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CAS 2003 Seminar on Reinsurance Pricing Techniques - Casualty Lines. Given by: Peter W. Wildman June 2003. CAS 2003 Seminar on Reinsurance. Pitfalls in Pricing Reinsurance Coverage Aggregate Excess of Loss Loss Portfolio Transfers (Includes Adverse Development Covers). - PowerPoint PPT Presentation
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Pegasus Advisors -Towers Perrin Reinsurance
CAS 2003 Seminar on Reinsurance
Pricing Techniques - Casualty Lines
Given by: Peter W. WildmanJune 2003
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Pitfalls in Pricing Reinsurance Coverage
Aggregate Excess of Loss
Loss Portfolio Transfers (Includes Adverse Development Covers)
CAS 2003 Seminar on Reinsurance
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General Issues to Consider(Quantitative and Qualitative)
Motivation of Buyer/Seller Risk Reward/Tradeoff Desired Mix of Business Payout Patterns (correlation to Ultimate Loss Picks) Parameter Risk/Process Risk Data Issues Terms & Conditions of Reinsurance Agreement Claims Handling
CAS 2003 Seminar on Reinsurance
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Case Study #1
Prospective Accident Year Stop Loss
Stabilization of results and reduction of reinsurance costs.
CAS 2003 Seminar on Reinsurance
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Type: Insurance Company
Policyholders Surplus: $500 millionBook of Business: Multiline (P&C)
Expected Premium: $500 millionExpected Loss Ratio: 66.0%
Market Conditions Hard market conditions, Reinsuranceprotection expensive at lowerretentions
Case Study #1Prospective Accident Year Stop Loss
Company InformationCompany Information
CAS 2003 Seminar on Reinsurance
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Provide reinsurance protection at a low cost Stabilize results Reduce/manage total reinsurance costs Protect earnings and surplus Maintain expense ratio Maintain or improve AM Best rating Incorporate sufficient risk transfer (timing & u/w risk) for
accounting approval
Case Study #1Prospective Accident Year Stop Loss
Objectives - MotivationsObjectives - Motivations
CAS 2003 Seminar on Reinsurance
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Case Study #1Prospective Accident Year Stop Loss
Stop Loss TermsStop Loss Terms
CAS 2003 Seminar on Reinsurance
Type: Aggregate Excess of Loss
Term: Single Accident Year
Subject Business: Whole Account
SNEP: $500 million
Attachment: 60.0% (U/W neutral)
Limit: $100 million (20% of SNEP)
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Case Study #1Prospective Accident Year Stop Loss
Stop Loss TermsStop Loss Terms
CAS 2003 Seminar on Reinsurance
Minimum & Deposit: 6.0% of SNEP (est. $30 million)
Additional Premium: 57.5% of UNL xs of 70.0% L/R
Maximum Premium: (est. $58.75 million)
Reinsurer Margin: 5% of All Premium
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Case Study #1Prospective Accident Year Stop Loss
Stop Loss TermsStop Loss Terms
All other reinsurance purchased inures to the benefit of this cover.
Funds Withheld - F/W. F/W balance is credited a contractual rate of 5.0%
effective annually. Profit Commission of 100%.
CAS 2003 Seminar on Reinsurance
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Case Study #1Prospective Accident Year Stop Loss
Accounting ResultsAccounting Results1) Expected - Company meets plan loss ratio
SNEP = $500MSubject Losses = $330M (66% L/R)
Calculations:Attachment = 60.0% x $500M= 300.0MLimit = 20% x 500M= 100.0MCeded Losses = 330M - 300M= 30.0MNet Ceded Premium = 6.0%x500M= 300.0MUnderwriting Income = 30M - 30M= 0.0MPotential PV Cost = 5.0% x 30M= 1.5M
CAS 2003 Seminar on Reinsurance
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SubjectLosses
Deviationfrom
ExpectedCededLosses
Reinsurer’sPV Cash
FlowsReturn onPremium
66% 0% 30,000 1,500 5.0%
70% 4% 50,000 1,500 5.0%
75% 9% 75,000 2,219 5.0%
80% 14% 100,000 0 0.0%
85% 19% 100,000 (5,882) -10.0%
90% 24% 100,000 (10,409) -17.7%
Scenario #1Prospective Accident Year Stop Loss
Expected Payout (All Extra Losses Prorated)
Reinsurer’s ResultsReinsurer’s Results
CAS 2003 Seminar on Reinsurance
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SubjectLosses
Deviationfrom
ExpectedCededLosses
Reinsurer’sPV Cash
FlowsReturn onPremium
66% 0% 30,000 1,500 5.0%
70% 4% 50,000 1,500 5.0%
75% 9% 75,000 208 0.5%
80% 14% 100,000 (2,959) -5.0%
85% 19% 100,000 (9,116) -15.5%
90% 24% 100,000 (13,870) -23.6%
Scenario #2Prospective Accident Year Stop Loss
Accelerated Payout Pattern
Reinsurer’s ResultsReinsurer’s Results
CAS 2003 Seminar on Reinsurance
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SubjectLosses
Deviationfrom
ExpectedCededLosses
Reinsurer’sPV Cash
FlowsReturn onPremium
66% 0% 30,000 1,500 5.0%
70% 4% 50,000 1,500 5.0%
75% 9% 75,000 813 1.8%
80% 14% 100,000 (3,111) -5.3%
85% 19% 100,000 (10,421) -17.7%
90% 24% 100,000 (15,821) -26.9%
Scenario #3Prospective Accident Year Stop Loss
Expected Payout (All Extra Losses to Line 1)
Reinsurer’s ResultsReinsurer’s Results
CAS 2003 Seminar on Reinsurance
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SubjectLosses
Deviationfrom
ExpectedCededLosses
Reinsurer’sPV Cash
FlowsReturn onPremium
66% 0% 30,000 1,500 5.0%
70% 4% 50,000 1,500 5.0%
75% 9% 75,000 2,219 5.0%
80% 14% 100,000 1,964 3.3%
85% 19% 100,000 (2,786) -4.7%
90% 24% 100,000 (6,203) -10.6%
Scenario #4Prospective Accident Year Stop Loss
Expected Payout (All Extra Losses to Line 2)
Reinsurer’s ResultsReinsurer’s Results
CAS 2003 Seminar on Reinsurance
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Prospective Accident Year Stop Loss(000)
Line 1 Line 2 TotalPremium 250,000 250,000 500,000Expected Losses 155,000 175,000 330,000Expected Loss Ratio 62.0% 70.0% 66.0%
Payout Pattern (Expected)Year Line 1 Line 2 Total1 42.3% 10.0% 25.2%5 89.2% 50.0% 68.5%10 97.0% 75.0% 85.4%20 100.0% 100.0% 100.0%
CAS 2003 Seminar on Reinsurance
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CAS 2003 Seminar on Reinsurance
Risk Reward Tradeoff
(50,000)
(40,000)
(30,000)
(20,000)
(10,000)
-
10,000
20,000
60.0%
63.0%
66.0%
69.0%
72.0%
75.0%
78.0%
81.0%
84.0%
87.0%
90.0%
Subject Loss Ratio
Prof
itabi
lity
FiniteBlendedTraditional
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Case Study #1Prospective Accident Year Stop LossData Issues - Reinsurer’s AnalysisData Issues - Reinsurer’s Analysis
Client Assessment - Published Rating Senior Management to communicate objectives Client Data Requirements
Historic subject base premiums ((5-10 years) larger if available) Indication of any discontinued lines and corresponding premiums Historical Rate Change, Rate Mods, by line, state, etc., Schedule Credits/Debits
Loss triangulations for past 5-10 U/W years, including the following:
CAS 2003 Seminar on Reinsurance
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Case Study #1Prospective Accident Year Stop Loss
Reinsurer’s AnalysisReinsurer’s Analysis
Client Data Requirements (continued) Incurred or outstanding indemnity; LAE, Combined
Paid indemnity, Claim Count Triangulations? (Depends on Line); Paid LAE
Policy limit(s) shift over time
Historical Reinsurance Retentions
Draft Placement Slip
Treatment of unique exposures
CAS 2003 Seminar on Reinsurance
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Case Study #1Prospective Accident Year Stop Loss
Reinsurer’s AnalysisReinsurer’s Analysis
Supplementary Data
Industry Losses
Industry Payout Patterns (What is the Tail?)
Other client information
Press releases
CAS 2003 Seminar on Reinsurance
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Case Study #2Loss Portfolio TransfersLoss Portfolio Transfers
CAS 2003 Seminar on Reinsurance
Type: Adverse Development Cover
Subject Business: Whole Account
Subject Losses: $500M of carried reserves
Premium: To be negotiated
Attachment: $250M (= $500M - $250M)
Limit: $400M
Reporting: Quarterly 60 days in arrears
Settlements: Quarterly 75 days in arrears
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Loss Portfolio Transfers
Pricing ConsiderationsPricing Considerations Probability of Cover being used (Contingent, attachment
relative to held reserves)
Who wants or is a natural buyer of Old Years’ Reserves? (lots of Sellers)
Insurance is easy business to enter, very difficult to exit.
Run-off Costs (How much Management time re: Actuarial, Claims, Financial, Ceded Reinsurance, etc.)
Motivations for Loss Portfolio Transfer
CAS 2003 Seminar on Reinsurance
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Loss Portfolio Transfers
Motivations of Buyer/SellerMotivations of Buyer/Seller
Sale of Company
Exit particular line of business/state of operation
Economic Risk Transfer
Financial Management
CAS 2003 Seminar on Reinsurance
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Loss Portfolio Transfers
Data AnalysisData Analysis
Due Diligence (Internal or Third Party)
House Purchase Analogy (Who cares more about potential defects, buyer or home inspector?)
Ask any and all questions!
Any segments not reviewed
CAS 2003 Seminar on Reinsurance
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CAS 2003 Seminar on Reinsurance
Loss Portfolio Transfers
Data Issues - Reinsurer’s AnalysisData Issues - Reinsurer’s Analysis
Client Assessment - Published Rating
Client Data Requirements Independent Actuarial Review Internal Actuarial Projections Confidence Intervals Incurred Loss Triangles (Gross and Net) Paid Loss Triangles (Gross and Net)
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CAS 2003 Seminar on Reinsurance
Loss Portfolio TransfersData Issues - Reinsurer’s AnalysisData Issues - Reinsurer’s Analysis
Client Data Requirements (continued) Historical pricing of business Historical inuring reinsurances Claims audits Reserving policies Changes to claims handling
26
CAS 2003 Seminar on Reinsurance
Loss Portfolio Transfers
Data Issues - Reinsurer’s AnalysisData Issues - Reinsurer’s Analysis
Supplementary Data
Industry Losses
Industry Payout Patterns
Peer company information
Press releases
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Loss Portfolio Transfers
Claims HandlingClaims Handling
Claims Audit - Access to Claim Files - Where are the Claim Files - Number of Open Claims
Adequacy of Held Reserves
Reconcile Claims Handling Philosophies
CAS 2003 Seminar on Reinsurance
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Loss Portfolio Transfers
Claims HandlingClaims Handling
Format of Claim Data (i.e, Electronic or Hard Copies)
Complete Claims History
Number of Years of History
Transferring Data from Buyer to Seller
Systems Compatibility/Reporting Responsibility
CAS 2003 Seminar on Reinsurance
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Loss Portfolio Transfers
Claims Handling/Run Off CostsClaims Handling/Run Off Costs
Staffing Requirement
Intellectual Capital
Additional TPA Costs
Less attention paid to than Actuarial/Financial evaluation
CAS 2003 Seminar on Reinsurance
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CAS 2003 Seminar on Reinsurance
Loss Portfolio Transfers
Terms and Conditions of Reinsurance AgreementTerms and Conditions of Reinsurance Agreement
Expected Results based upon actuarial projected probabilities
Upside to downside relationship
Return on Equity (Capital allocation) LOC usage
Underwriting constraints
Relationship implications - historical/prospective
Subject Loss Limitations (Asbestos/EIL)