Finite risk in 2003 it isn t 1998 anymore
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Finite Risk in 2003 ...It Isn’t 1998 Anymore. Edward S. Hochberg, CPA, CPCU Mark Callahan, FCAS, MAAA David Koegel, ACAS, MAAA. Finite Risk in 2003. Edward S. Hochberg - SVP Pegasus Advisors PMA Re, Deloitte&Touche Mark Callahan - SVP XL Re M&R, Scruggs

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Finite Risk in 2003 ...It Isn’t 1998 Anymore

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Finite risk in 2003 it isn t 1998 anymore

Finite Risk in 2003...It Isn’t 1998 Anymore

Edward S. Hochberg, CPA, CPCU

Mark Callahan, FCAS, MAAA

David Koegel, ACAS, MAAA


Finite risk in 2003

Finite Risk in 2003

Edward S. Hochberg - SVP Pegasus Advisors

PMA Re, Deloitte&Touche

Mark Callahan - SVP XL Re

M&R, Scruggs

David Koegel - SVP Enterprise/Imagine

Deloitte&Touche, Gil&Roeser, Am Re, AIG, ISO


Finite risk in 20031

Finite Risk in 2003

Topics to be covered:

  • Finite Risk Market Overview

  • The Buyer’s Perspective

  • The Seller’s Perspective

  • Example Transactions


Finite risk in 2003 it isn t 1998 anymore

Finite Risk in 2003Market Overview

  • Underwriting environment-traditional

  • Underwriting environment-finite

  • Interest rate environment

  • Accounting and disclosure issues…post-Enron


Finite risk in 2003 market overview traditional environment

The world in 1998…

VERY soft pricing and terms

No lack of capacity

Virtually anything could get done at attractive (buying) pricing and terms

The world in 2003…

Market much harder post 9/11

While there is often ample capacity, it comes at high (often unattractive) prices

Difficult to get coverage for certain lines, classes, and exposures

Finite Risk in 2003Market Overview-Traditional Environment


Finite risk in 2003 market overview finite environment

The world in 1998…

VERY soft pricing and terms

No lack of capacity

Virtually anything could get done at attractive (buying) pricing and terms-everything had a price

Adverse selection and risk aggregation

Many active market participants

Reputation risk rarely considered

Finite Risk in 2003Market Overview-Finite Environment

  • The world in 2003…

    • Market much harder post 9/11…pricing and terms

    • Several very active markets have exited the business (e.g. Stockton, Scandinavian, OPL, Commercial Risk)

    • Not everything has a price

    • Market much more intelligent about risk aggregation, credit risk, and other exposures

    • Reputation risk considered


Finite risk in 2003 market overview interest rate environment

The world in 1998…

The 10-year US Treasury was 5.80% (4/28/98)

Time value of money was a significant/dominant component of many finite risk transactions

Finite Risk in 2003Market Overview-Interest Rate Environment

  • The world in 2003…

    • The 10-year US Treasury was 3.90% (4/28/03)

    • Significantly changes the economics of many finite risk transactions…much less reliance on time value of money


Finite risk in 2003 market overview accounting and disclosure

The world in 1998…

“Enron” had not yet occurred

Relatively few scandals involving reinsurance

Relatively less stringent focus on application of reinsurance accounting standards

Less focus from rating agencies and analysts

Finite Risk in 2003Market Overview-Accounting and Disclosure

  • The world in 2003…

    • Post-Enron…Sarbanes-enough said

    • Scandals/Insolvencies: Independent, HIH, PHICO, Reciprocal Group

    • Very stringent application of accounting standards and auditing thereof; specific focus on accrual issues and quota share reinsurance

    • Analysts and rating agencies increased focus…end of “in-the-money” transactions


Finite risk in 2003 buyer perspective

The world in 1998…Buyer Motivation

Discounting of losses

Spreading of catastrophe losses

Y2K

Unusual exposures…e.g. credit, “integrated risk”, etc.

The world in 1998…Product Expectations

Inexpensive, with loose terms, plenty of capacity

Lack of attention to credit risk and other issues

Relatively few accounting issues

Finite Risk in 2003Buyer Perspective


Finite risk in 2003 buyer perspective1

The world of buying finite risk in 2003

Accounting issues

More scrutiny—rating agencies, analysts, auditors

More expensive—stricter terms and conditions

Less benefit from time value of money

WHY IS DEMAND INCREASING?

Finite Risk in 2003Buyer Perspective


Finite risk in 2003 buyer perspective2

Increase in Demand

The main reason finite risk is used (reconciliation of accounting models to underlying economics still exists)

Better underwriting environment is pressuring leverage limits for many companies

Significant increases in cost for many classes of traditional reinsurance are making finite risk structures a cost-effective solution for many companies (e.g. workers’ compensation, medical malpractice)

May be the only cost-effective way to deal with certain exposures (e.g. terrorism, mold, others)

Finite Risk in 2003Buyer Perspective


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