LINKING REINSURANCE TO SOLVENCY II

22nd June 2015

Munich

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Willis Re – Role of the Broker (Past)

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Reinsurance

Structure

Reinsurance

PriceReinsurer

Panel

Reinsurance

Contract Wording

Reinsurance

Placement

Reinsurance

Premium & Claims

Reinsurance

Price

Reinsurance

Contract Wording

3

Solvency II

challenges

Liability

Clash Scenarios

Run-Off

Management

Balance Sheet

Protection

Non-Modelled

Perils

Scenario-based

analyses

Retention

management

Capital

Management

Board directives

Regulatory

RequirementsShareholder

demands

Underwriting

Profitability

Combined Ratio < ???

Reinsurance

Structure

Reinsurer

Panel

Reinsurance

Placement

Reinsurance

Premium & Claims

Willis Re – Role of the Broker (Present)

From Risk Appetite to SII R/I decision making framework

In 2014 Willis Re initiated a journey with selected key clients in Europe, to share experience

and points of view on the following key themes:

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– The rising importance of the risk appetite concept

– How this is influencing reinsurance decisions

– Renewal strategies to achieve key objectives

– How to prepare for the Solvency II framework

Risk Appetite Survey

Key results

Performance

• Focus varies greatly – all performance measures are used by cedants

• Combined ratio marginally the most important

• ROE / ROC currently less focused on but this may change

Underwriting• Average underwriting result seen as the most important

• 1 in 20 year technical result receives more focus than 1 in 5 and 10 year

Capital• Most companies deem Economic and Regulatory Capital measure as the most

important

Most important performance / underwriting / capital measures for your reinsurance decisions.

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Context

Solvency II, financial objectives and reinsurance (i)

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Solvency II is a

reality…

…changing how you

can reach your

financial objective

…and how

Reinsurance can

support them

Regulation enforcement has already changed behaviours of insurers and

reinsurers across Europe

More focus is put on Capital management and risk appetite

The achievement of Key Financial Goals needs to take into account the

regulatory capital requirements

R/I and alternative solutions can be used to optimise the use of your capital

Evaluating the impact is essential and increasingly more complex as

Solvency II guidelines allows for more flexibility

Defining objectives and

priorities

• C-suite workshops

• Analysis of annual reports /

shareholder concerns

• Deep knowledge of regulation and

rating agencies models (BCAR)

• Peer benchmarking with Willis Re

Risk Appetite Survey

Build a dashboard to support

decisions

• Set scope at Group, Company or

Line of Business level

• Balance capital requirements with

focus on earnings

• Measure against key targets,

thresholds and peer groups

• Stress test for further sensitivity

analysis

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Define risk

appetite

Craft a decision

making framework

Link to reinsurance

Average ROE16.90% 14.50% 18.00% 16.00%

Average UWR 127.00m 122.00m 130.00m 125.50m

1 in 5 UWR 82.00m 75.00m 74.60m 80.30m

1 in 10 UWR 50.00m 38.00m 35.00m 47.50m

1 in 200 VaR for UWR -210.50m -214.30m -220.10m -212.80m

SCR173% 162% 145% 165%

BCAR 133% 124% 110% 135%

Strategy 3 Strategy 4Metric Strategy 1 Strategy 2

Impact on metrics are

calculated and visualized

• Various reinsurance strategies

tested against the established

set of metrics

• Best strategies can be

recognized

• Trade offs clearly identified

Decision making framework

A route through the fog

Case study

Client context

Multiline bank insurer focussed on personal lines and SME

Defining and embedding risk appetite were a priority of top management and shareholders

“We need to be sure we have enough regulatory capital to support our growth”

Thresholds for RoE and SCR were used to identify best RI strategies

Context

Solvency II, financial objectives and reinsurance (ii)

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QIS 5 evidencesRisk mitigation areas for non-Life companies

Reinsurance in Solvency II

Insurance Risk Context

Premium

• Non-catastrophe active underwriting risk;

• Calculation applies a factor from 21% (legal expenses) to 42% (General liability) to net premium depending on LoB;

Natural

• Defined scenarios driven by 2 digit postcode net aggregate sums insured (Property and MOD);

• MOD aggregates need only to be considered for Flood and Hail scenarios;

• Not all countries will be exposed to all perils (e.g. IT Hail but not WS);

Man-made

• There are defined man-made catastrophe scenarios for: Motor, Fire, Credit/Surety, Aviation, General liability, Marine;

• Unlike natural catastrophe there is no explicit diversification by country;

Reserve

• Calculation applies a factor from 24% (MOD) to 60% (miscellaneous) to the best estimate of claims outstanding after allowance for reinsurance depending on LoB;

CAT risk

Premium and reserve

Some forms of reinsurance work well for some risk types but not for others in the

standard formula

Reinsurance Solutions

Quota Share/Co-insurance

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Risk Type Year 1

Standard

Formula

Impact

Comments

Premium Reduces pro-rata to earned premium reduction

Natural Catastrophe Reduces pro-rata to cession percentage

Man-made Catastrophe Reduces pro-rata to cession percentage

Reserve Risk Reduces future years’ net best estimate reserve / SCR

Risk Type Year 1

Standard

Formula

Impact

Comments

Premium Other than proportionate impact on net premium

Natural Catastrophe Full benefit can be shown

Man-made Catastrophe Full benefit can be shown

Reserve Risk Can reduce future years’ net best estimate reserve/SCR

Excess of Loss

Reinsurance Solutions

Retrospective

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Risk Type Year 1

Standard

Formula

Impact

Comments

Premium No Impact

Natural Catastrophe No Impact

Man-made Catastrophe No Impact

Reserve Risk Full or partial benefit can be shown

Risk Type Year 1

Standard

Formula

Impact

Comments

Premium But Premium risk charge counts towards cat recovery

Natural Catastrophe Full benefit can be shown

Man-made Catastrophe Full benefit can be shown

Reserve Risk Can reduce future years’ net best estimate reserve/SCR

Stop Loss

Examples of Analytics Support

Nat Cat Perils

Storm surge

Snow pressure

Avalanche

Rock fall

Subsidence

…

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Man-made Perils

Terrorism

Liability Clash

Cyber risk

Conflagration

Pandemic

PA Clash

…

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Sce

na

rio

Life

sto

ck

Sce

na

rio

Te

rro

r

Sce

na

rio

Rh

ine

Flo

od

If we don’t have a model, we build one!

Conclusion

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Solvency II is now a reality requiring insurers to formalise their approach to risk

appetite and capital management

Financial aspiration can still be reached together with regulatory requirements

Understanding the true value of your reinsurance has a critical part to play

Opportunities will arise to use reinsurance intelligently to meet capital

requirements while maintaining /improving the long term profitability of your

business

Reaching these goals in a Solvency II environment is a continuous process

requiring business acumen, analytical power and regulatory knowledge

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AN UNPREDICTABLE

“NOWHERE IS SAFE”

WORLD DEMANDS A

FIRST CLASS ADVISOR.