The Actuary In Ceded Reinsurance: Non-Actuarial Considerations CAS Seminar On Reinsurance June 2-4,...
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Transcript of The Actuary In Ceded Reinsurance: Non-Actuarial Considerations CAS Seminar On Reinsurance June 2-4,...
![Page 1: The Actuary In Ceded Reinsurance: Non-Actuarial Considerations CAS Seminar On Reinsurance June 2-4, 2002 Tarrytown, New York Edward P. Lotkowski, FCAS.](https://reader035.fdocuments.net/reader035/viewer/2022081821/56649e4c5503460f94b4259c/html5/thumbnails/1.jpg)
The Actuary In Ceded The Actuary In Ceded Reinsurance:Reinsurance:
Non-Actuarial ConsiderationsNon-Actuarial Considerations
CAS Seminar On ReinsuranceCAS Seminar On Reinsurance
June 2-4, 2002June 2-4, 2002
Tarrytown, New YorkTarrytown, New York
Edward P. Lotkowski, FCASMain Street America Group
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This discussion is This discussion is notnot……
Actuarial:Actuarial:– Actuarial expertise is assumed, but…Actuarial expertise is assumed, but…– Model everything!Model everything!
• Retention settingRetention setting• PricingPricing• Portfolio – level analysisPortfolio – level analysis
Definitive:Definitive:– Reinsurance buyer’s behavior influenced by specific Reinsurance buyer’s behavior influenced by specific
situationsituation• ConstituenciesConstituencies• Market conditionsMarket conditions
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This discussion This discussion hashas::
General themes:General themes: Who are your customers?Who are your customers? The Actuary-Buyer is also a Broker and a The Actuary-Buyer is also a Broker and a
SellerSeller Pertinent information takes many formsPertinent information takes many forms Buying requires active management, not Buying requires active management, not
passive participationpassive participation Buyer succeeds when he/she leverages Buyer succeeds when he/she leverages
actuarial skills with communication and actuarial skills with communication and people skillspeople skills
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The Buyer’s CustomersThe Buyer’s Customers
Arrows Mean:Arrows Mean:– Reciprocal customer relationshipsReciprocal customer relationships– Reciprocal flows of informationReciprocal flows of information– Reciprocal responsibilitiesReciprocal responsibilities
Company Management
Buyer
Brokers Reinsurers
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Company Management as Company Management as CustomerCustomer
IssuesIssues Ceding company management has several audiencesCeding company management has several audiences
– Board of DirectorsBoard of Directors– Wall StreetWall Street– StockholdersStockholders– Rating AgenciesRating Agencies
What drives corporate risk philosophy?What drives corporate risk philosophy?– Is a philosophy articulated?Is a philosophy articulated?– Is it “robust”?Is it “robust”?– Is it consistent with yours?Is it consistent with yours?
““Hard” vs. “Soft” drivers of risk philosophyHard” vs. “Soft” drivers of risk philosophy
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Company management as Company management as customercustomer
““Hard” DriversHard” Drivers Corporate Form Corporate Form
– Access to capitalAccess to capital
Profile of investment portfolioProfile of investment portfolio– Equity/Fixed income compositionEquity/Fixed income composition
– LiquidityLiquidity
Diversification among businessesDiversification among businesses– Stand-alone P & C vs.Stand-alone P & C vs.
– P & C with Life, Annuities, Asset ManagementP & C with Life, Annuities, Asset Management
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Company management as Company management as customercustomer
““Soft” DriversSoft” Drivers Management's constituenciesManagement's constituencies
– Removed from reinsurance arenaRemoved from reinsurance arena Need for clear communicationNeed for clear communication
– Can dictate program structureCan dictate program structure• e.g., variable retentionse.g., variable retentions
– May preclude forms of reinsuranceMay preclude forms of reinsurance• e.g., traditional vs. finitee.g., traditional vs. finite
Management’s P & C/Reinsurance backgroundManagement’s P & C/Reinsurance background– Holding company structureHolding company structure
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Company management as Company management as customercustomer
““Soft” DriversSoft” Drivers, cont’d, cont’d Management’s attitudes towards Management’s attitudes towards
reinsurancereinsurance– Transaction vs. relationshipTransaction vs. relationship– Attitude towards “payback” notionsAttitude towards “payback” notions– Depth of understandingDepth of understanding
• Mean vs. varianceMean vs. variance
Individuals’ risk tolerancesIndividuals’ risk tolerances
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Company management as Company management as customercustomer
IssueIssue Management’s appetite for analyticsManagement’s appetite for analytics
– Appetite is often low; actuary’s appetite is higherAppetite is often low; actuary’s appetite is higher
– Management’s appetite is often hard to gaugeManagement’s appetite is often hard to gauge
– Actuary-Buyer’s analytical expertise is assumedActuary-Buyer’s analytical expertise is assumed
– Example (amounts are hypothetical):Example (amounts are hypothetical):Retention options considered:Retention options considered:
• Existing $1.5m per occurrenceExisting $1.5m per occurrence
• Existing with $2m AADExisting with $2m AAD
• $2m per occurrence$2m per occurrence
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((ExampleExample))Price/Volatility TradeoffPrice/Volatility Tradeoff
IdeaIdea– Analyze difference among purchasing optionsAnalyze difference among purchasing options– All program differences occur in ($1.5m, All program differences occur in ($1.5m,
$2.5m)$2.5m)– So, model activity in ($1.5m, $2.5m)So, model activity in ($1.5m, $2.5m)
Simulated risk process produces:Simulated risk process produces:
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((ExampleExample))Ceded LossesCeded Losses
Percentiles Percentiles of Annual of Annual
LossLoss
Option 1 Option 1 Annual Loss in Annual Loss in ($1.5m, $2.5m)($1.5m, $2.5m)
Option 2 Option 2 Annual Loss Annual Loss
($1.5m, $2.5m)($1.5m, $2.5m) After AADAfter AAD
Option 3Option 3Annual Loss Annual Loss
($1.5m, $2.5m) ($1.5m, $2.5m) Higher RetentionHigher Retention
25%25% $4.0m$4.0m $2.0m$2.0m $1.0m$1.0m
50%50% 5.05.0 3.03.0 1.51.5
75%75% 6.56.5 4.04.0 2.52.5
95%95% 9.09.0 7.07.0 3.53.5
99%99% $11.0m$11.0m $9.0m$9.0m $4.0m$4.0m
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(Example) (Example) Current structure as baselineCurrent structure as baseline
Percentiles of Percentiles of Annual LossAnnual Loss
Option 1Option 1
Current Current StructureStructure
Option 2Option 2
CurrentCurrent
With AADWith AAD
Option 3Option 3
RetentionRetention
25%25% $0m$0m $2m$2m $3.0m$3.0m
50%50% 00 22 3.53.5
75%75% 00 22 4.04.0
95%95% 00 22 5.55.5
99%99% 00 22 7.07.0
Est. PremiumEst. PremiumSaving Saving
$0m$0m $2m$2m $4.5m$4.5m
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Reinsurer as CustomerReinsurer as Customer
Buyer to ReinsurerBuyer to Reinsurer ““Perfect submission”Perfect submission”
– Stable primary Stable primary companycompany
– Well-articulated and Well-articulated and executed business executed business strategystrategy
– Lots of (accurate!) dataLots of (accurate!) data– Timely responseTimely response– Complementary Complementary
exposureexposure– Large “bank”Large “bank”
““Face time” importantFace time” important– MeetingsMeetings
Especially after big lossEspecially after big loss
– AuditsAudits
What does your What does your company have to offer?company have to offer?– Your companyYour company
– YourselfYourself
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Reinsurer as CustomerReinsurer as Customer
Reinsurer to BuyerReinsurer to Buyer Reinsurer’s attitude toward the marketReinsurer’s attitude toward the market
– Where does it write? – e.g. clash vs. working layersWhere does it write? – e.g. clash vs. working layers– Transaction – oriented vs.Transaction – oriented vs.– Relationship – orientedRelationship – oriented
Efficient pricing & termsEfficient pricing & terms– The market is efficient in the long runThe market is efficient in the long run– Not necessarily so in the short runNot necessarily so in the short run
Wide variance in quotes, even in working layersWide variance in quotes, even in working layers Result: e.g., might fill programs by moving money between Result: e.g., might fill programs by moving money between
layerslayers
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Reinsurer as CustomerReinsurer as Customer
SecuritySecurity Spread cover over capital bases:Spread cover over capital bases:
– U.S., London, Bermuda, Europe, otherU.S., London, Bermuda, Europe, other Specific reinsurers/marketsSpecific reinsurers/markets
– Reinsurer eligibility criteriaReinsurer eligibility criteria– Leading indicatorsLeading indicators– Post 9/11…a new gamePost 9/11…a new game
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Reinsurer as CustomerReinsurer as Customer
SecuritySecurity (cont’d) (cont’d) Willingness to payWillingness to pay
– Recent claims payment historyRecent claims payment history
– ReputationReputation
Willingness to playWillingness to play– Do they still want to be in the business?Do they still want to be in the business?
– Reliance on retrocessional capacityReliance on retrocessional capacity
– Corporate structure – who is calling the shots?Corporate structure – who is calling the shots?
– If new, are they “in, hard market”, “out, soft market”?If new, are they “in, hard market”, “out, soft market”?
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Broker as CustomerBroker as Customer
Buyer to brokerBuyer to broker– Company’s needs, risk philosophyCompany’s needs, risk philosophy– Discussion of prospective risk profileDiscussion of prospective risk profile– Best data possibleBest data possible– Frequent and proactive communication – Frequent and proactive communication –
evolving needsevolving needs
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Broker as CustomerBroker as Customer Broker to buyerBroker to buyer
– Advice on risks and Advice on risks and needsneeds
– Current market Current market knowledgeknowledge
– Aggressive Aggressive representationrepresentation ““The market says…” The market says…”
vs. “We should go to vs. “We should go to market with…”market with…”
Advice on specific Advice on specific placements (e.g., sign placements (e.g., sign on /sign down)on /sign down)
– Solid analyticsSolid analytics Actuarial/financial/risk Actuarial/financial/risk
theoretictheoretic PricingPricing Reinsurance as element Reinsurance as element
of DFAof DFA Modeling capabilitiesModeling capabilities Retention & limitsRetention & limits Treaty termsTreaty terms
– Strong back roomStrong back room Security analysisSecurity analysis ClaimsClaims ContractsContracts
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Some Post 9/11 QuestionsSome Post 9/11 Questions
Who is standing (counterparty risk)?Who is standing (counterparty risk)? What is terrorism?What is terrorism?
– What are the dimensions of cyber-terrorism?What are the dimensions of cyber-terrorism? Do relationships matter?Do relationships matter? What is a fair price?What is a fair price?