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Reinsurance

Session 3

Reinsurance
CATASTROPHE (RE)INSURANCE

2 Examples from Caribbean Region: Monoline Property Insurer Multi-line Non-life insurer

Reinsurance
CATASTROPHE (RE)INSURANCE
1. Aggregate Exposures Total sums insured by line of business & location. Must be plausibly severe Preferably modeled by a reputable modeling agency The real issue for supervisors! 2. Assess likely loss scenario

3. Does capital and reinsurance cover the loss scenario?

Reinsurance

Catastrophe Reinsurance

A Caribbean Insurer Ltd. Aggregate Property Exposures Y.E. March 31, 2008. US$ (net of fac) 24,333,470 82,534,118 513,572,642 655,535,718 1,648,750 1,645,250 1,177,224,951 10,298,520 21,762,939 29,952,188 91,490,811 36,008,407 22,141,125 6,779,389 70,676,148 6,158,620 325,000 160,551,133 847,027,808

A Caribbean Insurer Ltd. Abridged Balance Sheet Y.E. March 31, 2007.

Anguilla Antigua Bahamas Barbados Belize BVI Cayman Curacao Dominica Grenada Jamaica St. Lucia St. Kitts St. Nevis St. Maarten St. Vincent Trinidad & Tobago Turks & Caicos USVI

US$

Fixed Assets Other Assets Total Assets

1,976,554 63,194,128 65,170,682

Insurance Liabilities Other Liabilities Total Liabilities

20,507,368 11,271,860 31,779,228

Net Asset Value

33,391,454

Share Capital Retained Profits

29,644,330 3,747,124

Aggregate Property Exposures

3,759,666,987

Shareholders Equity

33,391,454

US$3.8 billion risk backed by US$33.4 million assets

Catastrophe Reinsurance

Aggregate Exposures

Probable Maximum Loss

The Critical Business Process


1.
2. 3.

Assess severity of probable loss


Inputs include sophisticated models & managements judgment Control underwriting based on PML - RI

PML Reinsurance Cover Capital Zero

Catastrophe Reinsurance
Aggregate Exposures

Analyze into cat-exposed portfolios (US$):

Homeowner / Residential

Commercial & Construction 589,584,682 290,795,370

Total 1,149,109,249 845,057,308

Cayman Is USVI

559,524,567 554,261,938

Other
Total

1,708,468,339

1,708,468,339

2,822,254,844

880,380,052

3,702,634,896

Apply PML assumptions to these numbers

Catastrophe Reinsurance Aggregate Exposures to Probable Maximum Loss

Aggregate Exposures $1.7B $1.2B


Business Assumptions

1. Severity of Loss Scenario for year


Modeled Scenario:1yr. in 50; 1yr. In 100 etc.

2. Underwriting Selection Criteria


Windstorm
Distance from shoreline

Quake
Location, Location, Location

Elevation above sea level Retrofitting of buildings Topography Underwriting Discipline Retrofitting of buildings

$845M Other Caribbean Is. PMLs


Further Reading: 1. A Probable Maximum Loss Study of Critical Infrastructure in Three Caribbean Island States

Cayman

Cayman

Other

USVI

USVI

Caribbean Disaster Mitigation Project http://www.oas.org/cdmp/document/pml/pml.htm# executive 2. Natural Catastrophe Probable Maximum Loss Woo. British Actuarial Journal 2002.

Non-life Reinsurance Types of Contract A reminder

Non-Proportional

Proportional

Excess of Loss
Specified limit e.g. $65m. Specified deductible
e.g. $5m.

Quota share
Traditionally, shares premiums and claims in the same proportions Specified line of business coverage BUT: Aggregate cession limits Event limits Risk limits

Specified line of business coverage Specified number of reinstatements.

Reinsurance Program for Y.E. March 31, 2008


75% Quota Share Max. single risk limit US$4m of which 75% is ceded & 25% retained. All territories excl. Cayman & USVI. 52% placed. (That is 39% r/i cover) Event limit is 15% of aggregate exposure, or 100% of PML. Cession limits US$4m per risk, but aggregate cession limit varies by territory. 100% placed. 1 Reinstatement. 100% placed. 1 Reinstatement. 100% placed. 1 Reinstatement.

Catastrophe Reinsurance

Commercial Excess of Loss US$30million XS US$5million Residential Excess of Loss US$65million XS US$5million Umbrella Property Catastrophe US$110million XS
1.US$70m Residential, 2. US$35M Commercial, and 3. QS Event & Cession limits

All territories.

All territories.

All territories.

Property Per Risk US$350k XS US$150k US$500k XS US$500k US$4million XS US$1million US$2.5million XS US$5million (Kicks in after all other reinsurances) (Reinsured decides what constitutes a risk)

All territories All territories All territories Cayman Is only

All layers 100% placed. 3 Reinstatements. 2 Reinstatements. 1 Reinstatement. 1 Reinstatement.

Reinsurance Program for Y.E. March 31, 2008


75% Quota Share Max. single risk limit US$4m of which 75% is ceded & 25% retained. All territories excl. Cayman & USVI. 52% placed. (That is 39% insurance cover) Event limit is 15% of aggregate exposure, or 100% of PML. Cession limits US$4m per risk, but aggregate limit varies by territory. 100% placed. 1 Reinstatement. 100% placed. 1 Reinstatement.

Catastrophe Reinsurance

Commercial Excess of Loss US$30million XS US$5million Aggregate limits per

All territories.

cover note:
All territories.

Residential Excess of Loss US$65million XS US$5million Southern Caribbean:

Northern Caribbean: $312m $183m

Compare to aggregate exposure (slide 5) Umbrella Property Catastrophe All territories. US$110million XS of $1.7billion for non Cayman & USVI risk.
The underwriting has overshot the cession limits, so reinsurance cover is averaged down in proportion (say by Property rd). Per Risk 1/3 US$350k XS US$150k All territories
US$500k XS US$500k US$4million XS US$1million US$2.5million XS US$5million (Kicks in after all other reinsurances) (Reinsured decides what constitutes one risk) All territories All territories Cayman Is only
1.US$70m Residential, 2. US$35M Commercial, and 3. QS Event & Cession limits

Reinsured decides what constitutes one risk. 100% placed.


1 Reinstatement. That is, they can decide whether to aggregate it if its part of a catastrophe, or not. All layers 100% placed. 3 Reinstatements. 2 Reinstatements. 1 Reinstatement. 1 Reinstatement.

Reinsurance Program for Y.E. March 31, 2008


US$180m

Catastrophe Reinsurance

Umbrella Property Catastrophe $110m XS: 1. 2. 3. $70m Residential $35m Commercial QS Event Limits (15% Agg. Exp.) & 1 Reinstatement

US$70m Residential XL, $65m xs $5m & 1 Reinstatement

$4m per risk limit is reduced:


15% Max. Agg. Exp. Zone B $27.45m Commercial XL, $30m xs $5m & 1 Reinstatement Per risk XL $7.5m XS $150k Other RI to be used first.

US$35m

1. Contract is only 59% placed. 2. Averaged down by a factor of 3.

US$5m

Quota Share. Max of US$0.79m per risk

Reinsurance Program for Y.E. March 31, 2008


US$180m

Catastrophe Reinsurance

Loss Scenario Assume 3 hurricanes causing losses to residential book of business: 2 losses of $75m & 1 loss of $35m to the insurer.
Gross incurred 1st Hurricane 2nd Hurricane 3rd Hurricane QS Recovery XL Recovery Risk XL Recovery Net Incurred

Umbrella Property Catastrophe $110m XS: 1. 2. 3. $70m Residential $35m Commercial QS Event Limits (15% Agg. Exp.) & 1 Reinstatement

$75m $75m $30m

$0.79m $0.79m

$70m $70m $7.35m

$4.21m $4.21m $22.65m $31.07m

US$70m Residential XL, $65m xs $5m & 1 Reinstatement Compare to Net Asset Value US$35m

$33.4m

Commercial XL, $30m xs $5m


& 1 Reinstatement Per risk XL $7.5m XS $150k US$5m Other RI to be used first. Quota Share. Max of US$0.79m per risk

Net premium income for 2007 was US$22million, which improves the above outcome.

Non-Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008


US$180m

Umbrella Property Catastrophe $110m XS: 1. 2. 3. $70m Residential $35m Commercial QS Event Limits (15% Agg. Exp.) & 1 Reinstatement

US$70m Residential XL, $65m xs $5m & 1 Reinstatement

Net premium income for 2007 was US$22million. Doesnt help that much when you add in the attritional non-cat losses!

US$35m

Commercial XL, $30m xs $5m


& 1 Reinstatement Per risk XL $7.5m XS $150k US$5m Other RI to be used first. Quota Share. Max of US$0.79m per risk

Non-Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008


US$180m

Umbrella Property Catastrophe $110m XS: 1. 2. 3. $70m Residential $35m Commercial QS Event Limits (15% Agg. Exp.) & 1 Reinstatement

Catastrophe losses have appropriate RI cover, but limited to two events Beware of attritional claims not covered by RI

US$70m Residential XL, $65m xs $5m & 1 Reinstatement

Dont forget about net premium income

US$35m

Commercial XL, $30m xs $5m


& 1 Reinstatement Per risk XL $7.5m XS $150k US$5m Other RI to be used first. Quota Share. Max of US$0.79m per risk

Non-Catastrophe Reinsurance

The example was a monoline property insurer. Diversified insurer reinsurance is usually designed to respond to a variety of business lines. PMLs & Loss Scenarios for all lines must be covered by reinsurance and capital.

Multi-line Reinsurance Another Insurer Y.E. 31 March 2009


Summary of Reinsurance Cover Notes
Cover
90% Quota Share (non-obligatory) A)Cession limit: $4m any one risk

Business covered
A)Property, Business Interruption, CAR (material damage). B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.

Comments
1. Aggregate cession limit of $600m. Quake & Windstorm 2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure. 3. 100% placed: Everest Re.

B) Cession limit: $1m any one risk

Catastrophe XL

$7.5m XS $750k. 1 Reinstatement

Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).

1. 100% placed: Lloyds (Chaucer)

Motor XL

$500k XS 500k (Annual aggregate limit: $6.0m) $4.0m XS $1.0m (Annual aggregate limit: $12.0m) $2.5m XS $5.0m (Annual aggregate limit: $7.5m)

All classes of business.

1. 100% placed: 40% Lloyds (Canopius), 60% Odyssey Re.

Motor, Workers Comp., Employers Liability, Third Party and CAR Liability.

Multi-line Reinsurance Another Insurer Y.E. 31 March 2009


Summary of Reinsurance Cover Notes
Cover
90% Quota Share (non-obligatory) A)Cession limit: $4m any one risk

Business covered
A)Property, Business Interruption, CAR (material damage). B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.

Comments
1. Aggregate cession limit of $600m. Quake & Windstorm 2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure. 3. 100% placed: Everest Re.

B) Cession limit: $1m any one risk

Aggregate sums insured are $550 million - within the cession limit.
Catastrophe XL $7.5m XS $750k. 1 Note Reinstatement the

event limit

- if no other claims, responds to 6 events


Motor XL

Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).

1. 100% placed: Lloyds (Chaucer)

Per risk limits split by line of business


$500k XS 500k All classes of business. - $4m per risk for property (Annual aggregate limit: $6.0m) $4.0m XS $1.0m - $1m per risk for other (Annual aggregate limit: $12.0m) $2.5m XS $5.0m Non-obligatory QS (Annual aggregate limit: $7.5m) Motor, Workers Comp., LOBs Employers Liability, Third Party and CAR Liability. 1. 100% placed: 40% Lloyds (Canopius), 60% Odyssey Re.

Multi-line Reinsurance Another Insurer Y.E. 31 March 2009

Motor XL
8m-

Catastrophe XL

7m-

6m-

5m-

4m-

3m-

2m-

1m-

Multi-line Reinsurance Another Insurer Y.E. 31 March 2009

Motor XL
8m-

Catastrophe XL
$7.5m xs $750k + 1 Reinstatement

7m-

$6.5m xs $1m Motor, Workers Comp, Employers Liab, TPL, CAR Liability $500k xs $500k

Fire, Homeowners, Motor, Business Interruption, CAR-material damage

6m-

5m-

4m-

All lines of business

3m-

90% QS, $4m per risk limit


2m-

1m-

Property, Business Interruption, CAR-material damage 90% QS, $1m per risk limit Burglary, PA, Marine Cargo, Fidelity

Multi-line Reinsurance Another Insurer Y.E. 31 March 2009

Motor XL Interaction Between Contracts


8m-

Catastrophe XL
$7.5m xs $750k + 1 Reinstatement Fire, Homeowners, Motor, Business Interruption, CAR-material damage

Reading all the contract wordings reveals:


7m-

1. Use Quota Share before XL 2. Use


Motor, Workers Comp, Employers Liab, TPL, Motor XL before CAR Liability $500k xs $500k

$6.5m xs $1m

6m-

Catastrophe XL

5m-

3. CAT XL
Two Risk Warranty for all covered lines of All lines of business business. Two losses from one event are necessary before making a recovery. A Hurricane or Quake are not necessary. 90% QS, $4m per risk limit

4m-

3m-

2m-

4. Motor XL
Motor (own physical damage) is only 90% QS, $1mhurricane per risk limit / quake
Burglary, All PA, Marine otherCargo, linesFidelity are covered

1m-

Property, Business Interruption, CAR-material damage covered for

on an each & every loss

basis

Multi-line Reinsurance Another Insurer Y.E. 31 March 2009

Motor XL
8m-

Catastrophe XL
e.e.l. except motor damage

$7.5m xs $750k + 1 Reinstatement Fire, Homeowners, Motor, Business Interruption, CAR-material damage Two risk warranty

7m-

$6.5m xs $1m Motor, Workers Comp, Employers Liab, TPL, CAR Liability $500k xs $500k All lines of business

6m-

5m-

4m-

3m-

1
90% QS, $4m per risk limit Property, Business Interruption, CAR-material damage 90% QS, $1m per risk limit Burglary, PA, Marine Cargo, Fidelity

2m-

1m-

Multi-line Reinsurance Within event limit of $90m. Another Insurer Y.E. 31 March 2009
The reinsured can determine what constitutes a risk under QS.
Cover 90% Quota Share A)Cession limit: $4m any one risk

it canComments of adjust its recovery under the QS to take A)Property, Business 1. Aggregate cession of limit of $600m. maximum advantage the XL.
Interruption, CAR (material damage).

Business covered If justifiable,

B) Cession limit: $1m any one risk

Assume a catastrophe loss of $75million Gross loss


Catastrophe XL $7.5m XS $750k. 1 Reinstatement

Quake & Windstorm 2. Event limit for Quake and QS is NON-OBLIGATORY Windstorm $90m or 15% of in force B) Burglary, Personal aggregate exposure. Accident, Marine Cargo, 3. 100% placed: Everest Re. Fidelity, Personal effects.

$75m ($67.5m) 1. 100% placed: Lloyds (Chaucer) ($7.5m)


Comprehensive, Motor,

Quota Share recovery 90% Fire, Homeowners Cat XL recovery Business Interruption, Net loss

CAR (material damage). ZERO

Motor XL

1 $500k XS 500k (Annual aggregate limit: $6.0m)

to

Motor XL does not cover property.

All classes of business. 1. 100% placed: 40% Lloyds (Canopius), 60% Odyssey Re. (assume 500 xs 500 is used up) Employers Liability, Third Party and CAR Liability.

$4.0m XS $1.0m A single claim (Annual aggregate limit: $12.0m) 10% XL. $2.5m XS $5.0m (Annual aggregate limit: $7.5m)

recovery can be split into 90% QS & Motor, Workers Comp.,

Non-life Supervisory Assessment

Capital + Reinsurance cover > Loss scenario

Summarize the reinsurance cover notes

Catastrophe business:
1. Get aggregate exposures 2. Understand & assess PML assumptions

Non-catastrophe business:
1. Compare loss ratio to prior years and market experience 2. Ensure that improved loss ratios are consistent with stricter underwriting 3. Onsite walkthrough test underwriting

3. PML assumptions consistent with underwriting guidelines


4. Onsite walkthrough test underwriting

Reinsurance
CASE STUDY ROUND 2

Contract Wordings
Read the wording: Identify areas where clarification is required What questions would you ask the insurer? What suggestions do you have to improve the wording?