CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006  Les 29 et 30 juin 2006 Ottawa, Ontario Session PC-1: Risk Transfer

CIA Annual Meeting  Assemblée annuelle de l’ICA Review of requirement Examples Session PC-1: Risk Transfer An AA Point of View

CIA Annual Meeting  Assemblée annuelle de l’ICA The Actuary must disclose information of any material financial reinsurance agreements, ceded and assumed, where there is not significant insurance risk transfer between the ceding company and the reinsurer, or where there are other reinsurance agreements or side letters that could offset the financial effect of the first reinsurance agreement. Session PC-1: Risk Transfer The OSFI Requirement

CIA Annual Meeting  Assemblée annuelle de l’ICA 1 treaty = 5 reinsurers 6 auditors 2 external reviews 14 opinions Session PC-1: Risk Transfer Ceded and Assumed

CIA Annual Meeting  Assemblée annuelle de l’ICA Eliminate requirement on assumed treaties Require only AA from lead reinsurer to provide an opinion Session PC-1: Risk Transfer Ceded and Assumed?

CIA Annual Meeting  Assemblée annuelle de l’ICA Reinsurance transaction is a financial transaction Financial reinsurance = limitation of risk transfer? Practically: Ignore! Session PC-1: Risk Transfer Material Financial Reinsurance

CIA Annual Meeting  Assemblée annuelle de l’ICA Material = AA materiality standard? –Too restrictive Material = auditors materiality standard? –Generally less than actuarial materiality –Auditor materiality is for an error; while actuarial materiality is for uncertainty Session PC-1: Risk Transfer Material Financial Reinsurance

CIA Annual Meeting  Assemblée annuelle de l’ICA No CIA guidance USA: 10% chance of a 10% loss –Does not handle catastrophe treaties well –Better to combined frequency and severity Under plausible scenarios, CR > threshold –CR = (loss + commission + brokerage) / premium –Premium includes reinstatement premium Session PC-1: Risk Transfer Significant Insurance Risk Transfer

CIA Annual Meeting  Assemblée annuelle de l’ICA Top layer $100M XS $100M Insured Values = $59 billion Scenario A –Cat Model 500 years event = $17.7M –ROL = 2.0% for premium of $2.0M Scenario B –Cat Model 500 years event = $0.5M Session PC-1: Risk Transfer Example 1 – Cat Treaties

CIA Annual Meeting  Assemblée annuelle de l’ICA Layer $1M XS $1M Subject Premium = $75M Rate = 6% for Premium of $4.5M Scenario A –In the last 10 years, 1 year shows incurred in the layer greater than $4.5M Scenario B –Worst experience is $2.1M incurred Session PC-1: Risk Transfer Example 2 – Auto Working Layer

CIA Annual Meeting  Assemblée annuelle de l’ICA Volume of $60M Expected Loss Ratio of 50% –A: Flat commission 35% –B: Sliding commission 60% sliding 1-1 to 45% –C: Add a Deficit/Credit carry forward Session PC-1: Risk Transfer Example 3 – Comm Prop QS

CIA Annual Meeting  Assemblée annuelle de l’ICA Questions? Session PC-1: Risk Transfer Thank You!