Upload
dattu-boga
View
217
Download
0
Embed Size (px)
DESCRIPTION
DATTU
Citation preview
Introduction to ReinsuranceIntroduction to Reinsurance
Presented by: Paul J. McGee, Mike Cass Presented by: Paul J. McGee, Mike Cass & Tom Pavelko& Tom Pavelko
The Reinsurance The Reinsurance MarketplaceMarketplace
WWhere to Go!!here to Go!!
Professional Reinsurance Companies
Primary Insurance Companies With Reinsurance Departments
Specialty Companies
Distribution SystemDistribution System
How To Get There!How To Get There!
The Direct MarketThe Direct Market
The Intermediary MarketThe Intermediary Market
Buyer’s Decision-Making Buyer’s Decision-Making ProcessProcess
The Whys of Choice!The Whys of Choice!
Advantages and Advantages and DisadvantagesDisadvantages
DefinitionsDefinitions
What Do These Words Mean?What Do These Words Mean?
The language of The language of ReinsuranceReinsurance
Reinsurance :Reinsurance :A form of insurance whereby one insurer A form of insurance whereby one insurer (the reinsurer) indemnifies another insurer (the reinsurer) indemnifies another insurer (the reinsured) for losses under insurance (the reinsured) for losses under insurance policies issued by the reinsured to the policies issued by the reinsured to the public.public.
Ceding CompanyCeding Company::A Primary Company, Direct Company, all A Primary Company, Direct Company, all known as the “Reinsured”known as the “Reinsured”
ReinsurerReinsurer: The Company to whom the risk : The Company to whom the risk is transferredis transferred
More of The Language of More of The Language of ReinsuranceReinsurance
RetrocessionRetrocession: Reinsurance of Reinsurance: Reinsurance of Reinsurance
Retrocessionaire and RetrocedentRetrocessionaire and Retrocedent::The parties to a RetrocessionThe parties to a Retrocession
TreatyTreaty: An automatic contract: An automatic contract
FacultativeFacultative: Risk reinsurance: Risk reinsurance
And,More of the Language And,More of the Language of Reinsuranceof Reinsurance
Pro Rata Reinsurance: A term describing a form of reinsurance whereby the reinsurer shares a pre-determined, proportional share of the premiums and losses of the reinsured.
Excess of Loss: A form of reinsurance whereby the insurer retains all losses up to a predetermined amount, and is then indemnified beyond that amount, to a predetermined amount, by reinsurers. Also known as “non-proportional”
Retention: The amount of risk not being reinsured
Function of Reinsurance Function of Reinsurance
A Need FulfilledA Need Fulfilled
FinancialFinancial Stabilize ResultsStabilize Results CapacityCapacity Protection From the Almost Protection From the Almost
ImmeasurableImmeasurable Other, More Obscure NeedsOther, More Obscure Needs
Method of ReinsuranceMethod of Reinsurance
Treaty - FacultativeTreaty - Facultative
Two DisciplinesTwo DisciplinesWithWith
Common GoalsCommon Goals
TREATYTREATY
A Block or Class of A Block or Class of BusinessBusiness
Usually ObligatoryUsually Obligatory Reinsurer Not Reinsurer Not
Involved In Risk Involved In Risk DecisionsDecisions
Long Term Long Term RelationshipRelationship
FACULTATIVEFACULTATIVE
One Risk At a One Risk At a TimeTime
Underwriter Can Underwriter Can Accept or RejectAccept or Reject
Risk UnderwritingRisk Underwriting Short Run Short Run
(Usually one Year)(Usually one Year)
Key DistinctionsKey Distinctions
Why Treaty?Why Treaty?When Facultative?When Facultative?
Treaty ExclusionsTreaty Exclusions
Protect TreatyProtect Treaty
CapacityCapacity
Forms of ReinsuranceForms of Reinsurance
Pro-RataPro-RataQuota Share and Surplus ShareQuota Share and Surplus Share
Excess of LossExcess of LossPer Risk, Per Occurrence, AggregatePer Risk, Per Occurrence, Aggregate
Pro Rata ReinsurancePro Rata Reinsurance
AA”Partnership” through SHARING”Partnership” through SHARING
Quota Share Quota Share
KEY TERMS AND CONDITIONSKEY TERMS AND CONDITIONS
Quota ShareQuota Share
75%Cession
25%Retention
$0$0 $1 M$1 M
Proper Identification of Proper Identification of Reinsured PartiesReinsured Parties
All Companies in a GroupAll Companies in a Group A Single CompanyA Single Company Only Named Companies in a GroupOnly Named Companies in a Group MGA-produced business for a MGA-produced business for a
CompanyCompany Includes Quota Share ReinsurersIncludes Quota Share Reinsurers
Interest and Liabilities Interest and Liabilities ContractContract
“ “ Such participation shall be several and not joint with Such participation shall be several and not joint with
the participation of other subscribing reinsurers and the participation of other subscribing reinsurers and
the Subscribing Reinsurer shall under no the Subscribing Reinsurer shall under no
circumstances participate in the interests, (if any) of circumstances participate in the interests, (if any) of
the other reinsurers in said instrument” the other reinsurers in said instrument”
ARTICLE 1 ARTICLE 1 Business Covered:Business Covered:
“A. The Company shall cede to the Reinsurer and the
Reinsurer shall accept from the Company ___% quota share
participation of the net retained insurance liability of the
Company on each risk insured under policies in force at ____,
Standard Time, _____, 20__ and new and renewal policies
becoming effective after (or on and after) said date, as
respects losses occurring after (or on and after) ___,
Standard Time _____, 20__, covering the Lines of Business
set forth below, except as excluded in the Exclusion Article,
subject to the limits set forth in the Limits of Cover Article.”
ARTICLE IIARTICLE IITerm and CancellationTerm and Cancellation
“A. This Agreement will apply to losses occurring
after (or on and after) ___ ___ Local Time _____, 20
__ as respects policies in force at said date and new
and renewal policies becoming effective after (or
on and after) said date and will be of unlimited
duration. This Agreement may be terminated as of
_____ any , of any year by either the Company or
the Reinsurer giving not less than __ days prior
written notice by Certified Mail to the other party.”
ARTICLE IVARTICLE IVExclusionsExclusions
The following risks and kinds of insurance are The following risks and kinds of insurance are excluded from coverage under this Agreement, and excluded from coverage under this Agreement, and no loss or losses thereon shall be recoverable no loss or losses thereon shall be recoverable hereunder:hereunder:
1. All lines of Business not specifically covered 1. All lines of Business not specifically covered hereunderhereunder
2. Reinsurance assumed, but not to exclude local 2. Reinsurance assumed, but not to exclude local Agency reinsurance Agency reinsurance
3. Pools, Associations and Syndicates business as 3. Pools, Associations and Syndicates business as per POOLS, ASSOCIATIONS AND SYNDICATES per POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE attachedEXCLUSION CLAUSE attached
4. Flood and Earthquake when written as such.4. Flood and Earthquake when written as such.5. Hail on growing or standing crops or timber.5. Hail on growing or standing crops or timber.6. Nuclear Incident …..6. Nuclear Incident …..7. War Risks ….. Etc. 7. War Risks ….. Etc.
ARTICLE IXARTICLE IXReinsurance PremiumReinsurance Premium
A. The Company shall pay promptly to the Reinsurer A. The Company shall pay promptly to the Reinsurer
_____% of the Company’s unearned premium on _____% of the Company’s unearned premium on
its net retained insurance liability in force at its net retained insurance liability in force at
_____, Standard Time, _____, 20__ on the business _____, Standard Time, _____, 20__ on the business
covered hereunder.covered hereunder.
ARTICLE XVARTICLE XVAccess to RecordsAccess to Records
“ “The Company shall place at the disposal of the The Company shall place at the disposal of the
Reinsurer at all reasonable times, and the Reinsurer at all reasonable times, and the
Reinsurer shall have the right to inspect, through Reinsurer shall have the right to inspect, through
its authorized representatives, all books, records its authorized representatives, all books, records
and papers of the Company in connection with and papers of the Company in connection with
the reinsurance hereunder or the subject matter the reinsurance hereunder or the subject matter
thereof.”thereof.”
ARTICLE XXIIIARTICLE XXIIIArbitrationArbitration
““A. Should an irreconcilable difference of opinion A. Should an irreconcilable difference of opinion
arise between the parties to this Agreement, arise between the parties to this Agreement,
whether before or after termination, as to the whether before or after termination, as to the
interpretation of this Agreement or transaction interpretation of this Agreement or transaction
with respect to this Agreement, such difference with respect to this Agreement, such difference
will be submitted to arbitration upon the written will be submitted to arbitration upon the written
request of one of the parties. One arbiter to be request of one of the parties. One arbiter to be
chosen by the Company and one by the Reinsurer. chosen by the Company and one by the Reinsurer.
An umpire will be chosen by the two arbiters An umpire will be chosen by the two arbiters
before they enter into arbitration…… etc.”before they enter into arbitration…… etc.”
ARTICLE XXIVARTICLE XXIVIntermediary ClauseIntermediary Clause
“…Reinsurance Intermediaries, … New York, New York, 10038 is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (……..) relating thereto will be transmitted to the Company or the Reinsurer through the office of…..Reinsurance Intermediaries. Payment by the Company to the Intermediary will be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary will be deemed only to constitute payment to the company to the extent that such payments are actually received by the Company.”
Pricing of Prorata Pricing of Prorata ReinsuranceReinsurance
Commission = PriceCommission = Price
Alternatives – Flat, Profit and Alternatives – Flat, Profit and Sliding ScaleSliding Scale
ARTICLE XIARTICLE XICommissionCommission
A. The Reinsurer shall make a commission allowance of % to the Company on the premiums ceded under this Agreement. On all return premiums the Company shall return to the Reinsurer the commission allowance of %.
B. The commission allowance which the reinsurer makes to the Company on the business transacted under this Agreement includes provision for all taxes, assessments and any other expenses whatsoever, except loss adjustment expenses.
ARTICLE XIIARTICLE XIIContingent CommissionContingent Commission
A. The reinsurer shall make a contingent commission allowance of % to the Company on the net profits accruing to the Reinsurer under this Agreement.
B. The net profits under this Agreement shall be calculated in accordance with the following formula:
INCOME
1. Premiums earned ….
OUTGO
2. Losses Incurred …
3. Commission allowance…
etc.
Profit CommissionProfit Commission
ExampleExample::(a) Ceded Premiums(a) Ceded Premiums $1,000,000$1,000,000(b) Commissions (25%)(b) Commissions (25%) 250,000 250,000(c) Incurred Losses(c) Incurred Losses 400,000 400,000(d) Reinsurer Margin(d) Reinsurer Margin 50,000 50,000
(e) (e) Net ProfitNet Profit $ 300,000 $ 300,000
(f) Profit Commission (25%) 75,000(f) Profit Commission (25%) 75,000(g) Original Commission (b) 250,000(g) Original Commission (b) 250,000(h) (h) Total CommissionTotal Commission 325,000 325,000 being 32.5%being 32.5% ($325,000/$1,000,000) ($325,000/$1,000,000)
FormulaFormula: : 25% Ceding Commission subject to: 25% Ceding Commission subject to: 25% Profit Commission after: Incurred 25% Profit Commission after: Incurred
Losses, Losses, Expenses and a 5% Reinsurer Margin Expenses and a 5% Reinsurer Margin
Sliding Scale Commission Sliding Scale Commission ArrangementArrangement
Provisional Commission 30% at a 65% Loss Ratio
Sliding Upwards ½% for Each 1% Improvement in
Loss Ratio, To Maximum Commission of 40%
Sliding Downwards 1% for Each 1% Deterioration
in Loss Ratio, To Minimum Commission of 25%
Sliding Scale (cont.)Sliding Scale (cont.)
Therefore;
If Loss Ratio develops at 70%, Company returns 5% points of commission to Reinsurer. Commission becomes 25% (1:1)
If Loss Ratio develops at 60%, Reinsurer pays Company an additional 2.5% points of Commission. Commission becomes 32.5%. (1/2:1)
Surplus Share AgreementSurplus Share Agreement
Company selects amount of liability retained on
each risk.
Company transfers “surplus” amount in multiples
of net, known as “lines”.
Retention and amount ceded subject to treaty
terms.
Surplus ShareSurplus Share
500K
1M
2M
4M
Limit
0
Policy 1 - $4M
Policy 2 - $2M
Policy 3 - $1M
$2M Ceded
to Surplus Share(50%)
NET($2M)
$1.5M Ceded
to Surplus Share(75%)
NET($500K)
$0Ceded to
Surplus Share
NET($1M)
Assume 3 Line Surplus, Min. Net 500K, $2M Limit to Treaty
Quota Quota ShareShare
Percentage ceded same on every risk
Obligatory
Applies to all business subject to Treaty
Percentage ceded varies at risk level
Obligatory and non-obligatory
Used mainly for larger
risks
Surplus Surplus ShareShare
EXCESS OF LOSSEXCESS OF LOSS
“Building Blocks”“Building Blocks”
THIRD LAYERTHIRD LAYER
FIRST LAYERFIRST LAYER
RETENTIONRETENTION
FOURTH LAYERFOURTH LAYER
SECOND LAYERSECOND LAYER
EXCESS OF LOSSEXCESS OF LOSS
CategoriesCategories
Per RiskPer Risk
Per OccurrencePer Occurrence
Aggregate (aka Stop Loss and Loss Ratio)Aggregate (aka Stop Loss and Loss Ratio)
An Example of Excess of An Example of Excess of Loss ReinsuranceLoss Reinsurance
TREATY LIMIT: TREATY LIMIT: $150,000 $150,000
EXCESS OF: EXCESS OF: $ 50,000 (Retention)$ 50,000 (Retention)
Loss A: Loss A: $45,000 $45,000 Loss B: Loss B: $100,000 $100,000
ReinsurerReinsurer
Pays: Pays: -o- -o- $50,000 $50,000
Pricing Excess of LossPricing Excess of Loss
A rate applied to a subject-premium base.A rate applied to a subject-premium base.
Normally, Deposit and Minimum premiums Normally, Deposit and Minimum premiums apply.apply.
FlatFlat
Formula a/k/a “Burning Cost”Formula a/k/a “Burning Cost”
Per Risk Pricing Per Risk Pricing AlternativesAlternatives
Formula Method for Excess Formula Method for Excess of Loss Ratingof Loss Rating
EXAMPLE:EXAMPLE:
Provisional Rate: 9.00%Provisional Rate: 9.00%
Minimum Rate: 6.00%Minimum Rate: 6.00%
Maximum Rate: 12.00% Maximum Rate: 12.00%
Loading 100/75 (1.333%)Loading 100/75 (1.333%)
ResultResult YearYear Premium Premium XS Losses XS Losses Loss CostLoss Cost LoadingLoading
RateRate2000 $10,000,000 $750,000 7.5% 1.333 2000 $10,000,000 $750,000 7.5% 1.333
10.0010.00
2001 $11,000,000 $550,000 5.0% 1.333 2001 $11,000,000 $550,000 5.0% 1.333 6.666.66
2002 2002 $12,000,000$12,000,000 $1,020,000$1,020,000 8.5% 1.333 8.5% 1.333 11.3311.33
Total $33,000,000 $2,320,000 7.03% 1.333 Total $33,000,000 $2,320,000 7.03% 1.333 9.37 9.37
FINAL RATE X PREMIUM = REINSURANCE PREMIUMFINAL RATE X PREMIUM = REINSURANCE PREMIUM
2000 10.00 $10,000,000 $1,000,0002000 10.00 $10,000,000 $1,000,0002001 6.66 $11,000,000 $ 732,6002001 6.66 $11,000,000 $ 732,6002002 11.33 $12,000,000 $1,359,6002002 11.33 $12,000,000 $1,359,600
CAN BE A ONE YR. PLAN OR IN 3-5 YEAR BLOCK CAN BE A ONE YR. PLAN OR IN 3-5 YEAR BLOCK
Important Points to be Important Points to be ConsideredConsidered
Treatment of Loss Adjustment Treatment of Loss Adjustment ExpensesExpenses
Excess Policy Limits (XPL)Excess Policy Limits (XPL)
Extra Contractual Obligations (ECO)Extra Contractual Obligations (ECO)
Catastrophe ReinsuranceCatastrophe Reinsurance
Large Limit and RetentionLarge Limit and Retention
Type of “event” limited by hours clauseType of “event” limited by hours clause
Per Occurrence coverage rather than Per RiskPer Occurrence coverage rather than Per Risk
The Reinstatement issueThe Reinstatement issue
Catastrophe ReinsuranceCatastrophe Reinsurance
Pricing ConceptsPricing Concepts
Pay-BackPay-BackRate-On-LineRate-On-Line
A Treaty Reinsurance A Treaty Reinsurance ProgramProgramPropertyProperty
Net RetentionPer Occurrence
$4M xs $2M1st Layer Cat
Excess of Loss
$4M xs $6M2nd Layer CatExcess of Loss
$0
$2M
$6M
$10M
Per Risk Property Catastrophe
$2M
500k Net
$400K excess of $100K
1st Excess of Loss
Per Risk SURPLUS SHARE
3 Lines$1,500,000 Limit
$0
$100k
75% Quota Share
(Net $25K max.)
$500K
RISK SIZE
Balance Sheet at Dec. 31, Balance Sheet at Dec. 31, Before ReinsuranceBefore Reinsurance
ASSETSASSETSCash and other assetsCash and other assets
$25,000,000$25,000,000Total AssetsTotal Assets $25,000,000$25,000,000
LIABILITIESLIABILITIESUnearned PremiumsUnearned Premiums
$10,000,000$10,000,000Loss and Expense ReserveLoss and Expense Reserve
$$10,000,00010,000,000
Total LiabilitiesTotal Liabilities $20,000,000$20,000,000
Policyholders SurplusPolicyholders Surplus $ 5,000,000$ 5,000,000
Balance Sheet on Jan. 1, Balance Sheet on Jan. 1, After Reinsurance After Reinsurance ((Assume Company has arranged for a 75% Assume Company has arranged for a 75% quota share treaty on in-force business, quota share treaty on in-force business,
receiving a 30% ceding commission.)receiving a 30% ceding commission.)
ASSETSASSETSCash and Other Assets Cash and Other Assets $19,750,000$19,750,000Total AssetsTotal Assets $19,750,000$19,750,000(75% of $10,000,000 less 30% comm. Paid from assets)(75% of $10,000,000 less 30% comm. Paid from assets)
LIABILITIESLIABILITIESUnearned PremiumsUnearned Premiums $ 2,500,000$ 2,500,000Loss and Expense ReserveLoss and Expense Reserve $10,000,000$10,000,000Total LiabilitiesTotal Liabilities $12,500,000 $12,500,000 Policyholders SurplusPolicyholders Surplus $ 7,250,000$ 7,250,000
(Increase represents 75% of $10,000,000 less 30% (Increase represents 75% of $10,000,000 less 30% commission)commission)
Thank You Thank You
For Your Attention!For Your Attention!