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The Actuary In Ceded Reinsurance: Non-Actuarial Considerations

The Actuary In Ceded Reinsurance: Non-Actuarial Considerations. CAS Seminar On Reinsurance June 2-4, 2002 Tarrytown, New York. Edward P. Lotkowski, FCAS Main Street America Group. This discussion is not …. Actuarial: Actuarial expertise is assumed, but… Model everything!

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The Actuary In Ceded Reinsurance: Non-Actuarial Considerations

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  1. The Actuary In Ceded Reinsurance:Non-Actuarial Considerations CAS Seminar On Reinsurance June 2-4, 2002 Tarrytown, New York Edward P. Lotkowski, FCAS Main Street America Group

  2. This discussion is not… • Actuarial: • Actuarial expertise is assumed, but… • Model everything! • Retention setting • Pricing • Portfolio – level analysis • Definitive: • Reinsurance buyer’s behavior influenced by specific situation • Constituencies • Market conditions

  3. This discussion has: • General themes: • Who are your customers? • The Actuary-Buyer is also a Broker and a Seller • Pertinent information takes many forms • Buying requires active management, not passive participation • Buyer succeeds when he/she leverages actuarial skills with communication and people skills

  4. The Buyer’s Customers Company Management • Arrows Mean: • Reciprocal customer relationships • Reciprocal flows of information • Reciprocal responsibilities Buyer Brokers Reinsurers

  5. Company Management as Customer Issues • Ceding company management has several audiences • Board of Directors • Wall Street • Stockholders • Rating Agencies • What drives corporate risk philosophy? • Is a philosophy articulated? • Is it “robust”? • Is it consistent with yours? • “Hard” vs. “Soft” drivers of risk philosophy

  6. Company management as customer “Hard” Drivers • Corporate Form • Access to capital • Profile of investment portfolio • Equity/Fixed income composition • Liquidity • Diversification among businesses • Stand-alone P & C vs. • P & C with Life, Annuities, Asset Management

  7. Company management as customer “Soft” Drivers • Management's constituencies • Removed from reinsurance arena • Need for clear communication • Can dictate program structure • e.g., variable retentions • May preclude forms of reinsurance • e.g., traditional vs. finite • Management’s P & C/Reinsurance background • Holding company structure

  8. Company management as customer “Soft” Drivers, cont’d • Management’s attitudes towards reinsurance • Transaction vs. relationship • Attitude towards “payback” notions • Depth of understanding • Mean vs. variance • Individuals’ risk tolerances

  9. Company management as customer Issue • Management’s appetite for analytics • Appetite is often low; actuary’s appetite is higher • Management’s appetite is often hard to gauge • Actuary-Buyer’s analytical expertise is assumed • Example (amounts are hypothetical): Retention options considered: • Existing $1.5m per occurrence • Existing with $2m AAD • $2m per occurrence

  10. (Example)Price/Volatility Tradeoff • Idea • Analyze difference among purchasing options • All program differences occur in ($1.5m, $2.5m) • So, model activity in ($1.5m, $2.5m) • Simulated risk process produces:

  11. (Example)Ceded Losses

  12. (Example) Current structure as baseline

  13. Buyer to Reinsurer “Perfect submission” Stable primary company Well-articulated and executed business strategy Lots of (accurate!) data Timely response Complementary exposure Large “bank” “Face time” important Meetings Especially after big loss Audits What does your company have to offer? Your company Yourself Reinsurer as Customer

  14. Reinsurer as Customer Reinsurer to Buyer • Reinsurer’s attitude toward the market • Where does it write? – e.g. clash vs. working layers • Transaction – oriented vs. • Relationship – oriented • Efficient pricing & terms • The market is efficient in the long run • Not necessarily so in the short run • Wide variance in quotes, even in working layers • Result: e.g., might fill programs by moving money between layers

  15. Reinsurer as Customer Security • Spread cover over capital bases: • U.S., London, Bermuda, Europe, other • Specific reinsurers/markets • Reinsurer eligibility criteria • Leading indicators • Post 9/11…a new game

  16. Reinsurer as Customer Security (cont’d) • Willingness to pay • Recent claims payment history • Reputation • Willingness to play • Do they still want to be in the business? • Reliance on retrocessional capacity • Corporate structure – who is calling the shots? • If new, are they “in, hard market”, “out, soft market”?

  17. Broker as Customer • Buyer to broker • Company’s needs, risk philosophy • Discussion of prospective risk profile • Best data possible • Frequent and proactive communication – evolving needs

  18. Broker to buyer Advice on risks and needs Current market knowledge Aggressive representation “The market says…” vs. “We should go to market with…” Advice on specific placements (e.g., sign on /sign down) Solid analytics Actuarial/financial/risk theoretic Pricing Reinsurance as element of DFA Modeling capabilities Retention & limits Treaty terms Strong back room Security analysis Claims Contracts Broker as Customer

  19. Some Post 9/11 Questions • Who is standing (counterparty risk)? • What is terrorism? • What are the dimensions of cyber-terrorism? • Do relationships matter? • What is a fair price?

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