Reinsurance Nigel Davies December 2, 2008.
Reinsurance
Nigel Davies
December 2, 2008.
ReinsuranceSession 1
Introduction & Overview. Case Study, Round 1.
Session 2Case Study Feedback. Life Reinsurance. Finite Reinsurance. Failure of Reinsurance.
Session 3Catastrophe Insurance. Securitization. Case
study – Round 2.
Session 4Case Study Feedback. Supervisory Issues.
ReinsuranceSession 1
Introduction & Overview.
• Reinsurance Market
• Definitions and Types of Contract
Reinsurance
Insured
Insurance
Company
Reinsurance
Company
Reinsurance
Company
Broker, Agent, Phone,
Online, In person.
Broker, Direct.
Broker, Direct.
Reinsura
nce
Retroce
ssion
Direct
Insu
rance
Reinsurance
Insurance
Company
Reinsurance
Company
Broker, Direct.
Reinsura
nceUS$ billion
Growth in 2007
Growth in 2006
Life 2,393 5.4% 4.1%
Non-life 1,668 0.7% 3.9%
Total 4,061
Global Premiums in 2007
Source: Swiss Re, Sigma 3/2008.
How much of this is
reinsurance?
…and why do we
measure it by
premium?
Reinsurance
Gross Reinsurance
Premium Assumed
Risk “Located” In:
Net “Risk”
Europe 88,989 (64,653) 24,336
North America 81,946 (90,306) (8,360)
Asia & Australasia 1,989 (11,219) (9230)
Africa, Near & Middle East
(2,614) (2,614)
Latin America (4,132) (4,132)
Total 172,924 (172,924) NIL
Destination & Source of Reinsurance Premium (US$ million)
Source: IAIS Global Reinsurance Market Report, December 2007Data Source:- 59 Reinsurers: Bermuda 8; Europe 21; Japan 2; USA 28.
ReinsuranceReinsurance Premiums Assumed by Class of Business & Contract Type
(US$ million)
Source: IAIS Global Reinsurance Market Report, December 2007
Proportional Reinsurance
Ceding insurer and assuming reinsurer share an agreed portion or percentage of original premiums and subsequent losses in respect of the reinsured business.
Non-proportional Reinsurance
Reinsurer assumes the part of the ceding insurer’s claims that exceed a certain amount. The premium is a specially calculated amount.
Reinsurance
68%4176132005
62%2413912004
70%2683822003Other
12%625202005
10%505012004
10%545572003Property
89%5245882005
85%4214962004
85%3744402003Motor
Non-life
97%399340972005
98%458946682004
98%408041662003
Life
Retention RatioNet PremiumGross Premium
Reinsurance Profile – Trinidad & Tobago (TT$million)
Reinsurance
Non-Life Life
Reinsurance Market Dynamics – How do reinsurers make money?
Reinsurance
Non-Life1. High returns in low cat.
years attracts capital.2. New capital creates
overcapacity and reduces prices (market softens).
3. Cats wipe out capital and prices increase (market hardens).
4. Hard market attracts capital.
Life1. Information asymmetry.
Reinsurers have annually updated loss experience – better than (time-lagged) mortality tables.
2. Risk profile: pandemics vs. advances in medical science.
3. Life vs. Pensions products hedge mortality and longevity risks.
4. Primary market trend for savings products reduces need for life reinsurance.
Reinsurance Market Dynamics – How do reinsurers make money?
HIGHLY CYCLICAL INCREASING LONGEVITY
ReinsuranceCapital Movements in a Major Reinsurers – 2007
(Overall 7% increase)
Source: Global Reinsurance Market Review 2007. Benfield. www.benfieldgroup.com
ReinsuranceNon-life Reinsurance
Prices
For expected loss of 1%, premium was 4% of sum insured in 2008 (2007, 5.5%).
For expected loss of 4%, premium was 11% of sum insured in 2008 (2007, 13%).
Reinsurance
Increasing Longevity in the Caribbean
For 18 age-group cohorts.
Source: Caribbean Epidemiology Centre. October 2000. www.carec.org
ReinsuranceStory so far……….
1. Reinsurance activity, measured by premium, is substantial but impossible to make cross-sectoral comparisons
2. Reinsurance risk tends to migrate to large European reinsurers.
3. Non-life RI >> Life RI.4. Proportional & non-proportional reinsurance5. Non-life RI highly cyclical – 7% increase in capital
in 2007 led to price drops of 10%-20% in ROL for 2008.
6. Life primary market driven by increasing longevity…..
7. ….. growing due to savings products, but this has little effect of Life RI. Life RI based on information asymmetry.
Reinsurance
• Prioritize Non-life reinsurance over Life reinsurance.
• Cover Proportional & Non-proportional contracts equally.
Reinsurance
Classification of Reinsurance Contracts
Reinsurance
TREATY REINSURANCE
FACULTATIVE REINSURANCE
Reinsures bundles of
primary policies
Reinsures individual primary policies
Reinsurance Contracts
Non-life / Life.Proportional / Non-
proportional.Obligatory / non-
obligatory.
}
Reinsurance
TREATY REINSURANCE
FACULTATIVE REINSURANCE
Reinsures bundles of
primary policies
Reinsures individual primary policies
Reinsurance Contracts
Non-life / Life.Proportional / Non-
proportional.Obligatory / non-
obligatory.
}
Reinsurance
Non-life Treaty Reinsurance
Non-proportional Proportional
Excess of Loss
Stop Loss
Quota Share
Surplus Treaty
Excess of Loss and Quota Share Treaties are most common.
Stop Loss contracts are very rare nowadays
Reinsurance1. Excess of Loss Contracts -
Basics
$1m
$4m
$5m
$2m
$3m$3m xs
$1m
Limit
Attachment point
Reinsurance cover for specified line(s) of business
} Deductible / Risk retention
Claim: For a $5m claim, $3m is recoverable under this contract.
RI cover exhausted!
Reinsurance
1. Excess of Loss Contracts
$10m
$50m
$40m
$30m
$20m
$5m
Line of Business A Line of Business B
1st Layer, $10m xs $10m
1 reinstatement
2nd Layer, $10m xs $20m
1 reinstatement
3rd Layer, $20m xs $30m
No reinstatements
1st Layer, $5m xs $5m
3 reinstatements
2nd Layer, $20m xs $10m
1 reinstatement
Reinsurance
1. Excess of Loss Contracts
$10m
$50m
$40m
$30m
$20m
$5m
Line of Business A Line of Business B
1 2 3
Claims & RI Recoveries ($m)
Claim 1 Claim 2 Claim 3 Loss Scenari
o
Gross Claim 55 25 30 110
R/I Rec. Layer 1 (10) (10) NIL (20)
R/I Rec. Layer 2 (10) (5) (5) (20)
R/I Rec. Layer 3 (20) N/A N/A (20)
Net Claim 15 10 25 50
} *
*
Reinsurance
2. Stop Loss Contracts
Aggre
gate
Loss
es
/ C
laim
s of
Insu
rer
Attachment point (e.g. loss ratio of 110%)
Limit (e.g. loss ratio of 130%)
Stop loss covers a specified %age of losses
between attachment point and limit.
Attachment points and limits expressed as either:
1. Loss ratios, or
2. Absolute amounts
Aggre
gate
Pre
miu
ms
Reinsurance
3. Quota Share Contracts
Proportional Reinsurance
Ceding insurer and assuming reinsurer share an agreed portion or percentage of original premiums and subsequent losses in respect of the reinsured business.
Quota Share Contracts have 2 types of limits:
1.Per risk limit
2.Aggregate exposure limit
Reinsurance
3. Quota Share Contracts
$2m
$1m
$4m
$3m
$6m
$5m
}
75% Quota Share
Aggregate exposure limit
Reinsurer imposes a limit on aggregate exposure (total sums insured). A breach of this limit will mean an averaging down of the QS cover.
$4m per risk limit
Reinsurance
3. Quota Share Contracts
$2m
$1m
$4m
$3m
$6m
$5m
}
75% Quota Share
Aggregate exposure limit
Reinsurer imposes a limit on aggregate exposure (total sums insured). A breach of this limit will mean an averaging down of the QS cover.
$4m per risk limit
Profit Commission
With extensive reinsurance cover in the lower layers, insurers may allow underwriting standards to drop (in order to gain market share) & this reduces underwriting profit.
To counteract this, QS contracts typically allow a retroactive payment from the reinsurer of, say, 20% of its profit on the contract.
Reinsurance
4. Surplus Treaty Contracts
Surplus Treaty
Ceding insurer retains a specified amount – called the line.
The amount ceded to the reinsurer is defined as a specified number of lines.
Example: 4 line surplus treaty of $1m
$2m
$1m
$4m
$3m
$6m
$5m
Retention
Reinsurance cover for 4 x retention in a 4 line surplus treaty. NOTE – 100% COVER FOR THESE CEDED LINES.
Reinsurance
4. Surplus Treaty Contracts
Example: 4 line surplus treaty of $1m
$2m
$1m
$4m
$3m
$6m
$5m
1
2
1
2
Cedant retains all premiums and claims.
pre
miu
m
pre
miu
m
Cedant retains 25% of premiums and claims. Reinsurer assumes 75% of premiums and claims.
Reinsurance
Time
A
mou
nt
Property Catastrophe
Household Fire & Contents (Non-
catastrophe)
MotorWorkers’ Compensation
What type of reinsurance contract suits the loss scenarios in these lines
of business?
Reinsurance
Time
A
mou
nt
Motor
Property Catastrophe
Workers’ Compensation
Household Fire & Contents
(Non-catastrophe)
Reinsurance
Claims Arranged by Line of Business
A
mo
un
t
Motor
Property Catastrophe
Workers’ Compensation
Household Fire & Contents
(Non-catastrophe)
The Ideal Reinsurance Program?
Catastrophe XL.
2 reinstatements to cover 3 events in total.Casualty XL.
3 reinstatements on bottom layer to cover 4 events.Quota Share.
To cover attritional losses in all lines of business.
Reinsurance
CASE STUDY – ROUND 1.• Contract wordings are “standardized” throughout the industry.
• Terms & conditions can vary greatly.
• Wordings do vary in quality and are capable of misinterpretation.
• Wordings contain jargon……..
• Please read the handout which is about a
Non-life Casualty XL Program.
• Prepare questions for discussion & reasons for your questions
• Prepare suggestions on how this program can be improved upon.