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2. Agenda. Reinsurance StructuresCalculating an On Level Loss RatioAdjustments to PremiumAdjustments to LossesAdding in a Catastrophe/Shock loadDealing with a change in mix of businessFilling in the gaps when data is unavailable. 3. Reinsurance Structures. Standard StructuresPro RataExcess
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1. Reinsurance Structures and On Level Loss Ratios Reinsurance Boot Camp July 2005
2. Agenda Reinsurance Structures
Calculating an On Level Loss Ratio
Adjustments to Premium
Adjustments to Losses
Adding in a Catastrophe/Shock load
Dealing with a change in mix of business
Filling in the gaps when data is unavailable
3. Reinsurance Structures Standard Structures
Pro Rata
Excess of Loss
NonStandard Structures
Stop Loss
Loss Portfolio Transfer
4. What is a Pro Rata Treaty? The cedant agrees to share x% of the premium and x% of the losses of a book of business.
The reinsurer returns some of the premium to the cedant in the form of a ceding commission.
One Pro Rata Structure, a Quota Share, cedes the same percentage on all risks.
A Variable Quota Share may cede different percentages for different limits.
A Surplus Share allows the cedant to retain a given amount, called a line, on any one risk and cede the remaining lines to reinsurers.
5. Variable Quota Share
6. Surplus Share
7. Uses for Pro Rata Treaties Surplus Relief
Pro Rata Structures reduce net premium which improves (decreases) the cedants net-premium-to surplus ratio
The ceding commission increases the cedants surplus, also improving (decreasing) the net-premium-to-surplus ratio.
Combined Ratio Improvement, in some cases
Although straight Pro Rata Structures do not improve loss ratios, the cedants actual overall results can improve if the ceding commission received exceeds the cedants actual expenses (an override).
Cedants overall portfolio results COULD be worse if they end up ceding out very profitable business instead of keeping it net.
8. What would I care about if I were pricing a Pro Rata Treaty? Expected Loss Ratio for the covered business
Volatility of Loss Ratio/Loss Sensitive Features
Cedants actual expenses
Alignment of Interests
9. Other concerns - Variable QS
Do I have the appropriate data to estimate a loss ratio by limit?
Surplus Share
Do I have surplus share data that represents the current line guide?
10. What is an Excess of Loss Treaty? For any loss, the cedant retains the first x dollars and cedes out the next y dollars, in exchange for premium.
Per Risk
Per Occurrence
Example: 9M x 1M per occurrence
For a loss sustained on any given occurrence, the cedant keeps the first 1M and the reinsurer picks up the next 9M.
11. Uses for Excess of Loss Treaties Stabilize loss experience
Catastrophe Protection
Increased Risk Capacity
12. What would I care about if I were pricing an Excess of Loss Treaty? Frequency of Layer Losses
Severity of Layer Losses
Volatility of Loss Ratio/Loss Sensitive Features
Alignment of Interests
13. What is a Stop Loss Treaty and what is it used for? The cedant retains the first x of aggregate losses and cedes out the next y of aggregate losses to a reinsurer in exchange for premium.
X can either be a percentage or a fixed dollar amount
Stabilizes net results
Example: 10% excess of a 70% net loss ratio in exchange for 3% premium.
14. What would I care about if I were pricing a Stop Loss Treaty? Expected Loss Ratio for the covered business
Volatility around the Loss Ratio
Special Funding features
Alignment of Interests
Accounting considerations
15. What is a Loss Portfolio Transfer and what is it used for? The cedant gives a block of loss reserves to a reinsurer in exchange for premium.
Premium considers the discounted value of those reserves along with a risk charge.
Enables the cedant to cleanly exit a line of business and focus on their going concern portfolio.
16. What would I care about if I were pricing a Loss Portfolio Transfer? Loss Reserve Adequacy
Latent Liabilities
Interest Rate Assumptions
Alignment of Interests
17. Calculating an On Level Loss Ratio Essential for pricing almost any prospective reinsurance structure.
Historical years of premium are adjusted to the prospective periods rate and dollar levels.
Historical years of losses are adjusted to an ultimate settled basis and trended to the prospective periods dollar levels.
Adjusted losses are ratio-ed to adjusted premium for an on level loss ratio.
18. Data Needs - Premium Historical Premium
Earned Premium if Losses Occurring treaty
Written Premium if Risks Attaching treaty
Historical Rate Changes
Premium/Exposure Trend if Exposure Base is Inflation Sensitive
19. Data Needs - Losses Historical Paid a/o Incurred Losses and ALAE
Accident Year if Losses Occurring treaty
Policy Year if Risks Attaching treaty
Loss Development Triangle
Loss Trend
Catastrophe/Shock losses separately
20. Adjustments to Premium Rate On Level Factors
Parallelogram method
Premium at Present Rates
Premium/Exposure Trend
Yes if exposure base is insured value, sales, revenues, etc.
No if exposure base is square feet, per vehicle, per employee, per doctor, etc.
21. Rate On Level Factors Rate Changes should consider changes to base rates, schedule credits and debits, tier rating, LCMs. They should also be adjusted for changes in limits and attachment points on the underlying policies.
Parallelogram method uses geometry to calculate on level factors.
Premium at Present Rates re-rates all historical policies using prospective rates.
22. Rate On Level Factors
23. Premium/Exposure Trend Trend from:
Average Earned Date of experience period for Losses Occurring
Average Written Date of experience period for Risks Attaching
Trend to:
Average Earned Date of prospective period for Losses Occurring
Average Written Date of prospective period for Risks Attaching
24. Adjustments to Losses Catastrophe/Shock losses should be separated out.
NonCat Incurred Losses need to be adjusted to ultimate, settled basis.
Use cedants own loss development triangle
Supplement with industry/peer data if necessary
Ultimate, settled noncat losses need to be trended to prospective period.
Trend from average date of loss of experience period
Trend to average date of loss of prospective period
25. Incurred Loss Development Triangle (in thousands)
26. Loss Development (contd)
27. Developing Incurred Losses
28. Loss Trend
29. On Level Loss Ratios: Making a Selection Select for Stability?
Select for Responsiveness?
Somewhere in the middle?
30. Stability versus Responsiveness
31. Adding a Catastrophe Load Catastrophe Load
By definition, catastrophes are low frequency, high severity.
Your experience period may not even have had such a lossyet
There are plenty of catastrophe exposure models available for property however.
Catastrophe experience should be reviewed, but given little weight due to its inherently volatile nature.
32. Adding a Shock Load Loss Experience versus Loss Exposure
Calculate a limited loss ratio at low stable level.
Add a load for larger losses that you are exposed to, but havent experienced yet.
Use exposure curves to add an excess charge above that limited level
Amortize in some large but possible loss
33. Dealing with a Shift in Business Mix A loss ratio analysis done on an all lines combined basis will miss shifts in the business mix.
Should analyze each line of business separately and then weight results on prospective premium by line.
34. Dealing with Start-Ups and No Data New line of business for a company
New company altogether
35. What to think about in no data situations Competitor experience or rate comparisons, but consider:
Growing pains/distractions in new line
Competitive advantage?
Position in the market cycle?
Burning your way in
Track record at prior carriers
Rating of current carrier/current paper
Company infrastructure established?
Smaller but growing book and volatility