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Reinsurance . Session 3. Reinsurance. CATASTROPHE (RE)INSURANCE 2 Examples from Caribbean Region : Monoline Property Insurer Multi-line Non-life insurer . Reinsurance. CATASTROPHE (RE)INSURANCE Aggregate Exposures Total sums insured by line of business & location.

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reinsurance

Reinsurance

Session 3

reinsurance1
Reinsurance
  • CATASTROPHE (RE)INSURANCE
  • 2 Examples from Caribbean Region:
  • Monoline Property Insurer
  • Multi-line Non-life insurer
reinsurance2
Reinsurance
  • CATASTROPHE (RE)INSURANCE
  • Aggregate Exposures
    • Total sums insured by line of business & location.
  • Assess likely loss scenario
    • Must be plausibly severe
    • Preferably modeled by a reputable modeling agency
  • Does capital and reinsurance cover the loss scenario?
    • The real issue for supervisors!
reinsurance catastrophe reinsurance
Reinsurance – Catastrophe Reinsurance

A Caribbean Insurer Ltd.

Aggregate Property Exposures – Y.E. March 31, 2008.

A Caribbean Insurer Ltd.

Abridged Balance Sheet – Y.E. March 31, 2007.

US$ (net of fac)

Anguilla

24,333,470

Antigua

82,534,118

Bahamas

513,572,642

Barbados

655,535,718

Belize

1,648,750

BVI

1,645,250

Cayman

1,177,224,951

Curacao

10,298,520

Dominica

21,762,939

Grenada

29,952,188

Jamaica

91,490,811

St. Lucia

36,008,407

St. Kitts

22,141,125

St. Nevis

6,779,389

St. Maarten

70,676,148

St. Vincent

6,158,620

Trinidad & Tobago

325,000

Turks & Caicos

160,551,133

USVI

847,027,808

Aggregate Property Exposures

3,759,666,987

US$

Fixed Assets

1,976,554

Other Assets

63,194,128

Total Assets

65,170,682

Insurance Liabilities

20,507,368

Other Liabilities

11,271,860

Total Liabilities

31,779,228

Net Asset Value

33,391,454

Share Capital

29,644,330

Retained Profits

3,747,124

Shareholders Equity

33,391,454

US$3.8 billion risk backed by US$33.4 million assets

catastrophe reinsurance
Catastrophe Reinsurance

Aggregate Exposures Probable Maximum Loss

PML – Reinsurance Cover – Capital ≥ Zero

  • The Critical Business Process
  • Assess severity of probable loss
  • Inputs include sophisticated models & management’s judgment
  • Control underwriting based on PML - RI
catastrophe reinsurance aggregate exposures
Catastrophe ReinsuranceAggregate Exposures

Homeowner /

Residential

Commercial & Construction

Total

Cayman Is

559,524,567

589,584,682

1,149,109,249

USVI

554,261,938

290,795,370

845,057,308

Other

1,708,468,339

1,708,468,339

Total

2,822,254,844

880,380,052

3,702,634,896

Analyze into cat-exposed portfolios (US$):

Apply PML assumptions to these numbers

catastrophe reinsurance aggregate exposures to probable maximum loss
Catastrophe ReinsuranceAggregate Exposures to Probable Maximum Loss

Aggregate Exposures

1. Severity of Loss Scenario for year

Modeled Scenario:1yr. in 50; 1yr. In 100 etc.

2. Underwriting Selection Criteria

Windstorm

Distance from shoreline

Elevation above sea level

Topography

Retrofitting of buildings

Business

Assumptions

$1.7B

Quake

Location, Location, Location

Retrofitting of buildings

$1.2B

Underwriting

Discipline

$845M

PMLs

Other Caribbean Is.

Further Reading:

1. A Probable Maximum Loss Study of Critical Infrastructure in Three Caribbean Island States

Caribbean Disaster Mitigation Projecthttp://www.oas.org/cdmp/document/pml/pml.htm#executive

2. Natural Catastrophe Probable Maximum Loss

Woo.British Actuarial Journal 2002.

Cayman

Cayman

USVI

USVI

Other

non life reinsurance types of contract a reminder
Non-life ReinsuranceTypes of Contract – A reminder

Non-Proportional

Excess of Loss

Specified limit e.g. $65m.

Specified deductible e.g. $5m.

Specified line of business coverage

Specified number of reinstatements.

Proportional

Quota share

Traditionally, shares premiums and claims in the same proportions

Specified line of business coverage

BUT:

Aggregate cession limits

Event limits

Risk limits

catastrophe reinsurance reinsurance program for y e march 31 2008
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

75% Quota Share

Max. single risk limit US$4m of which 75% is ceded & 25% retained.

All territories excl. Cayman & USVI.

  • 52% placed. (That is 39% r/i cover)
  • Event limit is 15% of aggregate exposure, or 100% of PML.
  • Cession limits US$4m per risk, but aggregate cession limit varies by territory.

Commercial Excess of Loss

US$30million XS US$5million

All territories.

  • 100% placed.
  • 1 Reinstatement.

Residential Excess of Loss

US$65million XS US$5million

All territories.

  • 100% placed.
  • 1 Reinstatement.
  • Umbrella Property Catastrophe
  • US$110million XS
    • 1.US$70m Residential,
    • 2. US$35M Commercial, and
    • 3. QS Event & Cession limits

All territories.

  • 100% placed.
  • 1 Reinstatement.
  • Property Per Risk
  • US$350k XS US$150k
  • US$500k XS US$500k
  • US$4million XS US$1million
  • US$2.5million XS US$5million
  • (Kicks in after all other reinsurances)
  • (Reinsured decides what constitutes a risk)
  • All territories
  • All territories
  • All territories
  • Cayman Is only
  • All layers 100% placed.
  • 3 Reinstatements.
  • 2 Reinstatements.
  • 1 Reinstatement.
  • 1 Reinstatement.
catastrophe reinsurance reinsurance program for y e march 31 20081
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008
  • Aggregate limits per cover note:
    • Northern Caribbean: $312m
    • Southern Caribbean: $183m
  • Compare to aggregate exposure (slide 5) of $1.7billion for non Cayman & USVI risk.
  • The underwriting has overshot the cession limits, so reinsurance cover is “averaged” down in proportion (say by 1/3rd).

Reinsured decides what constitutes one risk.

That is, they can decide whether to aggregate it if its part of a catastrophe, or not.

catastrophe reinsurance reinsurance program for y e march 31 20082
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

US$180m

  • Umbrella Property Catastrophe $110m XS:
  • $70m Residential
  • $35m Commercial
  • QS Event Limits (15% Agg. Exp.)
  • & 1 Reinstatement

US$70m

  • $4m per risk limit is reduced:
  • Contract is only 59% placed.
  • Averaged down by a factor of 3.

Residential XL, $65m xs $5m

& 1 Reinstatement

US$35m

15% Max. Agg. Exp. Zone B $27.45m

Commercial XL, $30m xs $5m

& 1 Reinstatement

Per risk XL $7.5m XS $150k

Other RI to be used first.

US$5m

Quota Share. Max of US$0.79m per risk

catastrophe reinsurance reinsurance program for y e march 31 20083
Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

US$180m

Loss Scenario

Assume 3 hurricanes causing losses to residential book of business: 2 losses of $75m & 1 loss of $35m to the insurer.

  • Umbrella Property Catastrophe $110m XS:
  • $70m Residential
  • $35m Commercial
  • QS Event Limits (15% Agg. Exp.)
  • & 1 Reinstatement

US$70m

Residential XL, $65m xs $5m

& 1 Reinstatement

US$35m

Net premium income for 2007 was US$22million, which improves the above outcome.

Commercial XL, $30m xs $5m

& 1 Reinstatement

Per risk XL $7.5m XS $150k

Other RI to be used first.

US$5m

Quota Share. Max of US$0.79m per risk

non catastrophe reinsurance reinsurance program for y e march 31 2008
Non-Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

US$180m

  • Umbrella Property Catastrophe $110m XS:
  • $70m Residential
  • $35m Commercial
  • QS Event Limits (15% Agg. Exp.)
  • & 1 Reinstatement

Net premium income for 2007 was US$22million. Doesn’t help that much when you add in the attritional non-cat losses!

US$70m

Residential XL, $65m xs $5m

& 1 Reinstatement

US$35m

Commercial XL, $30m xs $5m

& 1 Reinstatement

Per risk XL $7.5m XS $150k

Other RI to be used first.

US$5m

Quota Share. Max of US$0.79m per risk

non catastrophe reinsurance reinsurance program for y e march 31 20081
Non-Catastrophe ReinsuranceReinsurance Program for Y.E. March 31, 2008

US$180m

  • Umbrella Property Catastrophe $110m XS:
  • $70m Residential
  • $35m Commercial
  • QS Event Limits (15% Agg. Exp.)
  • & 1 Reinstatement
  • Catastrophe losses have appropriate RI cover, but limited to two events
  • Beware of attritional claims not covered by RI
  • Don’t forget about net premium income

US$70m

Residential XL, $65m xs $5m

& 1 Reinstatement

US$35m

Commercial XL, $30m xs $5m

& 1 Reinstatement

Per risk XL $7.5m XS $150k

Other RI to be used first.

US$5m

Quota Share. Max of US$0.79m per risk

non catastrophe reinsurance
Non-Catastrophe Reinsurance
  • The example was a monoline property insurer.
  • Diversified insurer – reinsurance is usually designed to respond to a variety of business lines.
  • PMLs & Loss Scenarios for all lines must be covered by reinsurance and capital.
multi line reinsurance another insurer y e 31 march 2009
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

Cover

Business covered

Comments

90% Quota Share

(non-obligatory)

  • Cession limit: $4m any one risk
  • B) Cession limit: $1m any one risk
  • Property, Business Interruption, CAR (material damage).
  • B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.

1. Aggregate cession limit of $600m. Quake & Windstorm

2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.

3. 100% placed: Everest Re.

Catastrophe XL

$7.5m XS $750k.

1 Reinstatement

Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).

1. 100% placed: Lloyd’s (Chaucer)

Motor XL

$500k XS 500k

(Annual aggregate limit: $6.0m)

$4.0m XS $1.0m

(Annual aggregate limit: $12.0m)

$2.5m XS $5.0m

(Annual aggregate limit: $7.5m)

All classes of business.

Motor, Workers Comp., Employers Liability, Third Party and CAR Liability.

1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.

Summary of Reinsurance Cover Notes

multi line reinsurance another insurer y e 31 march 20091
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

Cover

Business covered

Comments

90% Quota Share

(non-obligatory)

  • Cession limit: $4m any one risk
  • B) Cession limit: $1m any one risk
  • Property, Business Interruption, CAR (material damage).
  • B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects.

1. Aggregate cession limit of $600m. Quake & Windstorm

2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure.

3. 100% placed: Everest Re.

Catastrophe XL

$7.5m XS $750k.

1 Reinstatement

Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage).

1. 100% placed: Lloyd’s (Chaucer)

Motor XL

$500k XS 500k

(Annual aggregate limit: $6.0m)

$4.0m XS $1.0m

(Annual aggregate limit: $12.0m)

$2.5m XS $5.0m

(Annual aggregate limit: $7.5m)

All classes of business.

Motor, Workers Comp., Employers Liability, Third Party and CAR Liability.

1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re.

Summary of Reinsurance Cover Notes

  • Aggregate sums insured are $550 million
  • - within the cession limit.
  • Note the event limit
  • - if no other claims, responds to 6 events
  • Per risk limits split by line of business
  • - $4m per risk for property
  • - $1m per risk for other LOBs
  • Non-obligatory QS
multi line reinsurance another insurer y e 31 march 20092
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

“Motor XL”

“Catastrophe XL”

8m-

7m-

6m-

5m-

4m-

3m-

2m-

1m-

multi line reinsurance another insurer y e 31 march 20093
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

“Motor XL”

“Catastrophe XL”

$7.5m xs $750k + 1 Reinstatement

Fire, Homeowners, Motor, Business Interruption, CAR-material damage

8m-

$6.5m xs $1m

Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability

7m-

6m-

5m-

$500k xs $500k

All lines of business

4m-

3m-

90% QS, $4m per risk limit

Property, Business Interruption, CAR-material damage

2m-

1m-

90% QS, $1m per risk limit

Burglary, PA, Marine Cargo, Fidelity

multi line reinsurance another insurer y e 31 march 20094
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

“Motor XL”

“Catastrophe XL”

  • Interaction Between Contracts
  • Reading all the contract wordings reveals:
    • Use Quota Share before XL
    • Use Motor XL before Catastrophe XL
    • CAT XL
      • “Two Risk Warranty” for all covered lines of business. Two losses from one event are necessary before making a recovery. A Hurricane or Quake are not necessary.
    • Motor XL
      • Motor (own physical damage) is only covered for hurricane / quake
      • All other lines are covered on an “each & every loss” basis

$7.5m xs $750k + 1 Reinstatement

Fire, Homeowners, Motor, Business Interruption, CAR-material damage

8m-

$6.5m xs $1m

Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability

7m-

6m-

5m-

$500k xs $500k

All lines of business

4m-

3m-

90% QS, $4m per risk limit

Property, Business Interruption, CAR-material damage

2m-

1m-

90% QS, $1m per risk limit

Burglary, PA, Marine Cargo, Fidelity

multi line reinsurance another insurer y e 31 march 20095
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

“Motor XL”

“Catastrophe XL”

$7.5m xs $750k + 1 Reinstatement

Fire, Homeowners, Motor, Business Interruption, CAR-material damage

3

8m-

e.e.l. except motor damage

2

$6.5m xs $1m

Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability

7m-

Two risk warranty

6m-

$500k xs $500k

All lines of business

5m-

4m-

1

3m-

90% QS, $4m per risk limit

Property, Business Interruption, CAR-material damage

2m-

1m-

90% QS, $1m per risk limit

Burglary, PA, Marine Cargo, Fidelity

1

multi line reinsurance another insurer y e 31 march 20096
Multi-line ReinsuranceAnother Insurer Y.E. 31 March 2009

Within event limit of $90m.

The reinsured can determine what constitutes a risk under QS.

If justifiable, it can of adjust its recovery under the QS to take maximum advantage of the XL.

QS is NON-OBLIGATORY

Assume a catastrophe loss of $75million

Gross loss $75m

Quota Share recovery – 90% ($67.5m)

Cat XL recovery ($7.5m)

Net loss ZERO

to Motor XL does not cover property.

(assume 500 xs 500 is used up)

A single claim recovery can be split into 90% QS & 10% XL.

1

3

non life supervisory assessment
Non-life Supervisory Assessment

Capital + Reinsurance cover > Loss scenario

Summarize the reinsurance cover notes

  • Catastrophe business:
  • Get aggregate exposures
  • Understand & assess PML assumptions
  • PML assumptions consistent with underwriting guidelines
  • Onsite walkthrough test underwriting
  • Non-catastrophe business:
  • Compare loss ratio to prior years and market experience
  • Ensure that improved loss ratios are consistent with stricter underwriting
  • Onsite walkthrough test underwriting
reinsurance3
Reinsurance
  • CASE STUDY – ROUND 2
  • Contract Wordings
  • Read the wording:
  • Identify areas where clarification is required
  • What questions would you ask the insurer?
  • What suggestions do you have to improve the wording?