reinsurance to protect a green card portfolio The dynamics of buying reinsurance to protect a green card portfolio Nick Goulder International Casualty Director, Willis Re July 3 2007

Lots to Discuss … Deductible €200,000 Reinstatements Cover at the Low Level Cover at the Middle Level Unlimited Layer Issues Reinsurer Security The Future

How Big Is €200,000 ? Personal injury compensation in Russia Do the award levels feels right ? Very low compared to e.g. German or UK court awards Every country has a different view – nobody is “right” Severe injury e.g. Paraplegic/Tetraplegic Could cost €5m to €25m+ in the UK Would often cost €2m to €10m or more in other EC countries So reinsurers are wary of low deductibles

Ways to make Reinsurers more Comfortable? – (1) Territory Obtain transparent analysis of where Green Card vehicles are going If it’s to the Ukraine, Belarus, Moldova, Poland, Czech, Slovakia, Hungary or the smaller Baltic states, the XL risk is very low If it’s to Germany, France, Spain or UK the risk is very much more serious Good information helps create good reinsurance pricing

Ways to make Reinsurers more Comfortable? – (2) Vehicles Maintain transparent statistics as to which vehicles are being insured Small engine private cars – the XL risk is very low 40-tonne lorries – the risk is very much more serious Good underwriting is going to price to select the better risks Cheaper prices for 1000 cc cars, higher for 2000 cc + cars Cheaper prices for light commercial, higher for heavy lorries & “bad” fleets Good information helps create good reinsurance pricing

Making Reinsurers more Comfortable? – (3) Claims Very important concern for Reinsurers is your claims handling Are you going to be aware quickly that you may have a big claim ? Reinsurers have a great fear of their reinsureds piling up liabilities without reporting them Work hard to report quickly !

One More on Claim Handling Reinsurers can help in larger claim situations They have wide experience of this They can advise on tactics It’s going to be their money – they will really want to help you get the best result Don’t be afraid to report early, it works for the best for everyone

Pricing By Layer – It’s Not Rocket Science ! Mainstream claim distributions are well known Typical German motor TPL portfolio – claim split by layer (**) €25,000 xs € nil @ 36.8% €75,000 xs € 25,000 @ 18.2% €100,000 xs € 100,000 @ 8.9% €300,000 xs € 200,000 @ 8.6% €500,000 xs € 500,000 @ 3.9% € 1 mio xs € 1 mio @ 2.7% € 3 mio xs € 2 mio @ 0.9% € 95 mio xs € 5 mio @ 0.0% [Source – 2003/2004/2005 claims, average incidence of distribution, assumption 80% Loss Ratio 20% Cost + Profit Ratio]

Reinstatements Tradition in larger EC countries has been to give unlimited reinstatements for motor Reinsurers generally are trying to reduce this Willis doesn’t approve We think reinsurers can easily calculate the right premiums But (right or wrong) this seems to be the trend

Reinstatements (2) Especially for East European countries, the pattern is for limited reinstatements Commercial reality However … significant problem … RUMI has 23 insurer members XL Cover is one arrangement across all 23 Consider 1st XL layer …

1st Layer reinstatement problem Cover is €300,000 xs 200,000 per loss Could have many losses Usual pricing would be about 10% of primary premium in larger- award EC countries (see German example) Should cost less for Russian Green Cards (since big % of risk is in e.g. Ukraine etc) If total Green Card GNPI is €15 mio … … then 10% rate pays for 5 losses …

1st Layer Problem (ctd) Suppose we obtain cover for 10 losses (shared across 23 insurers) Suppose Insurer X and Insurer Y both have 5 losses each Then the cover is exhausted But what happens for Insurer Z ??? Insurer Z has paid premium … … but no cover is left now …

Coverage vs Cost question We hope reinsurers should realise that 10% would be a very fair rate for 100 reinstatements (We at Willis think it is generous to reinsurers – it would be enough for e.g. a 100% German portfolio) Then the cover could be given with at least two losses cover available to each of 23 insurers The larger insurers might want more reinstatements … Depth of cover should (roughly) match premiums paid

Middle Layers - Example Here’s another country … four insurers all buying €14 mio xs €1 mio All rates include domestic GNPI Ins A (GNPI €72m) pays 0.51% Ins B (GNPI €46m) pays 0.68% Ins C (GNPI €20m) pays 0.70% Ins D (GNPI €20m) pays 1.33% (why?)

Unlimited Layers Reinsurers trying to avoid writing unlimited But they have done it for years Philosophy, philosophy … Commercial truth – it’s hard for them to stop Insurers badly want the cover We have the Willis Facility

Long Tail, Long Worries Property XL is easy … you know very soon whether you have a loss Motor XL goes on for DECADES Average time delay for large personal injury claim to settle in major European countries is seven years Many claims take longer than this NB - the biggest claims usually take the longest time Children can be 18 years or more

Motor XL Security Issues So … you need to be friends with your Motor XL reinsurers for a VERY long time They need to be financially robust Willis recommends always to avoid anything BBB+ or worse (S&P) Willis recommends a cautious position we always try very hard to get best security Some of our clients only accept AA- (S&P)

The Future Each insurer is going to want to buy its own motor XL programme Clear reinstatements Good portfolios judged on merits Quality of reinsurer security becomes own decision Best planning will include …

Planning for the Future Keep very clear statistics Where your green card risks are going How long for What types of vehicle you are insuring What your claims experience is Keep clear claims information and report it Work with reinsurers to settle claims quickly Use a good reinsurance broker !

Questions ?