Session 6A Seven Popular Ways to Screw up your Reinsurance Program. Greg Solomon, FIA

Transcription

1 Session 6A Seven Popular Ways to Screw up your Reinsurance Program Greg Solomon, FIA

2 The SOA Asia-Pacific Annual Symposium 6-7 July 2017 Seven Popular Ways to Screw up your Reinsurance Program Greg Solomon Managing Director, Willis Towers Watson Head of Life & Health for Willis Re International 2

3 Reinsurance is a Tool It s a big industry (around US$100bn premium pa for L&H) It has many benefits: Enhance profitability Reduce volatility Optimise solvency Risk management ALM solutions Second opinion Access to services like u/w, claims, product development And more 3 Reinsurance is a Habit Reinsurance could be a tool It should be a tool But it s surprising how often reinsurance is done in a certain way simply because it has always been done that way without considering if it s still appropriate Where on the scale is your reinsurance program? eliminates value exists pointlessly effective efficient 4

4 Actuaries How we work out which mobile phone contract to enter into How we justify the reinsurance program we use (OK, I m being a little flippant, but let me explain what I mean ) 5 Seven Popular Ways to Screw up your Reinsurance Program I m not here to bash the reinsurers Nor the insurers! The focus of this session is to highlight what may be missed, either by insurers or by reinsurers The goal is to make reinsurance more useful and indeed more sustainable 6

5 You* I refer to You in this presentation Of course I don t mean are doing everything right I mean the others who are getting things wrong 7 #1. You have no idea where you re going In the financial statements and risk appetite statements of insurers, they make reference to three dimensions (or vectors ): Subject to an acceptable level of risk of insolvency, we aim to manage our business in a way which maximises our profitability, while still managing volatility of results There are many variations on this theme, and it s worth comparing how companies communicate this 8

6 1.1 (direction) Questions for the audience: What city are we in? Will the MYR/USD strengthen in the next 3 months? Did you read your company s most recent financial report? What RoC did your Chairman promise your shareholders? What RoC must you achieve on new health products? By C, do you mean regulatory, ratings or risk? Do you use VAR or TailVar? What s the biggest loss your shareholders would accept in the next 10 years? How much could your solvency dip this year without upsetting the analysts? (direction) Risk management & Strategy must be aligned Risk appetite / tolerance affects what strategy is possible, and chosen strategy affects the operational aspects of determining risk appetite & tolerance Minimise, Maximise, Optimise, Subject-to, Exploit If you don t know where you re going, how can you know whether reinsurance or indeed any other tool that you re using is making things better, or making things much much worse? 10

7 #2. You don t know why you need reinsurance Before we go into detail, we need to differentiate between: Needful reinsurance Reinsurance as a payment for services (why reinsurance?) So you know where you re going, well done Reinsurance is a fundamental tool for managing risk, and managing profitability, volatility, solvency If your reinsurance program isn t explicitly developed in relation to your corporate strategy, then you re either missing a trick to make things better or you might be making things worse without realising it 12

8 2.2 (why reinsurance?) Solvency Profitability Volatility The Actuarial Vectors represent the 3 key financial dimensions There are 3 of them Seriously It s amazing how many decisions are made without reference to all 3 of these vectors There are, after all, 3 of them (why reinsurance?) Profitability Profitability: average year Volatility: 1:10? 1:40? Solvency: 1:200 Solvency Volatility Regulatory, Economic GAAP, IFRS, book $ % RoRAC, RARoC VAR, TailVAR 14

9 2.4 (why reinsurance?) Example mistakes: We re big enough to survive a cat event, so we won t buy cat cover If we reinsure then we give away profits, so we won t reinsure Risk? Arghhh! (why reinsurance?) It s relatively easy to model these various financial measures It s much harder to optimise the vectors Even a 2D efficient frontier is hard to optimise You cannot begin optimising without constraining Source: 16

10 2.6 (why reinsurance?) The biggest macro miss seems to be 30% 40% 20% 10% 0% 20% 0% -10% (20%) -20% -30% (40%) -40% -50% -60% (60%) (80%) -70% Q4 14 Q4 15 Interest Rates +50bps Interest Rates -50bps Equity Market +30% Equity Market -30% Credit Spread +100bps Interest Rates +50bps Interest Rates -50bps Equity Markets +25% Equity Markets -25% Credit Spread +100bps (why reinsurance?) Services are a good reason for buying reinsurance Medical underwriting manual, Automated underwriting systems, Product design & pricing support, Research, DMTM, Wellness programs, Behavioural economics The reinsurer may require a fairly large quota share as fee-for-service You may thus be indifferent to the impact on volatility or solvency due to the reinsurance, as long as you get the services But at least be clear on what the impact is on profitability 18

11 #3. You aren t taking all your people into account CEO, CFO, CRO, AA, COO different priorities wrt the Vectors eg. Taiwan financing deal Product Actuary Valuation Actuary use less capital vs idle capital eg. 5 months of work down the drain Valuation Actuary Product Actuary having too much capital eg. opportunity to launch riskier product 19 #4. You re not talking to the right reinsurers You are different from your competitors And various reinsurers are different to each other risk appetite, pricing, diversification, skill sets, country experience, guarantees, etc. Are you speaking to the reinsurers who speak with you, or do you have access to a wider range of options? Are you sure what you want is not available out there? In your case, is it best to transact with one reinsurer? Two? A preferred panel? A fixed panel? 20

12 4.1 (reinsurers) Examples might include: our client thought that reinsurers couldn t offer while of life rate guarantees on cancer or critical illness some reinsurers you spoke with won t offer investment guarantees, so obviously none of them will?? big reinsurers are best for offering pandemic cover?? neither surplus nor stop-loss are available for medex?? 21 #5. You re using the wrong structure & terms If you know where you re going, and what financial metrics you re trying to optimise, and what services you need, if you ve spoken to everyone internally, and you ve approached the right reinsurers then this won t be a problem Simple But for everyone else 22

13 5.1 (wrong structure) Proportional vs Non-proportional (wrong structure) Risk premium vs Level premium 24

14 5.3 (wrong structure) Time 0: cash cashless nothing (wrong structure) Smoothing volatility 26

15 5.5 (wrong structure) Profit commission: eliminate the downside only (wrong structure) Rate guarantees 28

16 5.7 (wrong structure) Recapture clauses (wrong structure) Termination clauses 30

17 #6. Your contract wording sucks* (by sucks I mean is less than optimal ) This is different to getting the structure wrong There are a range of points on the scale: bad grammar & spelling ok confusing wording we re adults, we can resolve wrong wording - arbitration might solve it easily unintended consequences argh! think 9/11 (was it one event or two?) RGA vs Metlife (the most recent life example I m aware of, concerning events leading to a claim ) (contract wording) Signature date, Effective date, New business date, Coverage date In the [reasonable] opinion of [someone] Significant? Material? What events trigger what events? Multiple (and conflicting!) use of the same term There are advantages of using both actuaries and lawyers to write treaty contracts 32

18 #7. You re looking for something that isn t sustainable This applies to both the buyer and the seller Business is business, it s OK for BOTH sides to negotiate One party may bully the other into accepting terms Partnership is nice, but Win-win is nice, but There is value in an ongoing relationship but not to the point where that becomes the goal 33 Conclusion Reinsurance should be a tool not a habit There are some easy take-aways from this But some of the ideas involve a fair amount of work The upside is substantial put in place a reinsurance program that meets your various financial & service needs, which themselves have been set up to align with your corporate strategy 34

19 Contact Details 35