Overview of Property and Casualty Reinsurance Robert D. Graham Sr. V.P. & Assistant General Counsel General Reinsurance Corporation

Overview of Reinsurance Property & Casualty  Introduction  Purpose  Forms & Types  Domestic Market  Marketing Reinsurance  Security

Definition of Reinsurance “ Reinsurance is a contract of insurance whereby one insurer (called the reinsurer or assuming company) agrees, for a portion of the premium, to indemnify another insurer (called the reinsured or ceding company) for losses paid by the reinsured under insurance policies issued by the reinsured to its policyholders.”

Retrocession Reinsurer Retrocedent Insurance Policyholder Insured Underlying Insured Reinsurance Insurance Co. Ceding Co. Cedent Primary InsurerRisk Risk Risk Insurance Co. – Insured Reinsurer – Assuming Co. Reinsurer Retrocessionaire

Elements of Reinsurance  Reinsurance is a form of insurance.  There are only two parties to the reinsurance contract - the Reinsurer and the Reinsured - both of whom are insurers, i.e. entities empowered to insure.  The subject matter of a reinsurance contract is the insurance liability of the Reinsured undertaken by it under insurance policies issued to its own policyholders.  A reinsurance contract is an indemnity contract.

What Reinsurance Does 1. It converts the risk of loss of an insurer incurred by the reinsured under its policies according to its own needs. 2.It redistributes the premiums received by the reinsured, which now belong to the reinsured, according to its own business needs.

What Reinsurance Does Not Do Reinsurance does not:  Convert an uninsurable risk into an insurable risk.  Make loss either more or less likely to happen.  Make loss either greater or lesser in magnitude.  Convert bad business into good business. It is not Alchemy.  Reinsurance is not coinsurance.  Reinsurance is not banking – it is not the lending of money but it can have the same effect.  Reinsurance is not a security.

Functions of Reinsurance  Financing  Stabilization  Capacity  Catastrophe Protection  Services

Financing  is growing and needs additional surplus to maintain acceptable premium to surplus ratios.  Unearned premium demands reduce surplus.  In a down cycle, underwriting results are bad and reduce surplus.  Investment valuation negatively impacts surplus.  Marketing considerations dictate that an insurer enter new lines of business or new territories.

Stabilization Marketing Consideration Policyholders and stockholders like to be identified with a stable and well managed company. Management Consideration Planning for long term growth and development requires a more stable environment than an insurance company’s book of business is apt to provide.

Capacity  Refers to an insurer’s ability to provide a high limit of insurance for a single risk, often a requirement in today’s market.  Reinsurance can help limit an insurer’s loss from one risk to a level with which management and shareholders are comfortable.  Most states require that the maximum “net retention” from one risk must be less than 10% of policyholders’ surplus.

Catastrophe Protection  Objective is to limit adverse effects on P&L and surplus from a catastrophic event to a predetermined amount.  Covers multiple smaller losses from numerous policies issued by one primary insurer arising from one event.

Services 1.Claims Audit 2.Underwriting 3.Product Development 4.Actuarial Review 5.Financial Advice 6.Accounting, EDP and other systems 7.Engineering - Loss Prevention

Reinsurance is Provided Through A. Treaty a.Covers classes or entire “books” of business b.Reinsurer accepts as written by insurer as to form, price and risk B. Facultative a.Single Policy/Risk b.Reinsurer evaluates each risk and establishes or agrees to acceptance, form and price c.Automatic or semi-automatic facilities

Forms of Reinsurance PROPORTIONAL EXCESS OR NON-PROPORTIONAL Quota Share Reinsurer covers the same percent on each risk Surplus Share Reinsurer’s share based on type or size of risk Excess Each Risk/ Per Risk Per Risk Excess of Loss Reinsurer covers excess of a predetermined amount; limits apply separately to each loss Per Risk Aggregate Excess of Loss Reinsurer covers over aggregate claims for a risk in a specified period of time Excess Each Occurrence (Catastrophe) Reinsurer covers over a predetermined amount or limit for all losses arising out of one event or occurrence Aggregate Excess (Stop Loss) Reinsurer covers over a predetermined aggregate limit of loss or loss ratio for a specific period of time

Pro Rata or Proportional  Share in Premium in Predetermined Manner  Share in Losses in Direct Proportion to Premium Ceded  Pays Ceding Commission to Reimburse for Expenses  Can be Quota Share or Surplus Share è Quota Share: Reinsurer covers some percent on each risk è Surplus: Reinsurer share based on type/size of risk

Excess or Non-Proportional  No Proportional Sharing of Premium or Loss  Responds to Losses Excess of Predetermined Retention  Negotiated Premium  Written in Layers

Excess (XS) Risk Excess Written in Layers INSUREDS POLICY LIMITS (THOUSANDS) 2ND LAYER 1ST LAYER RETENTION

Excess (continued) CATASTROPHE $ LOSS 1ST 2ND 3RD ETC. 1ST 2ND 3RD ETC. RETENTION 10MM 5MM 1MM $1MM XS $5MM $4MM XS $5MM OCCURRENCE

Cat XS Summary  Retention Established  Maximum Recovery Established  Premium Negotiated  Sold in Layers  Usually Limited to Two Occurrences è Additional Cover Needed

Aggregate XS Summary  Stop Loss  Accumulation of Losses

Types of Reinsurers 1. Professional Reinsurers  Specialize in Reinsurance  Are Licensed in at Least One State  Derive Majority of Their Premium Income From Reinsurance  Forms  Stock Company  Mutual Company  U.S. Branch of Alien Company

Types of Reinsurers 2. Reinsurance Department of Primary Company 3. Pools  Special Purpose  General Purpose 4. Lloyd’s of London

Marketing of Reinsurance 1. Broker (Intermediary) Market  Reinsurance Intermediary  Provides Business for Reinsurers  Brings Parties Together - Helps Negotiate Reinsurance Terms  Acts as Agent of Ceding Company  Compensated by Reinsurer  Reinsurers Share Reinsurance Programs

Marketing of Reinsurance 2. Direct Writers  Contact Primary Insurers Directly Through Salaried Employees  Frequently Assume 100% of Reinsurance Program

Reinsurance Security  Evaluation of Cedants, Retrocessionaires and Intermediaries  Financial Condition  Underwriting Policies and Procedures  Claims Policy and Administration  Management Stability and Expertise

Market Share of U.S. Reinsurers' Year-End 2002 Results Ranked by Net Reinsurance Premiums Written Source: RAA Reinsurance Underwriting Report March 13, 2003 ReinsurersNet Reinsurance Premiums Written Year-End 2002 (In Thousands) 1. Employers Reinsurance Group $ 4,537, General Re Group 3,974, National Indemnity Company2,666, Transatlantic Re/Putnam Re 2,336, Everest Reinsurance Co. 2,119, American Re-Insurance Co. 1,169, Odyssey America Re Corp./Odyssey Re Corp.1,493, Swiss Reinsurance America Corp. 1,283, Converium Reinsurance (North America) Inc.1,064, Berkley Insurance Co. 940, Partner Re U.S. 755, Hartford Re Co. 702, Folksamerica Reinsurance Co. 678, CNA Re 665, SCOR U.S. Group 636, AXA Corporate Solutions Reinsurance Co. 550, Gerling Global Group 479, XL Reinsurance America, Inc. 411, American Agricultural Insurance Company 389, Trenwick America Reinsurance Corporation 387,867

LIST OF WORLD’S 10 LARGEST REINSURANCE BROKERS GROSS REVENUES COMPANY (MILLIONS) 2001EMPLOYEES Aon Re Worldwide $ ,700 Guy Carpenter & Co. Inc ,150 Benfield Group P.L.C ,683 Willis Re Inc JLT Risk Solutions Ltd N/A Heath Lambert Group Towers Perrin Reinsurance BMS Group John B. Collins Associates Inc HSBC Insurance Brokers Ltd ,694 Source: January 2002www.businessinsurance.com