CHANGES TO SSAP #62 PROPERTY & CASULTY REINSURANCE

1. CHANGES TO SSAP #62PROPERTY & CASULTY REINSURANCE NAIC Property and Casualty Reinsurance Study Group Chicago, IL May 10, 2005 Michael Moriarty Director, Capital Markets Bureau NY Insurance Dept.

2. SSAP # 62 CURRENT FRAMEWORK • Reinsurance Accounting or Deposit Accounting • “Either/Or” Approach • Standard for Favorable Reinsurance Accounting Treatment: “Transfer of Underwriting Risk” • Equates to Significant Risk of Significant Loss • Otherwise the Deposit Accounting Approach Applies

3. Binary Approach in SSAP #62 • Does Not Reflect the Economics of Certain Significant Reinsurance Transactions • Reinsurance Agreements Can Have a Range of Transfer of Insurance Risk • Main Intent of Transactions May Be Financing – Temporarily Taking Reserves Off the Books/”Parking” Reserves

4. Why “Finance” Losses In a Reinsurance Agreement IF Reinsurance Accounting Can Be Secured: • Discount in Reserves Can Be “Unlocked” • Enhance Capital Position • Improve Underwriting Results (& Earnings) • Improve Leverage Ratios (NPW to Surplus; Underwriting Ratios; Reserves to Surplus)

5. Sample TransactionExcess of Loss • COVER - $80 Million xs $50 Million • GROSS WRITTEN PREMIUM $150 Million • EXPECTED LOSSES by Ceding Company $120 Million • Probability of $110 Million in Losses>90% • PREMIUM for Cover $60 Million • ACTUAL LOSSES INCURRED $120 Million

6. Sample Transaction - Excess of Loss Financial Statement ImpactReinsurance Accounting – SSAP #62

7. Sample Transaction - Excess of LossWhat Really Happened • Reinsurer Took Marginal Risk – Was Exposed to $10 Million Over Expected Losses • Exposure Probably Achieved Transfer of Insurance Risk Under 10/10 Rule ($10 Mln Exposure/$60Mln Premium = 16.7% Loss) • Ceding Company KNEW it Was Transferring Losses That Would Be Indemnified ($50 Mln to $110 Mln Layer)

8. Sample Transaction - Excess of LossWhat is Driving Transaction? • What is the Economic Purpose of Ceding This Layer? Is it Insurance or Financing? • If the Ceding Company Wanted to Hedge its Underwriting Risk, Shouldn’t it Have Secured a $10Mln xs of $120 mln Cover Instead (i.e. Variability Above Expected Losses) • Reinsurer May “Lose” on Transaction from Accounting Perspective, but Not Economically • Significant Accounting Benefit of “Parking” the Working Layer off-Balance Sheet

9. Sample TransactionExcess of Loss w: Bifurcation • COVER - $80 Million xs $50 Million • GROSS WRITTEN PREMIUM $150 Million • EXPECTED LOSSES by Ceding Co. $120 Million • Probability of $110 Million in Losses>90% • FINANCING PREMIUM for $60 Mln xs $50 Mln = $53 Mln • INSURANCE PREMIUM for $20 Mln xs $110 Mln = $7 Mln • ACTUAL LOSSES INCURRED $120 Million

10. Sample Transaction - Excess of Loss Financial Statement ImpactBifurcation Framework * $53 Mln Receivable Under Deposit Acct.

11. Reinsurance Accounting Vs. Deposit Accounting • Reinsurance Accounting is Favorable • Disclosure Brings Better Transparency, but Does NOT Address the Issue that Seems to Be Driving Certain Transactions • How to Address: Bifurcation; Raising the Standard of Transfer of Insurance Risk; Allowing Discounting of Reserves; or Something Else??

12. PROPOSE REVISIONS TO SSAP # 62 • Discussion Draft Dated May 5, 2005 • NY Asks That It Be Received by Study Group and Exposed for Public Comment • Identify Issues that Need to be Addressed in Order to Connect the Concept with the Practical Application • Open to Alternatives • Casualty Actuarial Task Force Is Reviewing Issue

13. SSAP #62 Revisions (continued) New Paragraph 1 (N1) - Page 1 • Statement in the “Reinsurance Contracts Must Include Transfer of Risk” Section that Certain Reinsurance Agreements Will Require Bifurcation • It then Refers Readers to New Paragraphs 2, 3, & 4 for Further Guidance

14. SSAP #62 Revisions (continued) New Paragraph 2 (N1) - Page 3 • Leads off the New “Bifurcation of Reinsurance Agreements” Section in SSAP • Provides Reasoning for Bifurcation of Reinsurance Agreements • Alerts Readers that Bifurcation Will Not be Required for All Agreements; Only Those that Exhibit “Common Characteristics of Financing”

15. SSAP #62 Revisions (continued) New Paragraph 3 (N3) - Page 3 • Paragraph Specifies Six Categories of Reinsurance Agreements that Need NOT be Bifurcated • Excess Per Risk - Does Not Lend Itself To Predictability • Excess Per Occurrence - “ “ “ • Fronting Arrangements - No Reserves Typically Kept by Ceding Company

16. SSAP #62 Revisions (continued) New Paragraph 3 (N3) - Page 3 (continued) • Six Categories of Reinsurance Agreements that Need NOT be Bifurcated • Facultative - Have Not See Abuses in These Types of Deals • Premium/Limit Ratio is Low - In Financing Deals, the Premium Is “High” in Relation to the Losses Transferred, Which are Generally Capped • Any Other Agreements - that do not have the “Finite” Characteristics Set Forth In New Paragraph 4

17. SSAP #62 Revisions (continued) New Paragraph 4 (N4) - Pages 3 & 4 • Sets Forth Those Reinsurance Agreements NOT Specifically Exempted That Need to Be Bifurcated • Three Broad Categories • Contain Specific Contract Provisions • All Retroactive Agreements • All Multi-Year Agreements • If Exempted Under N3 OR Does Not Meet Any of the Conditions in N4, Agreement Need NOT Be Bifurcated

18. SSAP #62 Revisions (continued) New Paragraph 4 (N4) - Page 3 & 4 (continued) • Contractual Provisions Triggering Bifurcation • Premium/Limit Ratio is High - In Financing Deals, the Premium Is “High” in Relation to the Losses Transferred, Which are Generally Capped • Aggregate Loss Ratio Limits - Transferring Expected Losses • Loss Corridors - Limitations on Reinsurer’s Exposure • Retrospective Premium Adjustments - Revisions Intended to Reimburse Reinsurer’s Losses Under Contract

19. SSAP #62 Revisions (continued) New Paragraph 4 (N4) - Page 3 & 4 (continued) • Contractual Provisions Triggering Bifurcation (continued) • Sliding Scale/Adjustable Commissions - Can Reduce Reinsurer’s Expenses Based Upon Losses • Mandatory Reinstatement Premiums - Can Ensure that Reinsurer is Reimbursed for Unexpected Incurred Losses • Commutation Clause - allows ceding insurers a full refund of unused premiums

20. SSAP #62 Revisions (continued) New Paragraph 4 (N4) - Page 3 & 4 (continued) • Contractual Provisions Triggering Bifurcation (continued) • Conditional Cancellation Provisions That Require Entering Into New Agreements - Can Move Obligations from One Period to a Future Period • No Consistent Reporting - Indicative of Minimal Substance to Agreement • Funds Held - allows ceding insurers to retain funds to pay losses

21. SSAP #62 Revisions (continued) New Paragraph 5 (N5) - Page 4 • Guidance on HOW to Account for Bifurcation of Reinsurance Agreements • Estimate Layer of Coverage Where There is a Greater than Ninety Percent Probability That Ceding Company Will be Indemnified for Losses • Premiums/Expenses/Losses Attributable to That Layer Gets Booked Under Deposit Accounting Guidance; Remainder Gets Booked under Reinsurance Accounting Guidance

22. SSAP #62 Revisions (continued) Changes to Eliminate Current Treatment for Retroactive Agreements - Pages 5-9 • ALL Retroactive Reinsurance Contracts Must be Bifurcated • Portion that Transfers Insurance Risk Should Be Reported Under Reinsurance Guidance; Part that Finances Losses Should Be Reported Under Deposit Accounting Guidance • Similar to FAS 113 Approach

23. SSAP #62 Revisions (continued) Implementation Q&A - Page 9 • NO CHANGES Pending Exposure of Concepts Under Consideration • Revisions WILL Be Needed

24. SSAP #62 PROJECT P&C REINSURANCE STUDY GROUP TIMETABLE • P/C Reinsurance Study Group – continue to review over Summer • August – Receive Report from NAIC Casualty Actuarial Task Force • Put a Final Proposal on Study Group’s Agenda in the Fall and Move to Statutory Accounting Principles Working Group