1. Actuarial Role in the Client Relationship CARe Seminar June 2002

2. 2 Moderator Steven B White, Guy Carpenter Instrat Panelists Pierre Laurin, Zurich North America Michael Coca, Partner Re Steven Kelner, American Re

3. 3 Actuarial Role in Client Relationship Buyer/Ceding Company Broker (if used) Reinsurer Review reinsurance needs/goals Internal Actuarial Analysis Present goals/structure to external partners Analyze and recommend structure Gather, organize & present data to market Ceding company advocate with the reinsurer Analyze and recommend quotes Advice on structure/primary price Develop quote & present to broker/client Participate in UW/Claims audits Create pricing tools

4. The Buyer’s Perspective Pierre Laurin, FCAS Zurich Reinsurance Services

5. 5 Zurich Reinsurance Services North American Hub

6. 6 Goals of Structure n Review reinsurance needs and requirements before going the market n Increase analytics in establishing reinsurance structure n Provide management with enhanced tools for informed decision making n Establish retention levels at BU, Regional and Corporate level n Group Total Capacity perspective

7. 7 BU, Regional And Corporate Capacity n BU Capacity: retention based on –risk appetite, –allocated capital, –market factors, including expected portfolio’s profitability n Regional Capacity: –provides BU the same protection as external reinsurer –within regional management structure –taking advantage of negative co-variance within the organization n Corporate Capacity: –based on ZFS Group strategy –new business

8. 8 Time lines n Review of BU Reinsurance Strategy every six months, post Profitability reviews –Target Business –New Capacity requirements –Quota Share vs Excess of Loss covers –Allocated Capital Surplus –High level discussions on retention levels –Impact of Reinsurance coverage/exclusions on our target markets –Tactical discussions on upcoming treaty renewals

9. 9 Time lines n 120 days before renewal: –tactical review with CEO, actuary and CUO on goals of reinsurance –Manufacturing works with SBU/BU to enhance understanding of the LOB dynamics and risk profile –request for information n 90 days prior –Actuarial and structural analysis begins with timely delivery of data n 75 to 60 days prior –presentation of findings and recommendations –structure and strategy confirmed

10. 10 Time lines n 60 to 45 days prior –presentation of goals and proposed structure to core external partners n 45 days prior –go to market full market minimum 30 days prior to effective date n effective date –program placed n 15 days after inception –profile and all administrative requirements met n 90 days after inception –all treaties signed

11. The Broker Perspective Steven White, FCAS Guy Carpenter Instrat

12. 12 “The Relationship Wheel” Property Specialty Capital Markets Specialty Guy Carpenter Instrat Distribution/ Portfolio Solutions Catastrophe Modeling Marsh Inc. and Government Relations Guy Carpenter Relationship Managers Client

13. 13 3. Quantitative & Qualitative Analysis of Risks / Challenges 5. Execute in the Appropriate Markets - Find the Right Partners The Process Summary 4. Risk Management & Other Strategy Development 1. Goals/ Objectives 2. Risks/ Challenges that may Impede Reaching Goals/ Objectives 6. Monitor & Manage

14. 14 Broker Actuary Where do we fit in n Marketing –The process starts with a “Beauty Contest” where the point position is given to a broker or a direct market –We help prepare the presentation highlighting our technical abilities –Part of that presentation may be a state of the market to help set the expectations for the upcoming pricing/renewal –Help understand the risk appetite of the ceding company

15. 15 Broker Actuary Where do we fit in n Interaction with the ceding company actuary –Provides a single point of contact for the ceding company actuary –Develop “technical” indications for the deal –Two way sharing of information to help understand the risk –Source of Industry “Market” information –Assist bringing Ceding Company and Reinsurer towards a common understanding

16. 16 Product Pyramid

17. 17 Broker Actuary Involvement varies by type of deal and client n The types of deals that involve the highest level of actuarial input –Comparisons of alternate quotes and structure Which deal is most advantageous to the ceding company Depends on client objectives and risk appetite Typical criteria is to optimize the mixture of profit combined with allowable volatility –Technical Services Portfolio Optimization Capital Allocation –Dynamic Financial Analysis

18. 18 Broker Actuary n Who sets the price? –Broker Actuary may give a Technical Price Indication –The Market sets the price!

19. The Broker Market Reinsurer Michael Coca, FCAS Partner Re

20. 20 The Actuarial Role in the Client Relationship –Advisory –Collaborative –Priorities –Coordination –Documentation

21. 21 Actuarial Role in the Client Relationship –Advisory Develop rate indications –Lead quotes –Alternative quotes Help address client needs –Advice on reinsurance structure –Advice on changes in/terms and conditions –Advice on primary pricing Assess profitability on renewal accounts –Monitor prior pricing indications versus actual emergence –Establish IBNR by class of business/type of reinsurance. This will enable pricing area to provide underwriting with account experience by contract/treaty year at each renewal. New products/new approaches to existing products –Reinstatement backup covers/2 nd event covers –WC Catastrophe covers –Shortfall covers

22. 22 Actuarial Role in the Client Relationship –Collaborative Work with Underwriting and Executive management to –Develop pricing workflow interfaces with underwriting –Establish underwriting target returns by class/type –Set service standards Network with Underwriting teams and their clients –Participate in underwriting reviews –Attend specific Industry conferences –Assist underwriting and marketing in developing competitive products Coordination with claims department –ACRs –Advice on ceding company reserving practices Develop rapport with client/broker actuaries –Understand anomalies in the data –Gain access to information not readily available in submissions (ldfs, price monitoring……)

23. 23 Actuarial Role in the Client Relationship –Priorities Create standardized tools and procedures –Develop technical tools to enable the timely analysis of underwriting risk, and it’s pricing –Organize workshops for underwriters to educate them in the understanding of risk analysis output from pricing models. –Update pricing parameters for existing models. Pricing Response Time –Implement and deliver standard for submission turnaround time –Develop a competitive edge as a lead reinsurer

24. 24 Actuarial Role in the Client Relationship –Coordination Establish checks and balances to assure that pricing of business is appropriate –Peer review process –Build relationships with underwriting to assure pricing priorities are met Create uniform and consistent pricing tools and parameters –User friendly and efficient –Standardized pricing summary and assumptions –Process for evaluating and implementing new procedures based on findings in current relevant literature.

25. 25 Actuarial Role in the Client Relationship –Documentation Decision memo process –Document the underwriting process results –Link between pricing and reserving –Bridge to evaluating business decisions through profitability analysis –Early warning system for business monitoring Business Monitoring –Review profitability results with underwriting; by account,line,class or business segment –Profitability analysis can be updated and reviewed quarterly (result monitoring mechanism) –Develop initiatives/Strategies based on results –Creates accountability for underwriting results Price Monitoring by line –Severity trends –Price changes –Loss ratio movements –Effective rate changes

26. 26 Process Overview Submission Received Treaty U/W Actuarial Process Actuarial output & discussion with U/W Bind Contract Create Decision Memo 5 Actuarial Role in the Client Relationship Reserving Profitability Analysis Business Planning

27. 27 Actuarial Process Account Data Exposure RatingLoss Rating Determine Best Indication Model Variability of Results Determine Overall Return on Insurance Transaction Document the Underwriting Decision Business Monitoring Input Expected Results Variability of Results Return on Insurance Transaction Decision Memo Profitability Analysis Function Actuarial Role in the Client Relationship

28. The Direct Market Reinsurer Steven Kelner, FCAS American Re

29. 29 Direct Reinsurance Process n Different business models and buyers –Large Caps & Super Regionals –Regionals and Small Caps –Specialty and Niche

30. 30 Direct Reinsurance Business model and buyer differences n Large Caps and Super Regionals –Generally involve broker and direct markets –Well-staffed Ceded Reinsurance departments –Sophisticated buyers –Significant expertise and capabilities –Often suffering from data challenges due to mergers and complex internal structures –Generally buying capacity not expertise

31. 31 Direct Reinsurance Business model and buyer differences n Regionals and Small Caps –Where direct markets are involved brokers are often limited to capacity products such as property catastrophe and WC catastrophe but there is frequent sharing of programs, more than 5 five years ago –Experienced Ceded Reinsurance buyer –Less access to internal modeling and data management expertise –Ability to access and manipulate data varies greatly but sometimes extremely capable, more so than larger companies –Sometimes buying expertise in addition to capacity

32. 32 Direct Reinsurance Business model and buyer differences n Specialty and Niche –Mix of both worlds –Experienced Ceded Reinsurance buyer –Varied access to internal modeling and data management expertise –Sometimes buying expertise in addition to capacity –Clients are often MGAs

33. 33 Direct Reinsurance Broker dependent client Data Issues n Data is gathered by the client and provided to the broker. –Data spec’s appear to be provided by the broker –Data is cleaned and organized, then sent to the reinsurers. –The direct market is then provided the submission –Data issues brought to the client’s attention may be answered by the broker

34. 34 Direct Reinsurance Broker dependent client Structure and pricing n General structure is usually provided by the broker –Markets get to quote and offer alternatives –Capacity is built around consensus pricing –Much less opportunity for the directs to influence terms and conditions –Reinsurers generally play or don’t play based on firm order terms

35. 35 Direct Reinsurance Open Competition Data Issues n Data spec’s are provided by the competing markets –Those who develop the clearest and/or simplest spec’s or provide the best support for data development have a competitive advantage and may drive the data gathering process. –Data is then organized and sent to the reinsurers, often in the form of a standard submission. –Ability to manipulate and understand the data may be a separate and unique competitive advantage

36. 36 Direct Reinsurance Open Competition Structure and pricing n Structure at times is a free for all –Markets get to quote and offer unique alternatives –Buyer then may decide based on the structure and pricing as-is or may send the preferred structure to the market for re-pricing –Capacity may be built around consensus pricing –The program may not go to the creator of the structure. –The lead may have influence over a significant portion of the terms and conditions –Reinsurers may be asked to play in order to develop capacity

37. 37 Direct Reinsurance Where the actuary fits in As an actuary n Involvement with the client –May be the only guy who can explain what we mean in the data request, where to get it, and how we use it. –Often established as the contact in the geek-to- geek dialogue. –May be asked to demonstrate how we got our price and/or why we suggest a structure. –May be asked to opine on technical issues such as market loss trends or the validity of projections. –May be asked to quantify for the client how operational assumptions impacted pricing decisions

38. 38 Direct Reinsurance Where the actuary fits in As an Underwriter or Account Executive n Involvement with the client –Same as above but an issue of degree –More client involvement because some underwriters do some of what the actuary can do –Some don’t want the actuary involved. –Someone has to explain DFA and ERM!

39. 39 Role of All Actuaries n It is unreasonable to expect a consensus among all parties –We all have to common goal of getting the reinsurance placed –Within that goal we have different objectives –We must rely on our own judgment –We should be looking at where we agree as much as where we disagree in pricing assumptions and methodology We need to make sure that the Underwriters / Brokers / Account Executives / Company Executives understand that we agree more than we disagree. –We should avoid “dueling actuaries”