The Reinsurance Placement Cycle Session 507 Tuesday, June 9, 2015 1:30pm
Overview Interactive session among four parties: Insurance Company Reinsurance Company Reinsurance Broker Audience
Panel Members and Audience Participation Brad Bertsch Assistant Controller Brotherhood Mutual Insurance Company John Tarpey Vice President Everest Reinsurance Company James Brady Vice President Everest Reinsurance Company Christa Faustman Vice President BMS Intermediaries, Inc. Audience
Discussion Topics Why Reinsurance? Key Parties Reinsurance Brokers Reinsurance Placement Cycle
Why Reinsurance? Stabilization Competitiveness Increase Premium Volume Catastrophe Protection Manage Financial Ratios
Why Reinsurance: Stabilization Stabilize Company financial statements due to unforeseen loss severity and/or frequency. Prevents major swings in underwriting results Transfers high severity, low frequency losses
Why Reinsurance: Competitiveness Provide ceding Company with breadth of products and the necessary policy limit to be competitive. New lines of business or territories Increase primary policy limits
Why Reinsurance: Increase Premium Volume Provide ceding Company with ability to write additional business beyond the Company s own financial resources. Opportunity to write new business but has limited policyholder surplus Reinsurance helps manage growth opportunities while building policyholder surplus Rule of thumb: Insurance Companies normally keep direct written premium to a 3:1 ratio in line with policyholder surplus.
Why Reinsurance: Protection from Catastrophic Loss Protect ceding Company from loss of policyholder surplus due to catastrophic loss.
Why Reinsurance: Manage Financial Ratios Manage Company financial ratios used by rating organization and regulators to monitor health and performance of the insurance company. Reinsurance cessions can impact several operating ratios of an insurance company, for example:
Key Parties Insurance Company: party transferring all or part of the risk it has assumed Reinsurance Intermediary: Broker And/Or Broker Market Reinsurer Parties assuming the risk transferred. Direct Writing Reinsurer
Direct versus Broker Placement 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
Reinsurance Intermediary (Broker) Advocate for the Client Be informed about the Client Provide expertise on the reinsurance placement Market knowledge Communication Manage expectations of all parties Manage the relationships Reinsurance Brokers: Understand key exposures Analyze data to create most accurate and streamlined package of information for reinsurers Match ceding companies with reinsurers Negotiate terms in light of knowledge regarding best terms, conditions and rates Communicate timely, accurate and complete delivery of information that represents positions of parties at each end of reinsurance transaction
Reinsurance Placement Cycle Information Request Analysis of Exposure and Experience Analysis of Reinsurance Structure Selection of Reinsurers Submission to Reinsurers Evaluation of Quotes Issuance of Firm Order Terms Signed Lines Confirmation Year-round Servicing Contracts, Claims, Accounting etc.
Narratives & Financial Information Premium, Expense and Loss Information Claims Information Exposure Information Information Request Recent changes M&A activity Planned growth Underwriting guidelines Bios of key management personnel Claims guidelines (i.e. Catastrophe plan) BCAR statement Actuarial Report Annual Statement Projected, revised and historical subject premium Base rates and ILFs Projected and historical rate changes Schedule modifications Projected and historical expense and loss ratios by line of business Attritional Catastrophe Claims bordereaux Loss triangles Clash losses ECO / XPL losses Catastrophe losses Inflation factors Inuring reinsurance Other Catastrophe modeling data call Policy bordereaux Limits profiles Hazard, Use and Payroll Other information relating to specific lines of business Image source: www.gurufocus.com
Reinsurance Submission Key items for reinsurers Track record of Insurance Company Expertise of staff (management and operating) Lines of business Geographic areas Underwriting philosophy, practices and procedures Claims management IT / data quality Experience Exposure various profiles on portfolio or information regarding specific risk Reinsurance buying habits Key is to DIFFERENTIATE!!
Reinsurance Submission Continued Providing clean, consistent, coherent data that supports the position of the Company will often result in preferred pricing from the Reinsurer. Submission should include: Cover letter Overview of Company operations Profile of business Subject premium by line of business historical and projected Rate change Loss experience actual and as-if, if appropriate Contract wording sets the stage for negotiations
Pricing Methodologies Methodologies Exposure limits profiles, catastrophe modeling Experience trended and 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 contract terms Set appropriate limits and retentions as well as other appropriate pricing features Incumbent reinsurer experience Supply and demand
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
Evaluating Reinsurers Public financial information Ratings (A.M. Best / S&P) Knowledge of reinsurers underwriting philosophy (relationship versus opportunism) and expertise Reinsurer s claims payment ability Value added services Alignment of value propositions Reinsurer status (funding considerations) Traditional / Non Traditional Balance between relationship and price
Confirmation of Coverage Executed contracts Confirmation materials to Insurance Company Account Team Summary of terms Reinsurer participation Reinsurer financial data Copy of contracts and summary of changes Quote and authorization sheets Pricing analyses Experience Timeline
Post Placement Activities between Insurance Company and Broker Contracts contract certainty Assistance with rating agency discussions Assistance with SRQ, as needed Coordinate visits with Reinsurers Audits Special Acceptances Strategy for upcoming year
Please Complete the Session Evaluation Form on the Conference App
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
Forms & Functions of Reinsurance