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Reinsurance Optimisation GIPC Reinsurance Working Party
Steven Girvan, Will Gardner
GIPC Reinsurance Working Party – Steven Girvan, Will Gardner, Karl Marshall, Alison Drill, James Basman, Ty Birkett, Corinne Glasby, Evelyn Chow, Kyung Won and Stephen Lum
This presentation has been prepared for the Actuaries Institute 2012 General Insurance Seminar. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute
and the Council is not responsible for those opinions.
What does Reinsurance Optimisation look like?
Reinsurance Optimisation
On the one hand ….. Insurance Companies buy reinsurance for the same reasons …….
Reduce exposure Smooth earnings Supplement capital
Create surplus capital
Coverage
Price
Quality
On the other hand ….. Insurance Companies have vastly different reinsurance programs …..
Structure
From what perspective?
Factors that define the Reinsurance Environment
Insurance and reinsurance markets Economic forces Reinsurance market cycle Economic cycles
Reinsurance pricing Claims cycles
Soft v hard market
Reinsurance product Social and community Innovation Superimposed inflation
Global supply Utility of insurance
Legislative changes
Prudential and legislative requirements Capital charges Climate Prudential compliance Weather patterns
Legislative compliance Urbanisation
Catastrophe modelling
Environmental degradation
2
3
4
5
6
1
1
2
3
1
2
1
2
3
1
2
3
4
Insurance Company
Political Forces
Economic Forces
Social Forces
Technology Forces
Industry Layer
Directly influences reinsurance strategy
2
3 4
5
6 1
1
2
3
1
2
1
2
3
1
2
3
4
External Environment – Onion & PEST
Stakeholder Layer
Regulation and legislation are paramount
Macro Layer
Broad macro forces influence overall strategy
A Prudential view of Reinsurance Policyholders
Cap
ital
Man
agem
ent Risk M
anagement
Risk Appetite
Governance Framework
A Prudential view of Reinsurance Policyholders
Risk Appetite
Cap
ital
M
anag
emen
t R
isk M
anagement
Governance Framework
Underwriting Risk Maximum Event Retention (“MER”)
Minimum Capital Requirements
(“MCR”)
Reserving Risk
Market Risk
Large Risks
Risk accumulate
Uncertain Future
Risk Consequence
Credit Risk
Operation Risk
Reduce profit volatility Support Strategy
Balance the needs of policyholders and shareholders
Tax advantage
Insurance Group risk appetite
Risk appetite link to strategy
Reinsurance response
Aligning Risk Appetite and Reinsurance
•MCR targets •Solvency targets
•Earning volatility •MCR targets •Solvency targets
Risk Capacity
Risk Targets
Risk Tolerances
Risk Limits
•Reinsurance support MCR •Design and scale of Reinsurance program •Loss modelling, performed and verified
•Aligned KPIs •Reinsurance program reviewed by actuarial •Reinsurance specialists review wordings •Strong monitoring regime
•Board approval of MER •Board approval of target solvency ratio •Target reinsurance cession ratios •Reinsurance program design
•Minimum reinsurer counter-party ratings •Limits on original business aligned reinsurance capacity •Minimum compliance standards for GPS 230
Three Lines of Defence Framework
Non – core reinsurance functions are often outsourced
Claims
Technical Pricing
Finance
Operations
Management
Loss modelling
Capital modelling
Risk & Compliance
Peril monitoring
Technical pricing
IT a
nd s
yste
ms
Hum
an R
esou
rces
Reinsurance Business Units
Core Non core Shared Services
First line of defence
2nd line
oversight
3rd line
Board & Executive
Internal audit
Group and divisional risk &
compliance
• Risk appetite •Approve REMS
•Test and verify •Assurance on Risk and Compliance
• Design, interpret and develop reinsurance risk management framework
Reinsu
rance Managem
ent F
ramew
ork and P
rocess Alignm
ent
Risk
Appetite and M
onitoring A
lignment
Outsourced Services
Broking Service
Consult-ants
Dispute manage
Reinsurance Framework – Internal perspective
Reinsurance Levers REMS
Bes
t Pra
ctic
e
Use Test
Gap Analysis
Alignment
Review
Compliance Solvency
Counter-party
Cession ratios
KPIs
Review
Modelling
Design
MER
MCR
Benchmarking
Structure, including limit and retention
Price
Ceded cost of capital
Reinsurance Analysis and Process
Gross analysis
Must understand nature and
cost of losses being
considered for reinsurance
Pricing analysis Expected ceded losses
Expense loading
Profit or cost of capital
Benchmarking
Against peers
Against previous year(s)
Against expectations
Placement process
Art as much as science
Negotiation important
Incorporation of quantitative analysis critical
Security
Regulatory implications
Risk appetite considerations
Rating agencies
Downgrade clauses
Documentation
Contract wordings
REMS and RAS
Board reporting
Technical analysis reports
Quantitative
Qualitative
Impact analysis
Structure optimisation
Analysis of efficiency
Capital implications
Regulatory implications
Insurer data
Assumption setting
Simulation modelling
Decision making
Multiple stakeholders
Board
• Must understand both quantitative and qualitative elements
RI manager
Actuaries • Key role in quantitative
elements
APRA
RI broker
• Regulatory framework
• Key support role across quantitative and qualitative elements
• Key role in qualitative elements
Business • Key role across
quantitative and qualitative elements
Reinsurers • Providers of capacity
Optimisation 1: Capital Efficiency
Retu
rn
Risk
Gross
Net – current structure
Net – Alt 1
Net – Alt 3
Net – Alt 4
Net – Alt 2
Risk / Return defined
• Change in risk normally measured as change in capital, i.e.
Capital required before reinsurance
Less Capital required after reinsurance
• Return normally measured as
profit divided by change in capital
Retu
rn
Risk
Gross
Net – current structure
Net – Alt 1
Net – Alt 3
Net – Alt 4
Net – Alt 2
Ceded Return on Capital • Calculated as
Ceded Profit Margin Change in Capital
• Compared to the insurer’s
own internal Return on Capital • If lower, then the reinsurance
is accretive to the overall Return on Capital
• Or, the proposed structure is efficient
Efficient Frontier
Efficient Structures
Optimisation 1: Capital Efficiency
Optimisation 2: Reinsurance Strategy Map
Capital
Customer Value Proposition
Capital / Risk Operational Excellence
Organisation / Human / Information Capital
Productivity
First Line – Right people, right skills
Develop governance framework
Quantitative and qualitative analysis
Reinsurer Focus
Comply with REMS
Underwriting and reserving risk Risk appetite aligned
for reinsurance
Growth
Reduce profit volatility
Reinsurance program and execution
Build Reinsurance broker relationship
Reinsurance program design and selection
Long tem partner, risk and capital
Develop reinsurance risk levers
Build Reinsurer relationships
Manage Reinsurance program risk
Balance business objectives / reinsurance
Improve reinsurance placement process
Financial Perspective
Client Perspective
Internal Perspective
Learning and Growth Perspective
Support Capital
Long term shareholder value
Optimisation 3:Reinsurance Mind Map
Thank you
Any Questions?
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