Farm Mutual Reinsurance

Transcription

1 Farm Mutual Reinsurance Tuesday,, 12:15 p.m. Tim Hein Senior Vice President Platinum Underwriters Reinsurance Schaumburg, Ill. Tim Hein is a senior vice president at Platinum Underwriters Re, Inc., where he manages an underwriting team located in suburban Chicago. He began his career in 1980 at the St. Paul Fire & Marine as an actuarial trainee. He joined the pricing unit at Allstate Re in Tim subsequently moved to the underwriting side of the operation, holding trainee positions at Northbrook Property and Casualty s Rolling Meadows branch and Allstate s national accounts unit before rejoining Allstate Re as a treaty underwriter. He spent two years working at Allstate Re s London office, underwriting a book of U.S. casualty and international motor reinsurance. In 1997, Tim established a branch office for St. Paul Re, focusing on underwriting small- to medium-sized traditional property/casualty insurance companies across all treaty reinsurance products. That portfolio of business and team of insurance professionals were included within the 2002 IPO of Platinum Underwriters Reinsurance, Inc. He graduated from University of Wisconsin-River Falls with degrees in math and psychology. Tim also holds the CPCU and ARe designations and is a fellow of the Casualty Actuarial Society. Session Description: Drawing on more than thirty years of experience, our presenter will describe the changes he has observed in the global reinsurance market and draw parallels to changes in the farm mutual reinsurance market. Also to be discussed are reasons underwriters suggest for limiting their involvement in this space and ways companies can overcome some of those challenges. The market factors that impact the price of reinsurance will be explored as well.

2 Top Three Session Ideas Tools or tips you learned from this session and can apply back at the office

3 Farm Mutual Reinsurance Session Outline Overview Recent Changes in the Reinsurance Market Market Reconfigured Emphasis on Analytics Demise of Retrocession o Reinsurance Transaction o Retrocession Transaction Capital Markets o Early Adopters of Capital Market Solutions o Capital Market Participation in Catastrophe Facilities o Traditional Bonds vs. Catastrophe Bonds o Traditional Catastrophe Treaties vs. Catastrophe Bonds How These Changes Impact Farm Mutuals Reduction Insurance Aggregators Farm Mutuals and the Broader Reinsurance Market Barriers to Entry Lack of Insurance Products Size Matters Pricing Metrics Unlimited Coverage Less Retained Risk Less Pricing Power Questions Why is Reinsurance So Expensive? o Cost is Not Equal to Ceded Premium Reinsurance Premium is Front and Center Reinsurance Recoveries Reported Elsewhere o Loss Trends Trend Effect on Gross Losses Trend Effect on Net Losses Trend Effect on Excess Losses Leveraged Impact of Inflation o Risk/Return Gross Profit Margin Division of Profit? Return on Surplus Comparison What Makes a Company an Attractive Client? o Open Market o Reinsurers in General Long Term Results Long Term Equilibrium Results Measurement Framework

4 Questions & Answers Apply Technology to Underwriting Summarize Rate Changes by Year Data Quality

5 Farm Mutual Reinsurance Timothy Hein, FCAS, CPCU, Are Platinum Underwriters Reinsurance, Inc. Platinum Underwriters Group Platinum Underwriters Holdings, Ltd. (Bermuda) Platinum Underwriters Bermuda, Ltd (Bermuda) Platinum Underwriters Reinsurance, Inc. (U.S.) 2013 NAMIC Leadership Forum - Hein Page 1 of 26

6 Agenda Recent changes in the Reinsurance Market How these changes impact Farm Mutuals Barriers to Entry Questions Why is reinsurance so expensive? What makes a company an attractive client? Questions from the floor Recent Changes in Reinsurance Market Reconfigured Pressure on Results Recapitalize as Stand-Alone Reinsurers Some Diversification back to Specialty Primary 2013 NAMIC Leadership Forum - Hein Page 2 of 26

7 Recent Changes in Reinsurance Market Reconfigured Emphasis on Analytics Reinsurance Pricing Tools Financial Analysis / Retention Tools Increased Retentions by Cedants Recent Changes in Reinsurance Market Reconfigured Emphasis on Analytics Demise of Retrocession 2013 NAMIC Leadership Forum - Hein Page 3 of 26

8 Reinsurance Transaction Policy Primary Company Treaty Reinsurer Retrocession Transaction Treaty Reinsurer Retrocession Retrocessionaire 2013 NAMIC Leadership Forum - Hein Page 4 of 26

9 Recent Changes in Reinsurance Market Reconfigured Emphasis on Analytics Demise of Retrocession Capital Markets Loss Potential = Industry Surplus = $200 Billion US Bond Market = $31.2 Trillion Early Adopters of Capital Market Solutions 2013 NAMIC Leadership Forum - Hein Page 5 of 26

10 Capital Market Participation in Catastrophe Facilities Written Limit ($Bil) Traditional Bonds vs. Catastrophe Bonds Yield increases with duration Loss of Principal upon Default Riskiness measured by Financial Models / Rating Agencies Yield increases with catastrophe exposure Loss of Principal upon Cat Event Riskiness measured by Catastrophe Models Bond Yields both shortterm money rate plus catastrophe premium 2013 NAMIC Leadership Forum - Hein Page 6 of 26

11 Traditional Catastrophe Treaties vs. Catastrophe Bonds Annual Term All Perils Security based on Reinsurer s Rating Limit is immediately reinstated following loss Term ranges from 1 3 years May be single peril Security based on cash or near-cash equal to bond face amount Generally no reinstatement Recent Changes in Reinsurance Market Reconfigured Emphasis on Analytics Demise of Retrocession Capital Markets 2013 NAMIC Leadership Forum - Hein Page 7 of 26

12 Impact on Farm Mutual Reinsurers Reduction Guilderland Mutual Erie via Balis Pool aka RAP facility Columbia Mutual Cameron Mutual Impact on Farm Mutual Reinsurers Reduction Insurance Aggregators Mixed Primary and Reinsurance business Limited Reinsurance Scope Underwriting Operations Very Low Attachment Points Offer Ancillary Products Rely on Retrocession 2013 NAMIC Leadership Forum - Hein Page 8 of 26

13 Farm Mutuals and the Broader Reinsurance Market Barriers to Entry Lack of Insurance Products Size Matters Submission Count December November October September August July June May April March February January 2013 NAMIC Leadership Forum - Hein Page 9 of 26

14 Barriers to Entry Lack of Insurance Products Size Matters Pricing Metrics Rate on Line = Premium for Treaty / Limit of Treaty Profit on Line = Expected Profit for Treaty / Limit of Treaty Model Risk falls mostly on Reinsurers Barriers to Entry Lack of Insurance Products Size Matters Pricing Metrics Unlimited? Premium / => Rate on Line = 0% 2013 NAMIC Leadership Forum - Hein Page 10 of 26

15 Barriers to Entry Lack of Insurance Products Size Matters Pricing Metrics Unlimited Coverage Less Retained Risk Barriers to Entry Lack of Insurance Products Size Matters Pricing Metrics Unlimited Coverage Less Retained Risk Less Pricing Power 2013 NAMIC Leadership Forum - Hein Page 11 of 26

16 State of the Farm Mutual Reinsurance Market Specialty Reinsurers Retrocessional Support Barriers to Entry Why does Reinsurance Cost so Much? 2013 NAMIC Leadership Forum - Hein Page 12 of 26

17 Why is reinsurance so expensive? Cost Ceded Premium Reinsurance Premium is Front and Center 2013 NAMIC Leadership Forum - Hein Page 13 of 26

18 Reinsurance Recoveries Reported Elsewhere Why is reinsurance so expensive? Cost Ceded Premium Loss Trends Frequency Severity 2013 NAMIC Leadership Forum - Hein Page 14 of 26

19 Claim Number Incurred Loss 1 25, , , , , , , , , ,500 Trend Effect on Gross Losses Claim Incurred Trend Trended Number Loss Factor Loss 1 25, , , , , , , , , , , , , , , , , , , , , ,500 = NAMIC Leadership Forum - Hein Page 15 of 26

20 Trend Effect on Net Losses Claim Incurred Net Claim Incurred Trend Trended Net Number Loss Loss Number Loss Factor Loss Loss 1 25,000 25, , ,500 27, ,000 35, , ,500 38, ,000 50, , ,000 55, ,500 62, , ,750 68, ,000 75, , ,500 82, ,000 95, , , , , , , , , , , , , , , , , , , , , , , , , ,500 = 1.05 Trend Effect on Excess Losses Claim Incurred Excess Claim Incurred Trend Trended Excess Number Loss Loss Number Loss Factor Loss Loss 1 25, , , , , , , , , , , , , , , , , ,500 4, ,000 5, , ,500 15, ,000 25, , ,500 37, , , , , , , , , , , , ,000 = NAMIC Leadership Forum - Hein Page 16 of 26

21 Leveraged Impact of Inflation 1,000, , , , , , , , ,250 Nominal Trended 37% 5% Retained Ceded Why is reinsurance so expensive? Cost Ceded Premium Leveraged Effect of Inflation Risk / Return 2013 NAMIC Leadership Forum - Hein Page 17 of 26

22 Gross Profit Margin Gross Business Premium $1,000,000 Profit Margin 5.0% Profit $50,000 Division of Profit? Retained Business Premium $900,000 Profit Margin 4.5% Gross Business Profit $40,500 Premium $1,000,000 Profit Margin 5.0% Profit $50,000 Ceded Business Premium $100,000 Profit $9,500 Profit Margin 9.5% 2013 NAMIC Leadership Forum - Hein Page 18 of 26

23 Return on Surplus Comparison Retained Business Retained Business Premium $900,000 Premium $900,000 Profit Margin 4.5% Profit Margin 4.5% Gross Business Profit $40,500 Profit $40,500 Surplus $450,000 Premium $1,000,000 Profit on Surplus 9.0% Profit Margin 5.0% Profit $50,000 Ceded Business Ceded Business Premium $100,000 Premium $100,000 Profit $9,500 Profit $9,500 Profit Margin 9.5% Profit Margin 9.5% Surplus $100,000 Profit on Surplus 9.5% What Makes for an Attractive Reinsurance Client? Open Market Grow Move off 1/1/xx Drop unlimited 2013 NAMIC Leadership Forum - Hein Page 19 of 26

24 What Makes for an Attractive Reinsurance Client? Open Market Reinsurers in General Long Term Results Reinsurer makes money Company loses money Company makes money Reinsurer loses money 2013 NAMIC Leadership Forum - Hein Page 20 of 26

25 Long Term Equilibrium Reinsurer makes money Reinsurer loses a client We both have success Company loses money Company makes money We're both out of business Claims may not be paid Reinsurer loses money What Makes for an Attractive Reinsurance Client? Open Market Reinsurers in General Good Management Be Profitable 2013 NAMIC Leadership Forum - Hein Page 21 of 26

26 Results Measurement Framework Expense & Profit Risk/Casualty Cat/Aggregate Attritional Losses Retained by Company What Makes for an Attractive Reinsurance Client? Open Market Reinsurers in General Manage the business Be Profitable Keep up with the Market 2013 NAMIC Leadership Forum - Hein Page 22 of 26

27 Apply Technology to Underwriting Apply Technology to Underwriting 2013 NAMIC Leadership Forum - Hein Page 23 of 26

28 Summarize Rate Changes by Year West River Counties ( except for counties of Jones, Lyman, Tripp & Gregory): - Base rates for FO & HO increased 25% with exception of tenant forms which had a base rate change of 6% - Jones, Lyman, Tripp & Gregory Counties - HO base rate increase of 15%; FO rate increase is the same as East River Counties noted below East River Counties (Except for Yankton County) - Base rates on HO increased 10% except tenant forms which had a base rate increase of 6% - Base rates for Yankton increased 15% on HO and 6% on tenant forms - FO rate increases as follows for all counties East River including Yankton as well as Jones, Lyman, Tripp & Gregory counties: Dwelling - 4%; Out-buildings - 6%; Bins, Machine Sheds, & Pole Barns - 7% Irrigation Equipment - 25%; Intake of Rocks and Foreign Objects - 25% - Liability - base rate increase of 6% across the state in all counties Deductibles - $1,000 min deductible for all new FO & HO business effective April 15, 2012 Homeowners: +2% Farmowners: +4% What Makes for an Attractive Reinsurance Client? Open Market Reinsurers in General Manage the business Be Profitable Keep up with the Market Articulate the Impact of Your Actions Coverage or Deductible Rate Changes Expected Impact on Results 2013 NAMIC Leadership Forum - Hein Page 24 of 26

29 What Makes for an Attractive Reinsurance Client? Open Market Reinsurers in General Manage the business Data Quality Good data = better quote Good data may be complicated Row Crop Farm: PML = TIV? 2013 NAMIC Leadership Forum - Hein Page 25 of 26

30 Dairy Partnership: PML =?????? Questions? 2013 NAMIC Leadership Forum - Hein Page 26 of 26