Reinsurance Optimisation - Actuaries Institute · PDF fileMaximum Event . Underwriting Risk ....

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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.

Transcript of Reinsurance Optimisation - Actuaries Institute · PDF fileMaximum Event . Underwriting Risk ....

Page 1: Reinsurance Optimisation - Actuaries Institute · PDF fileMaximum Event . Underwriting Risk . ... •Minimum reinsurer counter-party ratings ... Mind Map : Thank you . Any Questions?

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.

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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?

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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

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3

4

5

6

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1

2

3

1

2

1

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3

1

2

3

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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

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2

3

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2

3

4

External Environment – Onion & PEST

Stakeholder Layer

Regulation and legislation are paramount

Macro Layer

Broad macro forces influence overall strategy

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A Prudential view of Reinsurance Policyholders

Cap

ital

Man

agem

ent Risk M

anagement

Risk Appetite

Governance Framework

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Optimisation 3:Reinsurance Mind Map

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Thank you

Any Questions?