Date 31st October 2011

Arab Reinsurance Company, Lebanon

Are you adequately protected?

Strictly Private and Confidential

Presented by:

Basma Barakat

Head of Technical Department

Are you covered?

Insurance

Catastrophic trends increasing globally?

2011 registered one of the worst natural & man made catastrophic losses

since 2001 – Economic Losses will exceed US$1 Trillion!

Images courtesy of AP and Reuters

HuricaineIrene

$7bn

Japan Earthquake

$250 bn

New Zealand

Earthquakes $16bn

Thailand Flood $13bn

Figures courtesy of Earthquake Report & Middle East Insurance news

$2-$3 bn $15-$20 bn $3-$8 bn $3-$5 bn

Insured Losses

Catastrophic trends increasing globally?

It has even reached our markets!

Images courtesy of AP and Reuters

Arab Political Waves

$20 bn

Turkish Earthquake

?

Figures courtesy of Al Bawaba

Insured Losses

? ?

What’s at stake?

HAZARD

• Probability

• Magintude

• Duration

Exposure

• Location

• Construction

• Age of Buildings

Damage

• Physical Damage

• Repair cost

Insured Loss / Terms of Covers

Insurance Companies:

Images courtesy of AP and Reuters

Exposure

Property & Engineering

Motor

Life & Health

Marine

Solutions

Risk Transfer

Captive

Risk Transfers

Proportional Treaties

Non-Proportional Treatie

CAT Pool

Designing a reinsurance protectionBasic questions to ask

Mandatory capital requirement and financial capability

Risk appetite and the relationship between the reinsurance

retention and the overall profitability of the company?

How much volatility to

transfer? Consistency with the goal set by the shareholders?

Expertise and know-how?

Frequency vs. Severity?

In which form / type of

reinsurance protection? Expected premium income?

What are we dealing with – What’s the make-up of the portfolio?

Random fluctuations like severity and volatility,

accumulation, frequency, etc.

Structural changes like inflation, global

warming and population growth

Errors in data analysis, models and in pricing.

(Models are TOOLS not the truth!)

Portfolio Risk

Basic Reinsurance Structure followed in the Arab Insurance Market:

QS Treaty

Surplus Treaty

Retention

CAT XL Cover offering protection for the cedant’s retention against

an accumulation of small/medium losses arising from one event

Depending on the size and make up of this portfolio, the CAT Cover

will be purchased in Layers

Pricing method used for CAT XL Cover relies ideally on Exposure &

Experience method combined

To set the proper path towards choosing & pricing the CAT XL Cover, the

insurance company’s portfolio needs to demonstrate the following:

CAT XL Structure

Class of Business per type of risk

(Industrial, Commercial, etc…)

Homogenous Risks

Territory / Exposure

Sum Insured versus PML/EML

Direct Insurance versus facultative reinsurance

Step 1: Setting the Retention/Priority

Return Period

• 1 in 100 year event

• 1 in 250 year event

• 1 in 500 year event

Capital

• Yearly dependence on the capital, rule of thumb 10% of Capital?

Risk Appetite – Risk Aversion

• The BOD’s decision, how much to retain?

No wrong retention?!

Step 1: Setting the Retention/Priority (Cont)

Risk appetite / Risk Aversion

• What is shareholder’s risk appetite and the level of risk they are willing to take?

• High Risk is necessary for high return!

0%

5%

10%

15%

20%

25%

30%

35%

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Risk - Standard Deviation

Avera

ge P

rofit

Step 2: Prepare the Data:

Risk Profiles per type of Risk

Sum Insured Band No of

Policy

Aggregate Sum

Insured

Total

Premium AV Rate Retention

Quota

Share

1st

Surplus

- 250,000 340 48,000,000 670,000 1.40% 148,000 222,000 300,000

250,001 500,000 400 155,000,000 450,000 0.29% 122,000 183,000 145,000

500,001 1,000,000 650 500,000,000 670,000 0.13% 180,000 270,000 220,000

1,000,001 1,100,000 65 70,000,000 104,000 0.15% 21,600 32,400 50000

1,100,001 1,200,000 60 72,000,000 95,000 0.13% 22,000 33,000 40000

ETC….

Premium

For Example – All Commercial Property

Aggregate Sum Insured Per Region/Zone

Loss history – IF any

Step 3: Deciding on how much protection to buy:

Aggregate Total Sum Insured

• Per Zone (Cresta Zone for EQ)

• Per Area/Region exposed

• Know your maximum accumulation

Probable Maximum Loss

• Set by CAT actuarial models

• Not much modeling done in our region

Solvency / Capital

• How much strain are we placing on our capital & what’s the return period?

Step 4: Exposure Rating

Establish a suitable loss distribution curve (CAT) or Poison Tables (Risk)

Actuarial tools which determines price of a cover using the probability of an event occurring the 1st time, the 2nd time, etc…

Establish a catastrophe premium

Risk premium per band estimated by applying a loss ratio to the GNPI

Do not account for the risk premium for the retention

Establish an estimate maximum loss

What is the expected PML? CAT PML for instance can be found through CRESTA

No real significant real experience available

It uses expected loss based on likely exposure

Step 4: Exposure Rating (Cont)

RISK XL COVERS

An example of pricing using one of Lloyd’s first loss scale:

Sum Insured BandNo of

Policy

Retained Sum

Insured

Retained

PremiumMid point

Layer 4,000,000 XS 1,000,000

Exposure as

% of Mid

Point

Priority as

% of Mid

Point

Rating

Factor

Exposure

Premium

0 1,000,000 1000 150,000,000 450,000 500,000 0 100 0 0

1,000,001 2,000,000 540 220,000,000 270,000 1,500,001 33 67 14 37,800

2,000,001 3,000,000 650 134,328,358 180,000 2,500,001 60 40 21 37,800

3,000,001 4,000,000 200 800,000,000 900,000 3,500,001 71 29 27 239,400

4,000,001 5,000,000 185 900,000,000 1,000,000 4,500,001 78 22 32 320,000

5,000,001 6,000,000 100 520,000,000 550,000 5,500,001 73 18 32 176,000

6,000,001 7,000,000 120 756,000,000 700,000 6,500,001 62 15 29 203,000

7,000,001 8,000,000 75 550,000,000 440,000 7,500,001 53 13 29 127,600

8,000,001 9,000,000 40 352,000,000 281,600 8,500,001 47 12 30 84,480

9,000,001 10,000,000 10 925,000,000 740,000 9,500,001 42 11 29 214,600

Total 5,307,328,358 5,511,600 1,440,680

ROL 26%Payback Years 3.8

Step 4: Exposure Rating (Cont)

CAT XL COVERS

An example of pricing a CAT XL Cover using the same data & Lloyds’ first

loss scale:

ROL 2.4%Payback Years 41

Layer: 20,000,000 XS 2,000,000

GNPI 5,511,600

PML (2% of Aggregate) 106,146,567

Limit 20,000,000

Priority 2,000,000

Loss Cost 16,011,590

Rating Factor (1st Loss Scale) 3%

Pure Exposure Rate 8.7%

Premium to Layer 480,348

Step 4: Exposure Rating (Cont)

An example of the Swiss Re exposure curves & MBBFED distribution class

There are numerous industry severity curves based on “similar” portfolios:

Items to be factored & remembered while Pricing:

• An underlying deductible reduces cedant’s exposure thus the price of the cover

Underlying Deductible

• Price does not always reflect the hazard, depending on market conditions

Soft versus Hard Market

• Sufficient Reinstatement at reasonable premium?

Reinstatement

• Increasing concentration of insured risks (Urbanisation)

• Sea Levels rising, global warming, etc… any effect?

Prone to Error

Underwriting Considerations:

• Loss amount after deducting all other reinsurance recoveries

Ultimate net loss

• What is considered one event or any one occurrence?

Hours Clause

• When does this cover start working? What is one risk?

Two risk warranty

It’s not only a science but an art…

Thank you for your attention: Questions?