1. Reinsurance Session 4

2. Reinsurance ICP 19 Capital Adequacy & Reinsurance Reinsurer Credit Risk Capital Quality Onsite Inspection Approach to Catastrophe Risk.

3. Reinsurance Insurance Core Principle 19 The supervisory authority requires that the insurer has a clear strategy to mitigate and diversify risks by defining limits on the amount of risk retained and taking out appropriate reinsurance cover or using other risk transfer arrangements consistent with its capital position. This strategy is an integral part of the insurer’s underwriting policy and must be approved and regularly monitored and reviewed by the board of directors. The supervisory authority reviews reinsurance arrangements to check that they are adequate and that the claims held by insurers on their reinsurers are recoverable. This includes that: - the reinsurance program provides coverage appropriate to the level of capital of the insurer (taking into account the real transfer of risk) and the profile of the risks it underwrites - the reinsurer’s protection is secure.

4. Reinsurance US$5m US$35m US$70m Residential XL, $65m xs $5m & 1 Reinstatement Commercial XL, $30m xs $5m & 1 Reinstatement Quota Share. Max of US$0.79m per risk Umbrella Property Catastrophe $110m XS: 1.$70m Residential 2.$35m Commercial 3.QS Event Limits (15% Agg. Exp.) & 1 Reinstatement US$180m Per risk XL $7.5m XS $150k Other RI to be used first. Capital Adequacy & Reinsurance NEEDED TO PAY ALL CLAIMS

5. Reinsurance Capital Adequacy & Reinsurance NEEDED TO PAY ALL CLAIMS CAPITAL REINSURANCECAPITAL REINSURANCE High reinsurance risk Capital must be high quality

6. Reinsurance Reinsurer Credit Risk Rating Agency Outlook – strengthening balance sheets, but lower premium rates & the pervasive threat of catastrophes. Source: Guy Carpenter LLC, 2008 Reinsurance Market Review

7. Reinsurance Reinsurer Credit Risk Liability of Primary Insurer is not changed by a reinsurance contract FRONTING IS NOT A RISK-FREE ACTIVITY!!! If the reinsurer has cashflow or solvency problems, they are automatically & quickly passed to the primary insurer. Check the rating of the reinsurer at the very least, but this is no guarantee of ongoing financial strength.

8. Reinsurance Reinsurer Credit Risk Example from Mauritius

9. Reinsurance High Quality Capital Characteristics of good capital: Permanent or semi-permanent Certain in value Appropriate to the liability profile REAL ESTATE is useless as an asset to back catastrophe risk. It is: ILLIQUID CORELLATED RISK with the liability side of the balance sheet But due to insufficient investment opportunities, it is common in the Caribbean Care with: Unrealized gains, including revaluation reserves Currency translation accounts

10. Reinsurance Onsite Inspection – ICP 13 “By law, the supervisory authority has wide-ranging powers to conduct on- site inspections and gather information deemed necessary to perform its duties.” “identify problems and irregularities in … quality of underwriting (both the prudence of the underwriting policy and the effectiveness of its implementation in practice)” Need the legal power and resources … prioritize. Suggestion: Before the onsite, obtain: Reinsurance cover notes and summarize Aggregate exposures, PML assumptions and underwriting guidelines During the onsite: Examine policies underwritten for compliance with guidelines.

11. Catastrophe Risk – What next? 1.Have all catastrophe perils been modeled, considered? Wind, storm surge, flooding, landslide, quake… 2.Reasonable frequency & severity? 2 or 3 events in a year? Severity level of 1 in 100 years, 1 in 250 years? 3.Are PMLs reasonable & generally consistent with other insurers? 4.Are PML assumptions translated into underwriting guidelines? 5.Is capital & reinsurance adequate to cover PMLs? 6.Is capital quality acceptable for catastrophe risk? 7.Is reinsurance of acceptable quality? Supervision & policyholder protection can be enhanced by adopting common standards and with greater sharing of supervisory information. What information?

12. Reinsurance Catastrophe Risk – Common Approach Coordinated approach would address these issues for all of us concerned… Standard techniques for measuring and enhanced exchange of information… Any comments….

13. Reinsurance We’ve covered….. Reinsurance market dynamics Basic reinsurance contract features Reinsurance programs – how contracts work together Shortcomings in reinsurance: real insurers and case study..…and concentrated on issues relevant to Caribbean region. MESSAGES….. Read & understand the cover notes / contracts Does capital & reinsurance cover a plausibly severe loss scenario? Quality capital as important as creditworthy reinsurers and Standard approach and exchange of information needed for regional insurers

14. Reinsurance Thank you!