1. INTRODUCTION TO REINSURANCE
NOLAN ASCH
CAS RATEMAKING SEMINAR
MARCH 8-9, 2007
INT-4

2. The insurer insures the individual or the corporation
INSURANCE
The insurer insures the individual or the corporation

3. The REINSURER insures the insurance company
REINSURANCE
The REINSURER insures the insurance company

4. REINSURANCE PLACEMENT MECHANISMS
DIRECT
BROKER

5. INSURANCE vs. REINSURANCE
BOTH concerned with future contingencies
BOTH require underwriting skills (risk)
BOTH involve transfer of risk
BOTH require payment of premium
BOTH provide protection
BOTH subject to (some) regulation

6. REINSURANCE Buyers assumed to be knowledgeable Responds to actual loss
Provides indemnification only
Reimburses for payments already made
Usually Global

7. FUNCTIONS OF REINSURANCE
CAPACITY

8. CAPACITY
Single Risk (Fac - Sears Tower)
PORTFOLIO (Treaty)

9. CAPACITY MECHANISMS
Excess-of-Loss
Quota Share

10. FUNCTIONS OF REINSURANCE
CAPACITY
CATASTROPHE

11. CATASTROPHE
QUOTA SHARE
EXCESS OF LOSS
SECURITIZATION

12. CATASTROPHE They are Cat Models not magic Was AIR client #4 in 1987
User tips

13. CATASTROPHE Outputs are probabilistic The “1 in 100 year event”
Is really a scenario with a 1% chance of occurring in any calendar year.
Look at the range of loss outcomes.

14. Cat Models NEED VERY detailed and accurate data input
CATASTROPHE GIGO
Garbage-In
Garbage-out
Cat Models NEED VERY detailed and accurate data input

15. FUNCTIONS OF REINSURANCE
CAPACITY
CATASTROPHE
STABILIZATION

16. Reduction in Variance (swings)
STABILIZATION
Reduction in Variance (swings)

17. Extreme contractual case “STOP-LOSS” Aggregate Excess
STABILIZATION
Extreme contractual case
“STOP-LOSS”
Aggregate Excess

18. FUNCTIONS OF REINSURANCE
CAPACITY
CATASTROPHE
STABILIZATION
FINANCING

19. FINANCING Reducing Liabilities
Ceding Commissions
“Overrides”

20. May increase PHS due to transaction
FINANCING
May increase PHS due to transaction

21. ALL Reinsurance is Financial
FINANCING
Finite Reinsurance......
Pre-Elliott Spitzer
ALL Reinsurance is Financial
Post Elliott Spitzer
I don’t think so….

22. FUNCTIONS OF REINSURANCE
CAPACITY
CATASTROPHE
STABILIZATION
FINANCING
ENTER AND EXIT MARKETS

23. Lessens risk as you learn With 100% Q/S you exit
ENTER OR EXIT MARKETS
Lessens risk as you learn
With 100% Q/S you exit

24. FUNCTIONS OF REINSURANCE
CAPACITY
CATASTROPHE
STABILIZATION
FINANCING
ENTER AND EXIT MARKETS
UTILIZE REINSURER EXPERTISE

25. USING REINSURER EXPERTISE
Large or unusual claims
Large or unusual risks
Special relationships and/or knowledge

26. LIMITATIONS OF REINSURANCE
Will NOT make bad business profitable
Transaction Costs
Rating Agency Impacts (Gross/Net)

27. How Reinsurance Is Priced in Practice
Hypothetical
Examples

28. NO PRICE REGULATION
(virtually)

29. CASE BY CASE

30. NEGOTIATION

31. FLEXIBILITY IN STRUCTURE Contractual

32. EXCESS OF LOSS LAYERING

33. (sounds like a wide layer)
$19.75 Mill xs $0.25 Mill
(sounds like a wide layer)

34. TYPICAL LAYERING 10M xs 10M Price F 5M xs 5M Price E 3M xs 2M Price D
Price C
1M xs 1M
Price B
500 xs 500
Price A
250 xs 250

35. High Frequency/ Low Severity
Buffer layers
ie xs 250
Price A
250 xs 250

36. Low Frequency/ High Severity
10M xs 10M
Price F
Capacity Layers
i.e. 10m xs 10m

37. CLIENT/BROKER NEGOTIATION
Change or re-subdivide
the layering

38. LAYER TRAP MANY PERMUTATIONS
Pricing for 500 xs 500
Later, request the 250 xs 250

39. LAYER TRAP
at “last minute”
Ask for 150 xs 100
--Requires more data

40. PRICING TRAPS
AGGREGATE ANNUAL DEDUCTIBLES

41. ASSUME A 10% RATE Request a 1% AAD Request a 2% AAD Request an 8% AAD
NOW the risk/variance
becomes LARGE vs a 2% rate

42. INFORMATION FOR PRICING
NO standards

43. WHAT THE REINSURER WANTS
EVERYTHING

44. WHAT THE BROKER/CLIENT MAY WISH TO SUPPLY
NOTHING

45. POSSIBLE OUTCOMES

46. Garbage-In Garbage-out
GIGO
Garbage-In
Garbage-out

47. Nothing-in Nothing-out
NINO
Nothing-in
Nothing-out

48. Using losses of the risk to price the risk.
EXPERIENCE RATING
Using losses of the risk
to price the risk.

49. All losses at half the attachment point & up
HISTORIC STANDARD
All losses at half the
attachment point & up

50. ACTUARIAL APPROACH DETRENDED LOSSES Varies with age of claim
BEGINS to show ACTUAL
CLAIMS as a sample outcome

51. Proxies for TRUE exposures:
EXPOSURE RATING Attempt to rate Reinsurance based upon the TRUE underlying exposures
Proxies for TRUE exposures:
Limits Profiles = Subject Premium by policy limit
Exposures by policy limit (still not the TRUE exposure)

52. LIMITS PROFILE $100,000 Policy Limit
Yr % of exposures at $100,000
Yr % of exposures at $100,000
Yr % of exposures at $100,000
loss was atypical in 2002
layer is effective 7/1/07
Include ‘02 and ‘03 losses at $100,000

53. limit loss to 2002 policy limitsor
trend and develop loss
beyond policy limits

54. “WE DON’T DO THIS ANYMORE”
“Throw out “ claims from
MGA’s, classes or states
we no longer write

55. QUOTA SHARE ISSUES Moral hazard and Retention - 1% net
Ceding Commission
Overrides
Sliding Scales
Loss Corridors