Overview of Property and Casualty Overview of Property and Casualty ReinsuranceReinsurance

Robert D. Graham Sr. V.P. & Assistant General CounselGeneral Reinsurance Corporation

Overview of ReinsuranceOverview of Reinsurance Property & Casualty Property & Casualty

Introduction Purpose Forms & Types Domestic Market Marketing Reinsurance Security

Definition of ReinsuranceDefinition of Reinsurance

“Reinsurance is a contract of insurance whereby one insurer (called the reinsurer or assuming company) agrees, for a portion of the premium, to indemnify another insurer (called the reinsured or ceding company) for losses paid by the reinsured under insurance policies issued by the reinsured to its policyholders.”

RetrocessionRetrocession Reinsurer Retrocedent

InsuranceInsurance Policyholder Insured Underlying Insured

ReinsuranceReinsurance Insurance Co. Ceding Co.

Cedent Primary Insurer

RiskRisk

RiskRisk

RiskRisk

Insurance Co.

– Insured

Reinsurer

– Assuming Co.

ReinsurerRetrocessionaire

Elements of ReinsuranceElements of Reinsurance

Reinsurance is a form of insurance. There are only two parties to the reinsurance

contract - the Reinsurer and the Reinsured - both of whom are insurers, i.e. entities empowered to insure.

The subject matter of a reinsurance contract is the insurance liability of the Reinsured undertaken by it under insurance policies issued to its own policyholders.

A reinsurance contract is an indemnity contract.

What Reinsurance DoesWhat Reinsurance Does

1. It converts the risk of loss of an insurer incurred by the reinsured under its policies according to its own needs.

2. It redistributes the premiums received by the reinsured, which now belong to the reinsured, according to its own business needs.

What Reinsurance Does Not DoWhat Reinsurance Does Not Do

Reinsurance does not:

Convert an uninsurable risk into an insurable risk.

Make loss either more or less likely to happen.

Make loss either greater or lesser in magnitude.

Convert bad business into good business.

It is not Alchemy. Reinsurance is not coinsurance.

Reinsurance is not banking – it is

not the lending of money but it

can have the same effect.

Reinsurance is not a security.

Functions of ReinsuranceFunctions of Reinsurance

Financing

Stabilization

Capacity

Catastrophe Protection

Services

FinancingFinancing

is growing and needs additional surplus to maintain acceptable premium to surplus ratios.

Unearned premium demands reduce surplus. In a down cycle, underwriting results are bad

and reduce surplus. Investment valuation negatively impacts

surplus. Marketing considerations dictate that an

insurer enter new lines of business or new territories.

StabilizationStabilization

Marketing ConsiderationMarketing ConsiderationPolicyholders and stockholders like to be identified with a stable and well managed company.

Management ConsiderationManagement ConsiderationPlanning for long term growth and development requires a more stable environment than an insurance company’s book of business is apt to provide.

CapacityCapacity

Refers to an insurer’s ability to provide a high limit of insurance for a single risk, often a requirement in today’s market.

Reinsurance can help limit an insurer’s loss from one risk to a level with which management and shareholders are comfortable.

Most states require that the maximum “net retention” from one risk must be less than 10% of policyholders’ surplus.

Catastrophe ProtectionCatastrophe Protection

Objective is to limit adverse effects on P&L and surplus from a catastrophic event to a predetermined amount.

Covers multiple smaller losses from numerous policies issued by one primary insurer arising from one event.

ServicesServices

1. Claims Audit

2. Underwriting

3. Product Development

4. Actuarial Review

5. Financial Advice

6. Accounting, EDP and other systems

7. Engineering - Loss Prevention

Reinsurance is Provided ThroughReinsurance is Provided ThroughA. TreatyA. Treaty

a. Covers classes or entire “books” of business

b. Reinsurer accepts as written by insurer as to form, price and risk

B. FacultativeB. Facultative

a. Single Policy/Risk

b. Reinsurer evaluates each risk and establishes or agrees to acceptance, form and price

c. Automatic or semi-automatic facilities

Forms of ReinsuranceForms of Reinsurance PROPORTIONAL EXCESS OR NON-PROPORTIONAL

Quota Share

Reinsurer covers the

same percent on each risk

Surplus Share

Reinsurer’s share based on type or size of risk

Excess Each Risk/Per Risk

Per Risk Excess of LossReinsurer covers excess of a predetermined amount; limits apply separately to each loss

Per Risk Aggregate Excess of LossReinsurer covers over aggregate

claims for a risk in a specified period of time

Excess EachOccurrence

(Catastrophe)

Reinsurercovers over a predetermined amount or limit

for all losses arising out of one event or occurrence

Aggregate Excess

(Stop Loss)

Reinsurer covers over a

predetermined aggregate limitof loss or loss

ratio for aspecific

period oftime

Pro Rata or ProportionalPro Rata or Proportional

Share in Premium in Predetermined Manner Share in Losses in Direct Proportion to Premium

Ceded Pays Ceding Commission to Reimburse for

Expenses Can be Quota Share or Surplus Share

Quota Share: Reinsurer covers some percent on each risk

Surplus: Reinsurer share based on type/size of risk

Excess or Non-ProportionalExcess or Non-Proportional

No Proportional Sharing of Premium or Loss

Responds to Losses Excess of Predetermined Retention

Negotiated Premium

Written in Layers

Excess (XS)Excess (XS)Risk ExcessRisk ExcessWritten in LayersWritten in Layers

0

25

50

75

100

INSUREDSINSUREDS

POLICY LIMITS (THOUSANDS)POLICY LIMITS (THOUSANDS)

2ND LAYER2ND LAYER

1ST LAYER1ST LAYER

RETENTIONRETENTION

Excess (continued)Excess (continued)CATASTROPHECATASTROPHE

$$LOSSLOSS

1ST1ST 2ND 2ND 3RD ETC. 3RD ETC.

RETENTIONRETENTION

10MM

5MM

1MM$1MM

XS $5MM

$4MM XS

$5MM

OCCURRENCE

Cat XSCat XS

SummarySummary

Retention Established

Maximum Recovery Established

Premium Negotiated

Sold in Layers

Usually Limited to Two Occurrences

Additional Cover Needed

Aggregate XSAggregate XSSummarySummary

Stop Loss

Accumulation of Losses

Types of ReinsurersTypes of Reinsurers

1. Professional ReinsurersSpecialize in ReinsuranceAre Licensed in at Least One StateDerive Majority of Their Premium Income

From ReinsuranceForms

Stock Company Mutual Company U.S. Branch of Alien Company

Types of ReinsurersTypes of Reinsurers

2. Reinsurance Department of Primary Company

3. PoolsSpecial PurposeGeneral Purpose

4. Lloyd’s of London

Marketing of ReinsuranceMarketing of Reinsurance

1. Broker (Intermediary) Market1. Broker (Intermediary) Market

Reinsurance IntermediaryProvides Business for ReinsurersBrings Parties Together - Helps Negotiate

Reinsurance TermsActs as Agent of Ceding CompanyCompensated by Reinsurer

Reinsurers Share Reinsurance Programs

Marketing of ReinsuranceMarketing of Reinsurance

2. Direct Writers2. Direct Writers

Contact Primary Insurers Directly Through Salaried Employees

Frequently Assume 100% of Reinsurance Program

Reinsurance SecurityReinsurance Security

Evaluation of Cedants, Retrocessionaires and Intermediaries

Financial Condition

Underwriting Policies and Procedures

Claims Policy and Administration

Management Stability and Expertise

Market Share of U.S. Reinsurers' Year-End 2002 ResultsRanked by Net Reinsurance Premiums Written

Source: RAA Reinsurance Underwriting Report March 13, 2003

Reinsurers Net Reinsurance Premiums Written Year-End 2002 (In Thousands)

1. Employers Reinsurance Group $ 4,537,6522. General Re Group 3,974,8513. National Indemnity Company 2,666,2594. Transatlantic Re/Putnam Re 2,336,6505. Everest Reinsurance Co. 2,119,1756. American Re-Insurance Co. 1,169,4247. Odyssey America Re Corp./Odyssey Re Corp. 1,493,1188. Swiss Reinsurance America Corp. 1,283,0069. Converium Reinsurance (North America) Inc. 1,064,11210. Berkley Insurance Co. 940,48411. Partner Re U.S. 755,31712. Hartford Re Co. 702,92213. Folksamerica Reinsurance Co. 678,72814. CNA Re 665,93615. SCOR U.S. Group 636,72516. AXA Corporate Solutions Reinsurance Co. 550,04017. Gerling Global Group 479,30218. XL Reinsurance America, Inc. 411,08419. American Agricultural Insurance Company 389,40020. Trenwick America Reinsurance Corporation 387,867

LIST OF WORLD’S 10 LARGESTLIST OF WORLD’S 10 LARGESTREINSURANCE BROKERSREINSURANCE BROKERS

GROSS REVENUESCOMPANY (MILLIONS) 2001 EMPLOYEES

Aon Re Worldwide $720.0 2,700Guy Carpenter & Co. Inc. 625.0 2,150 Benfield Group P.L.C. 401.2 1,683 Willis Re Inc. 383.0 945JLT Risk Solutions Ltd. 121.9 N/AHeath Lambert Group 98.0 384Towers Perrin Reinsurance 66.5 256BMS Group 34.0 232John B. Collins Associates Inc. 31.1 120HSBC Insurance Brokers Ltd. 28.7 1,694

Source: www.businessinsurance.com, January 2002