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February 16, 2012
OAMIC – Property Catastrophe Presentation
Lou Vivenzio Senior Vice President
Gen Re Intermediaries
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Predicated on the assumption that there has been some
recent dislocation, disruption, and even disappointment in
the process and results.
1
1. Try to provide a better understanding of
how we arrived at this point.
2. Suggest some ways to better cope with a
disruptive environment.
My Objectives
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The Anatomy of Catastrophe Pricing
2
The Four “E’s” of Catastrophe Pricing
Experience - Company and/or Industry loss experience
Expense - Reinsurer’s cost of capital, underwriting overhead,
brokerage, and profit margin
Economics - Simple principles of supply and demand
Exposure - What you write and where you write it
+ = Catastrophe
Program Cost
Experience Economics
Exposure
Expenses
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The Perfect Storm and it’s aftermath
3
3
Economics Supply of Peak Zone Aggregate Diminished
/Demand for Cat Aggregate Up
• Changes in modeled expected loss (D&S)
• Rating Agency pressure held new capital in check and influenced old capital. (D&S)
• Lloyds RDS (S)
Experience Significant Losses Sustained
• No chance to recover from 2004 Losses (Charley, Francis, Ivan, Jeanne)
• Concerns over shift in frequency and severity of loss experience (Cyclical?)
• Dislocation between the ability for primary companies and reinsurance companies to get rate.
Expense Cost of Doing Business Increased Dramatically
• Rating Agency pressure forces companies to write less business against higher capital positions
• Capital suppliers are requiring increased ROE’s
• Cost of Retrocession (when available) increased considerably.
Exposure What You Write And Where You Write Business
• Peak zone supply crunch
• Questions of valuation and Data Quality (accuracy and depth)
• Modeling Inadequacy (commercial vs. personal)
• Un-modeled or poorly modeled perils
Renewal Season 2006
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Summer 2008
4
Greetings From Greetings From
OhioOhio
Hey Lou,
Having fun making things wet Wish you were here!
Hurricane Ike
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Market Metamorphosis
Then Now
Purchasing Decision
Ceded Re Mgr / U/W Department Head
CEO / CFO & Actuaries
Cedent / Market Dynamic
Relationship Oriented (Controlled By Broker)
Cedent /Broker Dynamic
Bottle of Johnny Black and a round of Golf
Value added driven Price Hypersensitivity
Relationship Relationship Oriented?Oriented? “Transaction P&L”“Transaction P&L”
Broker / Market Dynamic
Relationship Oriented (“Potentially Levered”)
Effectiveness dictated by Technical Arguments
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Now that we have some idea as to why,
how do we deal with it?
Presentation for [client/prospect] | [date] 6
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-5%
0%
5%
10%
15%
20%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
RO
E Average = 8.4%
U.S. Property / Casualty Industry
Source: Highline Data
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DuPont ROE Decomposition
Formula the DuPont Corporation Started Using in the 1920s
Breaks Down ROE Into Three Parts
> Operating Efficiency
> Asset Use Efficiency
> Financial Leverage
8
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DuPont ROE Decomposition
ROE = (Net Profit) / (Equity)
9
Net Profit
Sales
Sales
Assets
Assets
Equity
ROE =
x
x
ROE = (Profit Margin) x (Asset Turnover) x (Equity Multiplier)
ROE = Operating Asset Use Financial
Efficiency Efficiency Leverage
x
x
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Financial Leverage = Assets / Equity
Source: Highline Data
U.S. Property / Casualty Industry
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Asset Use Efficiency = Sales / Assets
Source: Highline Data
U.S. Property / Casualty Industry
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Operating Efficiency = Profit Margin
Source: Highline Data
U.S. Property / Casualty Industry
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Profit Margin = Net Profit / Sales
Source: Highline Data
U.S. Property / Casualty Industry
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How do I Cope With Such a Fluid Environment?
14
View yourself as a Supplier of Risk to the global reinsurance marketplace
Not a Consumer of property catastrophe capacity.
You are competing with other firms for Capacity and Terms
How do you gain and sustain a competitive advantage?
Cost Leader Differentiation
Focus your negotiation from a technical perspective
1. What differentiates you from other firms? 2. Why does your firm deserve optimal Terms and Conditions?
Change the Way You Think About the Catastrophe Purchasing Transaction
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February 16, 2012
OAMIC – Property Catastrophe