Alabama Affordable Homeowners
Insurance Commission
Reinsurance Education Discussion
November 21, 2011
Hurricane Ivan - 2004
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Tuscaloosa, AL Tornado Damage (4/2011)
Tuscaloosa:
Wood
Square
Shopping
Center
BEFORE
Tuscaloosa:
Wood
Square
Shopping
Center
AFTER
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The Twenty Most Costly PCS Cats – Last 50 Years – U.S.
Event
Loss
Trended
Year
Hurricane Katrina
$41,100,000,000
$51,504,567,317
2005
Hurricane Andrew
$15,500,000,000
$38,390,322,809
1992
Northridge Earthquake
$12,500,000,000
$27,554,234,380
1994
WTC, Pentagon Attacks
$18,778,500,000
$27,529,490,696
2001
$515,000,000
$21,392,940,720
1965
$12,500,000,000
$13,925,600,000
2008
Hurricane Hugo
$4,195,000,000
$13,815,415,203
1989
Hurricane Wilma
$10,300,000,000
$12,907,470,642
2005
Hurricane Charley
$7,475,000,000
$9,742,007,453
2004
Hurricane Ivan
$7,110,000,000
$9,266,310,768
2004
Hurricane Cecelia
$309,950,000
$9,179,859,007
1970
Super Outbreak
$454,364,450
$8,716,248,560
1974
Hurricane Frederic
$752,510,000
$7,835,114,009
1979
Tuscaloosa Tornado Outbreak
$7,300,000,000
$7,300,000,000
2011
Hurricane Rita
$5,627,200,000
$7,051,739,689
2005
Joplin Tornado Outbreak
$6,500,000,000
$6,500,000,000
2011
Hurricane Frances
$4,595,000,000
$5,988,565,117
2004
Extreme Cold Outbreak
$880,000,000
$5,720,352,405
1983
Hurricane Carla
$100,000,000
$5,445,006,085
1961
$2,955,000,000
$5,159,556,343
1998
Hurricane Betsy
Hurricane Ike
Hurricane Georges
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Loss Occurrence Definition – Real-Life Example
 Hurricane Andrew, 1992
Mid-day – Aug 28 –
Began to Dissipate
8:30am – Aug 26
– Landfall in LA
8:50am Aug 24 –
Landfall in FL
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2011 PCS Combined Peril Catastrophe Losses through September
 Alabama is up 897% based upon long-term trend-adjusted averages
 Total All States up 165%
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Risk Management Options: Individuals
Example: Owning a Home
Avoidance
void
Elect not to purchase a home
Rontrol
C
educe
Utilize smoke detectors, burglar alarms, careful
maintenance, construction standards, manage
deductibles, etc.
Retention
etain
Rely on personal resources in case of loss
Transfer
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Insurance
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Risk Management Options: Insurance Companies
Example: Company Writing Homeowners Insurance
Avoidance
void
Elect not to write any policies
Rontrol
C
educe
Tighten underwriting standards, add exclusions,
charge more for policies not utilizing loss mitigation
features, etc.
Retention
etain
If abundant capital – retain 100% of risk
Transfer
Reinsurance
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Risk Management Options
Individuals
Avoidance
void
Rontrol
C
educe
Retention
etain
Transfer
Insurance Company
•
Elect not to purchase a
home
•
Elect not to write any
policies
•
Utilize smoke detectors,
burglar alarms, careful
maintenance, construction
standards, manage
deductibles, etc.
•
Tighten underwriting
standards, add exclusions,
charge more for policies not
utilizing loss mitigation
features, etc.
•
Rely on personal resources
in case of loss
•
If abundant capital – retain
100% of risk
•
Insurance
•
Reinsurance
Transfer If:
• You do not have financial resources to retain
• There are geographic, peril, or line of business
concentrations
• Another party can hold it for less cost than you
can
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Premium Capacity and Exposures
 The amount of premium and exposures a company can write is limited by
the amount of capital they have on hand
 This is a measure of financial strength used by most Departments of
Insurance and Rating Agencies
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Premium Capacity and Exposures
 Leverage Ratio = Net Written Premium to Policyholders’ Surplus
 Closely watched by state regulatory and rating organizations
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Definition of Reinsurance
The process by which an insuring organization cedes all or part of the
risk it has assumed to another organization (the reinsurer)
Insurance Company
RISK
Reinsurance Company
The pooling of risks of many insuring organizations to
pay for the losses of a few
Insurance
Company
Insurance
Company
Insurance
Company
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Insurance
Company
Insurance
Company
11
Forms of Reinsurance
Reinsurance
Facultative
Treaty
Pro Rata
Quota Share
Surplus Share
Excess
Property Per
Risk
Casualty
Excess
Excess
Catastrophe
Per
Occurrence
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Aggregate
Excess
Stop Loss
Treaty
 Covers an entire class or line of business
Reinsurance
 Obligatory contract for both parties
Treaty
 The treaty is the contract specifying the
agreement
Excess
Excess
Catastrophe
Per
Occurrence
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Aggregate
Excess
Excess Catastrophe

General characteristics:
– Protection against depletion of capital from
accumulation of loss from a single occurrence
(hurricane, earthquake, tornado) or a series of
occurrences within a specified time frame
Reinsurance
Treaty
– Typically a flat dollar retention and limit
– Coverage is frequently placed on a layered
basis to build capacity
Excess
– Coverage limited – usually a maximum of one
reinstatement allowed (generally for an
additional premium)
Excess
Catastrophe
– Ceded premium based on negotiated % rate
(typically of subject premium)

Catastrophic Perils commonly covered under
reinsurance, include:
Per
Occurrence
– Windstorm
•
Hurricane
•
Tornado/Hail
– Earthquake
– Fire/Brush fire
– Riot
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Aggregate
Excess
Excess Catastrophe – Per Occurrence
 Indemnifies cedent after an accumulation of
losses from a single event, i.e. Per
Occurrence
Reinsurance
Treaty
 Protects PHS from sudden drain
Excess
 Levels results and large fluctuations in
earnings
Excess
Catastrophe
Per
Occurrence
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Aggregate
Excess
Excess Catastrophe – Per Occurrence Example
Reinsurance
Treaty
$500M xs $300M
5% Co-Participation
ROL 5.0%
Premium $25,000,000
95% Placed
Excess
Excess
Catastrophe
$200M xs $100M
ROL 9.0%
Premium $18,000,000
95% Placed
Per
Occurrence
$60M xs $40M
ROL 20.0%
Premium $12,000,000
95% Placed
Retention
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Aggregate
Excess
Excess Catastrophe – Per Occurrence Example
Example:
Reinsurance
 Company Policyholders’ Surplus = $450,000,000
Treaty
 Company sustains $650,000,000 of loss from an
accumulation of property losses caused by a
hurricane
Excess
 Catastrophe Excess of Loss: $760,000,000 xs
$40,000,000 UNL per occ
Excess
Catastrophe
The first $40,000,000 retained by Company
Per
Occurrence
$610,000,000 ceded to Reinsurers
The Company retains a net loss of
only $40,000,000 and remains
solvent.
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Aggregate
Excess
Aggregate Excess
 Reinsurance is based on the
Aggregation of catastrophe losses
over a period of time, generally 12
months
Reinsurance
Treaty
Excess
Excess
Catastrophe
Per
Occurrence
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Aggregate
Excess
Aggregate Excess
Reinsurance
10% Co-Participation
Treaty
$200M xs $300M
ROL 24.0%
Premium $48,000,000
90% Placed
Excess
Excess
Catastrophe
Per
Occurrence
Retention
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Aggregate
Excess
Aggregate Excess
 Responds to a frequency of “smaller”
catastrophe events
Reinsurance
 Includes a limit, retention and a trigger
Treaty
 Coverage for frequency and some severity
Excess
 Provides assurance to Rating Agencies
and Capital Markets by reducing earnings
volatility
Excess
Catastrophe
 Protect capital needed to support
underwriting franchise
Per
Occurrence
 Increase efficiency and responsiveness of
reinsurance coverage
– Macro perspective vs. a silo approach
to coverage
 Generally cannot be reinstated
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Aggregate
Excess
Excess Catastrophe Reinsurance Models
 There are 4 respected catastrophe models available:
– Applied Insurance Research (AIR)
– Risk Management Solutions (RMS)
– EQECAT (EQE)
– Impact Forecasting
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Excess Catastrophe Reinsurance
 Catastrophe modeling results:
– Probable Maximum Loss (PML) or Exceedance Probability (EP):
• How high is high?
• Return times
– Average Annual Loss (AAL): On average, how much loss?
– Pure premium: How much loss in a layer?
– Insurance in force
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Reinsurance Market Update
 Multiple significant insurance events have stirred thoughts of a global market hardening
 Meaningful regional price adjustments have occurred outside the US, but as yet no global effect
 Despite the fact that 1H 2011 catastrophe events are the second most costliest in history for the
insurance industry the 2011 events are still at level of an earnings event – less than or equal to
expected full year income, after tax for most reinsurers – not a capital event
 Share buy-back programs impacted
 Reinsurer capital remains abundant despite recent catastrophe events in Japan, Australia, New
Zealand and U.S.
500
-5%
450
17%
USD (billions)
400
-17%
18%
350
470
445
300
411
402
342
250
200
FY 2007
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FY 2008
FY 2009
FY 2010
1H 2011
23
Aon Benfield Aggregate1 Combined Ratio Comparison
 Major events in Japan, Australia and New Zealand increased the catastrophe loss impact to the
combined ratio from 10.9 percent for H1 2010 to 34.1 percent in H1 2011
Source: Individual Company Reports, Aon Benfield Analytics
1
The ABA is a group of 28 of the world’s leading reinsurers; latest ABA study can be found at http://thoughtleadership.aonbenfield.com/ThoughtLeadership
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Select Reinsurer 1H2011 Combined Ratios
200%
Loss ratio
Expense ratio
ABA combined ratio
180%
160%
140%
120.6%
120%
100%
80%
60%
40%
20%
0%
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Impact Of Catastrophe Losses On Shareholders’ Funds
Source: Individual Company Reports, Aon Benfield Analytics
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