equity
Reinsurance Catastrophe linked bonds USAA, Swiss ReWinterthur Debt Contingent surplus notes Arkwright, Nationwide Standby line of credit Nationwide, State Farm, Florida JUA Equity Catastrophe equity puts RLI/Centre Re Investment Catastrophe options Travelers Cat Management Strategies — Non-Traditional
Summary • Elevated losses • Catastrophe models • Favorable trends • Best’s Ratings
Effectively managing catastrophe risk is one of the major challenges for insurance companies A.M. Best is focused on preventing and detecting insurer insolvency E.W. Blanch plays a vital role in providing sound advice and innovative risk transfer and risk financing products
Catastrophe Risk Management • Using Technology • As A Pricing Tool • To Understand Layering, Loss Costs, and Probabilities • To Create Practical Solutions • Integrate with Overall Financial Performance
E.W. Blanch Mission Statement To make an identifiable and measurable contribution to the success of our clients through innovative concepts and unparalleled service.
How We Deliver Solutions EWB Holdings, Inc. Swire Blanch (International) EWB Co. (N. America) Relationship Executives - Linda Johnson Scott Fest Post-loss Mitigation Services Risk Transfer Services Analytical Services Primary Servcices
EWB Holdings Financial Highlights: As of 12/97 REVENUES: $167M (53% Increase From 1996) GROWTH: Over 25% Compounded (Last 5 Years) EPS: $2.03 ASSETS: $920M OWNERSHIP: Publicly owned (NYSE = EWB) Approximately 25% Employee Ownership MARKETCAPITALIZATION: $446M
Global Network Over 1,100 employees worldwide
Sample Client List Business Solutions: Fireman’s Fund Insurance Company Orion Capital Companies Wausau Insurance Companies Catastrophe Management: American Family Mutual Insurance Co. Gryphon Insurance Group Hartford Insurance Company Insurers / Reinsurers Acceptance Insurance Company Allstate Insurance Group Alfa Insurance Corp. Amica Mutual Insurance CIGNA Insurance Company CNA Group Frontier Insurance Company Guidant Insurance Group Liberty Mutual Insurance Company Orion Insurance Reliance Insurance Company Renaissance Reinsurance, Ltd. St. Paul Cos. State Farm Insurance Company W. R. Berkley Corporation Governmental: California Earthquake Authority (CEA) Florida Hurricane Catastrophe Fund (FHCF) Florida Windstorm Underwriting Association (FWUA) Illinois Department of Insurance (Pine Top) Texas Wind Pool
Insurance Services Reinsurance Distribution Customer Risk Management Business Solutions What Specific Services Are Available