Reinsuring Small/Regional Insurers
July 26, 2016
Reinsurance
Pricing
Perspective
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Reinsuring Small/Regional Insurers
July 26, 2016
Pricing Actuary’s Responsibilities:
I.
Review treaty reinsurance structure
II.
Determine the expected loss cost for the
proposed reinsurance treaty
III. Compute the reinsurance rate based on the
expected loss cost, risk characteristics and
volatility (capital requirements) of the treaty
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Reinsuring Small/Regional Insurers
July 26, 2016
I. Treaty Structure

Understand the ceding company’s motivation
behind the reinsurance purchase

Discuss the alignment of the insurer’s and
reinsurer’s interests

Determine whether the submission data is
sufficient to analyze the proposed structure
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Reinsuring Small/Regional Insurers
July 26, 2016
I. Treaty Structure

The clock is ticking – manage expectations!
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing - Summary
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Data Issues
Rating Considerations
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Parameter Estimation
Interpreting Results
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Data Issues

Identify and quantify changes described in the
submission’s narrative
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Changes in class and product mix
Changes in policy limits usage and
deductible levels
Changes in inuring business or facultative
placements
Changes in risk concentrations
Etc.
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Data Issues

Small regional insurers may not be able to
break-out their book into component sub-lines

Carriers may not be able to provide robust price
monitoring reports
The impact of changes in claims handling or
reserving may be based on anecdotal evidence
from underwriting or claims rather than from hard
data provided by the cedant
Request the independent actuarial reserve study
(if available)
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Data Issues


Draw comparisons to the insurer’s peer group
Contact the insurer’s actuary

Develop a strategy to price the proposed
reinsurance structure
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing

Make a concerted effort to understand the
exposures being reinsured
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Rating Considerations

Actuarial first principles:
“Rates are not to be inadequate, excessive, or
unfairly discriminatory.”

Consider stability vs. responsiveness when
selecting rating segments

Greater segmentation can lead to increased
parameter risk, compounded conservatism, and
pricing inaccuracies
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Rating Considerations
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If excess loss experience is not credible or is
inconsistent with exposure indications, consider
experience rating a lower layer
This may be limited by the truncation point of
your historical loss experience and your annual
severity trends
The relative consistency of experience and
exposure indications on a lower layer, may not
hold as you extrapolate to a higher layer
Severity layers may require a frequency/severity
approach
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Parameter Estimation

Niche carriers may have very different loss
trends than national writers
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Compare premium and loss trend assumptions
to ensure consistency
Increased limits factors or exposure curves
based on industry sources may also be
inappropriate for niche or regional writers
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Interpreting Results
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If attritional experience and exposure loss cost
indications vary significantly, take the time to
understand the differences
Decisions as to credibility rely on your
understanding of these discrepancies
Experience based selections may result in “free
cover” if historical experience does not contain
losses that exhaust the reinsurance limit
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Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Interpreting Results
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Shock losses may skew experience indications
particularly if there are a limited number of years
of credible historical experience
Examine both line of business and consolidated
treaty experience indications to evaluate the
benefit of line of business diversification
For composite rated accounts, shifts in the
distribution of the underlying premium by line of
business can have a material impact on the
overall indicated loss cost
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Reinsuring Small/Regional Insurers
July 26, 2016
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II. Pricing - Example

Consider an excess of loss treaty with the following
projected subject premiums and loss cost indications.
Note that the personal auto liability does not expose the
reinsurance layer
Line of
Business
Projected
Subject Premium
Loss Cost
Commercial Property
Commercial Umbrella
General Liability
Workers Compensation
Personal Auto Liability
110,000,000
25,000,000
101,000,000
220,000,000
325,000,000
1.50%
45.00%
0.07%
3.50%
0.00%
Total
781,000,000
2.65%
Reinsuring Small/Regional Insurers
July 26, 2016
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II. Pricing – Example

If the company writes 20% more commercial umbrella
business and 2% less personal auto liability business, then
the overall loss cost indication increases by 11%
Line of
Business
Actual
Subject Premium
Loss Cost
Commercial Property
Commercial Umbrella
General Liability
Workers Compensation
Personal Auto Liability
110,000,000
30,000,000
101,000,000
220,000,000
320,000,000
1.50%
45.00%
0.07%
3.50%
0.00%
Total
781,000,000
2.93%
Reinsuring Small/Regional Insurers
July 26, 2016
II. Pricing – Non-Attritional Exposures
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Small regional insurers may not have
sophisticated catastrophe models
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Carriers may not capture all the data elements
necessary for pricing the catastrophe exposure
of the reinsurance treaty
Discuss the catastrophe modeling data and nonmodeled catastrophe exposures with the
underwriter and the catastrophe modeling unit
Make sure that exposure from secondary perils
is not double counted or missed entirely
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Reinsuring Small/Regional Insurers
July 26, 2016
III. Evaluating The Reinsurance Rate
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Aggregate loss distributions should be used to
determine the economic value of treaty features
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Post treaty feature profit distributions can be
used to determine capital requirements for the
treaty
Historical loss experience may provide some
help in determining the appropriate shape of the
aggregate loss distribution
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5 – 10 years of historical data provide little information
about the tail of the distribution (1:50 yrs, 1:100 yrs, …)
There is considerable process risk and parameter risk
involved in pricing small regional accounts
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Reinsuring Small/Regional Insurers
July 26, 2016
III. Evaluating The Reinsurance Rate

Don’t underestimate the downside risk!
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Reinsuring Small/Regional Insurers
July 26, 2016
III. Evaluating The Reinsurance Rate
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Reinsurance treaty structures for small regional
insurers can become unbalanced quickly:

Reinsurer can be exposed to limits that far exceed the
ceded premium
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A limit loss in a $4M xs $1M layer with $500k ceded
premium will produce a loss ratio of 800% for the reinsurer
Low-frequency/high severity coverages (e.g. property cat,
clash, ECO/XPL, and terrorism) can increase parameter
risk significantly
The rating process must account for the volatility
in results that arises from premium/limit
imbalances
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Reinsuring Small/Regional Insurers
July 26, 2016
III. Evaluating The Reinsurance Rate
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Small regional carriers can provide valuable
diversification in a reinsurance portfolio:
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May write niche products
Regional premium and loss trends are not fully
correlated with national trends
Often serve localized markets that don’t aggregate with
national accounts
These diversification benefits need to be
considered in the rating process
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Reinsuring Small/Regional Insurers
July 26, 2016
Conclusions:
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Take the time to discuss and understand the
small regional carriers book of business and
motivations
Evaluate the alignment of interests and make
recommendations to strengthen the reinsurance
partnership
Consider the amount of process/parameter risk
in the pricing indications and the portfolio benefit
of non-correlated exposures
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