1. An Introduction to Reserving and Financial Reporting Issues for Non-Traditional Reinsurance Casualty Loss Reserving Seminar September 14, 2004 Derek Jones, FCAS, MAAA

2. Milliman Finite Re Basics

3. Milliman Overview  Customized deals to address specific issues of cedant  Limited risk transferred by cedant  Limited upside for reinsurer

4. Milliman Common Uses  Deferral of taxes  Discounting  Earnings stabilization  Risk management  Surplus protection

5. Milliman Types of Deals Retroactive  Adverse development cover  Loss portfolio transfer Prospective  Aggregate stop-loss  Finite quota share  Spread loss

6. Milliman Loss Portfolio Transfer  Covers prior written business  Move reserves off balance sheet  Premium = PV (reserves) + provision for potential adverse development  Tends to cover smaller segments

7. Milliman Adverse Development Cover  Cedant retains portfolio  Premium is based on potential for adverse development and related timing of future payments  Tends to cover larger groupings of business than LPTs

8. Milliman Aggregate Stop-Loss  Stabilize earnings  Typically multi-year deals  Loss ratio corridor above plan ratio  Fixed premium

9. Milliman Finite Quota Share  Primary benefit = surplus relief  Differences from traditional QS  Loss ratio cap  Loss corridor  Lower net cost

10. Milliman Common Features  Time value of money (via experience account)  Cedant participation  Sub-limits of liability  Multiple years  Cancellation, commutation provisions

11. Milliman Reserving Issues

12. Milliman Understand Deal Structure  Line(s) of business, coverage type  Limits, sub-limits for reinsurer  Reinsurance or deposit accounting  Loss reserve discounting  Experience account  Commutation provision

13. Milliman Experience Account  EAB = premium – margin – loss payments + interest credit  What if EA is exhausted?

14. Milliman Monitor Emergence  Issue 1: temporary speed-up – Could exhaust EA too quickly  Issue 2: actual > expected – Initial estimate of nominal loss may be understated – Under-reporting will delay triggering additional premium

15. Milliman Interest Credit  Based on risk-free rate (e.g., U.S. Treasury spot rates)  Spread is larger for deals on a funds withheld basis

16. Milliman Sensitivity Testing  Both magnitude and timing of reinsurer payment are key  Nominal loss amounts – Retroactive: usually use more simplistic approach to produce range – Prospective: stochastic simulation  Use alternative payout patterns to evaluate impact of timing

17. Milliman Bulk Reserves  Law of large numbers doesn’t apply  How is best estimate determined (mode, mean, confidence level)?  Not commonly used in practice

18. Milliman Financial Reporting Issues

19. Milliman Type of Accounting  Reinsurance treatment is based on SFAS 113 or SSAP 62 – Reinsurer must assume significant risk – It must be reasonably possible to realize a significant loss  Deposit accounting is required unless both conditions are met

20. Milliman Prospective vs. Retroactive Reinsurance The following exceptions should be treated as prospective reinsurance  Structured settlements  Novations  Reduced participation in reinsurance treaties  Intercompany agreements that do not produce gain in surplus

21. Milliman Deposit Accounting  No initial impact on balance sheet or income statement for cedant or reinsurer  Emerges in financial statements as actual payments are made/received  Note: deposit liabilities are not part of lines 1 or 3 on statutory balance sheet

22. http://www.casact.org/pubs/forum/04fforum/ 04ff073.pdf derek.jones@milliman.com 646.473.3416