IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

The Reinsurance Placement Cycle

Session 507

Tuesday, June 10, 2014

1:45pm – 3:15pm

The Reinsurance Placement Cycle Overview

This will be an interactive session describing the placement

of a reinsurance program from the perspective of an

insurance company, a reinsurance broker and a reinsurer.

Our goal is to allow each of you to positively impact your

own reinsurance program following this session.

The Reinsurance Placement Cycle Panel Members

Jason Sherman

• Director of Reinsurance, West Bend Mutual

Katie Enslin

• Senior Vice President, BMS Intermediaries, Inc.

The Reinsurance Placement Cycle Agenda

Key Parties

Why Buy Reinsurance?

Reinsurance Broker’s Roles and Responsibilities

Reinsurance Lifecycle

• Insurer Data Request & Reinsurance Submission

• Analysis of Exposure & Reinsurance Structure

• Pricing Methodologies

• Evaluating Reinsurers

• Finalizing Placement & Confirmation of Coverage

The Reinsurance Placement Cycle Key Parties

Insurance Company / Carrier / Primary Company = Cedent

or Ceding Company

• The party transferring all or part of the risk it has assumed to another

organization

Reinsurance Intermediary = Broker

Reinsurer / R/I = Market

• The party assuming the risk from the Ceding Company

The Reinsurance Placement Cycle 5 Reasons for Reinsurance

Stabilize Company financial statements due to unforeseen

loss severity and/or frequency

Provide ceding Company with breadth of products and the

necessary policy limit to be competitive

Provide ceding Company the ability to write additional

business beyond the Company’s own financial resources

Protect the Company from loss of policyholder surplus due

to catastrophic loss

Manage Company financial ratios used by rating

organizations and regulators to monitor health and

performance of the insurer

Prevents major swings in underwriting results

Transfer high severity, low frequency losses

• Keep the predictable, transfer the unpredictable

• Smoother results, quarterly protection for public companies

The Reinsurance Placement Cycle Stabilization

The Reinsurance Placement Cycle Competitiveness

Company buys reinsurance to write new lines of business it

is unfamiliar with, relying on Reinsurers’ knowledge base of

appropriate rates, policy forms and underwriting guidelines

• Example: Insurance Company begins writing Surety insurance to

complement its commercial book of contractors

Reinsurance allows Company to increase primary policy

limits to be competitive in the marketplace

• Example: Insurance Company needs to offer $1M limits on Auto

policies where historically they have offered only $500K limits

The Reinsurance Placement Cycle Increase Premium Volume

Company has opportunity to write a large amount of new

business but has limited policyholder surplus (PHS) to

support this new business

Company buys reinsurance to manage growth opportunities

while building policyholders surplus (PHS)

• Insurers normally keep direct written premium (DWP) to a 3:1 ratio in

line with PHS

The Reinsurance Placement Cycle Property Catastrophe Protection

Company faces significant loss of PHS due to catastrophic

loss potential from its property portfolio

• Company may purchase specific catastrophe reinsurance to limit this

severity exposure

The Reinsurance Placement Cycle Manage Financial Ratios

Reinsurance cessions can impact several operating ratios

of an insurance company, for example:

The Reinsurance Placement Cycle Buying Reinsurance – Direct vs. Broker

Direct Writing Reinsurer

• Professional reinsurer whose employees deal directly with primary

insurers

• Frequently assumes 100% of a reinsurance program

Reinsurance Intermediary

• A broker who negotiates reinsurance agreements between the

primary insurer and one or more reinsurers

• Acts as agent of the ceding Company

• Usually has access to various reinsurance solutions from both

domestic and international markets

• Can usually obtain reinsurance under favorable terms at a

competitive price

The Reinsurance Placement Cycle Your Reinsurance Broker

Advocate for the Client

Be informed about the Client

• Understand key exposures

• Analyze the data to create the most accurate and streamlined

package of information for reinsurers

Provide expertise on the reinsurance placement

Market knowledge

• Latest knowledge of best terms, conditions and rates

• Best matching the Cedent with partnering Reinsurers

Communication

• Timely, accurate and complete delivery of information that represents

the positions of both the Cedent and the Reinsurer

Manage expectations of all parties

Manage the relationships

The Reinsurance Placement Cycle Life of a Reinsurance Treaty

Data Request to Cedent

Analysis of Exposure / Experience

Analysis of Reinsurance

Structure

Selection of Markets

(Marketing Visits)

Submission to Reinsurer (Contract Wording)

Evaluate Quotes /

Develop FOT

Distribute FOT and collect

authorizations

Sign Lines and Finalize Contracts

Confirmation to Cedent

Maintenance: Special

Acceptances, Visits, Audits

etc.

The Reinsurance Placement Cycle Insurer Data Request

Narratives & Financial Information

• Recent changes, M&A Activity, Planned Growth, Underwriting

Guidelines, Biographies of Key Management Personnel, Claims

Guidelines, BCAR Statement, Actuarial Report

Premium, Expense and Loss Information

• Projected, Revised and Historical Subject Premium, Base Rates and

ILFs, Projected and Historical Rate Changes, Schedule Modifications,

Projected and Historical Expense and Loss Ratios (cat and attritional

split if available) by Line of Business

Claims Information

• Claims Bordeaux, Loss Triangles, Clash Losses, ECO / XPL Losses,

Catastrophe Losses, Inflation factors and Inuring Reinsurance

Exposure

• Catastrophe Modeling Data Call, Policy Bordereaux (Limits Profiles),

Hazard, Use and Payroll Information

The Reinsurance Placement Cycle Reinsurance Submission

Key Items for Reinsurers

• Track record of Company

• Expertise of staff (management and operating)

• Lines of business

• Geographic areas

• Underwriting philosophy, practices and procedures – changes?

• Claims management

• IT / Data quality

• Reinsurance submission

• Reinsurance buying habits

Differentiate!

The Reinsurance Placement Cycle Reinsurance Submission

Providing clean, consistent, coherent data that supports the

position of the Company will often result in preferred pricing

from the Reinsurer

Submissions should contain the following:

• Cover letter highlighting the critical issues and changes as well as the

requested reinsurance structure for quoting, the desired outcome and

a realistic timeframe for the placement

• Overview of Company operations containing history as well as

planned changes

• Profile of business

• Historical and projected subject premium by state by LOB

• Rate change history

• Loss experience – historical, actual and “as if” (if appropriate)

• Contract (important!)

The Reinsurance Placement Cycle Analysis of Reinsurance Structure

Property Per

Risk

Casualty

Excess

Excess

Catastrophe

Surplus

Share Quota Share

Facultative Treaty

Reinsurance

Pro Rata Excess

Stop Loss

Aggregate

Excess

Per

Occurrence

Pro Rata Excess

Casualty or

Property

Casualty or

Property

A comprehensive

reinsurance

program requires

creative use of all

types of

reinsurance

Alternatives

The Reinsurance Placement Cycle Pricing Methodologies

Methodologies

• Exposure – limits profiles, catastrophe modeling

• Experience – trended & developed losses and on-level premium

• Portfolio / Industry reinsurance pricing

Pricing

• Excess of Loss – Pricing is separate from primary pricing

• Proportional – pricing follows primary pricing but is impacted by

ceding commission, commission adjustment, loss corridor, deficit

/credit carryforwards, loss occurrence caps, loss ratio caps, per

cession deductibles, etc.

• Set appropriate limits and retentions as well as other appropriate

pricing features

• Incumbent reinsurer experience

• Supply and demand

The Reinsurance Placement Cycle Evaluating Reinsurers

Public financial information (additional information often

provided by Brokers)

Ratings (A.M. Best / S&P)

Knowledge of reinsurers underwriting philosophy

(relationship vs opportunism) and expertise

Reinsurer’s claims payment ability and promptness

Value added services

Value propositions aligned

Admitted status (funding considerations) & collateralized

Traditional / Non-traditional

Balance between relationship and price

The Reinsurance Placement Cycle Confirmation of Coverage

Executed Contracts

Confirmation Materials to Company

• Account Team

• Summary of Terms including structure chart

• Summary of Terrorism coverage (if applicable)

• Reinsurer Participations by Percentage, Limit, Ceded Premium and

Ratings (financial strength)

• Reinsurer financial data

• Copy of contracts and summary of changes

• Copy of pertinent quote sheets and authorization sheets

• Copy of actuarial work and catastrophe modeling summaries

• Contract Experience by contract and reinsurer

• Upcoming timeline

The Reinsurance Placement Cycle Post Placement Activities

Contracts – contract certainty

Assistance with rating agency discussions

Assistance with SRQ

Coordinate visits with Reinsurers

Audits

Special acceptances

Strategy for upcoming year…

IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

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Appendix Reinsurance Structure

Covers entire portfolio – single

or multiple lines of business

• Examples – Property Per Risk,

Casualty Per Occurrence, Property

Cats

Can be assumed by a single

reinsurer or syndicated to many

R/I’s

Premiums processed usually

quarterly, losses reported and

settled either via a bordereaux

or individually.

Broker market R/I have largest

market share

Facultative Treaty

Pertains to an individual risk or

policy

• Examples – High value property risk,

unique liability or high limit Umbrella

Can be written by a single

reinsurer or syndicated to many

R/I’s

Individual certificates, premiums

and losses processed

individually

• Generally labor intensive

Direct writers have largest

market share

Appendix Forms & Functions of Reinsurance