The Reinsurance Placement Cycle

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2 Session 507 Tuesday, June 10, :45pm 3:15pm IASA 86 TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

3 Overview This will be an interactive session describing the placement of a reinsurance program from the perspective of an insurance company, a reinsurance broker and a reinsurer. Our goal is to allow each of you to positively impact your own reinsurance program following this session.

4 Panel Members Jason Sherman Director of Reinsurance, West Bend Mutual Katie Enslin Senior Vice President, BMS Intermediaries, Inc.

5 Agenda Key Parties Why Buy Reinsurance? Reinsurance Broker s Roles and Responsibilities Reinsurance Lifecycle Insurer Data Request & Reinsurance Submission Analysis of Exposure & Reinsurance Structure Pricing Methodologies Evaluating Reinsurers Finalizing Placement & Confirmation of Coverage

6 Key Parties Insurance Company / Carrier / Primary Company = Cedent or Ceding Company The party transferring all or part of the risk it has assumed to another organization Reinsurance Intermediary = Broker Reinsurer / R/I = Market The party assuming the risk from the Ceding Company

7 5 Reasons for Reinsurance Stabilize Company financial statements due to unforeseen loss severity and/or frequency Provide ceding Company with breadth of products and the necessary policy limit to be competitive Provide ceding Company the ability to write additional business beyond the Company s own financial resources Protect the Company from loss of policyholder surplus due to catastrophic loss Manage Company financial ratios used by rating organizations and regulators to monitor health and performance of the insurer

8 Stabilization Prevents major swings in underwriting results Transfer high severity, low frequency losses Keep the predictable, transfer the unpredictable Smoother results, quarterly protection for public companies

9 Competitiveness Company buys reinsurance to write new lines of business it is unfamiliar with, relying on Reinsurers knowledge base of appropriate rates, policy forms and underwriting guidelines Example: Insurance Company begins writing Surety insurance to complement its commercial book of contractors Reinsurance allows Company to increase primary policy limits to be competitive in the marketplace Example: Insurance Company needs to offer $1M limits on Auto policies where historically they have offered only $500K limits

10 Increase Premium Volume Company has opportunity to write a large amount of new business but has limited policyholder surplus (PHS) to support this new business Company buys reinsurance to manage growth opportunities while building policyholders surplus (PHS) Insurers normally keep direct written premium (DWP) to a 3:1 ratio in line with PHS

11 Property Catastrophe Protection Company faces significant loss of PHS due to catastrophic loss potential from its property portfolio Company may purchase specific catastrophe reinsurance to limit this severity exposure

12 Manage Financial Ratios Reinsurance cessions can impact several operating ratios of an insurance company, for example:

13 Buying Reinsurance Direct vs. Broker Direct Writing Reinsurer Professional reinsurer whose employees deal directly with primary insurers Frequently assumes 100% of a reinsurance program Reinsurance Intermediary A broker who negotiates reinsurance agreements between the primary insurer and one or more reinsurers Acts as agent of the ceding Company Usually has access to various reinsurance solutions from both domestic and international markets Can usually obtain reinsurance under favorable terms at a competitive price

14 Your Reinsurance Broker Advocate for the Client Be informed about the Client Understand key exposures Analyze the data to create the most accurate and streamlined package of information for reinsurers Provide expertise on the reinsurance placement Market knowledge Latest knowledge of best terms, conditions and rates Best matching the Cedent with partnering Reinsurers Communication Timely, accurate and complete delivery of information that represents the positions of both the Cedent and the Reinsurer Manage expectations of all parties Manage the relationships

15 Life of a Reinsurance Treaty Data Request to Cedent Maintenance: Special Acceptances, Visits, Audits etc. Analysis of Exposure / Experience Confirmation to Cedent Analysis of Reinsurance Structure Sign Lines and Finalize Contracts Selection of Markets (Marketing Visits) Distribute FOT and collect authorizations Submission to Reinsurer (Contract Wording) Evaluate Quotes / Develop FOT

16 Insurer Data Request Narratives & Financial Information Recent changes, M&A Activity, Planned Growth, Underwriting Guidelines, Biographies of Key Management Personnel, Claims Guidelines, BCAR Statement, Actuarial Report Premium, Expense and Loss Information Projected, Revised and Historical Subject Premium, Base Rates and ILFs, Projected and Historical Rate Changes, Schedule Modifications, Projected and Historical Expense and Loss Ratios (cat and attritional split if available) by Line of Business Claims Information Claims Bordeaux, Loss Triangles, Clash Losses, ECO / XPL Losses, Catastrophe Losses, Inflation factors and Inuring Reinsurance Exposure Catastrophe Modeling Data Call, Policy Bordereaux (Limits Profiles), Hazard, Use and Payroll Information

17 Reinsurance Submission Key Items for Reinsurers Track record of Company Expertise of staff (management and operating) Lines of business Geographic areas Underwriting philosophy, practices and procedures changes? Claims management IT / Data quality Reinsurance submission Reinsurance buying habits Differentiate!

18 Reinsurance Submission Providing clean, consistent, coherent data that supports the position of the Company will often result in preferred pricing from the Reinsurer Submissions should contain the following: Cover letter highlighting the critical issues and changes as well as the requested reinsurance structure for quoting, the desired outcome and a realistic timeframe for the placement Overview of Company operations containing history as well as planned changes Profile of business Historical and projected subject premium by state by LOB Rate change history Loss experience historical, actual and as if (if appropriate) Contract (important!)

19 Analysis of Reinsurance Structure Reinsurance Treaty Facultative Pro Rata Excess Pro Rata Excess Quota Share Property Per Risk Surplus Share Alternatives Casualty Excess Per Occurrence Excess Catastrophe Aggregate Excess Casualty or Property Stop Loss Casualty or Property A comprehensive reinsurance program requires creative use of all types of reinsurance

20 Pricing Methodologies Methodologies Exposure limits profiles, catastrophe modeling Experience trended & developed losses and on-level premium Portfolio / Industry reinsurance pricing Pricing Excess of Loss Pricing is separate from primary pricing Proportional pricing follows primary pricing but is impacted by ceding commission, commission adjustment, loss corridor, deficit /credit carryforwards, loss occurrence caps, loss ratio caps, per cession deductibles, etc. Set appropriate limits and retentions as well as other appropriate pricing features Incumbent reinsurer experience Supply and demand

21 Evaluating Reinsurers Public financial information (additional information often provided by Brokers) Ratings (A.M. Best / S&P) Knowledge of reinsurers underwriting philosophy (relationship vs opportunism) and expertise Reinsurer s claims payment ability and promptness Value added services Value propositions aligned Admitted status (funding considerations) & collateralized Traditional / Non-traditional Balance between relationship and price

22 Confirmation of Coverage Executed Contracts Confirmation Materials to Company Account Team Summary of Terms including structure chart Summary of Terrorism coverage (if applicable) Reinsurer Participations by Percentage, Limit, Ceded Premium and Ratings (financial strength) Reinsurer financial data Copy of contracts and summary of changes Copy of pertinent quote sheets and authorization sheets Copy of actuarial work and catastrophe modeling summaries Contract Experience by contract and reinsurer Upcoming timeline

23 Post Placement Activities Contracts contract certainty Assistance with rating agency discussions Assistance with SRQ Coordinate visits with Reinsurers Audits Special acceptances Strategy for upcoming year

24 Please Complete the Session Evaluation Form on the Conference App and Include Your Conference Registration ID# to be Included in a Drawing for a Free Conference Registration for the 2014 Annual Conference! NOTE: Your Conference Registration ID# is Located at the Bottom Left Hand Corner of Your Badge. IASA 86 TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

25 Appendix Reinsurance Structure Treaty Covers entire portfolio single or multiple lines of business Examples Property Per Risk, Casualty Per Occurrence, Property Cats Can be assumed by a single reinsurer or syndicated to many R/I s Premiums processed usually quarterly, losses reported and settled either via a bordereaux or individually. Broker market R/I have largest market share Facultative Pertains to an individual risk or policy Examples High value property risk, unique liability or high limit Umbrella Can be written by a single reinsurer or syndicated to many R/I s Individual certificates, premiums and losses processed individually Generally labor intensive Direct writers have largest market share

26 Appendix Forms & Functions of Reinsurance