Transcript Finite Reinsurance Discussion and Demonstration A Buyer’s Perspective

Finite Reinsurance
Discussion and
Demonstration
A Buyer’s Perspective
Finite/Blended Risk Transfer – A Buyer’s Perspective
Overview
Risk-Transfer Spectrum
Full Risk-transfer
Probability
Weighted
Economic Cost
Blended
Finite
Reduction in
Economic Volatility
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Finite/Blended Risk Transfer – A Buyer’s Perspective
Overview
• Evolved because traditional reinsurance does not work
for all levels of coverage, capacity, and pricing
• More conducive to frequency/working layers than
severity/excess layers
• More effective with long-tailed exposures and favorable
interest rate environment
• Less risk-transfer involved than traditional reinsurance
• Designed to meet financial objectives
• Desire to smooth results over multiple years
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Finite/Blended Risk Transfer – A Buyer’s Perspective
Program Features
• Customized risk transfer
– Increased flexibility and innovation
• Experience account
– Funds transferred
– Funds withheld
• Upside/Downside
– Additional premiums
– Profit Commissions
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Finite/Blended Risk Transfer – A Buyer’s Perspective
Examples of Programs
• Aggregate Stop Loss Cover
– Increase Confidence in Projected Earnings
– Customize level/amount of risk transfer
• LPT/Adverse Development Covers
– Management of net leverage
– Release capital from operations
– Wall off results of continuing operations from
discontinuing operations
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Finite/Blended Risk Transfer – A Buyer’s Perspective
Aggregate Stop Loss Example
Incremental Probability
2.50%
Plan Loss
Ratio
2.00%
Used to
Reduce
Volatility
1.50%
1.00%
Coverage
0.50%
0.00%
Loss Ratio
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Finite/Blended Risk Transfer – A Buyer’s Perspective
Aggregate Stop Loss Example
 A company writes $500 million of casualty business at a planned 100%
combined ratio.
 The planned loss ratio is 65%, with CV of 22%.
 The objective is to reduce the variability of the actual combined ratio, in
the event of adverse experience.
 Features of the proposed structure:
 Attachment point of 65%, Limit of 85%
 Net premium equal to 55% of ceded losses
 Funds withheld at a 4.5% interest credit
 Premiums grossed up for a 40% ceding commission
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Finite/Blended Risk Transfer – A Buyer’s Perspective
Aggregate Stop Loss Example
Pre-Aggregate
Scenario
Cover
Combined Ratio
Plan+10%
Post-Aggregate
Combined
Ratio
Benefit
Expected
Premium
Ceded
Losses
Expenses
Cover
Combined Ratio
Underwriting PV Profit
Benefit
Commission
110.0%
45,833
50,000
18,333
106.1%
3.9%
22,500
5,132
2,750
Plan +11%
111.0%
50,417
55,000
20,167
106.7%
4.3%
24,750
5,187
3,025
Plan +12%
112.0%
55,000
60,000
22,000
107.4%
4.6%
27,000
5,242
3,300
Plan +15%
115.0%
68,750
75,000
27,500
109.6%
5.4%
33,750
5,405
4,125
Plan + 20%
120.0%
91,667
100,000
36,667
113.5%
6.5%
45,000
5,228
5,500
Plan + 30%
130.0%
91,667
100,000
36,667
125.7%
4.3%
45,000
0
(9,370)
 Proposed structure provides a nearly 4% reduction to combined
ratio at plan +10%.
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Income
(Loss)
Finite/Blended Risk Transfer – A Buyer’s Perspective
Summary
 Alternative Reinsurance
 Designed to achieve various financial statement objectives
 Complement traditional reinsurance programs
 Reduces financial risks such as credit, investment and timing
risks
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