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Property and Casualty Reinsurance Issues from a Midwestern Buyer’s Perspective. February 9, 2004 Marty Orth, ACAS, MAAA Farm Bureau Financial Services Farm Bureau Mutual Insurance Company Vice President Research and Development. Speech Style. There are many issues

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property and casualty reinsurance issues from a midwestern buyer s perspective

Property and Casualty Reinsurance Issues from a Midwestern Buyer’s Perspective

February 9, 2004

Marty Orth, ACAS, MAAA

Farm Bureau Financial Services

Farm Bureau Mutual Insurance Company

Vice President Research and Development

speech style
Speech Style
  • There are many issues
  • Who can predict the next major issue?
  • Therefore, this is an interactive speech
  • Your participation appreciated
let s take a sampling
Let’s take a sampling
  • What is your Reinsurance Knowledge?
    • Never Involved…know very little
    • Work with infrequently
    • Part of current responsibilities
    • Primary responsibility
participation and discussion
Participation and Discussion
  • What do you think the reinsurance issues are in 2004?
  • What do you think the long-term reinsurance issues will be over the next 10 years?
lesson 1 reinsurance purposes
LESSON 1: Reinsurance Purposes
  • Limit liability of specific risks
  • Stabilize loss experience
  • Protect against catastrophes
  • Increase capacity
  • Other
    • Entry into a new line
    • Cut off exposure on an existing line
    • Gain reinsurer’s expertise
lesson 2 reinsurance does not
LESSON 2: Reinsurance Does NOT
  • Change the inherent nature of the risk
  • Make a bad risk insurable
  • Make an exposure more predictable or desirable
  • Alter the total risk exposure
types of reinsurance
Types of Reinsurance

General Types

  • Facultative
  • Treaty
  • Financial

Also

  • Proportional or Pro rata
  • Excess reinsurance or non-proportional
reinsurance examples
Reinsurance Examples
  • FAC
  • Excess
    • Property Per Risk
    • Excess Per Occurrence
  • Property Catastrophe
  • Aggregate Excess of Loss
  • Funded Programs
  • LPT
slide9

Property Facultative Obligatory Reinsurance Treaty (FOT)

Characteristics

Capacity to write larger risks

Stability by limiting exposure on an individual risk

Degree of catastrophe protection from major loss on an individual risk

Vehicle to protect other reinsurance results

Limits ceding company’s exposure on risks not normally written by the company

slide11

Combination

Per Risk Excess and Surplus Treaty

$40,000,000

Third Surplus

Share Layer

$30,000,000

$10,000,000

Second Surplus

Share Layer

$7,500,000

$ 2,500,000

First Surplus

Share Layer

$2,000,000

$ 500,000

Per Risk Excess

$400,000 xs $100,000

$ 100,000

Retention

slide12

Property Surplus Share

Example

Reinsurer

Insurance

Company

surplus share program example
Risk Size = $1,000,000

Retention = $200,000

Company retains 20%

Surplus Share ProgramExample
fundamentals of reinsurance
Fundamentals of Reinsurance
  • WWW.REINSURANCE.ORG
overview
Overview
  • Current Market Overview
  • Reinsurance Issues
  • Midwestern Buyer’s View
2001 combined ratios
2001 Combined Ratios

Source: Reinsurance Association of America – Reinsurance Underwriting Report

2002 combined ratios
2002 Combined Ratios

Source: Reinsurance Association of America – Reinsurance Underwriting Report

2003 9 month combined ratios
2003 9-Month Combined Ratios

Source: Reinsurance Association of America – Reinsurance Underwriting Report

historical combined ratios
Historical Combined Ratios

Source: Reinsurance Association of America – Reinsurance Underwriting Report

raa industry results u s reinsurers
RAA Industry Results – U.S. Reinsurers

Source: Reinsurance Association of America – Reinsurance Underwriting Report

reinsurance bits and pieces
Reinsurance Bits and Pieces
  • Reinsurance outlook
  • Reserve Charge Example

YIELD

reinsurance outlook
Reinsurance Outlook
  • Continuous reserve development?
  • Financial Rating Issues Capitalization
    • Is Bermuda overcapitalized?
    • Will there be additional capital entering?
  • Continued reinsurer exits and consolidations?
xl capital ltd 2004 example
XL Capital Ltd – 2004 Example
  • January 13
    • XL Capital Ltd Completes Previously Announced Claims Audit Review and Year End Reserve Review
      • Expects fourth quarter charge of $647 million after taxes
        • Majority due to adverse development in Company’s North American reinsurance operations for casualty business written during 1997-2001 underwriting years
      • Company to raise at least $750 million of new capital
xl capital ltd 2004 example24
XL Capital Ltd – 2004 Example
  • January 14
    • A.M. Best
      • Downgraded all debt ratings of XL Capital Ltd. (Cayman Islands)
      • Placed ratings of A+ (superior) under review with negative outlook for XL Capital Group (Hamilton, Bermuda) and its affiliated companies
    • S&P
      • Cuts XL Capital Rating to AA- vs. AA
xl capital ltd 2004 example25
XL Capital Ltd – 2004 Example
  • January 22
    • XL Capital Ltd Announces Retirement Of Insurance Operations Chief Executive
xl capital ltd 2004 example26
XL Capital Ltd – 2004 Example
  • January 22
    • XL Capital Ltd Announces Management Changes Within Its Global Reinsurance Operations
special termination language
Special Termination Language
  • Special Termination Language or Downgrading Clauses
    • Don’t Rely on it
    • Do the Due Diligence
    • Reinsurers beginning to resist
    • Could allow run on the bank due to return premiums
legacy issues
Legacy Issues
  • Mold
  • Construction Defects
  • Asbestos
  • Environmental
  • 9/11
  • Professional Liability/ Med Mal
  • Others???
new evolving issues
New / Evolving Issues
  • Terrorism
  • Mad Cow
  • GMO’s
  • Obesity
  • SARS?
  • Soft Market?
  • Others?
terrorism risk insurance act tria update
Terrorism Risk Insurance Act (TRIA) Update
  • A.M. Best SRQ
  • What are your potential targets?
  • TRIA Flow Chart
  • Update
a m best srq
A. M. Best SRQ
  • VI. Terrorism Section
    • 41. Terrorism Exposure Management
    • 42. Largest Single Insurance “At Risk”
    • 43. Largest Single Insured TIV
    • 44. Zonal Aggregate Exposure
tria update
TRIA Update
  • AIR landmark database includes over 300,000 Potential Targets
terrorism risk insurance act of 2002 coverage flowchart
Terrorism Risk Insurance Act of 2002Coverage Flowchart

LOSS OCCURS

Covered by Policy

Not Covered by Policy

Deny Claim

Is it a Certified Act?

No

Yes

Does underlying policy have a Terrorism Exclusion?

Pay & Submit to Treasury

No

Yes

Pay loss – Collect against the Terrorists

Deny Claim

Terrorism Risk Insurance Act of 2002 sunsets on December 31, 2005. The Act only applies to Commercial insurance which includes Farmowners. Department of Treasury is sole authority on terrorism act “certification”.

tria update34
TRIA Update
  • Treasury survey
    • How is the industry handling
  • Will the industry have enough capacity to handle itself?
  • Will TRIA be allowed to sunset?
mad cow
Mad Cow
  • What is a Mad Cow
    • Bovine Spongiform Encephalopathy
  • What does this have to do with reinsurance?
mad cow37
Mad Cow
  • USDA’s Risk Management Agency (RMA)
    • Offers Livestock Risk Protection
      • Market-based price protection policy
  • Mad Cow Disease found in Washington State
  • Results
    • Sold more policies on that day as compared to life-to-date of program
gmo s
GMO’s
  • What are they?
    • Genetically Modified Organisms
  • Issues
    • Potential Liability?
      • Cross pollination
      • Loss of market value
      • Health
      • Other
    • Reinsurance Issues?
hard market
Hard Market
  • Is the Primary market softening
  • What are the Reinsurance Issues
  • Best Rating Issues
midwestern issues and view
Midwestern Issues and View
  • Regional isolation
  • Cat Placement
    • Models
    • Data Issues
    • Pricing
  • Future Events / Issues
regional isolation
Regional Isolation
  • It’s what you don’t see
    • Earthquake
    • Coastal
  • Midwestern Issues
    • It’s all about the CAT
midwestern cat definition
Midwestern Cat Definition
  • Event occurs over a 72 hour period: Wind/hail etc
cat model issues
Cat Model Issues
  • Models
    • AIR: straight wind/tornado/hail
    • RMS: no straight wind
    • EQE: no tornado/hail
  • Data Issues
  • Where is the property located
    • County, zip, policy
  • Other Issues
use of reinsurance brokers
Use of Reinsurance Brokers
  • Pros
    • Expertise and service
    • Modeling and pricing
    • An intermediary
  • Cons
    • Access to directs
cat placement
Cat Placement
  • Number one questions asked
    • Deductibles
  • Number two questions asked
    • TIV
open discussion
Open Discussion
  • What are the reinsurance issues to watch out for in 2004 and beyond?
summary
Summary
  • Understand your exposures
  • Do your homework
  • Look for long-term relationships
  • Seek advice of experts if needed
    • Contract attorneys
    • Reinsurers
    • Brokers
  • Monitor Results…Monitor Results…
contact information
Contact Information
  • Marty Orth

morth@fbfs.com

(515) 226-6295