Reinsurance for Group Captives and RRGs. VCIA All Rights Reserved

Reinsurance for Group Captives and RRGs VCIA All Rights Reserved

Kathryn Westover, Community Blood Centers Exchange Risk Retention Group & Innovative Captive Strategies, Inc. Paul Hearn, Aon Benfield Moderator - William Hodson, USA Risk Group 1

Best Practices and Procedures of Reinsurance Intermediaries 2

General Documentation Mutual Confidentiality or Non Disclosure Agreement Confidential Information may include but not be limited to: Financial information and analyses Underwriting and Pricing Information Reinsurance Structure and Design Information Business Strategies, Loss Data. Models and Modeling Results, Actuarial Analyses, Claim Files, Expiration Dates, Client Lists 3

General Documentation Engagement Letter Services Structuring and placing the reinsurance As appropriate and agreed - actuarial analysis of reinsurance options, catastrophe modeling, rating agency modeling, financial modeling Reinsurance accounting and claims processing Reinsurance market updates, summaries of catastrophe events, reports on key legislative developments, etc. 4

General Documentation Engagement Letter (Cont.) Compensation Disclosure Materials Preparation of reinsurance submissions and other relevant documents and materials Fiduciary Funds Disclosure of Reinsurer relationships, investments that the reinsurance intermediary may have. Termination 5

Documentation Sent to Client Client Approval in writing of: Submission to be sent the Reinsurers A proposed Marketing List including every Reinsurer who will be approached along with basic Security information about each Reinsurer, including at a minimum their AM Best rating their S&P rating if applicable their Policyholders Surplus or the equivalent Draft Contract Wording(s) 6

Documentation Sent to Client Brokerage including brokerage to be earned by any co-broker and confirmation that co-brokers will only be used in order to access markets that are either more competitive in terms of pricing, structure, terms and conditions 7

Quotations / Indications Any Reinsurer providing a quotation or an indication provided subject to a best pricing, best terms or similar condition will be advised in writing that their quotation/indication will be presented to the Client but that any best pricing or similar subjectivity will not be considered All written and oral quotations / indications including Terms and Conditions will be provided to the Client 8

Firm Order Terms - Client Summary of proposed FOT s sent to the Client Client approves the FOT s in writing Client approves revised contract wording which reflects the FOT s 9

Firm Order Terms - Markets Confirmation to the markets that the FOT s supercede any other Terms and Conditions provided earlier by the markets Markets provided with the revised contract wording that reflect the FOT s 10

Marketing Results If needed, Client approves in writing any markets not included in the originally approved marketing list Written disclosure of all marketing results to the client including authorizations, declinations and non-responses 11

Prior to Binding / Signing Lines Client is provided with suggested Signed Lines for each market Client approval of Signed Lines 12

Confirmation of Signed Lines Markets are advised of their Signed Lines and provided a Final Contract Wording Markets are asked to confirm their agreement to their Signed Lines and to the Final Contract Wording. 13

The Case Study 14

Case Study Background 15

Who is BCx? An RRG formed in 1993 in response to hard market + emergence of HIV Commercial liability insurers withdrawal from tough classes of business Owned by independent tax exempt community blood centers Insured profile: very small deductibles, no internal risk management staff Founding members were Blood Center CEOs typically risk averse 16

Who Would Reinsure This Group!!! Average premium per insured in years 1-5 was less than $80k Written premium years 1-5 was less than $3mm RRG only raised enough capital to retain $100,000 (xs insureds $5k-10k SIRs) No credible loss forecasts (historical severity not frequency) No industry data for an actuary to use 17

Initial Placement Requirements 18

Demonstration of Commitment RRG executives met with reinsurers Founding members provided Good Samaritan Notes Policy was assessable 10 year Golden Handcuffs Hired claims adjuster with blood banking experience How important were the reinsurance intermediary relationships? 19

Initial Program Structure 20

The Original Reinsurance Program $5M $2M $100K EXCESS LAYER Cessions Excess of Loss $3MM xs $2M Per Claim PRIMARY LAYER Casualty Excess of Loss $1.9MM xs $100K Per Claim BCx Per Claim Retention Insured s SIR A Three Year Treaty Agreement to cover a portfolio (# of separate insureds) from a ceding company Multiple reinsurance companies can participate, all reinsurers agreeing to follow the terms and conditions set by the Lead reinsurer Two separate layers Reinsurers share of premium and losses is a percent of BCx premium 21

Benefits of This Structure Reinsurers goal was to maximize their share of premium Protection from severity Growth of written premium to over $5mm in year 6 Group benefited from hard market Growth in surplus meant RRG retention then increased to $250,000 22

Maintaining Reinsurance 1993-2003 23

Reinsurer Requirements Exclusions for new exposures Tissue and organ procurement Very conservative rating and reserving Introduction of a swing plan Annual aggregate retention above per claim retention Objective: Make Layer 1 reinsurance more loss rated 24

Illustration of Layer 1 Swing Plan Provisional premium is 25% of Gross Written Premium for Layer 1 Minimum rate is 12.5% of GWP Maximum rate is 48.5% of GWP Calculations are cumulative over the three years of each treaty Can anyone spell COMPLICATED? 25

Reinsurance Concerns 2003-2013 26

Loss of Critical Mass Health care organization structural changes Cost cutting pressure on insureds bottom lines Insureds want rate relief not future return of underwriting profits Rate reduction leads to proportionately higher reinsurance costs Mergers/acquisitions lead to loss of insureds Larger insureds can retain more risk Soft market: HIV no longer perceived as a threat Non-specialty insurers provide broader coverage 27

Are There Reinsurance Options That Should be Considered? 1. Fronted programs versus RRGs 2. Quota shares versus excess of loss 28

3 Key Factors to be Considered Size of the Group State of the Commercial Insurance Market Financial objectives of the Insureds 29

Questions? 30

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