THE CENTER FOR PROFESSIONAL EDUCATION Presentation Global Fronting and Differences in Conditions AIG...

THE CENTER FOR PROFESSIONAL EDUCATION

Presentation

Global Fronting and

Differences in Conditions

AIG

St. John’s University

Thursday, October 15

1


Presentation

The Big Issues Part 1

Fronting Basics Part 2

Fronting Hub Services Part 3

2


The Big Issues Part 1

• Central administration

• Policy issuance

• Premium collection, movement and reporting

• Claims reporting, billing and collection

• Audit and control

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THE CENTER FOR PROFESSIONAL EDUCATION 4

Fronting Basics Part 2

• Insurance is arranged with one insurer.• Losses are largely covered by

reinsurance or other contractual agreement.


Fronting Goals

• Comply with local laws.• Meet Local Insurance Needs.• Covers Differences in Conditions.• Meet Requirements of Counter Parties.• Blend Insurance Coverage.


#1. Comply with Local Laws

Compulsory Insurance. Required for doing business in the country.

Licensing Rules. For non-compulsory insurance.

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Licensing of Insurers

• Admitted Insurer. An insurance company that is licensed to offer coverage in a jurisdiction.

• Non-admitted Insurer. An insurance company that is not licensed to offer one or more lines of insurance in a jurisdiction.


Compulsory Insurance

Commonly required.•Work Injury. For employers and employees.•Automobile. Property and injury liability.•Industry Hazards. Pharmaceuticals, chemicals, and biological.•General Liability. For third parties.•Professional Liability. Accounting, medical, legal, and other services.

8


Regulated Insurance

Commonly regulated:

• Vehicles. Locally licensed insurers only.

• Assets. Coverage under local zoning codes and regulations.

• Liability. Ensure coverage for conflicts, disputes, and negligence.

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Question

A country requires chemical companies to carry personal injury liability coverage.

• No local carrier will cover a chemical factory acquired by a foreign firm.

• A licensed insurer accepted the risk and reinsured it with a foreign carrier.

• Does this work?

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Answer (1)

Yes:

•The insured complies with local laws.

•The local insurance company handles regulatory licenses, claims, and reporting services.

•The arrangement might help with other needs (See next slide).

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Answer (2)

Other needs:

•Lower premiums.

•Adequate capacity.

•Higher limits.

•Specialized coverage.

•Tax Considerations.

12


Question

Is fronting attractive to a locally licensed insurance company?

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Answer

Yes. Local insurer:

• Collects premiums from an insured.

• Reimburses losses to the insured.

• Earns profits.

14


Question

Does the fronting insurer accept any risk?

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Answer

Yes. It accepts credit risk.

• Losses are reinsured or guaranteed by a third party.

• The reinsurer or third party could fail to pay for losses.

16


Question

"The reliability of good fronts continues to be a fairly large problem. You can find fronts, but they are very expensive and unpredictable in the quality and level of experience you (receive).” Is this true?

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Answer

Worldwide economic conditions have raised caution flags.

Sufficient collateral may be an obstacle to creating a captive.

Fronting is getting expensive in many areas of the world.

18


Question

What about problems of accounting with fronting arrangements?

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Answer

Let’s take a look.

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Balance Sheet

（单位： 10 亿美元）Assets 资产 Debt & Capital 负债 & 资本Cash 现金 300B Debt 负债 400B

Securities 证券 500B Capital 资本 450B

Toxic

Assets 有毒资产 50B

Total 合计 850B Total 合计 850B

21


Repurchase Agreement 回购协议

Sell $50B of toxic assets

出售 500 亿美元有毒资产Buy back one week later.

一周后回购Fee: $1B.

费用： 10 亿美元

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Balance Sheet at Closing 成交后资产负债表



Toxic

Assets 有毒资产 0


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Balance Sheet after One Week一周后资产负债表



Toxic

Assets 有毒资产 50B


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Question (3)

What happened to this company?

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#2. Meet Local Insurance Needs.

Fronting helps achieve the following:•Reduce Cost of Insurance•Improve Carrier Terms or Service.•Cover Hard-to-place Risks.•Covers differences in conditions.

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Local Captive Insurer

• Captive. An insurance company owned or controlled by one or more companies to provide insurance coverage to the owning entities.

• Retention. A captive is a form of partial retention.


High-tariff Insurance Market

A jurisdiction where insurance rates are set by law at high levels.

• Standardized Approved Coverage.

• No competition based on pricing.

• Little innovation.

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Question

How can fronting help reduce cost of insurance in a high-tariff insurance market?

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Captive Fronting and High Tariffs

• Local captive accepts premiums.

• Reinsures losses outside jurisdiction.

• Reinsurer adjusts premiums to parent.

30


Question

How can fronting help improve carrier terms or service and cover hard-to-place risks?

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Answer

Reinsurer or guarantee partner has capabilities not available locally.

• Funds transfer.

• Investigation.

• Statistics and data.

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Answer (1) Question

A country has mandatory liability and optional collision insurance required on heavy construction equipment.

• It is encouraged by the government to place coverage with a licensed domestic insurance company.

• The local country does not have a convertible currency.

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Answer (2) Question

• It purchased customized, heavy construction equipment from Germany.

• It insured it locally with a payment of $30,000 in premiums.

• It sent $270,000 to an insurer in its home country.

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Answer (3) Question

• The licensed insurer agreed to pay for only 5% of any loss.

• The foreign insurer agreed to reimburse 95% of any loss with a Euro currency deposit in a German bank.

• Does this arrangement work?

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Answer (4) Question

• Change in Terms.• The licensed insurer agreed to pay zero

percent of any loss.• The foreign insurer agreed to reimburse 100%

of any loss with a Euro currency deposit in a German bank.

• Does this arrangement work?

36


Question (1)

A Spanish company sold a $50 million computer to a manufacturer in Brazil.

• The equipment was sent to a subsidiary in South Africa.

• The subsidiary:o Paid a $18 million invoice to the Spanish firm.o Insured the computer locally for $12 million.

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Question (2)

The Brazilian company: o Paid a $32 million invoice to the Spanish firm.o Insured it in London for $38 million using an

excess policy with an attachment point of $12 million.

Does this arrangement work?

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Diagram

Headquarters

Brazil

39

Subsidiary

South Africa

Manufacturer

Spain

Insurer

LondonInsurer

South

Africa

$12m

$32m

$32m

Asset

$18m


#3. Differences in Conditions Policy

Separate Insurance Policy

• Additional limits of coverage.

• Special perils.

• Exclusions.

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Foreign Property DIC Policy

• All risk coverage.

• Fills the gaps between master insurance policy and local policies.

• Provides uniformity of coverage in all locales.

41


Question

A company bought fire insurance to cover a factory.

• It also purchased earthquake insurance to cover structural damage from seismic tremors.

• An earthquake caused a fire that burned down the facility.

• Which policy covers the loss?

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Answer

In one case, neither policy.

• The fire policy excluded fires started by earthquakes.

• The earth movement policy excluded fires caused by earthquakes.

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#3. Meet Requirements of Counterparties

A counterparty is the other entity in a financial transaction or negotiated agreement.

•It may require a company to have locally admitted insurance protecting the agreement.

•Examples are clients, banks, and trading partners.

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Question

A coal-mining company purchases heavy-equipment machinery from a manufacturer in another country.

• The buyer wants a local jurisdiction guarantee of payment if the equipment does not meet operation or service life specifications.

• No local insurer will offer such a guarantee.• Can fronting help?

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Answer

Yes.

• A licensed insurer issues an insurance policy.

• The policy losses are covered by a guarantee from the foreign manufacturer or a reinsurer.

46


Question

A manufacturer has expensive machinery:

• It must be purchased in country A.

• It is installed for use in country B.

• The company wants replacement cost insurance denominated in currency A.

• Can fronting help?

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Answer (1)

• The manufacturer purchases insurance in country B.

• It is reinsured with a company that will reimburse in country A currency.

• The company wants replacement cost insurance denominated in currency A.

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Answer (2)

What happens if country B has currency restrictions?

49


Question

A company operates a $30 million factory with a bank mortgage.

All property insurance must be purchased from a locally licensed insurer.

The local insurer agreed to provide coverage with reinsurance of 90% backing it up.

The bank proposed buying $1 million of local insurance and secretly buying $29 million outside the country.

Is this a good strategy?


Answer

Issues.

• The recommendation does not comply with local laws.

• If the local insurer gets in trouble, the insured has no direct access to the reinsurance money.


#4. Create a Blended Program.

Blended programs:

• Profit and Loss. Combines profit-sharing of finite insurance with transfer of risk (also “integrated program.”)

• Loss Only. Combines different coverages with retention and transfer.

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Blended Profit and Loss

Finance profit and insurance loss:• Investment. Hedge fund transfers $50 million to

trust account offering 7% interest.• Transfer of Risk. Trust account guarantees to

reimburse primary insurer losses above $200 million in specified occurrence of loss.

• Return of Capital. After fixed time period, balance in trust account is returned to hedge fund.

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Blended Loss (1)

A risk transfer program is sought for a refinery.

• It has an accounting value of $11 million.

• It has a replacement cost of $34 million.

• Local laws require licensed coverage for property losses.

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Blended Loss (2)

The foreign parent wants:

• Retention of $1 million.

• No local transfer of loss.

• Retention of $3 million in loss above the book value.

• Transfer of remaining loss to Bermuda market.

Can fronting help achieve this goal?

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Answer

Yes.• Parent purchases primary insurance of $11

million with fronting licensed insurer.• Policy deductible is $1 million.• Fronting company reinsures losses at $1 million

attachment point to $11 million policy limit.• Parent purchases excess insurance with $14

million attachment point and $34 million policy limit from Bermuda carrier.

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Layered with Fronting Insurance

34m

Bermuda Excess

14m

Retained

11m Fronting Company

1m Retained


Claims Processing (1)

A company has losses insured with a licensed fronting insurance company.

• A loss occurs.

• Who handles claims processing and settlement?

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Claims Processing (2)

Product Product Incident Lawsuit Covering

Made it Sold in In in Policy

US US US US US

US US Foreign Foreign Foreign

Foreign US US US US

Foreign Foreign Foreign Foreign Foreign

Foreign Foreign US US US

US Foreign Foreign US ?

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Presentation

Questions and Answers

Underwriter of the Future

AIG

St. John’s University

October 16

60


Hurricane Andrew 安德鲁飓风

e

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Underwriting


Tropical Storm Underwriting 热带风暴承保

In 1992, Hurricane Andrew caused significant damage to property in Florida. At the time: 1992 年，安德鲁飓风给佛罗里达造成了巨大的财产损失。当时：Underwriting for hurricanes was based upon historical loss data. 飓风承保是基于历史赔付数据。Flood and wind damage were underwritten in separate policies. 洪灾和风害要分开承保。The policies did not handle the fact that damage came from both wind and flood. 保单无法处理风害和洪灾同时造成的损失。This was an underwriting weakness. 这是一种承保缺陷。62


Tropical Cyclone Underwriting 热带风暴承保

Allstate, State Farm, and other U.S. insurance companies have a major product line dealing with protecting property from tropical cyclones (hurricanes, typhoons). The underwriting for Hurricane Andrew is an interesting study.

Allstate ， State Farm 和其它一些美国保险公司都有关于热带风暴（飓风，台风）造成财产损失的重要产品线。有关安德鲁飓风的承保是一个很有趣的研究。

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Question 问题

One of the options for rating policies would be to allow the government to fix rates for each line of business. Would all parties, insurers, brokers, and insureds, benefit from this system?

对保险单定价的方式之一是让政府为每一条产品线设定固定费率。这种方式是否对各方（保险公司、经纪人和被保险人）都有利？

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THE CENTER FOR PROFESSIONAL EDUCATION65

Presentation

Tuscaloosa


Rising Concern 与日俱增的担忧

U.S. insurers are increasingly concerned about changes in property insurance: 美国保险公司对财产保险发生变化的担忧与日俱增。•Extreme weather. 极端天气•Rising temperatures. 气候变暖•Environmental changes. 环境变化•Bigger potential for natural disasters.

自然灾害概率加大What is missing?

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Rising Concern 与日俱增的担忧

U.S. insurers are increasingly concerned about changes in property insurance: 美国保险公司对财产保险发生变化的担忧与日俱增。•Extreme weather. 极端天气•Rising temperatures. 气候变暖•Environmental changes. 环境变化•Bigger potential for natural disasters.

自然灾害概率加大Cyber Risk

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Question (1) 问题（ 1 ）

Let us examine property exposures.

我们来看一下财产面临的风险•In 2005 Hurricane Katrina struck Mississippi and damaged many houses. 2005 年，卡特里娜飓风袭击了密西西比州，对许多房屋造成破坏•Many insureds had coverage for wind but not for flood damage. Insurers denied flood damage claims. 许多被保险人购买了风灾保险，但不包括洪灾损失。因此保险公司对洪灾损失拒赔。•Did they win? 他们胜诉了吗？

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Question (2) 问题（ 2 ）

Who posted the following quote on its web page?

“Insurance companies are long on happy slogans, but infamous for denying . . . claims.”

谁在其网页上引用了下面这句话？“ 保险公司擅长唱高调，但却因拒赔而声名狼籍。”

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Answer 回答

The Gulfport, Mississippi, law firm of Owen, Galloway & Myers. 密西西比州的一家律师事务所•The firm is your “Ally in Insurance Coverage Disputes.” 该公司是“你在保险范围争议上的盟友”•Its “experienced attorneys” represented 400 clients with property damage claims after Katrina.

公司 “经验丰富的律师”在卡特里娜飓风过后代理了400 位客户的财产损失理赔案•The firm won many bad faith claims after Katrina. 卡特里娜飓风后，该公司在很多不公平理赔案中胜诉

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Question 问题

Who posted the following quote?

“You trust your insurer to help when you need it. Some insurance companies make bad faith claims. When you are the victim of bad faith claims, you need a bad faith insurance lawyer to defend your rights.”

谁发布了下面这段话？“ 你相信保险公司在需要时能够帮助你。但某些保险公司进行了不公平的理赔。当你成为不公平理赔的受害者时，你需要一位不公平保险律师来维护你的权益。”

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Answer 回答

The New Orleans Law Offices of Edward A. Shamis, Jr., J.D. handles: 新奥尔良的一家律师所，他们的业务包括：•Birth injuries. Boating accidents. Brain injuries. Distracted driving accidents. Dog bite injuries. Drunk driving accidents. Fires and burns. Insurance bad faith. Medical malpractice. Motorcycle accidents. Personal injury. Premises liability. Catastrophic injuries. Back injuries. Texting and driving accidents . Trucking accidents. Workers compensation. Wrongful death.

出生创伤，划船事故，脑损伤，分心驾驶事故，狗咬伤，酒后驾车事故，火灾和烧伤，保险不公平事件，医疗事故，摩托车事故，人身伤害，物业责任，巨灾伤害，背部伤害，短信和驾驶事故，卡车事故，劳工赔偿，过失致人死亡等。

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Tuscaloosa Tornados Statistics塔斯卡卢萨龙卷风统计

April 27, 2010 2010 年 4 月 27 日•Length of Path: 81 miles.(130 km) 距离： 81英里（ 131 公里）•Width: 1.5 miles. (2.4 km) 宽度： 1.5英里（ 2.4 公里）•Rating: Force 4. 强度： 4 级•Peak Winds: 190 mph (310 km/h)

最高风速：每小时 190英里（每小时 310 公里）•Tuscaloosa Deaths: 43 people 龙卷风死亡： 43 人•Tuscaloosa Injuries: 1,000 龙卷风受伤： 1000 人•Total Deaths: 64 people 总死亡： 64 人•Total Injuries: 1,500 总受伤： 1500 人

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Tuscaloosa, Alabama, April 2010)塔斯卡卢萨，阿拉巴马州， 2010 年 4 月

74


Tuscaloosa, another view塔斯卡卢萨

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Tuscaloosa Today 今天的塔斯卡卢萨

A lot more to do. 万事待兴。

76


Presentation

New Orleans


Katrina New Orleans Statistics卡特里娜飓风，新奥尔良，统计

• Highest Winds: 175 mph (280 km/h)

最大风速：每小时 175英里（ 280 公里）• Strength: Category 1 or Category 2

强度： 1 级或 2 级• Number of Levee Breaches: 53 溃堤： 53 处• Escape Routes: Two 撤离路线： 2 条• Hyatt Hotel Debris: Glass and beds• Known Deaths: 700 已知死亡人数： 700• Total Deaths: Nobody knows 总死亡人数：未知

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Street During Katrina 卡特里娜飓风时街道

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Displaced Residents 无家可归的居民

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Lower Ninth Ward 下九区

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Lower Ninth Ward 下九区

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Lakeview Section 湖景区

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Lower Ninth Ward Rebuilding 下九区重建

84


Still Waiting 仍在等待

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Side by Side 连排房屋

86


Float House New Orleans 新奥尔良房屋

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Presentation

Biloxi and Gulfport


Katrina Mississippi Statistics卡特里娜飓风，密西西比州，统计

August 29, 2005 2005 年 8 月 29 日•Deaths: 238 people. 死亡人数： 238•Missing: 67 people. 失踪人数： 67•Storm Surge: 27-foot (8.2 meter) high.

浪高： 27英尺（ 8.2米）•Inlands Surge Penetration: 6 miles (10 km).

内陆延伸： 6 英里（ 10 公里）•Highest wind gust: 135 mph (217 km/h).

最大风速：每小时 135英里（ 217 公里）•Amount of Rain: 8-10 inches (200 – 250 mm).

降雨量： 8-10英寸（ 200-250毫米）89


Property Damage 财产损失

• 90% of structures within half a mile of the coastline were completely destroyed.

距海岸线 0.5英里范围内 90% 的建筑被完全摧毁

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Question 问题

What is this? 这是什么？

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Answer 回答

Santini Historic House, Biloxi, MS

Santini 历史建筑，比洛克西，密西西比州

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Grass Lawn Historic Home草坪历史建筑

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Grass Lawn After Katrina卡特里娜飓风后

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Bolton House, Biloxi 博尔顿建筑，比洛克西

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Bolton House, Biloxi 博尔顿建筑，比洛克西

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Blossom Lodge, Gulfport 旅馆，格尔夫波特

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Blossom Lodge, Gulfport 旅馆，格尔夫波特

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THE CENTER FOR PROFESSIONAL EDUCATION Presentation Global Fronting and Differences in Conditions AIG...

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