Reinsurance Counterparty Risk Life Ceding Company Perspective

John L. Shaw, FSA, MAAA Consulting Actuary Milliman USA

Guiding Principles of Risk Management

 Control Function  Risk Engineering  Maximize Risk-Adjusted Return

Control Function

 Goals and Objectives  Measurable  Monitoring

Risk Engineering

 Techniques used to “trim” or reduce the risk – – – – What is your “comfort” level with the risk?

Reinsurance ALM Hedging

Our Focus is on Reinsurance

 The ceding company is “trimming” its risk  Retention  Evaluating costs  Evaluating extreme risks

Reinsurance Counterparty Risks

 Ceding company still responsible for claim payment  Tend to assume reinsurance is collectible  Reinsurance company losses reported recently

Ceding Company Risk Issues

 Concentration of business with a reinsurer  Use of unauthorized reinsurers and letters of credit  Is the reinsurer’s risk diversified?  Program complete

What can a ceding company do?

 Perform Due Diligence  Treaty language to make sure the two parties are on the same risk  Perform cash-flow testing GROSS of reinsurance  Greater Diversification of Pools  Communicate with the Reinsurers

Perform Due Diligence

     Review Financial Statements Ratings Reviews Analyst Calls On-site visits and audits Insurance Press     Review Cash Flow Testing Stress Tests (what-ifs) Retro Counterparty Risk Risk Concentration of Reinsurer

Treaty Language

 Reflects the RISK!

 Provisions – Financial Protection Provisions – Recapture Provisions – – Due Diligence Requirements & Recapture Reinsurer’s Insolvency  May want to write your own treaty

Cash-flow Testing

 Include Reinsurance  Scenarios where the claim isn’t paid

Diversification of Pools

 Place more Reinsurers on the Risk  Use Reinsurers that meet your criteria and objectives  Limit the Amount of Risk per Reinsurer

Communicate

 Executive Management Discussions – Pricing – – New Markets Risks of the Reinsurer  Reduction in Misunderstandings – May avoid arbitration

Conclusion

 Reinsurance Risk Management Goals can be set & measured  Tools that help you “trim” your Reinsurance Counterparty Risk