reinsurance by roar rasten gard as 1 the nordic association of marine insurers

Reinsurance

By Roar Rasten Gard AS

1

The Nordic Association of Marine Insurers

Why a session on Reinsurance?

• All marine insurers are heavily reliant on reinsurance in their operations

• Both underwriting and claims handling are effected by the company’s reinsurance program and philosophy

• Insurance is the art of spreading risks and reinsurance is an important part of this

Goals for this session

• Discover why companies use reinsurance◦ Underwriting capacity

◦ Earnings volatility

◦ Capital protection

• Understand different types of reinsurance◦ Facultative reinsurance

◦ Treaty reinsurance; proportional and non-proportional

◦ Pool

• Reinsurance in practice, understand the impact of reinsurance◦ Quota Share

◦ Excess of loss with and without aggregate

Definition of risk

Risk is the potential for loss or failure to meet business objectives as a consequence of internal or external events

Risk CapacityThe ability to carry risks

• Demands:

◦ Regulatory requirements

◦ Market requirements (i.e. Rating)

◦ Capital providers requirements

◦ Other?

• Instruments:

◦ Capital

◦ Portfolio mixture

◦ Reinsurance

◦ Other?

Risk appetite

Risk appetite reflects the amount of risk taking that is acceptable to an organisation

An organisations risk appetite will shape its attitude towards risk taking and define level of exposure to specific risks or risk groups that the organisation is able to tolerate

Important factors for deciding the company’s risk appetite?

Reinsurance

• “Insurance of insurance companies”

◦ “Reinsurance is the transfer of parts of the hazards or a risk that a direct insurer assumes by way of insurance contracts or legal provision on behalf of an insured, to a second insurance carrier, the reinsurer, who has no contractual relationship with the insured.”

(M. Grossmann)

In distinction to co-insurance where the contractual relationship is between the insured and its co-insurers

Why reinsurance?

• Increase in underwriting capacity (maximum limit to be offered as risk transfer to a policyholder)

• Reduction in portfolio volatility (better balanced portfolio)

• Reduction in the economic effect of a catastrophe (accumulation of risks)

• Removal of unwanted risks

Reduced capital need

A reinsurer balance their book of business by taking on the same types of risk from many insurers.

Distribution of insurance risks

Policy holders

Insurance compromises

Reinsurers

Portfolio Exposure

Exposure

No of cover

Peak exposures

Max acceptable loss for own account

Basic: Reinsurance Forms

• Facultative reinsurance:◦ Facultative reinsurance is reinsurance for individual risks

• Obligatory Reinsurance◦ Obligatory reinsurance is treaty reinsurance for portfolios

• “Claims Pool”◦ A pool is not reinsurance but sharing of claims costs among a group of

insurers

Source: Swiss Re

Basic: Reinsurance Types

*Source: Swiss Re

• Proportional reinsurance The reinsurer’s share of premium is directly proportional to his obligation to pay claims*

• Non-proportional ReinsuranceThe reinsurer obliges himself to pay all losses above the deductable/excess amount up to a contractually defined cover limit*

• Alternative risk transfer (ART)Often organised as an instrument to smooth result over time

Reinsurance instruments

• Proportional reinsurance:◦ Facultative proportional reinsurance

◦ Quota Share treaty reinsurance

◦ Surplus treaty reinsurance

• Non-proportional reinsurance:◦ Facultative non-proportional reinsurance

◦ Excess of Loss treaty reinsurance

◦ Stop Loss

Facultative proportional Reinsurance per risk reinsurance

30%

70%

Buy out of top

exposure

Buy outof unwanted

risks

100%

“Fronting”of

Captive

80%

20%

Three examples where facultative proportional reinsurance is usedThe proportion is used both when sharing premium and claimsThe insurance conditions are often discussed with lead reinsurer before the policy are written

Quota Share

50%

50%

50%

50%

Premium Claims

Own account

Reinsuredshare

Quota Share

• Treaty capacity 50 million (exposure per risk; sum insured or PML)

• Placed share 50% (every risk is ceded 50%)• Overrider commission 10% (negotiable)

As long as the exposure of a risk is less than or equal to the treaty capacity the risk shall be ceded to the treaty and both premiums and claims are shared in the agreed proportions.

Quota Share Reinsurance 50 % Figures Gross QS reins. for ownfigures share account

Premium written 100.0 50.0- 50.0 Incurred claims 75.0- 37.5 37.5- Brokerage 10.0- 5.0 5.0- Own expenses/overrider comm.10%* 8.0- 5.0 3.0- Technical result 7.0 2.5- 4.5

* Negotiable

Quota Share and Fac

• If single risks have and exposure greater than the QS capacity the risks have to be reduced to the max limit before entered to the treaty.

• Proportional fac. is often used for this purpose

It is not seldom that facultative reinsurers are not paying overrider commission

Quota Share Reinsurance 50 % Figures Gross Ceded Figures QS reins. for ownfigures Fac. after Fac. share account

Premium written 110.0 10.0- 100.0 50.0- 50.0 Incurred claims 82.5- 7.5 75.0- 37.5 37.5- Commissions 11.0- 1.0 10.0- 5.0 5.0- Own expenses/overrider comm.* 8.8- 8.8- 5.0 3.8- Technical result 7.7 1.5- 6.2 2.5- 3.7

* Negotiable

Exercise 1 QS

• Program: 50% quota share with treaty capacity 50 million

• Brokerage Nil

• Overrider commission 10%

• Portfolio:

1. Exposure 50 million, premium 300.000

What will be the net* ceded premium to reinsurers?

The risk has a claim of 1 million , what is the claim recovery from reinsurers?

* Premium net of commissions

Exercise 1 QS

A 50% Quota share With a treaty capasity 50 millionOverrider 10%

Premium ClaimGross 300,000 Gross 1,000,000

Ceded Premium Ceded claimOverriderNet ceded -

Exercise 2 QS

• Program: 80% quota share with treaty capacity 50 million

• Brokerage Nil

• Overrider commission 10%

• Portfolio of 5 risks:





5. Exposure 50.000, Premium 1.000

Do we need to use Fac to reduce the exposure to the treaty?

What will be the net ceded premium to reinsurers?

Risk 2 has a claim of 1 million and risk 4 has a claim of 50.000. What is the total claims recovery from reinsurers?

Exercise 2 QS

Exercise 280 % Quota Share with capasity 50 mill

Brokerage nil, overrider commission 10 %

Ceded premiumGross Treaty Share ceded Share Premium Reinsurers Less Net ceded

Risk Exposure premium limit to Fac to treaty to QS share of prem. overrider premium1 75,000,000 750,000 50,000,000 2 50,000,000 300,000 50,000,000 3 30,000,000 200,000 50,000,000 4 2,000,000 20,000 50,000,000 5 50,000 1,000 50,000,000

Sum 1,271,000 - - - -

Recovery from reinsurersGross Treaty Share Claims Reinsurers

Risk Exposure Claims limit to treaty to QS 80% share1 75,000,000 - 50,000,000 - - 2 50,000,000 50,000,000 - - 3 30,000,000 50,000,000 - - 4 2,000,000 50,000,000 - - 5 50,000 50,000,000 - -

Sum - - -

Surplus treaty

• Each risk is ceded with an individual share

◦ Max retention for each risk is a fixed amount

◦ Ceded share is the share of the risk exceeding max retention

Example: A risk with exposure (PML) 100 Insurance company’s max retention 25 Ceded share to reinsurers (100-25)/100 = 75%

• Treaty capacity is often expressed in number of lines where one line in the company’s max retention

• Brokerage is ceded and claims recovered in the same per cent as premium

• Overrider is to be agreed

The Nordic Association of Marine Insurers 22

Surplus treaty

Each risk is ceded with an individual share

0

20

40

60

80

100

120

140

25%

50%

25%

29%

57%

14%

30%

60%

10%

33%

67%

38%

62%

43%

57%

60%

40%

75%

25%

100%

Fac. reinsurance

Reinsurance2 lines = 60

Own retention1 lines = 30

Exposure

Facultative non-proportional reinsuranceExcess of Loss (XL) per risk reinsurance

50

100Exposu

re

Expressed as:Cover is 50 in excess of 50 (deductable) The treaty covers claims in excess of deductable.For this the cedent pays an agreed premium.

Deductable

Reinsured

Excess of loss treaty. Cover all claims in an agreed portfolio for a limit in excess of underlying

0

20

40

60

80

100

120

This treaty is expressed as a treaty 80 excess of (xs) 20

Own retention

Reinsured

Excess of Loss premium

• Premiums are agreed and are not directly linked to portfolio premium◦ Often expressed as a RoL, meaning premium divided by

cover limit multiplied by 100. If you pay 300 for a limit of 1.000 the rate is 30 on line.

◦ Premiums are usually adjustable to portfolio premium. The premiums are agreed on a bases of an Estimated Premium Income (EPI). If the premium income increases in excess of EPI, the treaty premium increases with the same percentage.

◦ A minimum and deposit premium is often agreed

Excess of Loss Reinstatement premium

• When buying a XL-treaty you buy the right to draw on the reinsurers for claims in excess of underlying up to a full agreed limit.◦ The treaty 80 xs 20 gives you the right to collect 80 from the reinsurers if the

claim is 100 or more, or you can collect 20 from each of 5 claims which are 40, then the cover is exhausted.

• Usually it is agreed that after a claim you reinstate the cover by paying an additional premium (reinstatement premium). This can be expressed as:◦ 2 reinstatement at 100, meaning that you have the right and the obligation to

reinstate the cover two times by paying an additional premium equal to the original agreed premium for each reinstatement. The reinstatement premiums shall also be adjusted. There are also treaties with the wording: free and unlimited reinstatement meaning that no additional premium is charged and there are no restrictions to how many times you can use the limit.

0

20

40

60

80

100

120

Layered XL - program

1st layer

2nd layer

3rd layer

10 xs 10

30 xs 20

50 xs 50

Retention

0

20

40

60

80

100

120

140

160

Layered XL - program

1st layer

2nd layer

3rd layer

10 xs 10 XS 30 in the aggregate* with 2 reinstatement at 100

30 xs 20 with 2 reinstatement at 100

50 xs 50 with 2 reinstatement at 100

50 xs 100 with 1 reinstatement at 1004th layer

Retention

*In the aggregate; you can not collect from reinsurers before claims to layer exceeds the agreed aggregated amount

Exercise 3a XL-program

• 2 layered program:◦ 1st layer 10 xs 10 with 2 reinstatement at 100. Rate on line (RoL)

is 25.◦ 2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.◦ Minimum and deposit premium is equal to estimated premium

• What is estimated premium for layer 1 and 2?

Premium cost per layerLayer limit RoL M&D Prem.

12

Sum -

Exercise 3b XL-program


is 25.◦ 2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.◦ Total premium written is 66 million at the end of the year◦ There are no claims to the program

The program is adjustable at an Estimated Premium Income (EPI) of 60.

• What is the total adjusted premium for layer 1 and 2?

Premium cost per layer Adjustment AdjustedLayer limit RoL M&D Prem. rate premium

12

Sum - -

Exercise 4 XL-program



The program is adjustable at an EPI of 60.

• What is estimated premium for layer 1 and 2?• There are 3 large claims in the year: one is 30, the 2nd

one is 12 and the third is 15. Calculate the claim recovery from each layer.

Claims recovery per layerLayer 1 Layer 2

Retention 10 xs 10 30 xs 20 TotalClaim 1 30.0 Claim 2 12.0 Claim 3 15.0 Sum - - - 57.0




The program is adjustable at an EPI of 60.• What is estimated premium for layer 1 and 2?• There are 3 large claims in the year: one is 30, the 2nd

one is 12 and the third is 15. Calculate the claim recovery from each layer.

• What will be the reinstatement costs and the net recoveries from reinsurers?

Reinstatement premium per layerReinstate-

Layer ment Claim 1 Claim 2 Claim 3 Total Net recoveryRetention - Layer 1 2 at 100% - - - - - Layer 2 2 at 100% - - - - - Total - - - - -

Reinstatement payable



is 25.◦ 2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.

The program is adjustable at an EPI of 60. Minimum and deposit premium is equal to estimated premium.

• What is estimated premium for layer 1 and 2?• There are 3 large claims in the year: one is 30, the 2nd one is

12 and the third is 15. Calculate the claim recovery from each layer.

• What will be the reinstatement costs?

• The total premium income for the portfolio under the program has reached 66. Recalculate the premium for the program and the reinstatement premium (adjusted premium).


The Nordic Association of Marine Insurers 35

Adjustment premiumActual

EPI premium Adj. rate

Layer M&D Prem. Reinst. Prem. Pre adj. Prem Adj. Rate Adj. Prem Tot. Prem1 - - - 2 - - -

Sum - - - - -

Combination of Quota Share and Excess of Loss

• A Quota Share treaty will often leave the insurer with a possibility for unacceptably large losses.

• It is therefore common to protect the portfolio for own account after the Quota Share treaty by an Excess of Loss program.

• Example: A 50% Quota Share with capacity 100 where own retention is protected by an excess of loss program 40 xs 10.

Reinsurance security

• Ability and willingness to pay claims

◦ Rating

◦ Market approach (long term player or? History?)

◦ Long tail business?

◦ Ability to pay (Risk of default)

◦ Willingness to pay

The right reinsurance panel is important

Have we achieved?

• Discovering why companies use reinsurance◦ Underwriting capacity

◦ Earnings volatility

◦ Capital protection

• Understanding different types of reinsurance◦ Facultative reinsurance

◦ Treaty reinsurance; proportional and non-proportional

◦ Pool

• Reinsurance in practice, understanding the impact of reinsurance◦ Quota Share

◦ Excess of loss with and without aggregate

The Nordic Association of Marine Insurers39

reinsurance by roar rasten gard as 1 the nordic association of marine insurers

Documents

reinsurance types

nonproportional reinsurance

companys reinsurance

definition of risk risk

risk appetite risk appetite

types of risk

risk capacity

risk groups