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CARE Presentation – Ceding Company Considerations. David Flitman, FCAS, MAAA, ASA Chief Actuary June 1, 2006. Reinsurer Risk Management. Use and Appropriateness of PMLS Three methods of tracking exposure Limits

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Care presentation ceding company considerations

CARE Presentation – Ceding Company Considerations

David Flitman, FCAS, MAAA, ASA

Chief Actuary

June 1, 2006


Reinsurer risk management

Reinsurer Risk Management

  • Use and Appropriateness of PMLS

    • Three methods of tracking exposure

      • Limits

      • Per occurrence PML – variants (Scenario Based vs. probabilistic) Realistic Disaster Scenarios (Lloyds)

      • Aggregate Loss Modeling (Simulation, Closed Form, distribution dependent (Poisson vs Negative Binomial)

    • Implication of using each

      • Limits appear overly conservative and tend to shift capacity toward higher rate on line business

      • Per Occurrence PMLs – tend to create bridging problems in between quantifying order of events (first event vs. second event pmls)

        • How to translate to overall risk metrics for example AM Best’s company weathering two events vs. S&P aggregate 250 return period.

      • Aggregate appears most attractive yet additional assumptions about frequency variability need to be better incorporated.

        • Serial dependency. SSTs and other basin wide effects


Reinsurer risk management1

Reinsurer Risk Management

  • Model Changes

    • The modeling companies have instituted massive changes in the last release

    • RMS 75% Personal Lines and 120% commercial Lines where 45% is frequency

    • AIR has similar frequency increases also increasing Demand Surge caps to 40% from 30%

  • Correct Model Usage

    • Are the dials all correctly selected.

      • Demand Surge

      • Storm Surge

      • Secondary Uncertainty

      • Fire Following

      • ALAE Loads

      • Miscellaneous loads – Exposure, Vulnerability, etc…

  • Quantifying Unmodeled Risk

    • Models work on binary correlation - need to translate risk into event set schemes

    • Completeness of Portfolio

    • Adding proxy portfolios for unmodeled business.

    • Other correlated business – WC Cat, A&H Cat, Crop/Hail


Retrocession capacity

Retrocession Capacity

  • Market Changes:

    • Changes in the Traditional Market

      • M&A and rating downgrades

      • Product Changes

        • Less Comprehensive e.g. exclusion of Marine/Energy

        • More Zonal Focused – Primary Companies towers of coverage

      • Price Advantages

        • With the significant shifts in the market can reinsurerers arbitrage their risks?

        • Recent losses illustrate that we don’t model credit properly.

      • Capital Markets


Markets changes

Markets Changes

  • Capital Markets

    • Cat Bonds

    • Side car facilities

    • ILWs

    • Greater volume/More trading opportunities

    • More Basis Risk

      • Shifting away from UNL covers to:

      • ILW triggers

      • Parametric triggers

      • Model Losses


Credit default modeling

Credit Default Modeling

  • Reinsurance (Retrocession) Traditionally modeled via a credit default ratio associated with their rating:

    • Fails to identify significant correlation.

    • PML analysis tends to show complete recoveries at all high return periods.

    • Estimate Correlation via Proxy Portfolios like ILWs or even replicats/sub portfolios of the cedant.

    • Pattern could be a lot steeper except for counter trend toward more securitization.


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