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KPMG ACTUARIAL SERVICES

KPMG ACTUARIAL SERVICES. Illustration of Typical Structured Reinsurance Products. ADVISORY / ACTUARIAL SERVICES. Bradley LeBlond Manager Actuarial Services Hartford, Connecticut September 11-12, 2006. Common Structured Reinsurance Products. Loss Portfolio Transfer / Adverse Development Cover

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KPMG ACTUARIAL SERVICES

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  1. KPMG ACTUARIAL SERVICES Illustration of Typical Structured Reinsurance Products ADVISORY / ACTUARIAL SERVICES Bradley LeBlondManager Actuarial ServicesHartford, ConnecticutSeptember 11-12, 2006

  2. Common Structured Reinsurance Products • Loss Portfolio Transfer / Adverse Development Cover • Aggregate Stop Loss Cover • Financial Quota Share • Blended Occurrence Cover

  3. Loss Portfolio Transfer / Adverse Development Cover • Typical Motivations • Transfer the liabilities of an exited line of business or business segment – full risk transfer. • Reduce the cost of adverse development protection on a block of liabilities. • Absorb the financial impact of adverse development in a purchase using the discount embedded in liabilities. • Increase statutory surplus, improve solvency ratios.

  4. Aggregate Stop Loss Cover • Typical Motivations • Utilize future investment income to: • Protect financial plan loss ratio at a low cost (attaching at expected loss ratio) • Reduce the upcoming year loss ratio (attaching below expected loss ratio) • Include hard to place coverage elements on a limited basis

  5. Financial Quota Share • Typical Motivation • Reduce underwriting leverage while retaining most risk and reward on a book of business. • Protect combined ratio by utilizing sliding scale ceding commissions.

  6. Blended Cover • Typical Motivation • Spread the financial impact of one event over multiple years with risk coverage for second and sometimes third event. • Lower the cost of catastrophe reinsurance by retaining risk in a measured way.

  7. LPT – Example Illustration • Goal: Absorb the financial impact of a $200 million reserve increase on an $800 million block of expected liabilities as part of an acquisition. • Actuarial Assumptions • Expected Undiscounted Liabilities = $1 billion • Lognormal Distribution with a 10% Coefficient of Variation • Payout Pattern • Risk Free Discount Rate = 7%

  8. LPT – Example Illustration • Possible Structure • Attachment Point = $800 million • Limit = $300 million • Premium = $93 million comprised of: • $85 million in Deposit Premium – placed into Funds Withheld Experience Account credited with 8% interest • $8 million in Margin paid to Reinsurer • Potential Benefit • $200 million – $93 million = $107 million

  9. LPT – Example IllustrationLoss Scenario: 1,000,000,000

  10. LPT Example IllustrationLoss Scenario: 1,100,000,000

  11. LPT – Example Illustration CDF of Reinsurer NPV Result Expected NPV Result: $3.1 million

  12. Aggregate Stop Loss – Example Illustration • Goal: Lower and protect loss ratio for upcoming year • Actuarial Assumptions • Expected Gross Loss Ratio = 75% • Lognormal Distribution with a 15% Coefficient of Variation • Payout Pattern • Risk Free Discount Rate = 7%

  13. Aggregate Stop Loss – Example Illustration • Possible Structure • Attachment Point = 65% Gross Loss Ratio • Limit = 25% of Gross Premium • Premium = 8% of Gross Premium • 7% Deposit Premium – placed into Funds Withheld Experience Account credited with 8% interest • 1% in Margin paid to Reinsurer • Additional Premium • 70% of Losses above a 75% Gross Loss Ratio • Maximum Additional Premium = 3% of Gross Premium

  14. Aggregate Stop Loss – Example IllustrationLoss Scenario: 75% All Figures Shown as % Gross Earned Premium

  15. Aggregate Stop Loss – Example IllustrationLoss Scenario: 90% All Figures Shown as % Gross Earned Premium

  16. Aggregate Stop Loss – Example Illustration

  17. Aggregate Stop Loss – Example Illustration CDF of Reinsurer NPV Result Expected NPV Result = 0.4%

  18. Presenter’s contact details Bradley LeBlond KPMG LLP 860-297-5090 bleblond@kpmg.com www.kpmg.com The information contained hereinis of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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