Profit Share Reinsurance

Document Sample
Profit Share Reinsurance Powered By Docstoc
					Reinsurance Structures,
Pro Rata Pricing,
& When Good Pricing Goes Bad
August 8, 2007
     Proportional Reinsurance Structures

Straight Quota share- cede a percentage of losses for an identical
    percentage of premium. If the commission paid is commensurate
    with insurers costs, there is an alignment of interests.
1.    Used to reduce premium writings relative to surplus
2.    Generate commission overrides to offset expense and increase profit

Surplus Quota Share- A form of proportional reinsurance where the
   reinsurer assumes pro rata responsibility for only that portion of
   any risk which exceeds the company’s established retentions.
      May promote writing larger limits compared to historical experience
      Promote writing riskier or more volatile business

Variable Quota Share – insured cedes different percentages of business
    depending on the limit – 0% of 5 M limit, 50% of 10 M limit, etc.
    Essentially, this can be viewed as a variable quota share contract
    wherein the reinsurer's pro rata share of insurance on individual
    risks will increase as the amount of insurance increases, given the
    same reinsurer's retained line, in order that the primary company
    can limit its net exposure to one line, regardless of the amount of
    insurance written
1.    May promote the writing of larger or more hazardous risks going forward
2.    Encourage reducing limits on more profitable business to improve net results



                                             2
Commission Override Example



           Premium        L/R    Commission   Brokerage   Composite
   Gross    50,000,000   65.0%     25.0%        2.0%       92.0%

   Cede     40,000,000   65.0%     30.0%        2.0%       97.0%

    Net     10,000,000   65.0%     5.0%         2.0%       72.0%



           Premium        L/R    Commission   Brokerage   Composite
   Gross    50,000,000   90.0%     25.0%        2.0%       117.0%

   Cede     40,000,000   90.0%     30.0%        2.0%       122.0%

    Net     10,000,000   90.0%     5.0%         2.0%       97.0%




                         3
Non Proportional Reinsurance

Excess of Loss
     Flat Rated
          Can be appropriate when there is a standard limit and little variability in insured groups
          If limits vary, a flat rate may promoted more hazardous writing and large limits
     Cessions Rated
          Better when there are a variety of limits or various hazards ceded

Facultative
     Individual risks – usually priced at higher profit margins than treaty
      business.
     Obligatory – most similar to a treaty
Non-Obligatory
     Can be used with many types of reinsurance. It means that the insured can
      pick what risks it wants to keep and cede the rest.
Stop Loss
     A form of reinsurance under which the reinsurer pays some or all of a
      cedant’s aggregate retained losses in excess of a predetermined dollar
      amount or in excess of a percentage of premium
     Often significant adverse selection against reinsurers on these covers as
      the cedents have a better sense of the ultimate gross loss ratio than the
      reinsurer
     Almost always includes a loss ratio cap
     May have risk transfer issues
                                            4
Basics of Pricing

 Components
 Losses Paid/Reported
    Paid Losses– trend issues

    Reported Losses – Reserve issues

    Large Losses

    Cat Losses

    Claim Counts

    Triangulations of Losses

 Exposure Data
    Payroll

    Sales

    Square Footage

    Premium

    Doctors – Base Doctor Equivalents




                         5
Adjustments

Loss Development
Trend – Severity/Frequency
Premium On Level Adjustments
Exposure Adjustments
Adjustments for Limits and Attachment/SIR Changes
Loading for catastrophe
Free cover
Load for ECO/XPL
Summing claims for basket or aggregate cover
Load for Clash
Tort Reform
     adjust trend
     adjust loss development
     Is tort reform retroactive?



                                    6
           Loss Development Selection
Incurred
Losses - PY       3 Months    15 Months     27 Months     39 Months     51 Months     63 Months    75 Months     87 Months    99 Months

           1999      42,776     2,543,415    3,706,515    4,070,948      4,589,893     5,635,622     6,232,223    7,104,451   7,910,928

           2000      18,265     3,063,379    4,439,324    4,952,021      5,210,846     5,184,224     5,678,068    5,849,854

           2001     112,366     8,322,590    15,339,602   15,691,784    15,903,253    15,888,604    16,115,445

           2002     114,280     8,189,697    16,424,303   18,293,479    20,109,521    20,102,536

           2003     206,477     8,773,920    24,078,043   28,048,880    23,673,715

           2004     214,908     8,748,828    16,251,552   16,401,519
           2005     555,959     7,353,855    10,415,023
           2006     531,988    10,820,728
           2007     741,381


           1999      59.46          1.46          1.10          1.13         1.23          1.11          1.14         1.11
           2000      167.72         1.45          1.12          1.05         0.99          1.10          1.03
           2001      74.07          1.84          1.02          1.01         1.00          1.01

           2002      71.66          2.01          1.11          1.10         1.00
           2003      42.49          2.74          1.16          0.84
           2004      40.71          1.86          1.01
           2005      13.23          1.42
           2006      20.34
Strt Average         61.21          1.82          1.09          1.03         1.06          1.07          1.09         1.11    Tail Factor

Wtd Average          32.17          1.93          1.09          0.98         1.02          1.05          1.09         1.11
NCCI AY                             1.395         1.075          1.03         1.019        1.014         1.011        1.009        1.086
Selected             32.17          1.93          1.09          1.00         1.02          1.03          1.03         1.03         1.09
Ultimate             82.68          2.57          1.33          1.22         1.22          1.19          1.16         1.12         1.09
                                                           7
Umbrella Quota Shares use Excess Trend


           Ground up          Ground up         500,000    500,000


            Losses              Trend           x/s         x/s


          @12/31/2006           1.05            500,000    500,000


  Loss
   1           100,000           105,000              -           -
   2           300,000           315,000              -           -
   3           500,000           525,000              -     25,000
   4           900,000           945,000        400,000    445,000



  Total      1,800,000          1,890,000       400,000    470,000




          Overall trend          5%         Excess trend    18%


                          8
Excess Losses Deductibles and
Layering

Excess Trending and Layering Example                                                                      Trended     Trended
                                                                                              Trended      Loss        Loss +
   AY           SIR        Limit       Loss        LAE         LAE/       Trend    Loss +     Loss +      XS SIR        LAE
                                                             (Loss+SIR)    5%       SIR         SIR       XS 500      XS 500
        2002   100,000   1,000,000     500,000    150,000      25.0%      1.276    600,000     765,769     165,769     207,211
        2002   100,000   1,000,000     650,000    300,000      40.0%      1.276    750,000     957,211     357,211     500,096
        2002   100,000   2,000,000     800,000    200,000      22.2%      1.276    900,000    1,148,653    500,000     611,111
        2002   100,000   2,000,000     950,000    400,000      38.1%      1.276   1,050,000   1,340,096    500,000     690,476
        2002   100,000   1,000,000     250,000    200,000      57.1%      1.276    350,000     446,699         -           -
        2002   100,000   1,000,000     400,000    300,000      60.0%      1.276    500,000     638,141      38,141      61,025
Total          600,000   8,000,000   3,550,000   1,550,000                        4,150,000   5,296,568   1,561,121   2,069,919




                                                   9
On Leveling Premium

 Rate On Level Factors
 Parallelogram method or Premium at Present Rates
 Premium/Exposure Trend
 Yes if exposure base is inflationary
         insured value

         Sales

         revenues

 No if exposure base is
         square feet

         # vehicles

         # employees

         # doctors – should consider translating into base doctor
          equivalents
 Trend from:
 Average accident date of experience period to average accident date of
   prospective period



                              10
On Leveling Premium

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.
Minimum Premiums can have a significant impact on
rates. The impact is negative when rates are rising and
positive when rates are falling. In a rate environment
where rate increases have been significant the last few
years the actual on level will be overstated.


                      11
Actual Calculation for On Level Factor


                                                                                                              Average
Effective                Rate                                                                      Calendar   Earned             On Level
  Date                  Change                  "Indexed"                  Cumulative               Year       Level              Factor
                                                                              1.000                    2001
 1/1/2002                 5.00%                  105.00%                      1.050                    2002     1.025               1.268
 1/1/2003                10.00%                  110.00%                      1.155                    2003     1.103               1.179
 1/1/2004                12.50%                  112.50%                      1.299                    2004     1.227               1.059
 1/1/2005                 0.00%                  100.00%                      1.299                    2005     1.299               1.000

Assume: Losses Occurring Treaty incepting 1/1/2005



    12         1.000
                                                     1.050                                1.155                  1.299
    m
    o
    s
                            1.050                                  1.155                             1.299               1.299

             1/1/2002                            1/1/2003                               1/1/2004              1/1/2005
               5.00%                              10.00%                                 12.50%                 0.00%

                          -
           <--------------------------------------------->
                            12 mos
Note - On leveling procedure is different for policies attaching




                                                            12
Shifting Distributions and On Level Factors

Inputs      Rate Changes                   Premium                                     Premium %
                (1)          (2)              (3)              (4)           (5)            (6)           (7)
              Texas         Florida         Texas          Florida          Total         Texas          Florida
 1/1/2002         -30%              0%              500         4,000         4,500               11%           89%
 1/1/2003         -20%              0%              500         3,000         3,500               14%           86%
 1/1/2004             10%           0%         1,000            1,000         2,000               50%           50%
 1/1/2005             20%          30%         1,500            1,000         2,500               60%           40%
 1/1/2006             15%          10%         2,000            1,000         3,000               67%           33%
 1/1/2007         -10%              0%         2,000                 750      2,750               73%           27%
Incorrect       (8)          (9)              (10)          (11)
             Prem-Wtd       1 + (8)         Rolling       On-Level
            Rate Change                  Product of (9)    Factor
 1/1/2002             -3%      0.967           0.967            1.329
 1/1/2003             -3%      0.971           0.939            1.368
 1/1/2004             5%       1.050           0.986            1.303
 1/1/2005             24%      1.240           1.223            1.051
 1/1/2006             13%      1.133           1.386            0.927
 1/1/2007             -7%      0.927           1.285            1.000
Correct                     Texas                                          Florida                                     Total
                             (12)             (13)          (14)            (15)           (16)           (17)          (18)
                            1 + (1)         Rolling       On-Level         1 + (2)        Rolling       On Level      Prem-Wtd
                                       Product of (12)     Factor                     Product of (15)    Factor On-Level Facotr
 1/1/2002                      0.700           0.700            1.093         1.000          1.000          1.430        1.393
 1/1/2003                      0.800           0.560            1.366         1.000          1.000          1.430        1.421
 1/1/2004                      1.100           0.616            1.242         1.000          1.000          1.430        1.336
 1/1/2005                      1.200           0.739            1.035         1.300          1.300          1.100        1.061
 1/1/2006                      1.150           0.850            0.900         1.100          1.430          1.000        0.933
 1/1/2007                      0.900           0.765            1.000         1.000          1.430          1.000        1.000



                                                          13
WC On Level Example

               (1)         (2)     (3)             (4)         (5)      (6)
              Rate               Schedule        Rate       Change Change
             Changes      LCM Credit/Debit      Changes     in LCMin Sched. Cr/Dt
  1/1/2002      -30%        1.50       0%         -30.0%        0.0%      0.0%
  1/1/2003      -20%        1.50       0%         -20.0%        0.0%      0.0%
  1/1/2004       10%        1.50       5%          10.0%        0.0%      5.0%
  1/1/2005       20%        1.70       0%          20.0%       13.3%     -4.8%
  1/1/2006       15%        1.70      -5%          15.0%        0.0%     -5.0%
  1/1/2007      -10%        1.75    -10%          -10.0%        2.9%     -5.3%

                (7)        (8)       (9)           (10)        (11)        (12)
              1 + (4)    1 + (5)   1 + (6)      (7)*(8)*(9) Rolling On-Level
                                                          Product of (10) Factor
  1/1/2002      70.0%    100.0%        100.0%         0.70       0.70        1.15
  1/1/2003      80.0%    100.0%        100.0%         0.80       0.56        1.43
  1/1/2004     110.0%    100.0%        105.0%         1.16       0.65        1.24
  1/1/2005     120.0%    113.3%         95.2%         1.30       0.84        0.96
  1/1/2006     115.0%    100.0%         95.0%         1.09       0.92        0.88
  1/1/2007      90.0%    102.9%         94.7%         0.88       0.80        1.00

  1. Calculate change for each piece
  2. Aggregate changes
  3. Calculate on level factors




                                          14
Change in Average Premium

  Does not Equate to change in average rate

          Heavy Trucks                  Light Trucks                Total
          Premium        Trucks Average Premium      Trucks Average Average

   2005      2,000,000     400         5,000    1,000,000   400   2,500   3,750

   2006      4,000,000    1,000        4,000     500,000    200   2,500   3,750

  Total                                 -20%                        0%      0%


  Actual Rate Change                   -17.8%




                                  15
Losses Occurring with Run-Off

Distortion to On – Level Factors if rates are
decreasing
                             UEP = 1/3 of Treaty
                                    Premium




1/1/05        12/31/05         12/31/06



                   16
Risks Attaching with Cut-Off

Distortion to On – Level if rates are increasing


                             UEP = 1/2 of Treaty
                                    Premium




1/1/02        12/31/02         12/31/03



                  17
Premium On Level Adjustments

                    Written Premium


          Renewal           Expiring       Rate         Actual          Submission


          Policy            Policy        Increase      On Level        On Level

   2001    1,527,828            935,044           63%            2.86         5.00

   2002    3,748,682          2,066,040           81%            1.58         3.02

   2003    3,740,033          3,191,744           17%            1.35         1.65

   2004    3,455,287          3,205,047           8%             1.25         1.39

   2005    2,021,483          1,807,096           12%            1.12         1.28

   2006    1,750,713          1,567,789           12%            1.00         1.13


   2007                                           0%             1.00         1.00




                                 18
Limits/Attachments Adjustments

 When a company’s limits and attachments have shifted,
adjustments must be made to the analysis!
 Trend past historical limits – this will underestimate your costs if
  the losses were truncated. Only works if the policy limits have
  adjusted due to inflation.
 Price lower “fully exposed” layer and use exposure rating
  relativities to adjust to current layer. This approach is easiest if
  everything is fully exposed. If there are few losses in the layer,
  you need to convince yourself that the experience is not credible.
 Adjust using exposure rating differential based on limits
  distribution profile in each year
 Calculate a loss distribution based on current experience and run
  against new limits
 Attachments shifting downwards are the easiest to adjust for by
  subtracting old attachment out after trending and adding new
  attachment



                           19
Pricing for Contract Provisions

   Multi-Year Policies-
         Need to consider the impact on trend and development for multi-year policies
       Impact on the risk of a deal where your exposure now extends several years.

   Funding Requirements – this is generally ignored in pricing but shouldn’t be
       Requirement when rating or surplus drops or reinsurer stops writing new
         business. Companies that agreed to these provisions found themselves quickly
         out of business when there rating dropped.
       Some Surety deals require funding at every 12/31

       This usually require and LOC and this cost should be priced into the business

   Errors & Omissions clauses covering business excluded by the treaty if bound
    accidentally.
   Ex Gratia payments – anyone dealing with a large insured may find themselves
    paying claims just to keep them happy. If the deal is marginal to begin with, this
    would eliminate some of the expected profit.
   Some swing rated treaties allow for losses to be deemed $0 and pay only the
    minimum. It is important to look at the NPV of the deal in all situations and realize
    that the client will act to maximize that. The end result is that the likely outcomes will
    be minimum premiums until you are in a loss position.




                                     20
Select Projected Loss Cost

Select for Stability?
 Have there been changes in the writings.
 Tort Reform

Select for Responsiveness?
 Recent years effected by large development factors
 Mature years may be over trended or rate changes
 may be overstated.
 What if a company renews 60% of the book each
 year?
Somewhere in the middle?

                      21
Selecting Loss Costs
  Bornhuetter-Ferguson Method - On Level 2007    Trended        Ultimate        Ultimate
                                   % Rptd         Actual         Loss            Loss
      AY             EP                          Reported                     & LAE Ratio
     2001          97,136,535      58.4%         26,378,729     61,658,495        63%
     2002         245,497,267      45.5%        155,776,556    263,318,382       107%
     2003         311,053,329      38.8%        118,292,341    265,564,950        85%
     2004         313,876,233      29.5%         43,528,674    211,379,641        67%
     2005         324,899,561      31.7%          7,781,840    168,900,017        52%
     2006         295,755,900      14.6%         15,187,567    196,417,940        66%

  2001-2005     1,292,462,924                   351,758,141     970,821,485      75%
   All Years    1,588,218,824                   366,945,707   1,167,239,425      73%
  2001-2004       967,563,364                   343,976,301     801,921,468      83%




                                  22
Selecting Ultimate Loss & LAE Costs

Bornhuetter-Ferguson Method - Projected to 2007 Levels
                                                    Trended Actual     Expected         Expected
                                                       Reported        Ultimate         Ultimate
                     Premium          Expected          Layer            Layer        Loss & ALAE
Period               On-Level         Reported       Loss & ALAE     Loss & ALAE          Cost
LO1-1997              30,273,314            98.2%       27,855,627       28,256,620           93.3%
LO1-1998              30,698,075            95.6%       28,858,660       29,858,013           97.3%
LO1-1999              33,463,360            93.6%       25,633,338       27,197,238           81.3%
LO1-2000              37,888,220            92.7%       40,807,420       42,827,689          113.0%
LO1-2001              59,286,210            92.1%       45,427,366       48,838,636           82.4%
LO1-2002              81,502,437            91.2%       57,230,366       62,494,969           76.7%
LO1-2003             102,264,131            88.7%       71,151,490       79,649,037           77.9%
LO1-2004              77,529,317            82.4%       39,243,923       49,211,350           63.5%
LO1-2005              67,579,183            74.0%       33,437,255       46,325,335           68.5%
LO1-2006              66,791,355            49.5%       21,937,234       46,633,361           69.8%
Total                587,275,602                       391,582,677      461,292,249           78.5%
2001-2006            454,952,632                       268,427,633      333,152,689           73.2%




                                           23
Adjusting For Free Cover

Adjusting For Free Cover
                                           Select
layer                           Exper LC   LC

500K limit Gross                 65.0%      62.5%


                     Exposure
250K xs 250K           6.2%      6.5%        6.5%
700K xs 300K           8.4%      6.5%        7.5%
500K xs 500K           4.0%      2.7%        3.6%
1M xs 1M               2.4%                  2.2%
3M xs 2M               1.6%                  1.5%
5M xs 5M               0.8%                  0.7%
Stat xs10              0.9%                  0.8%

Stat XS 500            9.8%                  8.8%
Unlimited Gross                             71.3%




                                 24
Other Considerations

     “As If”
     A term used to restate the treaty statistics for prior years to accord with
     the current (or proposed) limits, terms and conditions Sometimes also
     used to show results as if exceptional losses had not occurred.
1.   “As If” – short for “As If I only wrote profitable business”
       1.   Exclude line of business no longer written
                 Does it exclude both losses and premium?
                 Did it also impact the rate changes as well?
       2.   Exclude these losses since they are excluded from the treaty.
            There are always exposures not included and there will always
            be exposures included now but not included in the future.
       3.   Excludes Underwriter “F”
       4.   Current insureds only – BEWARE – this is an “as if” in disguise
       5.   Do you get to exclude future losses from business they will
            decide to get out of next year? If not, beware of “as if” results.
2.




                               25
Another “as if”

“as If” I wrote the same distribution
 This is harder to dispute since the basis is well
 grounded in actuarial science. Take the historical
 losses and premium and adjust it to the current
 exposures written.
     If the book was predominantly GL and now it is
      predominantly products we should adjust the mix to
      the current business mix.
     If the book is predominantly Texas historically and
      is currently Missouri we should adjust the historical
      state experience to match the current mix.


                       26
       State Distribution Mix

                       Texas Only                                   All Other
Trended, Developed                    Trended ULT    Trended ULT                     Trended ULT Trended ULT
Ultimate Projections    Onlevel EP         Loss         Net LR        Onlevel EP          Loss      Net LR
7/1/2001 - 6/30/2002     20,414,358        5,988,236        29.3%      19,988,919        1,767,808      8.8%
7/1/2002 - 6/30/2003     12,110,112        9,175,143        75.8%      13,943,125        1,553,672     11.1%
7/1/2003 - 6/30/2004      4,907,744        2,098,588        42.8%        3,893,848         675,617     17.4%
7/1/2004 - 6/30/2005      1,707,479        1,773,972      103.9%         3,513,549         966,226     27.5%
7/1/2005 - 6/30/2006        651,002          267,741        41.1%        3,345,209       2,531,425     75.7%
7/1/2006 - 3/31/2007         56,079           30,079        53.6%        1,414,658         758,768     53.6%
Total 01-06              39,790,695       19,303,679        48.5%      44,684,650        7,494,749     16.8%


                                      Total
                                                      Trended ULT Trended ULT
                                        Onlevel EP        Loss         Net LR
                                         40,403,277      7,756,044          19.2%
                                         26,053,237     10,728,815          41.2%
                                          8,801,593      2,774,205          31.5%
                                          5,221,027      2,740,198          52.5%
                                          3,996,211      2,799,166          70.0%
                                          1,470,737        788,847          53.6%
                                         84,475,345     26,798,427          31.7%




                                                 27
Pricing New Business – Start Ups

 The class of “2001” created several insurance and reinsurance start ups. Many of
these companies wanted reinsurance and had no experience. For them the “clean
slate” was a plus. What information is available to price start up.
        Similar treaty business – Can this treaty perform significantly better than established
         books of similar business?
             New business is bought with cheaper prices
             Benchmarking
             Rate comparisons
        Overall industry experience
             Stat Bulletins – NCCI, ISO
             One Source – Annual Statement Data
             Broker or Trade Group Studies
             External or Internal actuarial rate studies
        Pricing hurdles for start ups.
             Return requirements – should they be higher?
             Execution risk
             Different structure for a start ups – lower cede, loss ratio cap, loss corridors or
              sliding scale commission
   What happens when the only business you write in a line are start ups?
          Time to question the pricing assumptions




                                       28

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:43
posted:7/12/2011
language:English
pages:28
Description: Profit Share Reinsurance document sample