CARE Seminar
Ceding Company Considerations
Elaine Caprio Brady
Vice President and Manager of Ceded Reinsurance Operations - Liberty Mutual
Gary Ganci
Second Vice President and Actuary, Enterprise Risk and Reinsurance - Travelers
Peter Wildman (Moderator), Vice President - Towers Perrin
May 19, 2008
CARE Seminar
Topics to be Covered
 Panel Discussion Format/questions, audience
participation encouraged
 Exposure Management
 Reinsurance Administration
 Underwriting Submission Data
 Purchasing Decision
 Emerging Claim Issues
 Actuarial Involvement/Wrap-up
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CARE Seminar
Exposure Management
 You need to transfer some risk; you’ve run your Cat models, now
what?
 How do you evaluate the various products offered to assist in the
context of Catastrophe management?
 Catastrophe Reinsurance
 Cat Bonds
 Swaps-Exposure PML Hedging
 Other Capital Market Products
 How can a ceding company evaluate the trade-offs between the above
products?
 What evaluation criteria are used? Is there a meaningful comparison
and what are the administrative implications of the various products?
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CARE Seminar
Cat Risk Mitigation Alternatives
Traditional Reinsurance, CAT Bonds, Collateralized Reinsurance
(Hedge Funds), Swaps
 Limits
 Single Limit vs. One Reinstatement
 Term
 One Year vs. Multi-Year
 Security
 Reinsurance Promise vs. Investor Funds vs. Collateral
 Time Value
 Near immediate collection vs. paid when paid
 Basis Risk
 Non-indemnity triggered CAT Bonds
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CARE Seminar
CAT Bond Ceded Less Indemnity Reinsurance Ceded
CAT Bonds - Basis Risk with Index Triggers
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CARE Seminar
Why Use Cat Bonds? A Cedant’s Perspective
 Diversify suppliers for a key purchase
 Reduce reinsurance market disruption risk
 Access broader capital base
 More capacity at similar prices
 Longer-term protection
 Multi-year term reduces immediate impact of market price
volatility
 Minimize credit risk
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CARE Seminar
Are Your Own Losses the Trigger?

Benefits of industry or parametric trigger


Simplify disclosure to investors
Relieve investors of worry about the quality of the sponsor’s book
More worry
 Reinsurance
 Excess & Surplus
 Large Commercial
 Small Commercial
 Homeowners
Less worry
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CARE Seminar
Are Your Own Losses the Trigger (Continued)?
 Downside of industry or parametric trigger
 “Basis Risk” The risk that your losses exceed what
you would have expected based on parametric or
industry loss data
 You may suffer a large loss, but recover nothing
because industry loss is small
 Who will bear the basis risk?
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CARE Seminar
Analyze Your Basis Risk
 Compare your losses in past events to (Market
Share) x (Industry Loss)
 Check exposure maps for “hot spots”
 See how your modeled share of industry loss varies
among events and among models
 Think about non-modeled loss sources
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CARE Seminar
Other Issues
 Multiple events
 Beware of multiple-event exposure
 More critical given multi-year nature of bonds
 Collateral costs important
 Termination of coverage
 Investors reclaim funds unless event occurs
 An event near end of term can present issues
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CARE Seminar
Typical Cat Bond Structure
Collateral
Trust
1. The cedant enters into a
reinsurance contract with
a Special Purpose
Vehicle (SPV)
3
Investment
earnings
Principal
& interest
1
2
Premium
Notes
SPV
Cedant
Investors
Cash
proceeds
Contingent
claim payment
Investment
earnings
Scheduled
interest
2. The SPV sells notes to
investors in the capital
markets
3. Proceeds from the notes
offering are invested in
high quality securities
and held in a collateral
trust
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Swap
Counterparty
4. Investment returns are
swapped to a LIBOR based rate by the Swap
Counterparty
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CARE Seminar
Exposure Management – Credit Risk
 How does security evaluation come into play as
counterparty credit risk is covered?
 What are the counterparty implications of the various
products for
 Availability of reinsurance markets
 Accessibility of reinsurance/other capital
 Quality of markets
 Suitability of markets
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CARE Seminar
Exposure Management – Credit Risk
Reinsurance Partners – Considerations
 Financial Strength
 Operating Company vs. Group Level
 Short or Long-tail Nature of Coverage
 Capacity
 Quoting Behavior
 Level of Engagement, Knowledge of the Business
 Aggregation
 Claim Payment History
 Consideration of Parental Support
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CARE Seminar
Exposure Management – Credit Risk
Credit for Reinsurance Considerations
 Collateral options ranked in order of quality:
 LOC
 Reg 114 Trust
 Individual non-Reg 114 Trust
 Funds withheld
 Multi beneficiary trust
 New Proposed Rules and State Regulation:
 NAIC REO Proposal
 New Fla and NY Collateral Regs
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CARE Seminar
Exposure Management - Cats
 Are Cat management issues difference based on
ownership issues?
 Publicly traded companies
 Mutual companies
 Privately held companies [What type of owner?]
 Does ceding company size matter?
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CARE Seminar
Reinsurance Administration
 How important is reinsurance administration to the
Reinsurance purchasing decision?
 What are the hot button decision criteria in contract
wording, broker vs. direct placement, claims
collection/dispute resolution, casualty vs. property
placements?
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CARE Seminar
Reinsurance Administration
Key Reinsurance Contract Clauses
 Special Termination: Permits ceding company to terminate and
commute in the event of specified triggers, with reinsurer given
option to cure by LOC funding.
 Arbitration: Consolidation of claims, streamlined procedures for
lower dollar value disputes, applies detailed reinsurance
arbitration procedures.
 Access to Records: Cedent may reserve rights to provide access
to sensitive documents, or all documents if reinsurer does not
respond to claim within 90 days.
 Assignment, Novation and Transfer: Requires cedent approval
before reinsurer liabilities are wholly or partially transferred to
affiliates or third parties.
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CARE Seminar
Reinsurance Administration
Collection and Dispute Resolution Issues
 English and US Law implications:
 Solvent Schemes of Arrangement:
— a forced commutation by a solvent reinsurer for a
fraction of the value of the projected losses.
— English law
— RI Legislation
 Part 7 Transfers: Reinsurer domiciled under English
law may transfer its reinsurance liabilities to a lesser
capitalized affiliate.
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CARE Seminar
Reinsurance Administration
Collection and Dispute Resolution Issues
 “Run off” Reinsurers may
 avoid paying valid claims
 delay collections for over 90 days after billing
 Press for commutation of treaties
 Arbitration vs. Litigation:
 Consolidation issues
 Cost
 Length of Proceeding
 Claim Preclusion
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CARE Seminar
Underwriting Submission Data
Information for Reinsurance Pricing
 Historical Written and/or Earned premium
 Current and Historical In-force Premium & Policy Profile
(what’s available)
 Limits profile by line of business – distribution of premiums,
policies, and exposures
 For AL/GL provide breakdown by Increased Limits Factor
category
 ILF’s for non-ISO lines or
 Distribution by class/hazard group, by state for WC
 For Excess/Umbrella, SIR, and large deductible business –
subject premiums mapped to a grid of policy limit by underlying
limit (deductible/SIR)
 Deductible profile
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CARE Seminar
Underwriting Submission Data
Information for Reinsurance Pricing

Projected Written and/or Earned Premium – by line of business (subject premium for
upcoming year)

Large Loss Listing
 Claims over $100,000 (or half of desired retention, whichever is less)
 Last ten years, where available

Excess (or Large Loss) Loss Triangles
 Individual losses at periodic valuation dates (preferably same loss threshold as above)
 Paid and incurred, where available
 Any changes in Claims Dept. philosophy

Historical effective rate level changes – if available (or rough estimates if possible)
 Provide breakdown of base rate and schedule credit/debit changes if available
 Explanation of schedule credit/debit methodology
 Most recent Annual Statement (note: for U.S. Companies, we usually have this on-line)

Proposed reinsurance contract (will identify any unusual features)

Catastrophe Submission data
 Exposure profiles, RMS, AIR, EQE (Cat modeling) files output
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CARE Seminar
Underwriting Submission Data (continued)
Observations
1. Introductory narrative important, Underwriting plans
2. Organize information
3. Index info, categorize what is most important!
4. Recognize various party incentives
5. Insurer questions, Reinsurer request for information
(early and often)
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CARE Seminar
Purchasing Decisions
 How do ceding companies view purchasing decisions?
 Are they centralized or decentralized?
 How are profit centers, different companies within
same group, different lines of business treated?
 Are any internal reinsurance solutions considered?
 What are some of the recipes for placing metrics on
the Go/no go purchase decision?
 To what extent are the unknown unknowns
considered? (What is value of Casualty Reinsurance
for latent, unanticipated exposures?)
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CARE Seminar
Purchasing Decisions
Types of Reinsurance Buyers
Large, Well Capitalized, Publicly Traded Insurers
 Peak Exposures Only
 Objective: long term growth in absolute book value
 Potential Metric: compare theoretical cost of capital savings
(reduction in pricing risk load) versus expected cost of
reinsurance
 Buy Retentions Down to Reduce Volatility
 Objective: achieve consistency in book value growth at the
cost of lesser absolute value. Believe in to the doctrine of
multiple expansion
 Potential Metric: compare reduction in modeled variance to
expected cost of reinsurance (have some equation that relates
CV of earnings to P/B multiple)
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CARE Seminar
Types of Reinsurance Buyers
Company A
Peak Exposures Only
Company B
Buy Down Retentions
Mult = 1.8
Mult = 1.5
Mult=1.7
Mult=1.5
Mult = 1.5
Mult = 1.5
Value
Current
5 Yr Plan
Current
5 Yr Plan
- book value
- market premium over book value
- frictional cost of additional reinsurance
Fundamental Question : Does reduced earnings volatility lead to a higher price/book multiple?
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CARE Seminar
Emerging Claims Issues
 What do you see as emerging issues in the industries
you represent?
 Will the sub-prime crisis result in reinsurance
disputes?
 Industry reports often state that disputes are rising
between cedents and reinsurers, do you think this is
true? If so, why have the disputes in the reinsurance
industry increased?
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CARE Seminar
Emerging Claims Issues (continued)

Global warming effects
 Impact on weather modeling
 Secondary issue to producers of green house gas vis-à-vis pollution exclusion

Nanotechnology
 Will be widely adopted
 Marathon man issue (Is it safe?)

Fear of illness from products under GL coverage
 Benzine, mercury, avian flu, etc.
 Does increased anxiety constitute bodily injury or not

Identity Theft
 Have purveyors of individual data “negligently” published the information by
having inadequate safeguards?
 Coverage B issues

Aging Public Infrastructure
 Inspection and Replacement procedures
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CARE Seminar
Actuarial Involvement/Wrap Up
 What are some of the various roles actuaries can play to assist
the reinsurance purchasing process being optimized?
 Risk Transfer Documentation
— should be more than simply audit fodder
— Should be natural extension of internal pricing work
 Need to be responsive to reinsurers’ actuarial questions –
develop rapport with broker/reinsurer actuaries
 Should be in a position to discuss reasonableness of quotes –
alternative pricing methodologies
 Can there be an optimal reinsurance decision?
 Need to develop buying strategy first
— Use quiet periods to define strategy
— Consistently apply metrics to support strategy
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CARE Seminar
Actuarial Involvement
Reinsurance Decision Making
 Understand decision dynamics of company
 What is management’s appetite for analytics?
 Actuarial desire is often greater than management (Rating Agency
metrics are requiring more analytical metrics)
 What is ceding company analytical level of expertise (in-house actuary,
committee, CFO is purchaser, etc.)? Who is the decision maker?
 Management appetite hard to gauge (do they think numerically,
graphically, or intuitively)
 What is management attitude towards reinsurance?
 Relationship oriented, transaction oriented, mix of both
 Is payback a common notion?
 What level of understanding or complexity is desired?
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