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Finite Reinsurance Discussion and Demonstration. A Buyer’s Perspective. Finite/Blended Risk Transfer – A Buyer’s Perspective Overview. Risk-Transfer Spectrum. Full Risk-transfer. Probability Weighted Economic Cost. Structured. Blended. Finite. Reduction in Economic Volatility.

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Presentation Transcript
slide1

Finite Reinsurance

Discussion and

Demonstration

A Buyer’s Perspective

slide2

Finite/Blended Risk Transfer – A Buyer’s PerspectiveOverview

Risk-Transfer Spectrum

Full Risk-transfer

Probability

Weighted

Economic Cost

Structured

Blended

Finite

Reduction in

Economic Volatility

finite blended risk transfer a buyer s perspective overview
Finite/Blended Risk Transfer – A Buyer’s PerspectiveOverview
  • Evolved because traditional reinsurance does not work for all levels of coverage, capacity, and pricing
  • More conducive to frequency/working layers than severity/excess layers
  • More effective with long-tailed exposures and favorable interest rate environment
  • Less risk-transfer involved than traditional reinsurance
  • Designed to meet financial objectives
  • Desire to smooth results over multiple years
finite blended risk transfer a buyer s perspective program features
Finite/Blended Risk Transfer – A Buyer’s PerspectiveProgram Features
  • Customized risk transfer
    • Increased flexibility and innovation
  • Experience account
    • Funds transferred
    • Funds withheld
  • Upside/Downside
    • Additional premiums
    • Profit Commissions
finite blended risk transfer a buyer s perspective examples of programs
Finite/Blended Risk Transfer – A Buyer’s PerspectiveExamples of Programs
  • Aggregate Stop Loss Cover
    • Increase Confidence in Projected Earnings
    • Customize level/amount of risk transfer
  • LPT/Adverse Development Covers
    • Management of net leverage
    • Release capital from operations
    • Wall off results of continuing operations from discontinuing operations
finite blended risk transfer a buyer s perspective aggregate stop loss example
Finite/Blended Risk Transfer – A Buyer’s PerspectiveAggregate Stop Loss Example

Plan Loss

Ratio

Used to Reduce Volatility

Incremental Probability

Coverage

Loss Ratio

slide7

Finite/Blended Risk Transfer – A Buyer’s PerspectiveAggregate Stop Loss Example

  • A company writes $500 million of casualty business at a planned 100% combined ratio.
  • The planned loss ratio is 65%, with CV of 22%.
  • The objective is to reduce the variability of the actual combined ratio, in the event of adverse experience.
  • Features of the proposed structure:
    • Attachment point of 65%, Limit of 85%
    • Net premium equal to 55% of ceded losses
    • Funds withheld at a 4.5% interest credit
    • Premiums grossed up for a 40% ceding commission
slide8

Finite/Blended Risk Transfer – A Buyer’s PerspectiveAggregate Stop Loss Example

  • Proposed structure provides a nearly 4% reduction to combined ratio at plan +10%.

Pre-Aggregate

Post-Aggregate

Combined

Expected

Cover

Ceded

Cover

Ratio

Underwriting

PV Profit

Income

Scenario

Combined Ratio

Premium

Losses

Expenses

Combined Ratio

Benefit

Benefit

Commission

(Loss)

Plan+10%

110.0%

45,833

50,000

18,333

106.1%

3.9%

22,500

5,132

2,750

Plan +11%

111.0%

50,417

55,000

20,167

106.7%

4.3%

24,750

5,187

3,025

Plan +12%

112.0%

55,000

60,000

22,000

107.4%

4.6%

27,000

5,242

3,300

Plan +15%

115.0%

68,750

75,000

27,500

109.6%

5.4%

33,750

5,405

4,125

Plan + 20%

120.0%

91,667

100,000

36,667

113.5%

6.5%

45,000

5,228

5,500

91,667

45,000

Plan + 30%

130.0%

100,000

36,667

125.7%

4.3%

0

(9,370)

slide9

Finite/Blended Risk Transfer – A Buyer’s PerspectiveSummary

  • Alternative Reinsurance
    • Designed to achieve various financial statement objectives
    • Complement traditional reinsurance programs
    • Reduces financial risks such as credit, investment and timing risks
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