Transcript Session 1 - Day 2 - Reinsurance

Reinsurance
Nigel Davies
December 2, 2008.
Reinsurance
Session 1
Introduction & Overview. Case Study, Round 1.
Session 2
Case Study Feedback. Life Reinsurance. Finite
Reinsurance. Failure of Reinsurance.
Session 3
Catastrophe Insurance. Securitization. Case
study – Round 2.
Session 4
Case Study Feedback. Supervisory Issues.
Reinsurance
Session 1
Introduction & Overview.
• Reinsurance Market
• Definitions and Types of Contract
Reinsurance
Reinsurance
Company
Reinsurance
Company
Insurance
Company
Insured
Broker, Agent, Phone,
Online, In person.
Broker, Direct.
Broker, Direct.
Reinsurance
…and why
do we
measure it
by premium?
How much of
this is
reinsurance?
Reinsurance
Global Premiums in 2007
US$
billion
Growth
in 2007
Growth
in 2006
Life
2,393
5.4%
4.1%
Non-life
1,668
0.7%
3.9%
Company
Insurance
Total
4,061
Source: Swiss Re, Sigma 3/2008.
Company
Broker, Direct.
Reinsurance
Destination & Source of Reinsurance Premium (US$ million)
Gross
Reinsurance
Premium
Assumed
Risk
“Located” In:
Net “Risk”
Europe
88,989
(64,653)
24,336
North America
81,946
(90,306)
(8,360)
1,989
(11,219)
(9230)
Africa, Near & Middle East
(2,614)
(2,614)
Latin America
(4,132)
(4,132)
(172,924)
NIL
Asia & Australasia
Total
172,924
Source: IAIS Global Reinsurance Market Report, December 2007
Data Source:- 59 Reinsurers: Bermuda 8; Europe 21; Japan 2; USA 28.
Reinsurance
Reinsurance Premiums Assumed by Class
of Business & Contract Type (US$ million)
Proportional Reinsurance
Ceding insurer and assuming
reinsurer share an agreed
portion or percentage of
original premiums and
subsequent losses in respect
of the reinsured business.
Non-proportional Reinsurance
Reinsurer assumes the part of
the ceding insurer’s claims
that exceed a certain amount.
The premium is a specially
calculated amount.
Source: IAIS Global Reinsurance Market Report, December 2007
Reinsurance
Reinsurance Profile – Trinidad & Tobago (TT$million)
Gross Premium
Net Premium
Retention Ratio
2003
4166
4080
98%
2004
4668
4589
98%
2005
4097
3993
97%
2003
440
374
85%
2004
496
421
85%
2005
588
524
89%
2003
557
54
10%
2004
501
50
10%
2005
520
62
12%
2003
382
268
70%
2004
391
241
62%
2005
613
417
68%
Life
Non-life
Motor
Property
Other
Reinsurance
Reinsurance Market Dynamics – How do reinsurers make money?
Non-Life
Life
Reinsurance
Reinsurance Market Dynamics – How do reinsurers make money?
Non-Life
1.
2.
3.
4.
High returns in low cat.
years attracts capital.
New capital creates
overcapacity and reduces
prices (market softens).
Cats wipe out capital and
prices increase (market
hardens).
Hard market attracts
capital.
HIGHLY CYCLICAL
Life
1. Information asymmetry.
Reinsurers have annually
updated loss experience –
better than (time-lagged)
mortality tables.
2. Risk profile: pandemics vs.
advances in medical
science.
3. Life vs. Pensions products
hedge mortality and
longevity risks.
4. Primary market trend for
savings products reduces
need for life reinsurance.
INCREASING LONGEVITY
Reinsurance
Capital Movements in a Major Reinsurers – 2007
(Overall 7% increase)
Source: Global Reinsurance Market Review 2007. Benfield. www.benfieldgroup.com
Reinsurance
Non-life Reinsurance Prices
For expected loss of 4%, premium was 11%
of sum insured in 2008 (2007, 13%).
For expected loss of 1%, premium was 4% of
sum insured in 2008 (2007, 5.5%).
Reinsurance
Increasing Longevity in the Caribbean
For 18 age-group cohorts.
Source: Caribbean Epidemiology Centre. October 2000. www.carec.org
Reinsurance
1.
2.
3.
4.
5.
6.
7.
Story so far……….
Reinsurance activity, measured by premium, is
substantial but impossible to make cross-sectoral
comparisons
Reinsurance risk tends to migrate to large European
reinsurers.
Non-life RI >> Life RI.
Proportional & non-proportional reinsurance
Non-life RI highly cyclical – 7% increase in capital in
2007 led to price drops of 10%-20% in ROL for 2008.
Life primary market driven by increasing longevity…..
….. growing due to savings products, but this has little
effect of Life RI. Life RI based on information
asymmetry.
Reinsurance
• Prioritize Non-life reinsurance over Life
reinsurance.
• Cover Proportional & Non-proportional
contracts equally.
Reinsurance
Classification of Reinsurance Contracts
Reinsurance
Reinsurance Contracts
TREATY
REINSURANCE
FACULTATIVE
REINSURANCE
Reinsures
bundles of
primary policies
Reinsures
individual
primary
policies
}
Proportional / Nonproportional.
Non-life / Life.
Obligatory / nonobligatory.
Reinsurance
Reinsurance Contracts
TREATY
REINSURANCE
FACULTATIVE
REINSURANCE
Reinsures
bundles of
primary policies
Reinsures
individual
primary
policies
}
Proportional / Nonproportional.
Non-life / Life.
Obligatory / nonobligatory.
Reinsurance
Non-life Treaty Reinsurance
Non-proportional
Proportional
Excess of Loss
Quota Share
Stop Loss
Surplus Treaty
Excess of Loss and Quota Share Treaties are most common.
Stop Loss contracts are very rare nowadays
Reinsurance
1. Excess of Loss Contracts - Basics
RI cover
exhausted!
$5m
Claim: For a $5m claim, $3m is
recoverable under this contract.
$4m
Limit
$3m
$2m
$1m
$3m
xs
$1m
}
Reinsurance cover for
specified line(s) of business
Attachment point
Deductible / Risk retention
Reinsurance
1. Excess of Loss Contracts
$50m
$40m
$30m
$20m
$10m
3rd Layer, $20m xs $30m
No reinstatements
2nd Layer, $10m xs $20m
1 reinstatement
1st Layer, $10m xs $10m
2nd Layer, $20m xs $10m
1 reinstatement
1 reinstatement
1st Layer, $5m xs $5m
$5m
3 reinstatements
Line of Business A
Line of Business B
Reinsurance
1. Excess of Loss Contracts
Claims & RI Recoveries ($m)
$50m
$40m
Claim 2
Claim 3
Loss
Scenario
55
25
30
110
R/I Rec. Layer 1
(10)
(10)
NIL
(20)
R/I Rec. Layer 2
(10)
(5)
(5)*
(20)
R/I Rec. Layer 3
(20)
N/A
N/A
(20)
15
10
25
50
Gross Claim
}*
$30m
$20m
$10m
$5m
Claim 1
1
2
3
Net Claim
Line of Business A
Line of Business B
Reinsurance
2. Stop Loss Contracts
Aggregate Losses / Claims of Insurer
Aggregate Premiums
Limit (e.g. loss ratio of 130%)
Stop loss covers a specified
%age of losses between
attachment point and limit.
Attachment point (e.g. loss ratio of 110%)
Attachment points and limits
expressed as either:
1. Loss ratios, or
2. Absolute amounts
Reinsurance
3. Quota Share Contracts
Proportional Reinsurance
Ceding insurer and assuming
reinsurer share an agreed
portion or percentage of
original premiums and
subsequent losses in respect
of the reinsured business.
Quota Share Contracts have 2 types of
limits:
1. Per risk limit
2. Aggregate exposure limit
Reinsurance
3. Quota Share Contracts
Aggregate exposure limit
$6m
Reinsurer imposes a limit on aggregate exposure
(total sums insured). A breach of this limit will
mean an averaging down of the QS cover.
$5m
$4m
$3m
$2m
$1m
75% Quota Share
}
$4m per risk limit
Reinsurance
3. Quota Share Contracts
Aggregate exposure limit
Profit Commission
$6m
$5m
$4m
$3m
$2m
$1m
Reinsurer imposes a limit on aggregate exposure
With
cover
(total
sumsextensive
insured). Areinsurance
breach of this limit
willin
the
layers,
insurers
may
allow
mean
an lower
averaging
down
of the QS
cover.
underwriting standards to drop (in
order to gain market share) & this
reduces underwriting profit.
}
To counteract this, QS contracts
typically allow a retroactive
payment
$4m per risk
limit
75% Quota Share from the reinsurer of, say, 20% of its
profit on the contract.
Reinsurance
4. Surplus Treaty Contracts
Surplus Treaty
Ceding insurer retains a specified amount – called
the line.
The amount ceded to the reinsurer is defined as a
specified number of lines.
Example: 4 line surplus treaty of $1m
$6m
$5m
$4m
$3m
$2m
$1m
Reinsurance cover for 4
x retention in a 4 line
surplus treaty. NOTE –
100% COVER FOR
THESE CEDED LINES.
Retention
Reinsurance
4. Surplus Treaty Contracts
Example: 4 line surplus treaty of $1m
$6m
$5m
1
Cedant retains all premiums and claims.
2
Cedant retains 25% of premiums and
claims. Reinsurer assumes 75% of
premiums and claims.
$4m
premium
$3m
$1m
premium
$2m
1
2
Reinsurance
What type of reinsurance contract suits the
loss scenarios in these lines of business?
Amount
Property
Catastrophe
Workers’
Compensation
Motor
Time
Reinsurance
Motor
Amount
Property
Catastrophe
Workers’
Compensation
Time
Reinsurance
The Ideal Reinsurance Program?
Motor
Catastrophe XL.
2 reinstatements to
cover 3 events in total.
Property
Catastrophe
Casualty XL.
3 reinstatements on bottom
layer to cover 4 events.
Amount
Quota Share.
To cover attritional
losses in all lines of
business.
Claims Arranged by Line of Business
Workers’
Compensation
Reinsurance
CASE STUDY – ROUND 1.
•
Contract wordings are “standardized” throughout the industry.
•
Terms & conditions can vary greatly.
•
Wordings do vary in quality and are capable of misinterpretation.
•
Wordings contain jargon……..
• Please read the handout which is about a
Non-life Casualty XL Program.
• Prepare questions for discussion & reasons for
your questions
• Prepare suggestions on how this program can be
improved upon.