effect of reinsurance on retained risk (practice)...motor 4.5% 4.5% total 3.8% 4.0% change mix of...
TRANSCRIPT
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Effect of Reinsurance on
Retained Risk (Practice)
A Swiss Re Presentation
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Example A
• Developing Asian country
• Market leader – leading market share in national market
• Mainly retail customer base – well known brand name
• Some commercial lines business – growing
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Historic Results
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Time
Net
Lo
ss R
ati
o
Fire Marine
Casualty Motor
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Actual Statistics
Volatility (Standard deviation of Net
Loss Ratio)
Percentage of
business (net premium)
Fire 17.2% 1% 1%
Marine 13.5% 2% 2%
Casualty 8.9% 7% 9%
Motor 4.5% 88% 91%
Total 4.0% 100%
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Reinsurance
Motor
Other
No
Reinsurance
60% business
ceded
proportionally
Existing
15% business
ceded
proportionally
No
proportional
reinsurance
Alternative
Negligible increase in income
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Alternative Reinsurance
“As if” Volatility (Standard deviation of Net
Loss Ratio)
Actual Volatility (Standard deviation of Net
Loss Ratio)
Fire 17.2% 17.2%
Marine 13.5% 13.5%
Casualty 8.9% 8.9%
Motor 4.5% 4.5%
Total 3.8% 4.0%
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Change mix of business
90% Motor
10% Other
25% Other
75% Motor
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Questions
• Should reinsurance be a – business unit tool or
– management tool
• Was this alternative ever considered?
• What are the knock on effects? – limits of cover under fire are very large
– need additional per risk cover perhaps?
• Is standard deviation a good measure of
risk?
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Standard Deviation as Risk Measure
Result
Fre
quecy o
f R
esult
Series 1
Series 2
• Both Series have
same mean and
standard deviation
• Series 2 has more
extreme downside
results
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Extreme
Types of Risk
• Result Volatility – One off large claims
– Unusual high number of medium claims
– Unusual higher number of claims
– Systemic pricing deficiencies
• Insufficient Capital – To meet solvency requirements
– To meet obligations
Standard deviation okay
Alternative measure
required
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Example B
• Commercial Property Insurance
• Exposure to – Frequency of small claims
– Large fire claims
– Earthquake claims
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Loss Profile Premium 100,000,000 100,000,000 100.0%
Expenses 25% (25,000,000) 25.0%
Underlying
Losses
Normal Distribution
Mean 50%
Standard Deviation 5%
(50,000,000) 50.0%
Large
Losses
Definition 500,000
Maximum 20,000,000
Poisson with mean 5
Pareto 500,000 & 1.2
(11,500,000) 11.5%
Event
Losses
Definition 5,000,000
Maximum 100,000,000
Poisson with mean 0.2
Pareto 5,000,000 & 0.9
(4,400,000) 4.4%
Total Expected Result 9,100,000 9.1%
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Reinsurance Options
All Types QS + Cat Risk + Cat
Quota Share
Per Risk XoL
Cat XoL
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Reinsurance Options
All Types QS + Cat Risk + Cat
Quota Share 50% Cession
27% Commission
50% Cession
27% Commission
None
Per Risk XoL $500k Retention
10 free reinstatements
$4.4m Premium1
None
$500k Retention
10 free reinstatements
$11.2m Premium1
Cat XoL $5m Retention
1 Reinstatement
(100%)
$1.65m Premium1
$5m Retention
1 Reinstatement
(100%)
$1.65m Premium1
$5m Retention
1 Reinstatement
(100%)
$4.31m Premium1
1. Reinsurance premium = risk premium + 25%
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Gross Result Profile
Gross
Mean $9.1m
Standard Deviation $16.5m
1% Capital at Risk $61.0m
Short Fall $77.9m
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With All Reinsurance Types
Gross All Types
Mean $9.1m $4.3m
Standard Deviation $16.5m $3.4m
1% Capital at Risk $61.0m $5.0m
Short Fall $77.9m $6.8m
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Consider the Options
Gross All Types QS + Cat PR+ Cat
Mean $9.1m $4.3m $5.2m $5.9m
Standard
Deviation
$16.5m $3.4m $5.2m $5.9m
1% Capital
at Risk
$61.0m $5.0m $9.7m $7.8m
Short Fall $77.9m $6.8m $12.7m $10.0m
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A Closer Look
Per risk + Cat
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A Closer Look
Per risk + Cat
QS + Cat
Greater
“Upside
Potential”
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Summary
• Different reinsurance programs give
different retained risk profiles
• Risk vs Reward
– but different types of risk
• Actively manage risk and reinsurance
– to provide competitive advantage
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Contact Details
James Attwood – Hong Kong +852 2582 3641
or usual Swiss Re contact