Member of The WRC Group of Companies OAMIC Annual Convention Columbus, Ohio February 19, 2014 Larry A. Bray, CPCU, PFMM Vice President of Client Support Wisconsin Reinsurance Corporation
Member of The WRC Group of Companies
OAMIC Annual ConventionColumbus, OhioFebruary 19, 2014
Larry A. Bray, CPCU, PFMMVice President of Client SupportWisconsin Reinsurance Corporation
What is Reinsurance?
What is Reinsurance?
• Insurance for insurance companies– Rated differently– Loss expectation is different
• Financing vehicle for insurance companies– Rated differently– Element of risk
• A “Bookie” Operation
Insurance / Reinsurance Parallels
Insurer(policy limit)
Reinsurer(policy limit)
Insurer(pays “retention”)
Policyholder(pays deductible)
Policyholderpays premiumto insurer
Insurerindemnifiesagainst loss
Insurer “cedes”part of premiumto reinsurer
Reinsurer“assumes”responsibilityfor part of loss
What Reinsurance Does on the Most Basic Level
• Prevents a total loss at one location from wiping out your company
• Prevents you from having to cash in all of your CD’s when there is one large loss at one location
• Prevents you from going out of business when you have one horrible year
What Reinsurance Does NOT Do!
• Magic tricks• Make unprofitable business profitable• Make underwriting and risk selection
unnecessary
What are the types of Reinsurance?
What are the Types of Reinsurance?• By Contract Type
– Facultative or Treaty• Pro-rata
– Quota Share– Surplus Share
• Excess (Non-Proportional)– Per Risk– Catastrophe– Aggregate
• By Exposure– Individual Loss– Individual Risk– Individual Event– Individual Year
Reinsurance
Facultative Treaty
Pro Rata Excess
Excess Per Risk
Excess Catastrophe
StopLoss/Aggregate
Quota Share
Surplus Share
OR
OR
Why do we need to buy Reinsurance?
l
Do Reinsurers buy Reinsurance?
Why is our Reinsurance different than another company our size?
Why does our Reinsurance cost more (or less) than that company?
Which is the best type of Reinsurance for us?
How much Reinsurance should we buy?
How large should our Reinsurance retentions or deductibles be?
Why does Reinsurance cost so much?
Is there a way to reduce our Reinsurance premiums?
How do Reinsurers determine our premiums?
Why does the Reinsurer send us a bill at the end of the year?
Sample Reinsurance Program• Primary insurer writes policies with the
following characteristics:– Homeowners policies– $1,000 deductible, $200,000 policy limit
• Primary insurer has the following reinsurance program in place:– Quota share: cede 60% of every policy– Per-risk excess: $ 90,000 XS $ 50,000– The quota share “inures to the benefit of” the
per-risk excess
How would each of the following losses be split?
Policy Primary Q/S ExcessLoss Insured Insurer Reinsurance Reinsurance
$ 500
21,000
111,000
121,000
201,000
How would each of the following losses be split?
Policy Primary Q/S ExcessLoss Insured Insurer Reinsurance Reinsurance
$ 500 500 0 0 0
21,000
111,000
121,000
201,000
How would each of the following losses be split?
Policy Primary Q/S ExcessLoss Insured Insurer Reinsurance Reinsurance
$ 500 500
21,000 1,000 8,000 12,000
111,000
121,000
201,000
How would each of the following losses be split?
Policy Primary Q/S ExcessLoss Insured Insurer Reinsurance Reinsurance
$ 500 500
21,000 1,000 8,000 12,000
111,000 1,000 44,000 66,000
121,000
201,000
How would each of the following losses be split?
Policy Primary Q/S ExcessLoss Insured Insurer Reinsurance Reinsurance
$ 500 500
21,000 1,000 8,000 12,000
111,000 1,000 44,000 66,000
121,000 1.000 48,000 72,000
201,000
How would each of the following losses be split?
Policy Primary Q/S ExcessLoss Insured Insurer Reinsurance Reinsurance
$ 500 500
21,000 1,000 8,000 12,000
111,000 1,000 44,000 66,000
121,000 1.000 48,000 72,000
201,000 1,000 50,000 120,000 30,000
With ReinsuranceCompany A Company B
Gross earned premium 1,000,000 1,000,000Less: reinsurance 350,000 350,000Net earned premium 650,000 650,000
Gross incurred losses 800,000 400,000Less: reins recoveries 450,000 50,000Net incurred losses 350,000 350,000
Net income 300,000 300,000
Less: expenses 250,000 250,000Plus: invest income 50,000 50,000
Gain / (Loss) 100,000 100,000
Without ReinsuranceCompany A Company B
Gross earned premium 1,000,000 1,000,000Less: reinsurance 0 0Net earned premium 1,000,000 1,000,000
Gross incurred losses 800,000 400,000Less: reins recoveries 0 0Net incurred losses 800,000 400,000
Net income 200,000 600,000
Less: expenses 250,000 250,000Plus: invest income 50,000 50,000
Gain / (Loss) 0 400,000
BREAK
How much should a Director know about Reinsurance?
What should you tell your Directors about Reinsurance?
Can Reinsurance solve your financial problems?
Why do Reinsurers want to know so much about our Company?
Why does our Reinsurer recommend changes to our Company?
How much should our Reinsurer help us?
How often should we meet with our
Reinsurer?
Projected Results:
Gross Premium Written 1,325,000
Less: Reinsurance Costs, Net of Commissions 373,764
Net Premium, Net of Reinsurance Commissions 951,236
Less: Max Net Losses Incurred ( w/o prior development) 756,000
Less: Estimated Overhead 354,599
Net Income/(Loss) before Investment Income and Taxes (159,363)
Plus: Investment Income 66,928
Estimated Net Income/(Loss) Before Tax (92,435)
Surplus - Prior Year End 1,244,467
Potential Loss to Surplus -7.43%
Do an annual “Pro-Forma” ( worst case scenario )
How do we plan a Reinsurance program?
How do we know that our Reinsurance program is right for
us?
Where should we buy our Reinsurance?
When do you use Pro Rata or Excess Reinsurance?
When to Use Pro Rata or Excess
• Pro Rata– Balance Sheet/Surplus Relief– Entering/Exiting New Line of Business– Large Loss Capacity (Surplus Share)
• Excess Per Risk– Large Loss Capacity– Smooth Results/Loss Ratio
Surplus Share Reinsurance
Sharing with a Neighbor
Company B
$100,000
Company A
$100,000
$200,000 Risk
Share with two Neighbors
Company B
$100,000
Company A
$100,000
Company C
$100,000
$300,000 Risk
Share with Reinsurer
$200,000 Reinsurance Partner
$100,000 Retention
$100,000 Retention
$100,000 Reinsurance
Partner
$200,000 Risk $300,000 Risk
Reinsurance Partner on an Excess
Basis
$600,000$40,000
Retention
$60,000
First per Risk
$200,000 Second per
Risk
$300,000 Reinsurance
Partner
Reinsurance Partner on an Excess Basis
$900,000
$600,000 Reinsurance Partner
$200,000 Second per Risk
$60,000 First per Risk
$40,000 Retention
Reinsurance Program
Reinsurance by individual risk – usually location
• Company: XYZ Mutual Insurance Company– Property Surplus Share Retention: $300,000– First Per Risk Excess Retention: $40,000– First Per Risk Excess Coverage: $60,000– Second Per Risk Excess Coverage: $200,000
Property Ceding Retention: $300,000First Per Risk Excess Retention: $40,000First Per Risk Excess Coverage: $60,000Second Per Risk Excess Coverage: $200,000
$30,000 First per Risk
$60,000
First per Risk
?
Less than Retention
$40,000 Retention
$50,000 Second per
Risk
$40,000 Retention
$40,000 Retention
$60,000
First per Risk
$170,000 Second per
Risk
$40,000 Retention
$60,000
First per Risk
$200,000 Second per
Risk
$30,000 $70,000 $150,000 $270,000 $400,000
How Five Losses Flow Through the Program
CONTRACTS
Contract Features
• Coverage• Definitions• Ultimate Net Loss• Limits of Cover• Exclusions• Claims• ECO/XPL
Contract Features (Cont)
• Subrogation and Salvage• Access to records• Premiums and payment• Offset Clause• Termination
Coverage
• Establishes the obligatory nature of the cessions to the treaty
• Describes whether the reinsurance is excess or pro rata
• Often describes the classes of business covered
• Describes the attachment for policies
Definitions
• Defines terms referred to in the “Coverage” section
• Usually defines what expenses• Can define anything that can be subject to
interpretation
Ultimate Net Loss
• This states what the reinsurer is obligated to pay
• States whether expenses are included as “part of loss” or are pro-rated
• If ECO and/or XPL are covered, it is stated here
• Inuring reinsurance is deducted
Limits of Cover
• States the retention, if excess of loss• States the limit of the treaty or treaty layer• States any co-participation by the ceding
company
Exclusions
• Types of risks/classes of risks that are excluded
• Perils can be excluded
Claims
• Contains Claims Reporting Clause• Right to Associate Clause• Reinsurer payment terms Clause
Subro/Salvage
• Gives Reinsurer right to pursue subro, if the insurer does not want to
• If recoveries are “top down” or shared!!• Defines how subro expenses are treated
Access to Records
• Gives authority to the Reinsurer to view any or all of the clients claims file
• Does not necessarily mean the insurer has to send privileged documents
EXERCISES
Reinsurance Program Construction
• Normally write max of $1,000,000 Property • Want to keep $100,000 net• You have a Quota Share Treaty in Place
to cede 25% of all risks to QS Treaty• You have a Per Risk Excess Treaty for
$150,000 XS $100,000• Second layer of $500,000 XS $250,000
Need Additional Reinsurance
• Want to write a risk with higher limits than $1,000,000
• Would use facultative reinsurance
$2,000,000 Risk
• Facultative: $1,000,000 XS $1,000,000• Quota Share: $250,000 (25%)• XOL Treaty: $150,000 XS $100,000• $500,000 XS $250,000• Net Retention: $100,000
$2,000,000 Risk
• Quota Share: $500,000 (25%)• Facultative: ?• XOL Treaty: $150,000 XS $100,000• $500,000 XS $250,000• Net Retention: $100,000
$2,000,000 Risk
• Quota Share: $500,000 (25%)• Facultative: $750,000 XS $750,000• XOL Treaty: $150,000 XS $100,000• $500,000 XS $250,000• Net Retention: $100,000
Trustworthy Mutual - Exercise
• Since 1875• $2,000,000 in Gross Premium• $2,000,000 in Surplus• Largest risk
– Meadow View Farms • $1,000,000 in property risk
Trustworthy Mutual
• Concerns– BIG liability losses– BIG property losses– Unpredictable losses– Some risks are very big– Protect Surplus in bad years– Meet the legal requirements
Liability Claim Protection
• Not “Directly” Experience rated• Higher retention = Lower cost• Reinsurer usually handles adjusting
of larger or all claims• Legal fees are covered by Reinsurer
up to the contract limit
100% of Loss and
Loss Adjusting Expenses of $2500Excess of retention
$2500 per loss Retention
Protection for each Property Claim
$100,000
First Layer
$350,000
Second Layer
$50,000 per Loss Retention
$500,000 Capacity
$50,000 Retention
+ $100,000 Layer 1
+ $350,000 Layer 2
= $500,000 CAPACITY
Protection for each Claim
$100,000
First Layer
$350,000
Second Layer
$50,000 per Loss Retention
$500,000 Capacity
• Retention can be adjusted • There is always some
experience rating• Capacity should cover
majority of risks and needs to be looked at every few years
House Fire Case Study
House Fire Case Study
The Loss:$200,000 Dwelling$100,000 Contents$10,000 Additional Living Expense
$310,000 Total Loss
House Fire Case StudyThe Reinsurance Recovery$310,000 lossLoss Who Pays$50,000 Trustworthy
$100,000 Reinsurer - First Layer$160,000 Reinsurer - Second Layer
$310,000 Total
Insuring Large Risks
$100,000
$350,000
$50,000 per
SPECIFICREINSURANCE
You buy what you need on
risks over your capacity
$500,000 Capacity
Insuring Large Risks
$100,000
$350,000
$50,000 per
FACULTATIVE
We need to cede $500,000
50% of risk
Meadow View Farms$1,000,000 at one location
Insuring Large Risks• PRO RATA Facultative
$100,000
$350,000
$50,000 per
FACULTATIVE
Mutual Ceded $500,000
50% of the risk
$1,000 Claim
$500 Facultative
$500 Trustworthy
Insuring Large Risks• PRO RATA Facultative
$100,000
$350,000
$50,000 per
FACULTATIVE
Mutual Ceded $500,000
50% of the risk
$100,000 Claim
$50,000 Facultative
$50,000 Trustworthy
Insuring Large Risks• PRO RATA Facultative
$100,000
$350,000
$50,000 per
FACULTATIVE
Mutual Ceded $500,000
50% of the risk
$1,000,000 Claim
$500,000 Facultative
$50,000 Trustworthy
$100,000 Layer #1
$350,000 Layer #2
$1,000,000 Total
Insuring Large Risks• EXCESS Facultative
$100,000
$350,000
$50,000 per
FACULTATIVE
Mutual Ceded $500,000 excess of $500,000
Insuring Large Risks• EXCESS Facultative
$100,000
$350,000
$50,000 per
FACULTATIVE
Mutual Ceded $500,000 excess of $500,000
$50,000 Claim
$50,000 Trustworthy
Insuring Large Risks• EXCESS Facultative
$100,000
$350,000
$50,000 per
FACULTATIVE
Mutual Ceded $500,000 excess of $500,000
$500,000 Claim
$50,000 Trustworthy
$100,000 Layer #1
$350,000 Layer #2
Insuring Large Risks• EXCESS Facultative
$100,000
$350,000
$50,000 per
FACULTATIVE
Mutual Ceded $500,000 excess of $500,000
$1,000,000 Claim
$50,000 Trustworthy
$100,000 Layer #1
$350,000 Layer #2
$500,000 Excess Fac.
Barn Fire Case Study
Meadow View Farms suffers major fire loss
Barn Fire Case StudyMeadow View Farms –$1,000,000 risk
Risk was ceded 50% to PR Facultative
The Loss:$400,000 Barn$200,000 Farm Personal Property$600,000 Total Loss
Barn Fire Case StudyThe Reinsurance Recovery$600,000 lossLoss Who Pays$300,000 PR Facultative$50,000 Trustworthy
$100,000 Reinsurer - First Layer$150,000 Reinsurer - Second Layer
$600,000 Total
Aggregate “Stop Loss”100%
Excess of Attachment
Point
Net ClaimsPaid by Trustworthy
Trustworthy’s Attachment Point$1,000,000
Aggregate “Stop Loss”
• Key Points– Unlimited coverage or not?– Lower Attachment point = Higher costs– Higher Attachment point = Lower costs – Attachment point regulated by OCI– Lower claims = Lower costs
Aggregate Case Study
Case Study• September 30th Hail Storm• Trustworthy gets 400 claims averaging
$2,000 each • = $800,000 of net claims • Trustworthy had $700,000 of net claims
before the storm• = $1,500,000 Net claims as of 9-30-11
Aggregate Case Study
• Assume a $1,000,000 attachment• $1,500,000 of net claims• Trustworthy pays first $1,000,000• Reinsurer pays next $500,000• Reinsurer also pays all claims for the rest
of the year
Worst Case ScenarioGross Premium $2,000,000Plus Invest. Income $100,000Total Inflow $2,100,000
Less Max Net Losses ($1,000,000)Less Reinsurance ($700,000)Less Overhead ($500,000)Total Outflow ($2,200,000)
Maximum Loss to Surplus ($100,000)
100% Excess of
$1,000,000Attachment
Point
AllNet
LossesPaid By
Mutual
100% of Loss and
Loss Adjusting Expenses of $2500 retention
$2500 per loss
Retention
Trustworthy Mutual Reinsurance Program
Liability Per Risk Aggregate
$100,000
Layer #1
$50,000 per Loss Retention
$350,000
Layer #2
PRORATA
FAC
EXCESSFACULTATIVE
Legal Requirements
• Maximum Attachment point on AGG• Unlimited Aggregate coverage• Limited net individual Property risk• Limited net individual Liability risk
QUIZ TIME!!
Your insured’s cow gets out through a gate left open by your insured.
The cow was struck by a car causing $80,000 of damage and injuries plus we paid lawyers $20,000 to settle lawsuit
How much of this claim willTrustworthy pay?
100% Excess of
$1,000,000Attachment
Point
AllNet
LossesPaid By
Mutual
100% of Loss and
Loss Adjusting Expenses of $2500 retention
$2500 per loss
Retention
Trustworthy Mutual Reinsurance Program
Liability Per Risk Aggregate
$100,000
Layer #1
$50,000 per Loss Retention
$350,000
Layer #2
PRORATA
FAC
EXCESSFACULTATIVE
ANSWER
$80,000 Liability Claim$20,000 Legal's (covered as part of the claim)
$100,000
$2,500 Paid by Trustworthy ( Retention )
$ 97,500 Paid by Reinsurer$100,000
QUIZ TIME!!
Your insured’s Implement shed burns down.Total loss was $200,000
How much of this claim willTrustworthy pay?
100% Excess of
$1,000,000Attachment
Point
AllNet
LossesPaid By
Mutual
100% of Loss and
Loss Adjusting Expenses of $2500 retention
$2500 per loss
Retention
Trustworthy Mutual Reinsurance Program
Liability Per Risk Aggregate
$100,000
Layer #1
$50,000 per Loss Retention
$350,000
Layer #2
PRORATA
FAC
EXCESSFACULTATIVE
ANSWER
$200,000 Shed Fire
First $50,000 Paid by TrustworthyNext $100,000 Paid by Layer #1Next $50,000 Paid by Layer #2
QUIZ TIME!!
Trustworthy gets hit by a hail storm causing 300 claims that average $5,000 each = 1.5 million
Trustworthy had $500,000 in net claims this year before the storm
How much of this claim willTrustworthy pay?
100% Excess of
$1,000,000Attachment
Point
AllNet
LossesPaid By
Mutual
100% of Loss and
Loss Adjusting Expenses of $2500 retention
$2500 per loss
Retention
Trustworthy Mutual Reinsurance Program
Liability Per Risk Aggregate
$100,000
Layer #1
$50,000 per Loss Retention
$350,000
Layer #2
PRORATA
FAC
EXCESSFACULTATIVE
ANSWER
= $2,000,000 In Net Claims to Trustworthy so far this year
Attachment Point is $1,000,000SO….
Reinsurer Pays $1,000,000 now ( amount over Attachment Point ) and the rest of the net claims
for the remainder of the year
QUIZ TIME!!
Your insured’s Barn burns down.Total loss was $400,00025% Pro Rata Facultative reinsurance
How much of this claim willTrustworthy pay?
100% Excess of
$1,000,000Attachment
Point
AllNet
LossesPaid By
Mutual
100% of Loss and
Loss Adjusting Expenses of $2500 retention
$2500 per loss
Retention
Trustworthy Mutual Reinsurance Program
Liability Per Risk Aggregate
$100,000
Layer #1
$50,000 per Loss Retention
$350,000
Layer #2
PRORATA
FAC
EXCESSFACULTATIVE
QUIZ TIME!!
Total loss was $400,00025% Pro Rata Facultative reinsurance
so…Facultative pays first $100,000Retention $50,000First layer $100,000Second Layer $150,000
TOTAL $400,000
Questions?
Member of The WRC Group of Companies
Thank You!
Larry A. Bray, CPCU, PFMMVice President of Client Support
Wisconsin Reinsurance Corporation Madison, Wisconsin