1. Parametric (re)insurance (Non-catastrophe) and the changing nature of reinsurance buying
5th October 2017
Michael Cane

2. Agenda for Discussion Changing Nature of Reinsurance Buying
The evolving landscape
Deal examples
Parametric Reinsurance (Non-catastrophe)
What is parametric reinsurance?
Example of a current deal in progress
Summary

3. The Changing Nature of Reinsurance Buying The evolving landscape
In the past….
Individual reinsurance programmes purchased for each business unit
The retention level and reinsurance programme evolved over time
Performance evaluated per line of business result
The present…
Insurers and Syndicates buying cross class reinsurance programmes
Contracts increasingly have aggregate and franchise features
New reinsurance products being created
Performance evaluated on group results
Why the change…?
Solvency 2 has focused insurers on risk appetite and capital efficiency
Purchase of ‘specific’ covers can lead to redundant cover
Influence of the CRO role
Changing nature of the Reinsurance Buyer’s position

4. The Changing Nature of Reinsurance Buying
Reinsurance purchasing – the past (good old days…?)
Reinsurance team operates almost autonomously
Little or no actuarial evaluation
Little or no consideration given to the capital model
Buying authority sits with the reinsurance manager
Broker relationships a prominent feature dictating reinsurance programme
Deals done here…
And here!

5. The Changing Nature of Reinsurance Buying
Reinsurance purchasing – the present
Reinsurance team connected to the business
Reinsurance manager may be an actuary or report to the Chief Actuary
Capital actuaries stochastically model and evaluate alternative structures
Buying authority is usually a panel including reinsurance, underwriting and actuarial colleagues
Brokers selected more on service and modelling / advisory capability

6. The Changing Nature of Reinsurance Buying Deal Example 1
Rationale: Earnings protection via “Group Volatility Cover”
Classes covered: Property, Engineering, Marine Hull, Marine Cargo
Placed “close to the money” in terms of their budget for large losses
Franchise retention of 10M, maximum contribution differs by class/territory
120M xs 150M in the aggregate

7. Reinsurance Buying Trends Deal Example 2
Rationale: Cost savings, retain profit within group
Classes covered: Property, Liability, Energy, Marine, Aviation, Energy, Financial Lines
Two stage transition
Stage 1 – replace all first layers with 100m xs 100m aggregate cover
Stage 2 – replace all second layers with Xm xs Ym aggregate cover
Contracts ‘placed’ internally, and protected with retrocession

8. Parametric Reinsurance (Non-Catastrophe)
What is Parametric Reinsurance
“Parametric insurance is a type of insurance that does not indemnify the pure loss, but ex ante agrees to make a payment upon the occurrence of a triggering event. The triggering event is often a catastrophic natural event which may ordinarily precipitate a loss or a series of losses. But parametric insurance principles are also applied to Agricultural crop insurance and other normal risks not of the nature of disaster, if the outcome of the risk is correlated to a parameter or an index of parameters”

9. Parametric Reinsurance (Non-Catastrophe) Current deal in progress!
Triggering event – Loss ratio for a collection of insurers
Buyer can select the ‘return period’ that will trigger the deal
If loss ratio trigger is breached, cover is provided for all underwriting risk – much like how an aggregated ILW (Industry Loss Warranty) would work
Illustrative Indemnity Triggers
Loss Ratio Trigger
116%
138%
147%
Return Period
1 in 20
1 in 100
1 in 200
Probability of trigger
5.0%
1.0%
0.5%
Estimated Rate on Line
TBC

10. Parametric Reinsurance (Non-Catastrophe) Current deal in progress!
What is the drawback of parametric insurance? Basis Risk!!
Basis Risk exists to the extent that your own results differ from the of the index to which the parametric insurance is based. I.e. You suffer heavy losses but the index does not trigger.
Basis Risk can also be positive! You have a good year but the index doesn’t

11. Summary Times are changing: Regulatory regimes Chief Risk Officer
New products and innovation
Capital market capacity
Reinsurance programmes increasingly have:
Multi class cover
Aggregate / franchise features
Parametric solutions are starting to evolve in the non catastrophe space
Credible index required
Basis risk a key consideration