Transcript The Actuary In Ceded Reinsurance: Non-Actuarial Considerations CAS Seminar On Reinsurance

The Actuary In Ceded
Reinsurance:
Non-Actuarial Considerations
CAS Seminar On Reinsurance
June 2-4, 2002
Tarrytown, New York
Edward P. Lotkowski, FCAS
Main Street America Group
This discussion is not…
Actuarial:
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Actuarial expertise is assumed, but…
Model everything!
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Retention setting
Pricing
Portfolio – level analysis
Definitive:
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Reinsurance buyer’s behavior influenced by specific
situation
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Constituencies
Market conditions
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This discussion has:
General themes:
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Who are your customers?
The Actuary-Buyer is also a Broker and a
Seller
Pertinent information takes many forms
Buying requires active management, not
passive participation
Buyer succeeds when he/she leverages
actuarial skills with communication and
people skills
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The Buyer’s Customers
Company
Management
Buyer
Brokers

Reinsurers
Arrows Mean:
– Reciprocal customer relationships
– Reciprocal flows of information
– Reciprocal responsibilities
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Company Management as
Customer
Issues
Ceding company management has several
audiences
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What drives corporate risk philosophy?
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Board of Directors
Wall Street
Stockholders
Rating Agencies
Is a philosophy articulated?
Is it “robust”?
Is it consistent with yours?
“Hard” vs. “Soft” drivers of risk philosophy
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Company management as
customer
“Hard” Drivers
 Corporate Form
– Access to capital
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Profile of investment portfolio
– Equity/Fixed income composition
– Liquidity
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Diversification among businesses
– Stand-alone P & C vs.
– P & C with Life, Annuities, Asset Management
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Company management as
customer
“Soft” Drivers
 Management's constituencies
– Removed from reinsurance arena
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Need for clear communication
– Can dictate program structure
• e.g., variable retentions
– May preclude forms of reinsurance
• e.g., traditional vs. finite
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Management’s P & C/Reinsurance background
– Holding company structure
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Company management as
customer
“Soft” Drivers, cont’d
 Management’s attitudes towards reinsurance
– Transaction vs. relationship
– Attitude towards “payback” notions
– Depth of understanding
• Mean vs. variance
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Individuals’ risk tolerances
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Company management as
customer
Issue
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Management’s appetite for analytics
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Appetite is often low; actuary’s appetite is higher
Management’s appetite is often hard to gauge
Actuary-Buyer’s analytical expertise is assumed
Example (amounts are hypothetical):
Retention options considered:
• Existing $1.5m per occurrence
• Existing with $2m AAD
• $2m per occurrence
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(Example)
Price/Volatility Tradeoff
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Idea
– Analyze difference among purchasing options
– All program differences occur in ($1.5m,
$2.5m)
– So, model activity in ($1.5m, $2.5m)
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Simulated risk process produces:
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(Example)
Ceded Losses
Percentiles
of Annual
Loss
Option 1
Annual Loss in
($1.5m, $2.5m)
Option 2
Annual Loss
($1.5m, $2.5m)
After AAD
Option 3
Annual Loss
($1.5m, $2.5m)
Higher Retention
25%
$4.0m
$2.0m
$1.0m
50%
5.0
3.0
1.5
75%
6.5
4.0
2.5
95%
9.0
7.0
3.5
99%
$11.0m
$9.0m
$4.0m
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(Example)
Current structure as baseline
Percentiles of
Annual Loss
Option 1
Current
Structure
Option 3
Retention
$0m
Option 2
Current
With AAD
$2m
25%
50%
0
2
3.5
75%
0
2
4.0
95%
0
2
5.5
99%
0
2
7.0
Est. Premium
Saving
$0m
$2m
$4.5m
$3.0m
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Reinsurer as Customer
Buyer to Reinsurer
 “Perfect submission”
– Stable primary
company
– Well-articulated and
executed business
strategy
– Lots of (accurate!) data
– Timely response
– Complementary
exposure
– Large “bank”
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“Face time” important
– Meetings
 Especially after big loss
– Audits
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What does your
company have to offer?
– Your company
– Yourself
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Reinsurer as Customer
Reinsurer to Buyer
 Reinsurer’s attitude toward the market
– Where does it write? – e.g. clash vs. working layers
– Transaction – oriented vs.
– Relationship – oriented
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Efficient pricing & terms
– The market is efficient in the long run
– Not necessarily so in the short run
 Wide variance in quotes, even in working layers
 Result: e.g., might fill programs by moving money between
layers
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Reinsurer as Customer
Security
 Spread cover over capital bases:
– U.S., London, Bermuda, Europe, other
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Specific reinsurers/markets
– Reinsurer eligibility criteria
– Leading indicators
– Post 9/11…a new game
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Reinsurer as Customer
Security (cont’d)
 Willingness to pay
– Recent claims payment history
– Reputation
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Willingness to play
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Do they still want to be in the business?
Reliance on retrocessional capacity
Corporate structure – who is calling the shots?
If new, are they “in, hard market”, “out, soft market”?
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Broker as Customer
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Buyer to broker
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Company’s needs, risk philosophy
Discussion of prospective risk profile
Best data possible
Frequent and proactive communication –
evolving needs
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Broker as Customer
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Broker to buyer
– Advice on risks and
needs
– Current market
knowledge
– Aggressive
representation
 “The market says…”
vs. “We should go to
market with…”
 Advice on specific
placements (e.g., sign
on /sign down)
– Solid analytics
 Actuarial/financial/risk
theoretic
 Pricing
 Reinsurance as element
of DFA
 Modeling capabilities
 Retention & limits
 Treaty terms
– Strong back room
 Security analysis
 Claims
 Contracts
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Some Post 9/11 Questions
Who is standing (counterparty risk)?
 What is terrorism?

– What are the dimensions of cyber-terrorism?
Do relationships matter?
 What is a fair price?
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