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					CARE Seminar
Ceding Company Considerations
Elaine Caprio Brady
Vice President and Manager of Ceded Reinsurance Operations - Liberty Mutual

Gary Ganci
Second Vice President and Actuary, Enterprise Risk and Reinsurance - Travelers

Peter Wildman (Moderator), Vice President - Towers Perrin

May 19, 2008
CARE Seminar
                Topics to be Covered
 Panel Discussion Format/questions, audience
  participation encouraged
 Exposure Management
 Reinsurance Administration
 Underwriting Submission Data

 Purchasing Decision

 Emerging Claim Issues

 Actuarial Involvement/Wrap-up


                                                2
CARE Seminar
                     Exposure Management
 You need to transfer some risk; you’ve run your Cat models, now
   what?
 How do you evaluate the various products offered to assist in the
   context of Catastrophe management?
 Catastrophe Reinsurance
 Cat Bonds
 Swaps-Exposure PML Hedging
 Other Capital Market Products
 How can a ceding company evaluate the trade-offs between the above
   products?
 What evaluation criteria are used? Is there a meaningful comparison
   and what are the administrative implications of the various products?

                                                                           3
CARE Seminar
             Cat Risk Mitigation Alternatives
Traditional Reinsurance, CAT Bonds, Collateralized Reinsurance
   (Hedge Funds), Swaps
 Limits
   Single Limit vs. One Reinstatement
 Term
   One Year vs. Multi-Year
 Security
   Reinsurance Promise vs. Investor Funds vs. Collateral
 Time Value
   Near immediate collection vs. paid when paid
 Basis Risk
   Non-indemnity triggered CAT Bonds

                                                                 4
                                           CARE Seminar
                                                  CAT Bonds - Basis Risk with Index Triggers
CAT Bond Ceded Less Indemnity Reinsurance Ceded




                                                                                               5
CARE Seminar
      Why Use Cat Bonds? A Cedant’s Perspective
 Diversify suppliers for a key purchase

    Reduce reinsurance market disruption risk

 Access broader capital base

    More capacity at similar prices

 Longer-term protection

    Multi-year term reduces immediate impact of market price
      volatility

 Minimize credit risk


                                                                6
    CARE Seminar
             Are Your Own Losses the Trigger?
   Benefits of industry or parametric trigger
       Simplify disclosure to investors
       Relieve investors of worry about the quality of the sponsor’s book




                  More worry
                                           Reinsurance
                                           Excess & Surplus
                                           Large Commercial
                                           Small Commercial
                                           Homeowners


                  Less worry

                                                                             7
CARE Seminar
  Are Your Own Losses the Trigger (Continued)?

 Downside of industry or parametric trigger

   “Basis Risk” The risk that your losses exceed what
     you would have expected based on parametric or
     industry loss data

   You may suffer a large loss, but recover nothing
     because industry loss is small

 Who will bear the basis risk?




                                                         8
CARE Seminar
            Analyze Your Basis Risk

 Compare your losses in past events to (Market
  Share) x (Industry Loss)

 Check exposure maps for “hot spots”

 See how your modeled share of industry loss varies
  among events and among models

 Think about non-modeled loss sources




                                                       9
CARE Seminar
                     Other Issues
 Multiple events

   Beware of multiple-event exposure

   More critical given multi-year nature of bonds

   Collateral costs important

 Termination of coverage

   Investors reclaim funds unless event occurs

   An event near end of term can present issues


                                                     10
CARE Seminar
                Typical Cat Bond Structure


                               Collateral                                  1. The cedant enters into a
                                 Trust                                        reinsurance contract with
                                               3                              a Special Purpose
                                                                              Vehicle (SPV)
                       Investment      Principal
                        earnings       & interest
                                                                           2. The SPV sells notes to
               1                                       2                      investors in the capital
            Premium                                  Notes
                                                                              markets
  Cedant                          SPV                          Investors   3. Proceeds from the notes
             Contingent                               Cash
                                                    proceeds                  offering are invested in
           claim payment
                                                                              high quality securities
                       Investment      Scheduled                              and held in a collateral
                        earnings        interest                              trust
                           4
                                                                           4. Investment returns are
                                   Swap                                       swapped to a LIBOR -
                                Counterparty                                  based rate by the Swap
                                                                              Counterparty




                                                                                                   11
CARE Seminar
        Exposure Management – Credit Risk
 How does security evaluation come into play as
  counterparty credit risk is covered?
 What are the counterparty implications of the various
  products for
   Availability of reinsurance markets
   Accessibility of reinsurance/other capital
   Quality of markets
   Suitability of markets




                                                          12
CARE Seminar
          Exposure Management – Credit Risk
          Reinsurance Partners – Considerations
 Financial Strength
   Operating Company vs. Group Level

 Short or Long-tail Nature of Coverage

 Capacity

 Quoting Behavior
 Level of Engagement, Knowledge of the Business

 Aggregation

 Claim Payment History
 Consideration of Parental Support


                                                   13
CARE Seminar
           Exposure Management – Credit Risk
           Credit for Reinsurance Considerations

 Collateral options ranked in order of quality:
    LOC
    Reg 114 Trust
    Individual non-Reg 114 Trust
    Funds withheld
    Multi beneficiary trust

 New Proposed Rules and State Regulation:
    NAIC REO Proposal
    New Fla and NY Collateral Regs



                                                   14
CARE Seminar
           Exposure Management - Cats
 Are Cat management issues difference based on
  ownership issues?
   Publicly traded companies
   Mutual companies
   Privately held companies [What type of owner?]

 Does ceding company size matter?




                                                     15
CARE Seminar
              Reinsurance Administration

 How important is reinsurance administration to the
  Reinsurance purchasing decision?
 What are the hot button decision criteria in contract
  wording, broker vs. direct placement, claims
  collection/dispute resolution, casualty vs. property
  placements?




                                                          16
CARE Seminar
                 Reinsurance Administration
              Key Reinsurance Contract Clauses
 Special Termination: Permits ceding company to terminate and
   commute in the event of specified triggers, with reinsurer given
   option to cure by LOC funding.
 Arbitration: Consolidation of claims, streamlined procedures for
   lower dollar value disputes, applies detailed reinsurance
   arbitration procedures.
 Access to Records: Cedent may reserve rights to provide access
   to sensitive documents, or all documents if reinsurer does not
   respond to claim within 90 days.
 Assignment, Novation and Transfer: Requires cedent approval
   before reinsurer liabilities are wholly or partially transferred to
   affiliates or third parties.


                                                                         17
CARE Seminar
             Reinsurance Administration
       Collection and Dispute Resolution Issues
 English and US Law implications:

   Solvent Schemes of Arrangement:
    — a forced commutation by a solvent reinsurer for a
      fraction of the value of the projected losses.
    — English law
    — RI Legislation

   Part 7 Transfers: Reinsurer domiciled under English
    law may transfer its reinsurance liabilities to a lesser
    capitalized affiliate.

                                                           18
CARE Seminar
                Reinsurance Administration
         Collection and Dispute Resolution Issues
 “Run off” Reinsurers may
    avoid paying valid claims
    delay collections for over 90 days after billing
    Press for commutation of treaties

 Arbitration vs. Litigation:
    Consolidation issues
    Cost
    Length of Proceeding
    Claim Preclusion


                                                        19
CARE Seminar
                Underwriting Submission Data
               Information for Reinsurance Pricing

 Historical Written and/or Earned premium
 Current and Historical In-force Premium & Policy Profile
  (what’s available)
   Limits profile by line of business – distribution of premiums,
     policies, and exposures
   For AL/GL provide breakdown by Increased Limits Factor
     category
   ILF’s for non-ISO lines or
   Distribution by class/hazard group, by state for WC
   For Excess/Umbrella, SIR, and large deductible business –
     subject premiums mapped to a grid of policy limit by underlying
     limit (deductible/SIR)
   Deductible profile



                                                                   20
CARE Seminar
                            Underwriting Submission Data
                           Information for Reinsurance Pricing

   Projected Written and/or Earned Premium – by line of business (subject premium for
    upcoming year)
   Large Loss Listing
     Claims over $100,000 (or half of desired retention, whichever is less)
     Last ten years, where available
   Excess (or Large Loss) Loss Triangles
     Individual losses at periodic valuation dates (preferably same loss threshold as above)
     Paid and incurred, where available
     Any changes in Claims Dept. philosophy
   Historical effective rate level changes – if available (or rough estimates if possible)
     Provide breakdown of base rate and schedule credit/debit changes if available
     Explanation of schedule credit/debit methodology
     Most recent Annual Statement (note: for U.S. Companies, we usually have this on-line)

   Proposed reinsurance contract (will identify any unusual features)
   Catastrophe Submission data
     Exposure profiles, RMS, AIR, EQE (Cat modeling) files output


                                                                                                21
CARE Seminar
      Underwriting Submission Data (continued)
                      Observations

1. Introductory narrative important, Underwriting plans
2. Organize information
3. Index info, categorize what is most important!
4. Recognize various party incentives
5. Insurer questions, Reinsurer request for information
  (early and often)




                                                          22
CARE Seminar
                 Purchasing Decisions
 How do ceding companies view purchasing decisions?

 Are they centralized or decentralized?

 How are profit centers, different companies within
  same group, different lines of business treated?
 Are any internal reinsurance solutions considered?
 What are some of the recipes for placing metrics on
  the Go/no go purchase decision?
 To what extent are the unknown unknowns
  considered? (What is value of Casualty Reinsurance
  for latent, unanticipated exposures?)
                                                        23
CARE Seminar
                    Purchasing Decisions
                 Types of Reinsurance Buyers
Large, Well Capitalized, Publicly Traded Insurers
 Peak Exposures Only
   Objective: long term growth in absolute book value
   Potential Metric: compare theoretical cost of capital savings
      (reduction in pricing risk load) versus expected cost of
      reinsurance
 Buy Retentions Down to Reduce Volatility
   Objective: achieve consistency in book value growth at the
     cost of lesser absolute value. Believe in to the doctrine of
     multiple expansion
    Potential Metric: compare reduction in modeled variance to
     expected cost of reinsurance (have some equation that relates
     CV of earnings to P/B multiple)

                                                                    24
CARE Seminar
                          Types of Reinsurance Buyers

                   Company A                                                  Company B
               Peak Exposures Only                                        Buy Down Retentions

                                                                                        Mult = 1.8
                                   Mult = 1.5
                                                                                                     Mult=1.7

                                                                                                     Mult=1.5
          Mult = 1.5                                                 Mult = 1.5


Value




          Current                  5 Yr Plan                         Current            5 Yr Plan

                       - book value
                       - market premium over book value
                       - frictional cost of additional reinsurance


Fundamental Question : Does reduced earnings volatility lead to a higher price/book multiple?


                                                                                                                25
CARE Seminar
                Emerging Claims Issues
 What do you see as emerging issues in the industries
  you represent?
 Will the sub-prime crisis result in reinsurance
  disputes?
 Industry reports often state that disputes are rising
  between cedents and reinsurers, do you think this is
  true? If so, why have the disputes in the reinsurance
  industry increased?




                                                          26
CARE Seminar
                     Emerging Claims Issues (continued)
   Global warming effects
     Impact on weather modeling
     Secondary issue to producers of green house gas vis-à-vis pollution exclusion
   Nanotechnology
     Will be widely adopted
     Marathon man issue (Is it safe?)
   Fear of illness from products under GL coverage
     Benzine, mercury, avian flu, etc.
     Does increased anxiety constitute bodily injury or not
   Identity Theft
     Have purveyors of individual data “negligently” published the information by
        having inadequate safeguards?
     Coverage B issues
   Aging Public Infrastructure
     Inspection and Replacement procedures




                                                                                     27
CARE Seminar
                 Actuarial Involvement/Wrap Up
 What are some of the various roles actuaries can play to assist
   the reinsurance purchasing process being optimized?
    Risk Transfer Documentation
      — should be more than simply audit fodder
      — Should be natural extension of internal pricing work
    Need to be responsive to reinsurers’ actuarial questions –
      develop rapport with broker/reinsurer actuaries
    Should be in a position to discuss reasonableness of quotes –
      alternative pricing methodologies
 Can there be an optimal reinsurance decision?
   Need to develop buying strategy first
      — Use quiet periods to define strategy
      — Consistently apply metrics to support strategy


                                                                     28
CARE Seminar
                          Actuarial Involvement
                      Reinsurance Decision Making
 Understand decision dynamics of company

 What is management’s appetite for analytics?
    Actuarial desire is often greater than management (Rating Agency
     metrics are requiring more analytical metrics)
    What is ceding company analytical level of expertise (in-house actuary,
     committee, CFO is purchaser, etc.)? Who is the decision maker?
    Management appetite hard to gauge (do they think numerically,
     graphically, or intuitively)
 What is management attitude towards reinsurance?
    Relationship oriented, transaction oriented, mix of both
    Is payback a common notion?
    What level of understanding or complexity is desired?



                                                                           29

				
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