Anti Trust Policy. Anne Caliento Steve Moran NAMIC Underwriting Series - Module 14 Page 1 of 23

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1 Anne Caliento Steve Moran Anti Trust Policy Before we begin our meeting, please keep in mind that numerous state and Federal laws absolutely prohibit the exchange of information among competitors regarding price, refusals to deal, or agreements to proceed in certain anti competitive respects, and that no such exchange of this information is either sanctioned by NAMIC or will be permitted during our meeting. This is a very serious matter and your cooperation will be appreciated. Although the McCarran Ferguson Act has given a limited exemption to the insurance industry from certain otherwise prohibited activities, board members should realize that the exemption provided companies has definite limits and that NAMIC itself, as a trade association, has no such exemption. Activities, both in and out of the meeting room, are exempt only if they: a) involve the business of insurance; b) are regulated by state law; and c) do not constitute an agreement to boycott, coerce and/or intimidate or an act to further any of the three. Please note that legislative activities are protected by the 1st Amendment and are generally not subject to anti trust laws. Conviction for certain violations of the anti trust laws (Sherman Act, Clayton Act, FTC Act and Robinson Patman Act) often result in jail sentences, fines or both, even for first offenders who are otherwise leaders in their communities. Beside discussions involving any possible insurance market boycott, coercion and/or intimidation, which are never protected under any circumstances, here are some practices which you should not initiate nor participate in as they may expose you, your company, and NAMIC to possible anti trust investigation and/or prosecution by any state or the FTC or Justice Department. Discussing, sharing data or signaling with the purpose of agreeing to proceed in anti competitive respects in any of the following areas: Price, profits, commission, credit, or other terms or conditions of any products to be offered for sale. Reinsurance, salaries, or any other cost components and elements. Underwriting criteria with an eye toward standardizing. A market division plan without a state law covering the plan, including discussions of type or products to be offered, customers to whom insurance products may be sold or the territories in which they may be sold. Rates, the stabilizing of rates, or future rate plans including actuarial projections. Fair profit levels or developing standards for company operations. Keeping access to NAMIC membership unduly restrictive or denying unique services of NAMIC to nonmembers. Matters that would adversely affect availability of insurance or services to the public. Dealing or refusing to deal with certain customers or suppliers; business bidding practices; or dealings with any agency/ broker or other insurance market participant. Current or future company market place reactions to legislation or regulations. If any of the above occurs, you should object, have your objection noted in the minutes of any meeting and, if the discussion or practice continues, leave the room. Further, the prohibitions apply to discussions in an informal or social setting, not just regularly scheduled meetings. If you see any prohibited practices occurring in any NAMIC meeting or social event, please mention your concern to an officer of the Association NAMIC Underwriting Series - Module 14 Page 1 of 23

2 Asking Questions Thanks to our sponsors e2value can assist you with all of your Insurance-to-Value (ITV) and collateral value monitoring needs NAMIC Underwriting Series - Module 14 Page 2 of 23

3 Thank you to our sponsors NAS is a leader in cyber liability insurance solutions for mutual insurance companies, providing turnkey insurance and breach response services for the carrier s policyholders. Understanding Facultative Reinsurance Presented by: Anne Caliento & Steve Moran 2017 NAMIC Underwriting Series - Module 14 Page 3 of 23

4 Proprietary Notice The material contained in this presentation has been prepared solely for informational purposes by Gen Re. The material is based on sources believed to be reliable and/or from proprietary data developed by Gen Re, but we do not represent as to its accuracy or its completeness. The content of this presentation is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. A Little About Us Anne Started with GPF in Chicago in 1989 Boston Branch Underwriter since 1991 Graduated from Hope College in MI with a BA in Business Prior to Gen Re worked for the Four Seasons Hotel in Chicago Team Leader for REGIONAL Client Segment Property Steve Started with GCF in Kansas City in 2001 Casualty Branch Manager since 2009 Graduated from Westmar College in Iowa with a BA in Business Management Prior to Gen Re worked in Des Moines and Omaha with Travelers and ERC in KC Team Leader for REGIONAL Client Segment Casualty 2017 NAMIC Underwriting Series - Module 14 Page 4 of 23

5 Reinsurance Products Fac or Fiction Agenda Prop Fac Cas Fac Premium Distribution Scales Facultative Purchasing Examples Programs / Bundled Fac Takeaways Spectrum of Reinsurance Products Major Types of Reinsurance FACULTATIVE PROGRAMS TREATY Treaty Certain group or class of business reinsured under a single contract While in force, neither party has an option to ceding and assuming risk related to the business covered under the contract Pro Rata Excess of Loss Facultative Separate reinsurance contract negotiated on each risk The ceding company retains the right (faculty) to purchase reinsurance on an individual risk 2017 NAMIC Underwriting Series - Module 14 Page 5 of 23

6 Fac or Fiction What do YOU think of when you hear the word Fac? Fac or Fiction Facultative is only used by Stock Companies Using Facultative creates extra work for underwriters Facultative is additional cost and expense Facultative can turn a bad risk into a good risk Facultative is only useful for high excess capacity Facultative is only bought on fire perils Polling Time! 2017 NAMIC Underwriting Series - Module 14 Page 6 of 23

7 Fac or Fiction Can Facultative be a useful TOOL? Fac or Fiction Which of the following is True? List all that apply A. Facultative is a tool to help you grow your Business? B. The best layer to buy Facultative is the frequency layer. C. To help you retain your Business, you can buy facultative? D. Facultative coverage never pay claims? E. Facultative can help improve your underwriting? Motivations For Purchasing Facultative Grow Tough piece of otherwise acceptable account (carve out) Cover the gap between Treaty and net risk appetite New line of business Accommodation business for an important agent Retain Treaty exclusion Treaty protection Good risk with new severity exposures Good risk with recent large losses New / Difficult jurisdiction Improve Underwriting We see a wide scope of risks Underwriting expertise and second opinion Emerging issues 2017 NAMIC Underwriting Series - Module 14 Page 7 of 23

8 Fac or Fiction (I need a low quote) Property Coverages Perils Coverages All Risk Named Perils and EC Flood Wind Earthquake DIC Other, Personal Property, Business Income / Business Interruption Boiler and Machinery / Equipment Breakdown Inland Marine Service Interruption Contingent Time Element Other 2017 NAMIC Underwriting Series - Module 14 Page 8 of 23

9 Property Classes of Business From Homeowners to Petrochemical The Good, The Bad, The Ugly Residential / Homeowners Retail and Service Manufacturing / Processing Warehousing / Storage Auto Physical Damage Agricultural Vacant Properties Petrochemical, Pulp and paper, Semiconductor Fidelity and Crime Inland Marine Coverage Property Facultative Carve Out Examples FAC Helps You Reduce Volatility and Unknowns Spot location That one unique risk on a schedule Nat Cat Perils Flood, EQ, Wind, etc. Unprotected risks Impaired risks Builders risks Dealer s Open Lot Jewelry and fine arts (schedules and individual items) High-valued vehicles Transit Exposures (single trip and annual floaters) DIC Contractors Equipment 2017 NAMIC Underwriting Series - Module 14 Page 9 of 23

10 Casualty - The Basics The Common Stuff Auto GL Products Premises Umbrella Excess Liquor Liability OCP/RRP WC Specialty Lines EPLI Product Recall Med Mal E&O D&O LPL > Normal attachment is 500K > Up to 5M in capacity Casualty: Real Life Examples Workers Comp Regular Carve outs Industrial Aid Aircraft Transportation, Scuba divers, pit crews Auto UM only (perhaps in a certain state) Poor driver(s) (MVR) (Age) Carve-out of any and every vehicle type (Bus, limo, LHTT, 15 passenger van, etc.) GL Discontinued Products Tail / ERP coverage Designated events, locations, jobsites, states (NYLL) Umbrella Carve out auto or GL only, PERSONAL! Unique Risk or just near or related to what is unique for your appetite NAMIC Underwriting Series - Module 14 Page 10 of 23

11 Casualty Risk Information Provide your Reinsurance underwriter with the following: Name Insured and Location (city and state) Type of reinsurance needed ( AL, GL, WC, Umbrella) Limits you need quoted always think policy limit and layer reinsured ( Umbrella vs GL or both) Description of operations Exposures: Receipts, payroll, number of employees, fleet breakdown. Historical Loss experience ( currently valued) Casualty Premium Development Basics Your reinsurance underwriter will need the following: Provide the underlying premium for the line of coverage you want quoted: Auto $1M CSL $15,000 net or gross GL $1M/$1M/$2m/$2M $35,000 net or gross. Net means no commission - it is NOT included! Calculating for commission: Example If you get a net quote and want it to include commission. Auto $7,500 net and divided by.80 (20% commission) = $9,375 20% cedent commission To net a Gross number down take the gross premium $9,375 x.80 = $7,500 net NAMIC Underwriting Series - Module 14 Page 11 of 23

12 Casualty Rating Methods and Layering Reinsurance Underwriters use multiple methods to develop a quote. Manual Excess / Exposure Rating / Loss Rating / Layer Rating Each method has some credibility and judgment involved What Umbrella layers could look like: 1M xs Primary $35,000 1x2 $21,000 1x3 $ x4 $7,500 1x5 $5,000 5x5xP $12,500 or $2,500 per million 5x20xp $5,000 or $1,000 per million SCALES (Property) A Tool to Distribute Premium Advantages: -Simple to use - Accepted by the market Disadvantages: -Don t take into account individual risk characteristics -Don t allow discount or loading of premium based on underwriting information -Makes no consideration for $ amount attachment. -Some scales are not statistically based NAMIC Underwriting Series - Module 14 Page 12 of 23

13 Common Scales Lloyds Scales US Broker (Guy Carpenter) Scales Worldwide (Munich Re) Low Loss/High Loss Scales Ruth E Salzmann Scales (Ruthie) Ludwig Scales There are a myriad of other scales available Excess Layer Percentage across the different Scales 2017 NAMIC Underwriting Series - Module 14 Page 13 of 23

14 Excess Layer Percentage across the different Scales Prem. Distribution M.HgHaz RB RA Lloyds M.LowHaz Guy Carp Re te ntion SCALES No individual Risk fits a scale Office/Apartments Vs Warehouses Sprinklered Risks Construction PML Risks Summary Scales are used for Premium distribution Scales are not individually risk based Scales assume generic risk characteristics Scales can make a good guide for premium distribution Scales do not replace the individual underwriter Underwriting & Risk analysis is the key!!!!! 2017 NAMIC Underwriting Series - Module 14 Page 14 of 23

15 Premium Distribution Premium $ Catastrophes Error in PML PML Normal Loss Expectancy Premium $$$$$ Frequency # of losses Premium Distribution $13,046 $40,000 Total Premium $6,440 $2,920 $1,040 4M 80% 4M 4M 4M 4M 60% 2.6% 40% 7.3% 20% Ground up Rate (GUR) = Rate for 100% of the TIV $40,000 $20,000,000 (per hundred) =.20 GUR 16.1% 32.6% 20M TIV 2017 NAMIC Underwriting Series - Module 14 Page 15 of 23

16 Premium Distribution Premium = $3,520 Xs Rate =.088 Premium = $6,600 Xs Rate =.165 Premium = $1,040 Xs Rate =.026 Premium = $1,880 Xs Rate =.047 4M 4M 4M 4M 4M xs 16M 4M xs 12M 4M xs 8M 4M xs 4M Premium = $26,960 Xs Rate =.674 $40,000 Total Premium 4M Excess Rate = Rate for 100% of the Reinsurance Layer $1,040 Rein. Premium $4,000,000 (per hundred) Layer =.026 ($260 Net Per Mil) 20M TIV Multi Facultative Reinsurance Purchase I would like to discuss a multi building, residential property risk and the considerations an underwriter might want to take when buying facultative fire reinsurance. Questions I get asked a lot when a client has a multi building risk: - How much spread should there be between buildings? - Should I buy over all the buildings or just what I think are exposed? - What if I don t buy enough? Reinsurers should be able to help their client companies with these answers on a per-risk basis as really, each and every risk is different NAMIC Underwriting Series - Module 14 Page 16 of 23

17 Multi Reinsurance Examples Example 1 10 s with a maximum of 30 feet between each building Example 2 10 s - 4 buildings with 30 feet between and then a spread of 200 feet and the other 6 buildings with 30 feet between maximum Example 3 10 s with 150 feet between each building Each building in our example is $1,000,000 and is of frame construction and non-sprinklered. We are not in a brush or high wind area and shrubbery is normal. I say these disclaimers as a slight change in any of these areas could change our examples. For our purposes here we are focusing on the peril of fire only. In our example the client company retains 3,000,000. Example 1 Example 1 TIV of all 10 s is $10,000,000. There is 30 feet between each frame building Most would recommend treating this as 1 amount subject and buying up to the TIV Ft Separation Amount Subject Example 1: Ground up premium is $15,000 (.15 x $10M) Layer is $7,000,000 xs $3,000,000 7 Attachment is 30% - Lloyds says 21.9% goes to the reinsurance Premium is $ NAMIC Underwriting Series - Module 14 Page 17 of 23

18 Example 2 Example 2 TIV of all 10 buildings is $10,000,000 however there is 200 feet of separation between 4 blgs and 6 blgs. The clusters still only have 30 feet of separation between them. 1 Amount Subject Ft Separation 200 Ft Separation Ft Separation 200 feet of separation for most companies is sufficient to consider this 2 amount subjects. AS 1 is 4,000,000 and AS 2 is 6,000, Ft Separation 9 10 Example 2: Example 2: Ground up premium is $15,000 Layer is 3,000,000 xs 3,000,000 AS 1 of $4M we are attaching at 75%. Lloyds says 10% goes to the reinsurer = $600 AS 2 of $6M we are attaching at 50%. Lloyds says 15% goes to the reinsurer = $1350 Total premium is $1950 Example 3 Example 3 TIV of all buildings is $10M and there is 150 feet of separation between each feet of separation for most companies is sufficient to consider these all separate amount subjects from a fire point of view Company would buy No Fac Ft Separation NAMIC Underwriting Series - Module 14 Page 18 of 23

19 Programs FACULTATIVE PROGRAMS TREATY Pro Rata Excess of Loss What is a Facultative Program? Combines the Elements of Individual underwriting and pricing approach of Facultative reinsurance Guaranteed capacity and transactional efficiency of a Treaty 2017 NAMIC Underwriting Series - Module 14 Page 19 of 23

20 Benefits of a Facultative Program Easy to Use Internet based, company and program specific, Instantaneous Response Ability to quote, bind and endorse via the application Automatic access to guaranteed capacity for all risks within agreed parameters Customized specifically for your portfolio and needs Cost-effective, competitive pricing Efficient processing, expense savings Agreements are mutually reviewed each year Facultative Terminology Review What is a layer of reinsurance. The amount you want the reinsurer to quote. (Auto 500,000 xs 500,000 / Umbrella $5M xs $10m xs Primary/ Property all risk 5M xs 5M) What is a carve out, spot or lazar quote? Coverage for a specific exposure, not the entire risk. (Elderly driver, IAA, pool, liquor, product or premises, delivery units, Flood, EQ, Wind, single location) Terms and conditions ( these are the exclusions, limitations or specifics of coverage ) Buffer Layer (aka working layer means the limit within the primary policy) (Your policy limit is $1M CSL and the 500k xs 500k is the working layer quote request. You have a TIV of 20M but the PML is 10 and you buy a 5 xs 5 ) Direct Reinsurance You will deal direct with the underwriter that will quote the account Cedent A ceding company (ABC Mutual) who cedes liability to a reinsurer NAMIC Underwriting Series - Module 14 Page 20 of 23

21 Takeaways Facultative can help you GROW your business. Facultative s DIRECT distribution model ensures the highest quality underwriting interactions. Facultative PROGRAMS are an effective and efficient solution to guaranteed capacity and pricing. Facultative Certificates can be purchased for a VARIETY of risk transfer needs. (Grow/Retain/Improved) SCALES can be a helpful guide in helping you distribute facultative reinsurance premium. A facultative reinsurer is a great SECOND HEAD for pricing discussion in a changing marketplace. There are many ways to effectively PURCHASE facultative reinsurance and facultative underwriters are great resources to help you. Reinsurance Symposium 2016 Thank you! Anne Caliento / / acalien@genre.com Steve Moran / / smoran@genre.com 2017 NAMIC Underwriting Series - Module 14 Page 21 of 23

22 Asking Questions Upcoming Webinars: June 13, 2017 Emerging Farm Technology June 15, 2017 Equipment Breakdown: Who Needs It? June 20, 2017 Closing the Gap in Home Based Business Coverage July 12, 2017 The Importance of Insurance to Value in Cost Trends For more information, visit: NAMIC Underwriting Series - Module 14 Page 22 of 23

23 More webinars are coming soon NAMIC Underwriting Series - Module 14 Page 23 of 23