2006 General MeetingAssemblée générale 2006

Chicago, Illinois

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

Group Disability Quota Share Reinsurance

Pascal Verrette, FSA, FCIADirector, Group Actuarial and Financial AnalysisMunich Reinsurance

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Agenda

– Overview of Reinsurance Methods– Scope of Quota Share Reinsurance– Benefits of Quota Share Reinsurance – Reinsurance Services expected with

Quota Share Arrangements

Overview of Reinsurance Methods

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Overview of Reinsurance Methods

– Quota Share– High Amount Excess– Extended Wait (Duration Excess)– Aggregate Stoploss– Catastrophe– Combinations

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Overview of Reinsurance Methods

high

low

Cap

ital R

elie

f

Risk Tolerancehighlow

Quota Share with/without Profit Sharing

Combination of Quota Share/Excesswith/without Profit Sharing

Aggregate Stoploss

Extended Wait

High Excess of Loss

Catastrophe

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Overview of Reinsurance Methods

Deciding on a Reinsurance Method and Level

– Insurer’s knowledge of itself: current financial and operational situation, financial and business objectives, risk tolerance

– Determining actual financial needs/objectives first, then establishing desired reinsurance solution

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Overview of Reinsurance Methods

Deciding on a Reinsurance Method and Level

– Performing projection impact analysis of I/S, B/S, EV, MCCSR, tax implications, administrative (processes and people) requirements

– Based on needs and analysis, reinsurer can provide input into appropriate/optimal reinsurance approach

– Re-evaluate reinsurance needs/solution periodically

Scope of Quota Share Reinsurance

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Scope of Quota Share Reinsurance

Premiums– Coinsurance basis – aligned with gross premium– Partners both share in group discounts / loads

Expense Allowances – linked to insurer’s expenses– Usually flat % of premium, % of paid claims– Reinsurer’s share of out of pocket expenses – rehab,

legal, etc..

Claims– Reinsurer’s Quota Share of any claim – Net of CPP, COLA and any other adjustments

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Scope of Quota Share Reinsurance

Issuing New Business– Automatic treaty thresholds agreed to by

partners• Set to obtain optimal cost/benefit ratio for partners• Updated periodically as partners see fit

– Special Acceptances• For business not meeting automatic criteria which

partners agree to reinsure according to existing treaty terms

– Facultative Acceptances• Non automatic business reinsured based on unique

terms

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Scope of Quota Share Reinsurance

Paying Claims– Automatic threshold agreed to by partners

• Set to obtain optimal cost/benefit ratio for partners

• Updated periodically as partners see fit

– Claims exceeding treaty threshold• Reinsurance input obtained• Mutual agreement is reached re claim decision

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Scope of Quota Share Reinsurance

Reinsurance Profit Sharing with Insurer– Can be provided depending on type and

size of business reinsured– Applies to pooled / non refund accounted

business– Partners determine whether to include other

than Quota Share coverages– Profit sharing enhances alignment of

interests

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Scope of Quota Share Reinsurance

Refund Accounted Business– Typically reinsured in conjunction with

other pooled business– Excluded from treaty level profit sharing– Profit sharing applied at group level based

on Quota Share based on gross policyholder retention formula

– Expense allowance also based on policyholder retention formula, net of reinsurance expenses

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Scope of Quota Share Reinsurance

Inception and Termination– Reinsurance on an Incurral basis– Applies to all claims incurred from treaty

inception– For all existing groups and groups issued

after inception

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Scope of Quota Share Reinsurance

Inception and Termination– Upon termination of agreement, newly

issued groups no longer reinsured– Inforce groups can be recaptured subject to

target treaty duration and profitability – Claims incurred prior to termination /

recapture remain reinsured until claim termination / expiry unless negotiated otherwise

Benefits of Quota Share Reinsurance

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Benefits of Quota Share Reinsurance

Risk Relief / Earnings Volatility Management

– Adverse claim frequency and claim severity protection

– All risks shared from 1st dollar• Includes investment income and expense risks

– Reduced overall result volatility

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Benefits of Quota Share Reinsurance

Capital Relief / Management– Maximized capital relief– Reduced new business strain

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Benefits of Quota Share Reinsurance

Access to reinsurance services and market intelligence

– Full access to reinsurer’s services• Access to additional industry knowledge via

reinsurer • Expertise and credibility gained from industry

experience• Reinsurer can act as a consultant across all

functional areas• Services provided at no extra cost

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Benefits of Quota Share Reinsurance

Best alignment of insurer / reinsurer interests results in full partnership

– Insurer and reinsurer have same interests, same problems, same opportunities

– Similar accounting, reserving and capital measurements

– i.e., insurer and reinsurer speak the same language and work together to meet market and insurer’s needs and to solve arising insurer’s issues

– Reinsurer’s objective is to provide support without interfering in management of the business

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Benefits of Quota Share Reinsurance

Additional benefits of / reasons for quota share reinsurance

– Easily combined / topped up with additional reinsurance cover

– Simpler reinsurance administration– Increased capacity for rapid growth– Increased competitive market position

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Benefits of Quota Share Reinsurance

Quota Share is appropriate:– For volatile benefits – For high growth business– When launching new products – When entering new markets– When acquiring new companies– For small, medium and large insurers… …many ways to structure and customize

needs-based reinsurance solutions; adequate analysis is critical

Reinsurance Services Expected with Quota Share Arrangements

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Reinsurance Services

Reinsurer: – Acts as a consultant to insurer, a

partner, an extension to insurer’s staff– Follows insurer’s lead, insurer

manages its business, not reinsurer– Focuses on sound practices which

can improve insurer’s results

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Reinsurance Services

Services:– Group Underwriting– Medical Underwriting– Actuarial / Product– Claims

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Reinsurance ServicesGroup Underwriting

– Annual reviews– Special and facultative acceptances– Consultations on challenging /

complex cases– Training– Assistance with group level pricing– Market information

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Reinsurance ServicesMedical Underwriting

– Approvals for high amounts– Consultations on challenging /

complex cases– Access to online manuals

• Ongoing medical research to update manuals

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Reinsurance ServicesActuarial / Product

– Pricing / rate review assistance– Valuation assumptions and methods

review– Financial experience / trend analysis– Product development – Contract wording

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Reinsurance ServicesClaims

– Annual reviews– Training– Consultations on challenging /

complex / litigated cases– Industry seminars– Access to online claims education

and training modules

Questions?