BENFIELD GREIG

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# BENFIELD GREIG - PowerPoint PPT Presentation

Long Term Reinsurance Buying Strategies modelled using a component based DFA Tool Astin July 2001. BENFIELD GREIG. Introduction. Investigate possible reinsurance strategies over several years. Two Strategies: Constant Cover, but vary premium spend. Constant Spend, but vary cover purchased.

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## BENFIELD GREIG

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Presentation Transcript

modelled using a component based DFA Tool

Astin July 2001

BENFIELD GREIG

Introduction

Investigate possible reinsurance strategies over several years.

Two Strategies:

• Constant Cover, but vary premium spend.
• Constant Spend, but vary cover purchased.

Use Monte Carlo Simulation to evaluate Risk / Return for an example company.

Reinsurance Pricing Factors
• Many potential ways to model changes in reinsurance pricing
• Various factors including:
• Loss Experience
• Changes in exposure
• Reinsurance Market conditions
• The method used here is based on Loss Experience, with exposure and market factors assumed to be constant.
Example Company

Example model is a property Cat XL programme with the following parameters (USD million):

• Expenses 30
• Small Claims 48
• Large Cat Loss Freq Poisson distribution with mean 1.
• Large Cat Loss Size Lognormal distribution, mean 12, standard dev. 16.
Example Company Reinsurance
• The reinsurance programme consists of 4 layers as follows:
• (USD million)
• All layers have 1 reinstatement at 100%.
• Initial coinsurance for all layers is 25%.
Different Strategies
• Each Layer considered Separately
• In Constant Cover strategies, coinsurance is fixed and premium paid varies.
• In Constant Spend strategies, coinsurance varies to keep premium spend constant.
Change in Reinsurance Pricing
• The price of each layer in the reinsurance programme will vary, with an increase in price if the experience account (EA) for the layer is negative, and a reduction in price if the EA is positive and there are no losses in the previous year.
• EA = reinsurance premiums and reinstatements – recoveries
• if EA < 0 then premium = previous premium + EA * 10%
• if EA > 0 then rate = previous rate * 90%
• Initial EA = 0.
Model Implentation
• Modelled Using ReMetrica II
• Component Based Framework for risk analysis and DFA ( Dynamic Financial Analysis )
• Main Uses Include:
• Reinsurance Pricing and Strategy
• Risk Based Capital Modelling & Capital Allocation
Results
• The graphs below show the cedant’s net underwriting result. As a measure of risk we show:
• Standard Deviation
• 1 in 100 result
• Probability of a negative UW result
• As a measure of return we use expected UW result.
• The numbers on the graph indicate the years 1 – 5.
Results
• The results were based on 20,000 simulations using stratified sampling of 10,000 strata
• Performed sensitivity testing with further simulations ( 50,000 ) and different parameters.
Conclusions
• Constant Spend strategy better than Constant Cover Strategy.
• Return appears similar, but risk is less.
• Consistent across different risk measures.
Relevance
• Constant Spend strategy is similar to the following strategy:
• Buy core programme down from a top PML ( probable maximum loss ) figure and buy lower down on an opportunistic basis.
• Opposite strategy reduces reinsurance when cost is low and buys more when costs are high. I call this the ‘short memory’ strategy.
• Constant Cover is neutral.
• This analysis indicates that buying down from your PML as far as your budget will allow is a good strategy. ( In practice, will still need a core programme. )
• This analysis may help a reinsurance manager defend against the ‘short memory’ strategy.