Transcript TREATY NEGOTIATION & RENEWAL

DEVELOPING REINSURANCE
STRATEGY FOR ENERGY BUSINESS
Seminar Paper
presented by:
AGHOGHOVBIA, K.
African Reinsurance Corporation
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Contents
Introduction
 Designing A R/I Programme
 Energy Business & Reinsurance
 Arranging the desired Programme
 Negotiating Terms
 Reviewing Programmes

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Introduction

Insurance and Reinsurance

Insurers seek to develop a reinsurance
strategy that is capital-efficient to enable
them achieve their corporate goals.

The objective of this paper is to highlight
the necessary ingredients in the design of
a Reinsurance programme, particularly for
the Energy class, that would satisfy,
sometimes, conflicting goals.
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Designing a Reinsurance Programme
A
reinsurance programme is the
combination of Reinsurance
Contracts that an Insurer
obtains to meet its reinsurance
needs.
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Designing …

The Management of an insurance
company, in formulating its reinsurance
programme, must aim at:

Protecting its net retained account from
abnormally large losses, and

Providing itself with a greater acceptance
capacity than what his financial resources
would ordinarily allow.
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… continues

The purpose of a reinsurance
programme is therefore to form a
bridge between two aims; in the
sense that it enables the company
to write the former and achieve
the latter.
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Issues for Consideration in
Designing a R/I Programme

The designing of a reinsurance programme
involves coordinating an insurer’s needs and
the functions performed by reinsurance.

It is therefore essential to start the process by
determining insurer’s needs that reinsurance
can meet and these including the issues of
retentions and limits, are influenced by the
business strategy, financial resources and
management attitude towards risks.
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Continues …

As reinsurance cannot meet some of the
insurer’s needs; the designing of a
reinsurance programme focuses on the
functions of reinsurance viz:
Increasing capacity,
 Providing stability,
 Providing catastrophe protection,
 Providing relief to shareholders funds, and
 Providing underwriting expertise.

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Business Strategy and R/I Functions
Reinsurance needs based on business strategy can be
summarized below:
Growth
Plans
Capacity
Stability
X
X
Cat.
Protection
U/W
Expertise
X
Lines of
Business
X
X
Portfolio
Size
X
X
Company
Structures
X
Geographic
Spread
Relief to
S/holders
Funds
X
X
X
X
X
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Financial Resources and R/I Functions
Reinsurance needs based on insurer’s financial resources can
be summarized below:
Capacity
Limited
Liquidity
Stability
X
Limited
Access to
Capital
X
X
Limited
Shareholders
Funds
X
X
Catastrophe
Protection
X
Relief to
S/holders
Funds
X
X
X
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X
Retentions

Primary decision here is how much
can be retained for the insurers own
account.
The retention considerations will be :
a) Amount of single loss
b) Amount of Accumulated loss
c) Frequency of (a) and (b)
d) Likely future trends “The U/W circle”.
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Continues …

Again business strategy, financial resources and
management attitude influence the retentions
and limits that the insurer selects.

Other factors that influence retentions include:






Types and cost of reinsurance;
Size of portfolio;
Premium income and profitability;
Type and spread of risks and pattern of losses;
Reinsurer requirements;
Retentions
of
similar
insurers
and
co-insurance
contributions.
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Limits

The limits of reinsurance contract are the
maximum amounts of liability that the
reinsurer can accept as defined in the
reinsurance contract.

Factors considered in setting treaty limits
vary by the kind of treaty and include:


- Maximum Policy limits
- Catastrophe exposure
Note Extra Contractual Obligations, Excess of Policy limits
Exposure …
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Analyse the Business

After identifying the insurer’s needs,
historical information on portfolio
premium, losses, rate changes and
reinsurance limits must be gathered
and analysed to determine whether
the
proposed
reinsurance
programme meets the insurers
needs.
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Technical Selection of Appropriate
Form of Reinsurance

Having analysed its portfolio of business
and in the light of its proposed retention
limits, it is clear that some form of
reinsurance will be required, a decision
will then be made on whether to arrange
a Facultative or Treaty or a combination
of both on either a pro – rata or excess
of loss basis.
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Selecting Types of Reinsurance
Types of Reinsurance and R/I Functions
Increase
Risk
Capacity
Facultative
Provide
Stability
Provide
Cat.
Protection
Provide
Relief to
S/holders
X
X
Quota
Share
X
Surplus/
Fac Oblig
X
Excess of
Loss
X
Provide
U/W
Expertise
X
X
X
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Facultative Reinsurance
This could be Proportional or
proportional and is useful where:





Non-
The risk is highly hazardous or of an unusual
nature;
Additional capacity is required ;
The insurer wishes to protect the Treaty;
The risk is excluded from the Treaty; and
Underwriting advise is required.
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Treaty Reinsurance
Forms of Treaty R/I
Proportional
QS
Surp
Non-Proportional
Fac Oblig
XOL
XOL Loss Ratio
or Stop Loss
Risk
Basis
Occurrence
Basis
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Factors in Selecting Appropriate
Type(s) of Reinsurance Treaties
Factors In Selecting Appropriate (Type(s) of Reinsurance
Treaties)
♪ The nature of business
♪ Administrative costs and ease or otherwise of operation
♪ The effect on the company’s retained account
♪ Whether the reinsurance is being sought solely to control
exposures or for other purposes too, such as easing the
financing strains of solvency
♪ Whether company wishes to engage in reciprocity
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Energy Business & Appropriate Reinsurance




Energy business reinsurance programme design follows the same
principles as other lines. In selecting appropriate reinsurance therefore,
cognizance must be taken of the risk characteristics.
Energy Risk Characteristics:
 High value (billions of Dollars)
 Often long tailed
 High concentration of risks
 Few policies, high premium
 Highly hazardous business
Due to above characteristics, particularly the unbalanced nature of energy
portfolio and exposure to accumulation, treaty reinsurance is not
fashionable.
Reinsurers prefer to have discretion to accept/decline business and under
terms and conditions acceptable to them, thus fac, Line Slip & Pools.
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Reinsurance Options Available on Energy
Business

Facultative Proportional Reinsurance

Advantages:






Cedant recovers part of all losses,
Over-rider covers acquisition costs,
Simple to administer,
Cost reflects original rates,
Attractive to reinsurer as premium/limit ratio is
balanced.
Disadvantages:

Insurer may cede too much premium.
NB: This type of reinsurance is good for increased market share,
capacity and limitation of net exposure
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R/I Options Available on Energy Business

Facultative Non Proportional Reinsurance

Advantages:





Simplest form of reinsurance,
Maximizes retained income through retention
mechanism,
Ideal against accumulations through CAT event
coverage,
Easy to place with reinsurers.
Disadvantages:




Volatile if claims experience is not satisfactory,
Affect cash flow as premium is paid in advance,
Rates do not follow original terms, and could be
expensive,
No over-rider.
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Line Slip

Reinsurer enters an agreement with broker to
accept cessions of a given class of business,
subject to acceptance by lead reinsurer,

Not a treaty as it is not obligatory,

Rarely used nowadays.
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Energy Reinsurance Pools

Pools Arrangement

Available to members of an Energy Pool








Formed on both National & Regional basis,
Participants exposed to accumulation of risk from
business attaching to pool,
Balance in risk portfolio enables pool to reinsure to limit
accumulation problems.
Regional Pools spread risk wider than national ones,
Premium in a region available for investment within
regional economy,
Realized profit for the benefit of members,
Example of regional Energy pool is the African Oil &
Energy Insurance Pool – the most successful pool in
the continent of Africa,
Companies that want the twin advantage of Capacity
& Expertise may cede business and enjoy profit from
the pool.
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Arranging the desired
Programme
 Direct or Through Brokers
 Selection of Markets & Reinsurer
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Negotiating Terms
 Information Required
 Price
Proportional
Non-Proportional
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Reviewing Programme
o Reinsurance programmes are reviewed at
renewal because conditions change,
o Important aspect of review is to ensure that:
-
Company continues to enjoy adequate
reinsurance,
-
Underwriters remain
limits and exclusions,
-
Claims
reporting
procedures
continually observed, and
-
Cost of reinsurances remain competitive.
aware
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of
treaty
are
Responsibilities for Design of
Programmes
 1. The General Management
 2. The Departmental Managers
Underwriting Departments:
Accounting and Administrative Dept
Financial Department
 3. The Reinsurance Manager
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