reinsurance in the specialty marketplace key reinsurance ... in the... · • stable u/w, claims,...

NAPSLO Marcus Payne Advanced E&S Program

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Reinsurance in the Specialty Marketplace

Key Reinsurance Definitions

The Basics

_____

1. Premiums and losses shared proportionally by the ceding company and reinsurer.

A. Net Retention

_____

2. Reinsurance coverage that applies excess of the ceding company net retention.

B. Ceding Company

_____

3. The amount of exposure the ceding company assumes without reinsurance protection.

C. Excess of Loss Reinsurance

_____

4. Describes the insurer underwriting the business that is transferred to the reinsurer.

D. Pro Rata or Quota Share Reinsurance

The Placement

_____

5. Reinsurance for a book of business written on a long-term basis at agreed upon terms.

E. Facultative Reinsurance

_____

6. Reinsurance for a book of business for which the reinsurer has a limited right of rejection.

F. Catastrophe Reinsurance

_____

7. Individual risk reinsurance.

G. Treaty Reinsurance

_____

8. Property coverage that applies to a single large event.

H. Clash Reinsurance

_____

9. Liability or WC insurance that applies to a large loss involving more than one insured.

I. Automatic Reinsurance

_____

10. Reinsurance for verdicts larger than the ceding company limit and/or awards against the ceding company for negligence to its insured, (bad faith).

J. ECO/XPL Reinsurance

_____

11. A placement in which the reinsurer cedes risk to another reinsurer.

K. Retrocessional Placement


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Fifteen Key Reinsurance Definitions

The Market & General Concepts

_____

12. Capital market placements, including catastrophe bonds, ILW’s and collateralized reinsurance that act as reinsurance, primarily for property catastrophe exposures.

L. Admitted Reinsurance

_____

13. A business understanding that requires reinsurers to accept a ceding company’s good faith and reasonable decision that a risk is covered by the ceding company policy, and thus the reinsurer.

M. Follow the Fortunes Clause

_____

14. A specific type of securitized capital market property placement that involves various loss triggers such as indemnity, modeled loss, index and parametric. This placement is usually fronted by a special purpose reinsurer.

N. Catastrophe Bond

_____

15. Provided by a reinsurer licensed or authorized in the appropriate state. Affects Schedule F of the ceding company annual statement.

O. Securitized or ILS Placements

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2016 Marcus Payne Advanced E&S

November 6 - 9, 2016


Randall JonesEducation Director

NAPSLO

Course Learning Outcomes

• To understand:

–Key definitions

–Reinsurance placement and loss examples

–Reinsurance relationship tips

–Current reinsurance trends and issues

–Real life reinsurance buying decisions

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Why Buy Reinsurance?

Ceding Company

Spread Risk

Build Limits

U/W Expertise

Surplus Relief

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Reinsurance Placements Basics

Provides CoverageTreaty, FacultativeAutomatic

Ceding Company

Reinsurer Retrocession Reinsurer

Cedes Risk

Excess of LossPro Rata or Other

Cedes Risk

Provides Coverage

Pro Rata/Quota Share Placement

$1 Million Limit – 50% Quota Share

• Pro Rata Sharing of Losses and Expenses

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500,000

NET

500,000

QS Cession

Pro Rata/Quota Share Example

$1 Million Limit – 50% Quota Share$200,000 Loss - $50,000 ALAE

• Pro Rata Sharing of Losses and Expenses

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500,000

NET

500,000

QS Cession

(100k +25k) (100k +25k)

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Excess of Loss Placement$2 Million Limit – 500,000 Retention

• Tiered Sharing of Losses and Expenses

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Key Question

How is ALAE handled?

500,000

NET

1.5 Million

XOL

Cession

Excess of Loss Example$2 Million Limit – 500,000 Retention


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Loss Example

$1mm loss - $200k ALAE

• ALAE outside limit

500,000 NET

1.5 Million

XOL

Cession

(500k+100k)

(500k+100k)

Excess of Loss Example$2 Million Limit – 500,000 Retention


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Loss Example

$1mm loss - $200k ALAE

• ALAE inside limit

500,000 NET

1.5 Million

XOL

Cession

(700k)

(500k)

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Excess of Loss & Aggregate Placement$2 Million XOL Limit - $1 Million Agg. Limit

Varying XOL & Aggregate Retentions

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500,000 NET XOL

1.0 Million Net Agg.

1.5 Million

XOL

Cession

1 Million Agg. Cession


Varying XOL and Aggregate Retentions

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Example

• Four 300,000 Losses

500,000 NET XOL

1.0 Million Agg

1.5 Million

XOL

Cession

1 Million Agg.

(1,000,000) (200,000)

Example

• Three 1,000,000 losses

(500,000)


Varying XOL and Aggregate Retentions

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500,000 NET XOL & 1.0 Million Net Agg

1.5 Million

XOL

Cession

1 Million Agg.

(1,500,000)

(1,000,000) (500,000)

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• Stronger impact on net underwriting results• Reduced to nil ceding commissions• Net rate impacts only loss ratio, NWP, NEP• A larger bet on U/W results

Placement Life Cycle

• Greatest net protection• Predictable loss scenarios• Good starting point• Maximum surplus protection• Supports more DWP• Ceding commission reduces expense ratio• Less value with nets above 50% of gross limits

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Quota Share

Excess of Loss

• Higher to total net retention• Less to no reinsurer scrutiny• Less to no severity loss protection

Net

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• Obligatory

• Long-term

• Retrospective rating

• Low volatility

• Payback rationale

• One contract, many

risks

Types of Reinsurance Contracts

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• Obligatory & reinsurer right of rejection

• Transitional

• Prospective rating

• High volatility

• One contract, many risks

• Agreed upon pricing

• Individual risk U/W

• Adverse selection, one at a time deals

• Prospective rating

• High volatility

• No payback rationale

AutomaticTreaty Facultative

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Treaty and Facultative Contracts

Treaty Contract

• Comprehensive• Defined business • Varied term & basis• Cession and retention• Multiple exclusions• ECO/XPL/Terrorism• Reporting, remittance,

offset provisions• Collateral provisions• Participation schedule

Facultative Certificate

• Simple• Based on the deal• Basic term, limits, premium• Cession and retention• Ltd., if any exclusions• Follow the fortune clause• Claim reporting provision• Arbitration provision

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Sample Reinsurance Placement

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2 Million Aggregate Cession$1 Million Net

Liability Property

$45 Million Property

Catastrophe Layered Program

10% Net

$20 Million Additional

Clash Coverage

10$ et

$5 Million

Per Risk

XOL

$4 Million XOL5% Net

$5 MillionXOL

$20 MillionXOL

5% Net

$20 millionAdditional Clash

Coverage10% Net

Liability Property50 Million

30 Million

5 Million

$ 1 Million XOL

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What Impacts Ceding Company Buying Decisions?

• Ceding Company Positioning and Performance– Financial strength & leverage ratios– Underwriting performance– Risk appetite– The book of business– Expertise – both ceding co. and R/I– Premium to retention and limit ratio

• Type of placement – XOL, P/R, other?• Contract basis – treaty, auto, facultative?

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Primary vs. Reinsurer Loss Development

General Liability

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0

20

40

60

80

100

120

1 2 3 4 5 6 7 8 9 10

Reinsurers Primary Companies

Percentage of Ultimate

Report Period (Years)

Source: A.M. BestBased on: 2013 Best’s Casualty Loss Reserve Development (for primary only)

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Surplus Lines R/I – Scenario One

• Carrier < three years in business• All liability policies at $1 million limit or below• All binding authority or small brokerage policies• Stable growth and loss experience

What type of placement would you recommend?– Pro rata, XOL, other?

What type of contract would you recommend?– Treaty, facultative, automatic

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Surplus Lines R/I – Scenario Two

• Carrier < ten years in business• Stable book of primary and excess liability business

at limits up to $10 million• Entering the property business for coastal hospitality

business

What type of placement(s) would you recommend?– Pro rata, XOL, other?

What type of contract(s) would you recommend?– Treaty, facultative, automatic?

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R/I Distribution & Placements

• Direct vs. intermediary usage and roles

– Treaty vs. facultative

– Property/I.M. & other LOB’s

• Best submission practices

• Claims handling

• General underwriting philosophy

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Relationship ExpectationsR/I Expectations of the Ceding Company

• Stable U/W, claims, mgt.• Expertise, track record• Deal & exposure knowledge• Accuracy• Clean audits• Information sharing• Tailored communication

**Trust

Ceding Company Expectations of the Reinsurer

• Financial strength• Underwriting knowledge• Consistency• Good claims and accounting• Simple access• A partnership• Relationship U/W

**Trust

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R/I Market Dynamics

R/I

Market

Alternative Capital

Capacity & Concentration

Emerging Issues & Loss Reserves

Competition & Focus

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The Global R/I Cycle

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2016 Reinsurance Market Trends

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RI Market Trends

Low Leverage Ratio

Low ROE’s

Low Investment Yield

Alternative Competition

Heavy Cat Influence

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2015 Capital & Cat. Bond Market Trends

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Alternative Market Trends

Cat bond / ILS staying power

Loss Triggers

Broadened Classes

Lower “Risk” Margins

Stable 2015 Growth

“Direct” Buyer Relationship

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2015 Cat. Bond/ILS Triggers

Indemnity

Industry Loss

Other Loss

Trigger Formats

%

Source: Munich Re 2015 ILS report

0

20

40

60

80

100

2009 2010 2011 2012 2013 2014 2015

10

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Alternate Capacity - % of Global Cat. R/I

19 22 24 28 39 50 64 72

321378

446 427466

490511

528

0

100

200

300

400

500

600

700

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 2015

Traditional Capital

Alternative Capital

340

400

470455

505

540

575600Global Reinsurer Capital

Source: Company reports, Verisk Analytics

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Basic Structure of a Cat. Bond

Sponsor (Cedent)

Single Purpose

Reinsurer

Investor

Reinsurance Premiums

Reinsurance Contract

Reinsurance Recoveries

Bonds

Proceeds

Interest Due

Principal (At Maturity)

Investments(Collateral Trust or Escrow of Funds)

Principal and Interest

Investment Earnings

2016 Marcus Payne Advanced E&S

November 6 - 9, 2016


Randall Jones

https://www.surveymonkey.com/r/RandallJonesA

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Key Definitions ADMITTED REINSURANCE

Provided by a reinsurer licensed or authorized in the appropriate state. Key impact is credit for loss reserves in financials and higher loss funding needs for non-admitted/alien reinsurers. Directly impacts Schedule F of the Annual Statement carriers must file with the NAIC.

AUTOMATIC

Reinsurance placement for a book of business for which the reinsurer has a limited right of declination within a period of time after the placement.

BASIS OF ATTACHMENT

A methodology that determines which original policy losses will be covered under a given reinsurance agreement. There are two types of methodologies: policies attaching and losses occurring. The determination may be based on 1) the effective or renewal date of the original policy; or 2) on the date of the loss; or 3) on the date when the ceding company recorded the premium or loss transaction.

Underwriting Year The effective date of the original policy, rather than the date of loss, determines the basis of attachment. Any losses occurring on policies written or renewed with inception or renewal dates during the term of the given reinsurance agreement will be covered by that reinsurance agreement irrespective of when the loss actually occurred. This mechanism is often used with “the policies attaching” methodology.

Accident Year The date of the loss under the original policy rather than the effective date of the original policy that determines the basis of attachment. Any losses occurring during the reinsurance agreement period on policies in force (if any), written or renewed will be covered by that reinsurance agreement irrespective of the inception or the renewal date of the original policy. This mechanism is often used with “the losses occurring during” the contract period methodology.

BORDEREAU

A report periodically provided by the ceding company detailing the reinsurance premiums and/or reinsurance losses and other pertinent information with respect to specific risks ceded under the reinsurance agreement.

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CATASTROPHE BOND A bond capitalized by investors to pay for losses upon a triggering event (catastrophe). In return for this capitalization, investors are paid above market interest returns during the life of this multi-year bond. Capital is returned to investors upon expiration of the bond if no loss has occurred.

CATASTROPHE BOND LOSS TRIGGERS:

Indemnity- The cedant’s actual losses in a triggering event. Modeled Loss- A modeling threshold that is exceeded in a triggering event. Indexed- An overall industry loss threshold that is exceeded in a triggering event. Parametric- A natural threshold that is exceeded in a triggering event.

CATASTROPHE REINSURANCE

Property coverage which applies to a single large event; i.e., hurricanes, earthquakes.

CEDENT

Insurer underwriting the original business. The cedent “cedes” exposures to a reinsurer through a "cession" or transfer of risk.

CLASH REINSURANCE

Liability or workers compensation coverage which applies to a large loss involving more than one insured.

COMMUTATION AGREEMENT

An agreement between the ceding company and the reinsurer that provides for the valuation, payment and complete discharge of some or all current and future obligations between the parties under particular reinsurance contract(s).

COMMUTATION CLAUSE

A clause in a reinsurance agreement that provides for the valuation, payment, and complete discharge of some or all obligations between the ceding company and the reinsurer, including current and future obligations for reinsurance losses incurred.

ECO (EXCESS CONTRACTUAL OBLIGATIONS)

Monetary awards required by a Court of law against an insurer for its negligence to its insured. Such payments to its insured are extra contractual in that they are beyond the contract between the insurer and the insured.

EXCESS OF LOSS REINSURANCE

Reinsurance coverage applies excess of the ceding company. FACULTATIVE

Individual risk reinsurance placement.

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FINITE REINSURANCE A type of reinsurance that transfers a “finite” or limited amount of risk to the reinsurer. Risk is reduced through accounting or financial methods in conjunction with risk transfer. These accounting methods reduce the risk transferred to the reinsurer, thus reducing the cost of reinsurance. This type of reinsurance is usually done over multiple years to reduce volatility of results.

FOLLOW THE FORTUNES

Follow the fortunes generally provides that a reinsurer must follow the underwriting fortunes of its reinsured and, therefore, is bound by the decisions of its reinsured in the absence of fraud, collusion or bad faith. It requires a reinsurer to accept a ceding company’s good faith, business-like, reasonable decision that a particular risk is covered by the terms of the underlying policy.

LOSS ADJUSTMENT EXPENSE (LAE)

The expense incurred by the ceding insurer in the defense, cost containment and settlement of claims under its policies. They are normally broken down into two categories: Allocated (ALAE) and Unallocated (ULAE). ALAE are often considered part of the loss to the ceding insurer and may be recovered as part of the reinsurance payments from the reinsurer. By contrast, ULAE is considered part of the ceding insurer’s overhead and cost of doing business, and should not be subject to reinsurance recovery. The elements of loss adjustment expenses that are covered by reinsurance are specified in the terms of the reinsurance agreement.

LOSS PORTFOLIO TRANSFER

A financial reinsurance transaction in which loss obligations that are already incurred and which are expected to ultimately be paid are ceded to a reinsurer. In determining the premium paid to the reinsurer, the time value of money is considered, and the premium is therefore less than the ultimate amount expected to be paid. The difference between the premium paid for the transaction and the amount reserved by the cedant is the amount by which the cedent’s statutory surplus increases.

NET RETENTION

Amount of exposure the cedent assumes without reinsurance protection. PRO RATA REINSURANCE

Premiums and losses shared proportionally with reinsurer.

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RATE ON LINE A percentage derived by dividing the reinsurance premium by the reinsurance limit; For example, a $10 million catastrophe cover with a premium of $2 million would have a rate on line of 20 percent.

REINSTATEMENT COVER

A type of reinsurance that provides a ceding company all or a portion of the ceding company’s contract or program limits that were eroded by loss in the original reinsurance agreement. The reinstatement cover is normally a separate agreement and the term usually incepts at the date of the last loss, running through the end of the original coverage period. Customarily, the reinstatement cover provides only a single limit which is not likely to include an additional reinstatement provision. Catastrophe programs typically have a reinstatement cover.

RETROCESSION

Placement in which the reinsurer cedes all or part of its risk to another reinsurer, the retrocessionaire.

SIDECAR AGREEMENT

A reinsurance offering set up as a special purpose vehicle (SPV) that is capitalized by private investors, usually hedge funds, to provide catastrophe coverage and additional capacity in a tight market. Coverage is typically written on a pro rata basis.

SPECIAL PURPOSE VEHICLE (SPV)

A quasi reinsurance company used in jurisdictions, typically offshore, that approve the use of an SPV to front securitized offerings such as sidecars or catastrophe bonds.

SURPLUS SHARE REINSURANCE (also known as Variable Quota Share Reinsurance)

A form of pro rata reinsurance under which the ceding company cedes that portion of its liability on a given risk which is greater than the portion of risk the cedent retains (i.e., net line), and the premiums and losses are shared in the same proportion as the ceded amount bears to the total limit insured on each risk.

TREATY

Reinsurance placement in which the insurer cedes classes or books of business to the reinsurer who accepts all risks as written, subject to terms of the treaty contract.

UNAUTHORIZED REINSURANCE

Reinsurance placed with a reinsurer that does not have authorized or equivalent status in the jurisdiction in question.

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XPL (JUDGMENTS IN EXCESS OF POLICY LIMITS) The amount paid by an insurer to a third party in excess of the stated policy limit because of the insurer’s failure, due to negligence or bad faith, to settle a claim for an amount within the limits of the policy.

RAA 2007 Glossary of Terms has been a source for portions of this narrative.

reinsurance in the specialty marketplace key reinsurance ... in the... · • stable u/w, claims,...

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