Swiss Re America masterwt.ppt 1 Swiss Re America Presented by: David B. Powell, Western Regional Director Swiss Re New Markets April 1999 Financial Risk.

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Presentation transcript:

Swiss Re America masterwt.ppt 1 Swiss Re America Presented by: David B. Powell, Western Regional Director Swiss Re New Markets April 1999 Financial Risk Management CAS Special Interest Seminar April 12-13, Denver, Colorado

Swiss Re America masterwt.ppt 2 MOTIVATORS & MARKET FORCES Mergers & Acquisitions Company Demutualization Marketplace Competition Other Business Needs

Swiss Re America masterwt.ppt 3 OVERVIEW Alternative Risk Products Aggregate XS, LPT, ADC’s Finite Risk/Financial Reinsurance Integrated/Blended Programs Credit Enhancements Operational Exposures

Swiss Re America masterwt.ppt 4 LOSS PORTFOLIO COVERAGES Excess Expected/Retained AGG $10M $5M OCC $500K $2M OCC XS AGG XS

Swiss Re America masterwt.ppt 5 Financial Statement Enhancement Loss Portfolio Transfer Cost = Discounted Ultimate + Margin IBNRCase Reserves $15M $10M $5M Policy Years

Swiss Re America masterwt.ppt 6 INTEGRATED PROGRAM W/ FINITE FEATURE Can Include “Traditional “ & “Financial” YRS 5 1 LIMITS $5M $25M 234 Risks Underwriting Credit Timing Return “Funding” Risk Transfer

Swiss Re America masterwt.ppt 7 FINANCIAL EXPOSURES Interest Rates Foreign Currency Raw Materials/Commodity Weather Anomalies Others (Environmental/Political)

Swiss Re America masterwt.ppt 8 TYPICAL FEATURES/REQUIREMENTS Basket/Agg. Retention Some Funding Sufficient Risk Transfer Good UW Data Good Credit Profile Ready Capital Market

Swiss Re America masterwt.ppt 9 EFFECT OF PORTFOLIO Portfolio Loss Distribution Multiple Lines/Multiple Treatments Loss Distribution 25% 10M Ave Loss $20M 25M 30M 20M 15M 35M 50%75% Note: Like Multi-Year Retro

Swiss Re America masterwt.ppt 10 BASKET PORTFOLIO ADVANTAGES Minimize Administration Efficiency: Markets & Techniques Stabilizes Cost Volatility Improved Tax Treatment? Can Simplify Hedge Accounting

Swiss Re America masterwt.ppt 11 SOME EXAMPLES Paper Co. Inc. Construction Corporation Power Suppliers LTD. Tax Scheme LLP.

Swiss Re America masterwt.ppt 12 PAPER CO. INC. Time Cumm. ProfitCumm. Profit Profits P is Pulp Price Rising P Constant P Declining P

Swiss Re America masterwt.ppt 13 PAPER CO. INC. Call Option (Risk or Counterparty Credit Enhancement) K Cost Per TonCost Per Ton Call Value Actual Price K: Strike at $250 Time

Swiss Re America masterwt.ppt 14 CONSTRUCTION CORP. Cov A:Credit Enhancement (Assures Repayment $100M) Cov B:Renewal Guarantee (Tenant Default, Toll $) Cov C:Course of Construction, Regular P&C Cov D:Residual Value Policy

Swiss Re America masterwt.ppt 15 POWER SUPPLIERS LTD. Financial Solution - Indexed Retention Average temperature for period is 3° or more below the median temperature of 30°, exceeding the one standard deviation boundary. This triggers an increase in the aggregate and per occurrence retention. $1,000 $500 $250 1,0002,000 2,600 2,900 “Warm Weather” “Baseline” “Cold Weather” Average temperature for period is 3° or more over the median temperature of 30°. This triggers a reduction in the per occurrence and aggregate retention. Aggregate Retention (number in thousands) Occurrence Retention Business Interruption losses or profit/loss change as a function of temperature. Example

Swiss Re America masterwt.ppt 16 POWER SUPPLIERS LTD. Financial Products/Solutions An Example to Consider Example Your book of business consists of leveraged Aggibusiness cooperatives concerned that two events will happen concurrently: (1) there will be large number of bad weather days interfering with harvests and (2) interest rates will rise increasing the cost of debt financing. The coverage period is six months, from April 1 to October 1. Event Triggers (1) Inches of rain exceeds strike point “K”. (2) Interest rates on short-term commercial paper increases by 50 basis points. Payout Triggered No Payout Number of “bad” weather days exceeds maximum Number of “bad” weather days remains below maximum time Interest Rate Interest rates rise above pre-determined levels and = $ Claim $ = No Claim Interest rates stay below pre-determined threshold time Interest Rate or

Swiss Re America masterwt.ppt 17 TAX SCAM LLP Coverage: * Tax Code Repeal* Credit? * Asset Disqualification* Prop/BI? TS AssetsInsurer Fund Source Loan Repayment LossLoss PayeePayee BuyBuy TaxTax Premium Policy