Retrospective Reinsurance unlocking value in the balance sheet

Transcription

1 Retrospective Reinsurance unlocking value in the balance sheet Warren Dresner and Grant Hollyman Aon Benfield Australia

2 Agenda Run-off possible solutions Statutory Transfers Loss Portfolio Transfers Adverse Development Covers What s in it for you? Reinsurance security

3 Run-off Possible solutions Sale Total Finality Statutory Transfer (Part III) Scheme of Arrangement Immediate finality Usually lengthy process Potentially expensive Execution risk Reinsurance Loss Portfolio Transfer Adverse Development Cover Blended Solutions No immediate finality Cheap, quick and reduced supervision Credit and residual risk Ongoing Management Claims settlement Commutation No immediate finality Commutation can speed up the process Uncertainty of cost spread over time

4 Total Finality Statutory Transfers in Australia Transfer policyholder obligations under Part III of the Insurance Act Move all liabilities off balance sheet to third party balance sheet Notify policyholders of this and new balance sheet obligations Signed off by the court subject to the views of an independent expert Advantages Removes burden of running off portfolio over time Flexibility Cost can be below expected loss cost depending on acquirer s view of risk Disadvantages Regulatory and legal costs Requires up front expense and resource during the transfer process Regulators may require communication of transaction details to all policyholders

5 Case Study One: Statutory Transfer The Event: Company A has legacy portfolio expired 1993 Motivation: Company A wish to free resources and release tied up capital Outstanding Loss Reserves: $15,000,000 Discounted Loss Reserves: $13,000,000 Independent valuation completed and $13,000,000 transfer premium agreed. Policyholders notified Court agreed Transaction completed

6 Reinsurance Adverse Development Cover (ADC) In-the-money or Out-of-the-money Provides stop loss protection Premium will reflect likelihood and magnitude of any adverse deterioration of reserves 99.5% 80% 75% ADC solution Reserve level Probability p for loss scenario ADC solution 50% Best estimate loss burden 0 Reserve level Ultimate Loss

7 Case Study Two: Adverse Development Cover (ADC) The Event: Company A has CTP liabilities from Portfolio in Run-off Motivation: Company A wishes to cap their potential liability at $12.5m Discounted Loss Reserves: $10,000,000 Attachment of ADC: $12,500,000 (25% on top of estimated loss) Layer: $10,000,000 xs $12,500,000 Premium: $1,000,000

8 Reinsurance Loss Portfolio Transfer (LPT) Protection from ground up, subject to a limit Insurer usually required to take co-insurance line Premium = claims reserves + investment income + claims deterioration risk charge Some capital reserve will need to be retained Credit risk + residual risk of burning through limit 99.5% 80% 75% LPT solution Reserve level Probability p for loss scenario LPT solution 50% Best estimate loss burden 0 Reserve level Ultimate Loss

9 Case Study Three: Loss Portfolio Transfer The Event: Company A has Workers Compensation Portfolio Portfolio in Run-off Motivation: Company A does not want the retained volatility and capital cost of running off liabilities Discounted Loss Reserves $10,000,000 Limit: $25,000,000 Premium: $11,500,000 (estimate loss + profit + expenses)

10 What s in it for you Depending on the solution complete finality is achievable At a minimum liabilities can be capped at a level sleep easy Cost can be below expected loss cost depending on acquirer s view of risk Release tied up capital Free up management time Favourable regulatory / rating agency view of portfolio

11 Retrospective reinsurance Reinsurance security Normally long tail liabilities Expertise required to audit / estimate and price account Very time intensive Security paramount As a rule: Minimum A+ (S&P Rating) APRA engagement required (particularly for LPT, Statutory Transfer) Claims management how is it going to work?

12 Must be a strategic decision Conclusion Process is extensive and time consuming Reinsurers will want to know everything about the business Partnership (ADC/LPT) There is appetite from Reinsurers