CAS Spring Meeting

1. CAS Spring Meeting

2. Contents • About Island Heritage • Caribbean Market • Managing Risk • Planning / Structuring a Reinsurance Program • Hurricane Ivan

3. Island Heritage • Specialist Property Insurer • Residential Focus • Founded in 1996 • Caribbean Wide • 12 Islands • Risk Taker (Within Reason) • Reinsurance • Data Collection • State of the Art • GWP > $50M in 2005

4. Caribbean Market • Low Premium Base • By American Standards • High CAT Exposure • Small Capital Base • Huge Dependence on Reinsurance Capacity • Many Companies Rely on Reinsurance Commissions.

5. Caribbean Market • U.S. Islands • Rate Filing • Actuarial Report • Loss experience • Reinsurance costs • Retention • Deductibles • Other Islands • No Filing • Reinsurance (key driver) • Competition • Deductibles

6. Managing Risk • Underwriting • Each Risk • Construction • Occupancy • Location • Deductible (2% min) • Coverage • B.I ? • Risk Dispersion • Risk Retention Strategy • Reinsurance

7. Managing Risk Risk Dispersion • Single Island vs. Multi Island • Concentration • Spread • Each Island • Per risk • Per county • Towers of Excellence • Similar large aggs in 4/5 islands • In different zones • Smaller aggs spread over other islands

8. Planning / Structuring A Reinsurance Program • Time • Four months planning • Two months executing / placing • Marketing • We visit all reinsurers at least once per year • Data Control • Accurate exposure numbers • CAT Modeling • WHY? – 50% of G.P spent on Reinsurance

9. Reinsurance Team • Island Heritage • Multi discipline • Technical • Financial • Marketing • Guy Carpenter • Actuarial • CAT modeling (INSTRAT) • Broking • Lead Reinsurers • Pre renewal discussions

10. Reinsurance Planning • Data Collection • Per Risk • Location • Occupancy • Construction • Deductible • Per County • Per Island • Per Zone • Cresta • Caribbean sub-zone • Historical Data • Industry • Own experience • Modeled data

11. Reinsurance Planning • CAT Models • Peer Review • Instinct (under-estimated) • Risk Strategy • Risk Averse • Q/S reinsurance (90% +) • Risk Taker • Set retention parameters. • E.g. Per Risk – 1% of Cap + Surplus Per Event – 10% of Cap + Surplus Multi Event - ?

12. Reinsurance Planning • Frequency • Severity • 2004 Season • Frequency: Ivan, Francis, Jeanne • Severity: Ivan • PML /Event Limit ?

13. Event Limits • All Q.S. (Quota Share) reinsurance programs have event limits • Used to be cost effective method of buying CAT reinsurance • Must have fall back provision if Q.S. limit is insufficient • CAT XL program • Some limits are mandated by Regulator • Hours clause • Cost

14. Reinsurance Program • Quota Share • Regional • Single island • Risk XL • Per Risk • Finite • Working layer • Multi retention • Reinsurance Security • Ratings of each reinsurer • Dynamic not static monitoring • Maximum exposure per reinsurer

15. Reinsurance Program • CAT XL • Layer Structure • Per single island • Island grouping • Caribbean • Clash • Reinstatements • Number • Cost

16. Reinsurance Structure St. Maarten & Other Islands QS Cayman / Bahamas & Turks QS USVI / BVI QS Cayman Commercial QS USVI Commercial QS Barbados QS QS QS QS Retained QS QS Retained QS Retained Retained Retained Retained Risk XL Programme Cat XL Programme Layer 6 Layer 4 Layer 5 Layer 3 Layer 4 Layer 3 Layer 2 Layer 2 Layer 1 Layer 1 Funded Layer Retention Retention

17. Hurricane Ivan

18. Hurricane Ivan

19. Hurricane Ivan

20. Ivan • Grand Cayman – Sept 12, 2004 • Cat 4/5 • Surge • 80% of damage was surge related • 20% wind related • Minimal loss of life • Good construction • 92% of all structures damaged • 60% of all vehicles written off

21. Ivan • Damage to buildings and infrastructure of Cayman Islands: US$3bn (Munich Re) • US$75,700 economic loss per capita in Cayman Islands (UN’s highest ever recorded).

22. Ivan Island Heritage Results • PML Loss 24.9% • Reinsurance Program 23.2% (>30% for 2005) • PML Breakdown: • Residential 27.2% • Commercial 23.6% • Condos 21.5% • Buildings 22.6% • Contents 43.9%

23. Were We Surprised? • Yes at the extent of the surge loss • Industry wide issue in Cayman • Why can’t the CAT modelers model the surge exposure prospectively? • Michelle was a wake-up call. • We bought more protection but not enough!

24. The Scenario • Logistical Nightmare • 60% of autos destroyed • 92% of buildings damaged • Very limited accommodation including hotels • Airport damaged • Power outages • No water • Forced to abandon office • Timing • 3 storm losses in Florida • Bahamas / Jamaica / Grenada • Adjusters?

25. How Did We React? • We were partially operating within 4 days • Fully operational within 7 days • Back-up systems worked • Arranged temp office accommodation • Got adjusters on island quickly • Found vehicles, offices and systems for them • Many aspects of disaster plan worked • Pre-printed claim forms • Pre-printed cheques • All staff in place

26. Lessons To Be Learnt • Underwriting • Reinsurance – review protection strategy • Deductibles – 2% not enough • Coverage Issues • Alternate accommodation • Debris removal • Professional fees • Contents • Ground floor exposures • Construction Standards • EFIS ?

27. The Claims Process • 92% of all policy holders claimed • 95% of all claims settled • Underinsurance not a huge problem • Loss adjustment process difficult • Availability of adjusters • Multi-storm season • Sourcing of building materials • 4 storms in Florida • Media reaction • Fantastic reinsurance response

28. Operational Issues • Reputation – A key element • Fair claim settlement • Effective P.R campaign • Maintained Rating • Opportunities • Dislocated marketplace • Security concerns • High rates (and reinsurance) • Result • More business • More licenses • Now a ‘real’ company