Preparing for a Successful Reinsurance Meeting Tuesday, September 24, 2013, 1:00 p.m. David Thomas Managing Director Guy Carpenter & Company, LLC Philadelphia, Pa. David Thomas is a managing director in Guy Carpenter & Company, LLC's Philadelphia office. He is responsible for the management and placement of the firm's treaty regional accounts program, which includes overseeing the marketing, broking, and administrative aspects of the program for all Guy Carpenter offices. David also manages the broking activities of the firm's Albany, New York, office and services a book of larger regional property/casualty accounts and various prospects. David initiated his reinsurance career in 1980 at Guy Carpenter s subsidiary, Balis & Company, Inc. He also served as a member of the board of directors of Guilderland Reinsurance Company, a subsidiary of Excess Reinsurance Company in Wilmington, Delaware. David is a graduate of Temple University, where he earned a Bachelor of Science in business administration and accounting.
PREPARING FOR A SUCCESSFUL REINSURANCE MEETING SEPTEMBER 24, 2013 David A. Thomas Managing Director Today, you will learn 1. What reinsurance programs are available for companies like yours 2. How reinsurers make business decisions 3. How to make your company attractive to a reinsurer 4. How to evaluate a potential reinsurance partner 2013 NAMIC Annual Convention - Thomas Page 1 of 13 1
Regional insurers are increasingly attractive to reinsurers Why? Your business is valuable to them because it is stable and less risky. R 2 5 reasons reinsurers like small regionals: 1. Drive past the risks they insure Better risk selection 2. Easy to understand Common regulatory requirements minimizes the learning curve 3. Cat exposure is easier to manage Exposures normally don t aggregate with other exposures 1 2 3 4. Reinsurance is vital to protect surplus Consistent rather than opportunistic buyers 5. Preponderance of personal lines premium (>75%) Less hazardous business to write 2013 NAMIC Annual Convention - Thomas Page 2 of 13 4 5 3
Available products Whole Account traditional Aggregate/Stop Loss protection Unlimited catastrophe/aggregate protection (when required by state law) Per Risk/Occurrence protection with Free and Unlimited Reinstatements Programs that avoid large minimum property/casualty facultative premiums Ability to enhance current product offering through 100% reinsurance relationship Ability to expand current offering on Company paper i.e., Umbrella There is appetite for products not necessarily available to others. 4 Reinsurer pricing should reflect unique characteristics of the small, regional company business Business Characteristic Pricing Implication Shorter Tail, Less Risky Exposure Lower Overall Limits = = Can Target Lower Margin Ties Up Less Capital Reinsurers should also consider the overall profitability of the relationship rather than taking a program by program approach. 2013 NAMIC Annual Convention - Thomas Page 3 of 13 5
Today, you will learn 1. What reinsurance programs are available for companies like yours 2. How reinsurers make business decisions 3. How to make your company attractive to a reinsurer 4. How to evaluate a potential reinsurance partner 6 2 RULES 1 Reinsurers hate uncertainty. 2 Reread rule # 1. ER Reduce uncertainty to generate the best terms. 2013 NAMIC Annual Convention - Thomas Page 4 of 13 7
5 principles to guide your dealings with reinsurers: 1. Assume reinsurance underwriters don t understand how a small regional company works 2. Be able to articulate your business plan confidently 3. Be prepared anticipate potential questions 4. Fully disclose relevant information 5. Respond to reinsurers inquiries promptly 1 2 3 4 5 There are no right or wrong answers, but having no answer creates uncertainty. 8 What to expect in a meeting with a reinsurance market Don t assume an understanding of historical experience/future needs Provide an update on all activities, especially exposure and pricing changes Be prepared for loss activity to potentially impact current structure and pricing Expect options if only to validate current structure as well as supporting analysis Be sure to understand how coverage responds in event of loss Anticipate that the reinsurer will be influenced by your track record, financial position, staff experience and capabilities 2013 NAMIC Annual Convention - Thomas Page 5 of 13 9
Regarding prospective markets Be prepared for the reinsurer to assess cost/benefit of quoting new business Non AM Best rated company may require special acceptance Non NAIC reporting company may present challenges for pricing Expect the prospective reinsurer to ask if there are openings on program and why Anticipate that the reinsurer will request current structure and rates 10 Today, you will learn 1. What reinsurance programs are available for companies like yours 2. How reinsurers make business decisions 3. How to make your company attractive to a reinsurer 4. How to evaluate a potential reinsurance partner 11 2013 NAMIC Annual Convention - Thomas Page 6 of 13
Remember rule # 1; be prepared! Conduct a thorough assessment in advance covering: Underwriting Claims Risk management Regulatory restrictions Market trends 12 How to gain a reinsurer s confidence 1. Underwriting What is targeted combined/operating ratio? Current underwriting results, both individual risk and catastrophic Underwriting expenses, fixed and variable What are the historical trends in underwriting results anything noticeable by line of business, agent, territory? Is there a plan in place to regularly review rates? Do rates include a margin for catastrophe losses and profit? Any new product offerings in last 5 years, or any plans to? Reinsurers want some assurance that the company can make an underwriting profit. 2013 NAMIC Annual Convention - Thomas Page 7 of 13 13
How to gain a reinsurer s confidence 1. Underwriting Is there a process in place to review the inforce book in order to manage exposure? Insurance to value, automatic inflation guard, deductibles all perils, windstorm, hurricane, earthquake Are agent regularly reviewed? target loss ratio, agency rehabilitation, cancellation, agency contingency program Reinsurers want some assurance that the company can make an underwriting profit. 14 How to gain a reinsurer s confidence 2. Claims Management Use of inside/outside adjustors control of claims process Can sufficient information be provided for reinsurer to evaluate a claim? What about subrogation? fraud detection? What are the company s reserving practices property and casualty? Are there procedures in place for catastrophe claims management? Is company in compliance with relevant legal and regulatory requirements? Is there a claims handling manual to ensure consistency? Is there a co-ordinated process in place to avoid negative surprises such as a potential bad faith claim? Reinsurers are looking to determine that valid claims are being handled consistently and appropriately. 2013 NAMIC Annual Convention - Thomas Page 8 of 13 15
How to gain a reinsurer s confidence 3. Risk Management Property Per Risk retention: 1.0% of total premium, surplus, limits offered? Catastrophe retention: 5% of Property Premium, 10% of Surplus? How does Company compare to peers? Limitation of Total Insured Value by zip code, township, county Probabilistic modeling looks at thousands of possible events Deterministic modeling what if another Joplin occurs? Are average expected catastrophe results built into Company s business plan? Reinsurers will expect the company to be able to clearly articulate its risk tolerance. 16 How to gain a reinsurer s confidence 4. Regulatory Restrictions Maximum net expense ratio (42.5%) When multi-state, maintaining minimum (or maximum) state % of writings (where required) Maximum loss in surplus any one year (15%- 20%) 100% reinsurance for specific lines (Section II HO) Unlimited catastrophe or aggregate reinsurance Direct lines that can t be offered (regulatory, expertise, size) Reinsurers need to be aware of restrictions that will impact the reinsurance structure. 2013 NAMIC Annual Convention - Thomas Page 9 of 13 17
How to gain a reinsurer s confidence 5. Market Trends Where are we in the market cycle and how long will it continue? Ability to take rate increases? Are we seeing growth in specific product line? Is there a reason? Can surplus support growth? and how is growth measured unit count, premium? Can company support limits required? do they have needed expertise? Is company s ability to succeed constrained by state charter, size of company? Does company information technology infrastructure support current operations? growth plans? Your reinsurer should offer a solution that supports your current operations and facilitates your future plans. 18 Today, you will learn 1. What reinsurance programs are available for companies like yours 2. How reinsurers make business decisions 3. How to make your company attractive to a reinsurer 4. How to evaluate a potential reinsurance partner 2013 NAMIC Annual Convention - Thomas Page 10 of 13 19
Important considerations from your perspective Will the reinsurer be there to pay claims when necessary? Is the reinsurer committed to my business and the small company marketplace for the long-term? Will the reinsurer s approach to pricing be consistent from year to year? Am I able to maintain the flexibility to make the best business decisions for my company? 20 Reinsurer evaluation criteria Y / N Surplus i.e., minimum $250mm for Property, $500mm for Casualty? Admitted carrier in state of domicile (eliminates need for Letters of Credit)? Strength of rating agency (AM Best and S&P) rating and outlook, i.e., A- or better? Claims payment turnaround? Track record in small mutual marketplace new player or committed to long term? Minimum premium or share of program requirements? Ability to provide a range of reinsurance products? Does reinsurer provide value added services to support your business? 2013 NAMIC Annual Convention - Thomas Page 11 of 13 21
Services to expect from a reinsurance partner Y / N Catastrophe modeling, portfolio management Primary rate indication Industry perspective (peer analysis) Experience and exposure rating (understand drivers of reinsurance rates) Policy form, underwriting and claims file reviews Legal and regulatory guidance Perspective on emerging issues Risk transfer analysis 22 have Today, you will learn ed 1. What reinsurance programs are available for companies like yours Capacity is available for small regional companies. 2. How reinsurers make business decisions Reinsurers hate uncertainty. 3. How to make your company attractive to a reinsurer Reduce uncertainty by doing your homework. 4. How to evaluate a potential reinsurance partner Select a partner that is able and willing to meet its financial obligations. 2013 NAMIC Annual Convention - Thomas Page 12 of 13 23
Questions? 24 2013 NAMIC Annual Convention - Thomas Page 13 of 13