OAMIC Annual Convention€¦ · With Reinsurance. Company A Company B. Gross earned premium...

Member of The WRC Group of Companies

OAMIC Annual ConventionColumbus, OhioFebruary 19, 2014

Larry A. Bray, CPCU, PFMMVice President of Client SupportWisconsin Reinsurance Corporation


ReinsuranceAn Expensive Bargain

[email protected]

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



$ 500 500 0 0 0

21,000

111,000

121,000

201,000



$ 500 500

21,000 1,000 8,000 12,000

111,000

121,000

201,000



$ 500 500

21,000 1,000 8,000 12,000

111,000 1,000 44,000 66,000

121,000

201,000



$ 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



$ 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

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


$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


$100,000

$350,000

$50,000 per

FACULTATIVE


50% of the risk

$100,000 Claim

$50,000 Facultative

$50,000 Trustworthy


$100,000

$350,000

$50,000 per

FACULTATIVE


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


$100,000

$350,000

$50,000 per

FACULTATIVE


$50,000 Claim

$50,000 Trustworthy


$100,000

$350,000

$50,000 per

FACULTATIVE


$500,000 Claim

$50,000 Trustworthy

$100,000 Layer #1

$350,000 Layer #2


$100,000

$350,000

$50,000 per

FACULTATIVE


$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


$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


Point

AllNet

LossesPaid By

Mutual

100% of Loss and


$2500 per loss

Retention



$100,000

Layer #1


$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


100% Excess of


Point

AllNet

LossesPaid By

Mutual

100% of Loss and


$2500 per loss

Retention



$100,000

Layer #1


$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


100% Excess of


Point

AllNet

LossesPaid By

Mutual

100% of Loss and


$2500 per loss

Retention



$100,000

Layer #1


$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


100% Excess of


Point

AllNet

LossesPaid By

Mutual

100% of Loss and


$2500 per loss

Retention



$100,000

Layer #1


$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?


Thank You!

Larry A. Bray, CPCU, PFMMVice President of Client Support

Wisconsin Reinsurance Corporation Madison, Wisconsin

[email protected]

OAMIC Annual Convention€¦ · With Reinsurance. Company A Company B. Gross earned premium...

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Transcript of OAMIC Annual Convention€¦ · With Reinsurance. Company A Company B. Gross earned premium...