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.

2. Assess likely loss scenario

• Must be plausibly severe

• Preferably modeled by a reputable modeling agency

3. Does capital and reinsurance cover the loss scenario?

• The real issue for supervisors!

Reinsurance – Catastrophe Reinsurance

A Caribbean Insurer Ltd. Aggregate Property Exposures – Y.E. March 31,

2008.

A Caribbean Insurer Ltd.

Abridged Balance Sheet – Y.E. March 31, 2007.

3,759,666,987Aggregate Property Exposures

847,027,808USVI160,551,133Turks & Caicos

325,000Trinidad & Tobago6,158,620St. Vincent

70,676,148St. Maarten6,779,389St. Nevis

22,141,125St. Kitts36,008,407St. Lucia91,490,811Jamaica29,952,188Grenada21,762,939Dominica10,298,520Curacao

1,177,224,951Cayman1,645,250BVI1,648,750Belize

655,535,718Barbados513,572,642Bahamas82,534,118Antigua24,333,470Anguilla

US$ (net of fac)

33,391,454Shareholders Equity

3,747,124Retained Profits29,644,330Share Capital

33,391,454Net Asset Value

31,779,228Total Liabilities11,271,860Other Liabilities20,507,368Insurance Liabilities

65,170,682Total Assets63,194,128Other Assets1,976,554Fixed Assets

US$

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

Catastrophe Reinsurance

Aggregate Exposures Probable Maximum Loss

PML – Reinsurance Cover – Capital ≥ Zero

The Critical Business Process

1. Assess severity of probable loss

2. Inputs include sophisticated models & management’s judgment

3. Control underwriting based on PML - RI

Catastrophe ReinsuranceAggregate Exposures

Analyze into cat-exposed portfolios (US$):

3,702,634,896880,380,0522,822,254,844Total

1,708,468,3391,708,468,339Other

845,057,308290,795,370554,261,938USVI

1,149,109,249589,584,682559,524,567Cayman Is

Total

Commercial & Construction

Homeowner /Residential

Apply PML assumptions to these numbers

Catastrophe ReinsuranceAggregate Exposures to Probable Maximum Loss

Cay

man

US

VI

Oth

er C

arib

bea

n I

s.

Cay

man

US

VI

Oth

er

$1.7B

$845M

$1.2B

Aggregate Exposures

PMLs

Business

Assumptions

Underwriting

Discipline

Further Reading:

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

Caribbean Disaster Mitigation Projecthttp://www.oas.org/cdmp/document/pml/pml.htm#executive

2. Natural Catastrophe Probable Maximum Loss

Woo. British Actuarial Journal 2002.

1. Severity of Loss Scenario for year

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

2. Underwriting Selection Criteria

Windstorm

Distance from shoreline

Elevation above sea level

Topography

Retrofitting of buildings

Quake

Location, Location, Location

Retrofitting of buildings

Non-life ReinsuranceTypes of Contract – A reminder

Non-Proportional

Excess of Loss•Specified limit e.g. $65m.

•Specified deductible e.g. $5m.

•Specified line of business coverage•Specified number of reinstatements.

Proportional

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

Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

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

•All territories•All territories•All territories•Cayman Is only

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)

•100% placed.•1 Reinstatement.

All territories.Umbrella Property CatastropheUS$110million XS

1.US$70m Residential,2. US$35M Commercial, and3. QS Event & Cession limits

•100% placed.•1 Reinstatement.

All territories.Residential Excess of LossUS$65million XS US$5million

•100% placed.•1 Reinstatement.

All territories.Commercial Excess of LossUS$30million XS US$5million

•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.

All territories excl. Cayman & USVI.

75% Quota ShareMax. single risk limit US$4m of which 75% is ceded & 25% retained.

Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

75% Quota ShareMax. 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.

Commercial Excess of LossUS$30million XS US$5million

All territories. • 100% placed.•1 Reinstatement.

Residential Excess of LossUS$65million XS US$5million

All territories. • 100% placed.•1 Reinstatement.

Umbrella Property CatastropheUS$110million XS

1.US$70m Residential,2. US$35M Commercial, and3. QS Event & Cession limits

All territories. • 100% placed.•1 Reinstatement.

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 one

risk)

•All territories•All territories•All territories•Cayman Is only

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

•Aggregate limits per cover note:

Northern Caribbean: $312m

Southern Caribbean: $183m

•Compare to aggregate exposure (slide 5) 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 1/3rd).

Reinsured decides what constitutes one risk.

That is, they can decide whether to aggregate it if its part of a catastrophe, or not.

Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

US$5m

US$35m

US$70m

Residential XL, $65m xs $5m

& 1 Reinstatement

Commercial XL, $30m xs $5m

& 1 Reinstatement

Quota Share. Max of US$0.79m per risk

Umbrella Property Catastrophe $110m XS:

1. $70m Residential

2. $35m Commercial

3. QS Event Limits (15% Agg. Exp.)

& 1 Reinstatement

15% Max. Agg. Exp. Zone B $27.45m

US$180m

Per risk XL $7.5m XS $150k

Other RI to be used first.

$4m per risk limit is reduced:

1. Contract is only 59% placed.

2. Averaged down by a factor of 3.

Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

US$5m

US$35m

US$70m

Residential XL, $65m xs $5m

& 1 Reinstatement

Commercial XL, $30m xs $5m

& 1 Reinstatement

Quota Share. Max of US$0.79m per risk

Umbrella Property Catastrophe $110m XS:

1. $70m Residential

2. $35m Commercial

3. QS Event Limits (15% Agg. Exp.)

& 1 Reinstatement

US$180m

Per risk XL $7.5m XS $150k

Other RI to be used first.

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

QS Recovery

XL Recovery

Risk XL Recovery

Net Incurred

1st Hurricane

$75m $0.79m $70m $4.21m

2nd Hurricane

$75m $0.79m $70m $4.21m

3rd Hurricane

$30m $7.35m $22.65m

$31.07m

Compare to Net Asset Value $33.4m

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

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

US$5m

US$35m

US$70m

Residential XL, $65m xs $5m

& 1 Reinstatement

Commercial XL, $30m xs $5m

& 1 Reinstatement

Quota Share. Max of US$0.79m per risk

Umbrella Property Catastrophe $110m XS:

1. $70m Residential

2. $35m Commercial

3. QS Event Limits (15% Agg. Exp.)

& 1 Reinstatement

US$180m

Per risk XL $7.5m XS $150k

Other RI to be used first.

Net premium income for 2007 was US$22million. Doesn’t help that much when you add in the attritional non-cat losses!

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

US$5m

US$35m

US$70m

Residential XL, $65m xs $5m

& 1 Reinstatement

Commercial XL, $30m xs $5m

& 1 Reinstatement

Quota Share. Max of US$0.79m per risk

Umbrella Property Catastrophe $110m XS:

1. $70m Residential

2. $35m Commercial

3. QS Event Limits (15% Agg. Exp.)

& 1 Reinstatement

US$180m

Per risk XL $7.5m XS $150k

Other RI to be used first.

•Catastrophe losses have appropriate RI cover, but limited to two events

•Beware of attritional claims not covered by RI

•Don’t forget about net premium income

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 ReinsuranceAnother Insurer Y.E. 31 March 2009

1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.

All classes of business.

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

$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)

Motor XL

1. 100% placed: Lloyd’s (Chaucer)Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).

$7.5m XS $750k.1 Reinstatement

Catastrophe XL

1. Aggregate cession limit of $600m. Quake & Windstorm2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.3. 100% placed: Everest Re.

A)Property, Business Interruption, CAR (material damage).

B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.

A)Cession limit: $4m any one risk

B) Cession limit: $1m any one risk

90% Quota Share(non-obligatory)

CommentsBusiness coveredCover

Summary of Reinsurance Cover Notes

Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.

All classes of business.

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

$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)

Motor XL

1. 100% placed: Lloyd’s (Chaucer)Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).

$7.5m XS $750k.1 Reinstatement

Catastrophe XL

1. Aggregate cession limit of $600m. Quake & Windstorm2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.3. 100% placed: Everest Re.

A)Property, Business Interruption, CAR (material damage).

B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.

A)Cession limit: $4m any one risk

B) Cession limit: $1m any one risk

90% Quota Share(non-obligatory)

CommentsBusiness coveredCover

Summary of Reinsurance Cover Notes

•Aggregate sums insured are $550 million

- within the cession limit.

•Note the event limit

- if no other claims, responds to 6 events

•Per risk limits split by line of business

- $4m per risk for property

- $1m per risk for other LOBs

•Non-obligatory QS

1m-

2m-

3m-

4m-

5m-

6m-

7m-

8m-

“Motor XL” “Catastrophe XL”

Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

1m-

2m-

3m-

4m-

5m-

6m-

7m-

8m-

“Motor XL” “Catastrophe XL”

$6.5m xs $1m

Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability

$500k xs $500k

All lines of business

90% QS, $1m per risk limit

Burglary, PA, Marine Cargo, Fidelity

$7.5m xs $750k + 1 Reinstatement

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

90% QS, $4m per risk limit

Property, Business Interruption, CAR-material damage

Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

1m-

2m-

3m-

4m-

5m-

6m-

7m-

8m-

“Motor XL” “Catastrophe XL”

$6.5m xs $1m

Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability

$500k xs $500k

All lines of business

90% QS, $1m per risk limit

Burglary, PA, Marine Cargo, Fidelity

$7.5m xs $750k + 1 Reinstatement

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

90% QS, $4m per risk limit

Property, Business Interruption, CAR-material damage

Interaction Between Contracts

Reading all the contract wordings reveals:

1. Use Quota Share before XL

2. Use Motor XL before Catastrophe XL

3. CAT XL

“Two Risk Warranty” for all covered lines of business. Two losses from one event are necessary before making a recovery. A Hurricane or Quake are not necessary.

4. Motor XL

Motor (own physical damage) is only covered for hurricane / quake

All other lines are covered on an “each & every loss” basis

Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

1m-

2m-

3m-

4m-

5m-

6m-

7m-

8m-

“Motor XL” “Catastrophe XL”

$6.5m xs $1m

Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability

$500k xs $500k

All lines of business

90% QS, $1m per risk limit

Burglary, PA, Marine Cargo, Fidelity

$7.5m xs $750k + 1 Reinstatement

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

90% QS, $4m per risk limit

Property, Business Interruption, CAR-material damage

1

3

1

2

Two risk warranty

e.e.l. except motor damage

Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

Cover Business covered Comments

90% Quota Share

A)Cession limit: $4m any one risk

B) Cession limit: $1m any one risk

A)Property, Business Interruption, CAR (material damage).

B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.

1. Aggregate cession limit of $600m. Quake & Windstorm2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.3. 100% placed: Everest Re.

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

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

1. 100% placed: Lloyd’s (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.

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

1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.

Assume a catastrophe loss of $75million

Gross loss $75m

Quota Share recovery – 90% ($67.5m)

Cat XL recovery ($7.5m)

Net loss ZERO

to Motor XL does not cover property.

(assume 500 xs 500 is used up)

A single claim recovery can be split into 90% QS & 10% XL.

Within event limit of $90m.

The reinsured can determine what constitutes a risk under QS.

If justifiable, it can of adjust its recovery under the QS to take maximum advantage of the XL.

QS is NON-OBLIGATORY

1 3

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

3. PML assumptions consistent with underwriting guidelines

4. Onsite walkthrough test underwriting

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

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?