CAS Spring Meeting

Contents

• About Island Heritage• Caribbean Market• Managing Risk• Planning / Structuring a Reinsurance

Program• Hurricane Ivan

Island Heritage

• Specialist Property Insurer– Residential Focus

• Founded in 1996• Caribbean Wide

– 12 Islands• Risk Taker (Within Reason)

– Reinsurance• Data Collection

– State of the Art• GWP > $50M in 2005

Caribbean Market

• Low Premium Base– By American Standards

• High CAT Exposure• Small Capital Base• Huge Dependence on Reinsurance Capacity• Many Companies Rely on Reinsurance

Commissions.

Caribbean Market

• U.S. Islands– Rate Filing

• Actuarial Report• Loss experience• Reinsurance costs• Retention• Deductibles

• Other Islands– No Filing

• Reinsurance (key driver)• Competition• Deductibles

Managing Risk• Underwriting

– Each Risk– Construction– Occupancy– Location– Deductible (2% min)– Coverage

• B.I ?• Risk Dispersion• Risk Retention Strategy• Reinsurance

Managing Risk

Risk Dispersion• Single Island vs. Multi Island

– Concentration– Spread

• Each Island– Per risk– Per county

• Towers of Excellence– Similar large aggs in 4/5 islands

• In different zones– Smaller aggs spread over other islands

Planning / Structuring A Reinsurance Program• Time

– Four months planning– Two months executing / placing

• Marketing– We visit all reinsurers at least once per year

• Data Control– Accurate exposure numbers

• CAT Modeling• WHY? – 50% of G.P spent on Reinsurance

Reinsurance Team• Island Heritage

– Multi discipline• Technical• Financial• Marketing

• Guy Carpenter– Actuarial– CAT modeling (INSTRAT)– Broking

• Lead Reinsurers– Pre renewal discussions

Reinsurance Planning• Data Collection

– Per Risk• Location• Occupancy• Construction• Deductible

– Per County– Per Island– Per Zone

• Cresta• Caribbean sub-zone

– Historical Data• Industry• Own experience• Modeled data

Reinsurance Planning• CAT Models• Peer Review• Instinct (under-estimated)• Risk Strategy

– Risk Averse• Q/S reinsurance (90% +)

– Risk Taker• Set retention parameters.• E.g. Per Risk – 1% of Cap + Surplus

Per Event – 10% of Cap + SurplusMulti Event - ?

Reinsurance Planning• Frequency• Severity• 2004 Season

– Frequency: Ivan, Francis, Jeanne– Severity: Ivan

• PML /Event Limit ?

Event Limits• All Q.S. (Quota Share) reinsurance programs

have event limits– Used to be cost effective method of buying CAT

reinsurance• Must have fall back provision if Q.S. limit is

insufficient– CAT XL program

• Some limits are mandated by Regulator• Hours clause• Cost

Reinsurance Program• Quota Share

– Regional– Single island

• Risk XL– Per Risk

• Finite– Working layer– Multi retention

• Reinsurance Security– Ratings of each reinsurer– Dynamic not static monitoring– Maximum exposure per reinsurer

Reinsurance Program• CAT XL

– Layer Structure• Per single island• Island grouping• Caribbean• Clash

– Reinstatements• Number• Cost

Retained QSRetained QS QS QS QSQS

USVI / BVI QSCayman / Bahamas & Turks QS USVI Commercial QS Barbados QS St. Maarten & Other

Islands QSCayman Commercial QS

Retained Retaine

dRetaine

dRetaine

d

Layer 3

Layer 2

Layer 1

Retention

Layer 4

Layer 4Layer 3

Retention

Layer 6

Layer 2Layer 1

Layer 5

Funded Layer

Reinsurance Structure

Risk XL Programme Cat XL Programme

Hurricane Ivan

Hurricane Ivan

Hurricane Ivan

Ivan• Grand Cayman – Sept 12, 2004• Cat 4/5• Surge

– 80% of damage was surge related– 20% wind related

• Minimal loss of life– Good construction

• 92% of all structures damaged• 60% of all vehicles written off

Ivan• Damage to buildings and infrastructure of

Cayman Islands: US$3bn (Munich Re)• US$75,700 economic loss per capita in

Cayman Islands (UN’s highest ever recorded).

IvanIsland Heritage Results• PML Loss 24.9%• Reinsurance Program 23.2% (>30% for 2005)• PML Breakdown:

– Residential 27.2%– Commercial 23.6%– Condos 21.5%– Buildings 22.6%– Contents 43.9%

Were We Surprised?• Yes at the extent of the surge loss• Industry wide issue in Cayman• Why can’t the CAT modelers model the surge

exposure prospectively?• Michelle was a wake-up call.

– We bought more protection but not enough!

The Scenario• Logistical Nightmare

– 60% of autos destroyed– 92% of buildings damaged– Very limited accommodation including hotels– Airport damaged– Power outages– No water– Forced to abandon office– Timing

• 3 storm losses in Florida• Bahamas / Jamaica / Grenada• Adjusters?

How Did We React?• We were partially operating within 4 days• Fully operational within 7 days• Back-up systems worked• Arranged temp office accommodation• Got adjusters on island quickly

– Found vehicles, offices and systems for them• Many aspects of disaster plan worked

– Pre-printed claim forms– Pre-printed cheques

• All staff in place

Lessons To Be Learnt• Underwriting

– Reinsurance – review protection strategy– Deductibles – 2% not enough– Coverage Issues

• Alternate accommodation• Debris removal• Professional fees

– Contents• Ground floor exposures

– Construction Standards• EFIS ?

The Claims Process• 92% of all policy holders claimed• 95% of all claims settled• Underinsurance not a huge problem• Loss adjustment process difficult

– Availability of adjusters– Multi-storm season– Sourcing of building materials– 4 storms in Florida– Media reaction

• Fantastic reinsurance response

Operational Issues• Reputation – A key element

– Fair claim settlement– Effective P.R campaign– Maintained Rating

• Opportunities– Dislocated marketplace– Security concerns– High rates (and reinsurance)

• Result– More business– More licenses– Now a ‘real’ company