Capital Considerations of Insurers with Catastrophe Exposure October 22, 1998 Jeanne H. Dunleavy...
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Transcript of Capital Considerations of Insurers with Catastrophe Exposure October 22, 1998 Jeanne H. Dunleavy...
Capital Considerations of Insurers with Capital Considerations of Insurers with Catastrophe ExposureCatastrophe Exposure
October 22, 1998October 22, 1998
Jeanne H. DunleavyJeanne H. DunleavySenior Vice PresidentSenior Vice PresidentRisk ManagementRisk Management
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CatastrophesCatastrophes
Natural DisastersNatural Disasters
Y2KY2K
Tobacco LiabilityTobacco Liability
Asbestos & EnvironmentalAsbestos & Environmental
Man-made CatastrophesMan-made Catastrophes
33
Discussion OutlineDiscussion Outline
Best’s Rating PhilosophyBest’s Rating Philosophy
Catastrophe Exposure Trends Catastrophe Exposure Trends
Financial & Strategic EvaluationFinancial & Strategic Evaluation
Catastrophe Management StrategiesCatastrophe Management Strategies
44
A.M. Best’s Rating Evaluation —A.M. Best’s Rating Evaluation —Key ComponentsKey Components
Financial Financial StrengthStrength
Operating Operating PerformancePerformance
Market Market ProfileProfile
Best’s RatingBest’s Rating
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Best’s Rating Philosophy —Best’s Rating Philosophy —Catastrophe RiskCatastrophe Risk
Extensive PML analysisExtensive PML analysis
Cat modeling standardization issuesCat modeling standardization issues
SecureSecure insurers must survive insurers must survive reasonable reasonable PMLsPMLs
Gross PML leverageGross PML leverage < 100% for < 100% for superiorsuperior insurers insurers
Concern over opportunistic players in cat-prone areasConcern over opportunistic players in cat-prone areas
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Compiling Information — Compiling Information — Best’s Supplemental Rating QuestionnaireBest’s Supplemental Rating Questionnaire
Gross & net PMLGross & net PML 50-, 100-, 250- & 500-year return periods50-, 100-, 250- & 500-year return periods
Catastrophe modelsCatastrophe models Modeler & versionModeler & version Key assumptionsKey assumptions
Liquidity profileLiquidity profile
Historical experienceHistorical experience
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Gross Catastrophe Leverage By SeverityGross Catastrophe Leverage By Severity
Total Sample (60)
36% 35%
47%
26%
50%
15%
0%
10%
20%
30%
40%
50%
60%
0-30% (Moderate) 75+ (Excessive)
1994 1995 1996
(Gross PML/Surplus%)Source: A.M. Best Co.Source: A.M. Best Co.
88
Net Catastrophe Leverage By SeverityNet Catastrophe Leverage By Severity
Total Sample (60)
55%
22%
69%
5%
74%
2%0%
10%
20%
30%
40%
50%
60%
70%
80%
0-15% (Moderate) 46%+ (Excessive)
1994 1995 1996
(Net PML/Surplus %)Source: A.M. Best Co.Source: A.M. Best Co.
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Catastrophe Reinsurance DependenceCatastrophe Reinsurance Dependence
Total Sample (60)
25%
16%
65%
20%
66%
19%
0%
10%
20%
30%
40%
50%
60%
70%
0-30% (Moderate) 91%+ (Excessive)
1994 1995 1996 (Ceded PML/Gross PML %)
Source: A.M. Best Co.Source: A.M. Best Co.
1010
A.M. Best’s Financial Evaluation — A.M. Best’s Financial Evaluation — Catastrophe RiskCatastrophe Risk
CapitalizationCapitalization
LiquidityLiquidity
ProfitabilityProfitability
Financial FlexibilityFinancial Flexibility
1111
Cat Risk Financial Evaluation — Cat Risk Financial Evaluation — CapitalizationCapitalization
Best’s Capital Adequacy Model (BCAR) Best’s Capital Adequacy Model (BCAR) Net after tax PML - higher of:Net after tax PML - higher of:
Hurricane 100-year return periodHurricane 100-year return period Earthquake 250-year return periodEarthquake 250-year return period
1212
Cat Risk Financial Evaluation — LiquidityCat Risk Financial Evaluation — Liquidity
Liquid assetsLiquid assets
Liquidity stress testLiquidity stress test Pro forma 120 basis point rise in Pro forma 120 basis point rise in
interest rates interest rates Bond securities with unrealized lossesBond securities with unrealized losses
1313
Cat Risk Financial Evaluation — Cat Risk Financial Evaluation — ProfitabilityProfitability
Earnings volatility/earnings dragEarnings volatility/earnings drag Frequency as well as severityFrequency as well as severity Costly reinsurance coverageCostly reinsurance coverage
1414
Cat Risk Financial Evaluation —FlexibilityCat Risk Financial Evaluation —Flexibility
Reinsurance utilizationReinsurance utilization
Access to capital marketsAccess to capital markets
Debt capacityDebt capacity
Parental resourcesParental resources
1515
Catastrophe Risk — Financial EvaluationCatastrophe Risk — Financial Evaluation
Earnings Volatility & DragEarnings Volatility & DragProfitabilityProfitability
Liquid Asset ProfileLiquid Asset ProfileCash Flow Stress TestCash Flow Stress Test
LiquidityLiquidity
Sensitivity AnalysisSensitivity AnalysisGross & Net PML LeverageGross & Net PML Leverage
CapitalizationCapitalization
Access to CapitalAccess to CapitalReinsurance UsageReinsurance UsageDebt CapacityDebt CapacityParental SupportParental Support
Financial Financial FlexibilityFlexibility
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Catastrophe Risk — Strategic EvaluationCatastrophe Risk — Strategic Evaluation
Reinsure/Risk FinancingReinsure/Risk FinancingRegulatory ConstraintsRegulatory Constraints
Exposure CapsExposure CapsExposure EliminationExposure EliminationLoss MitigationLoss Mitigation
StrategiesStrategies
Cash FlowCash FlowInvestor ViewInvestor ViewBest’s RatingBest’s Rating
Risk AppetiteRisk AppetiteSurplus / SolvencySurplus / SolvencyEarnings VolatilityEarnings Volatility
Risk RetentionRisk Retention
Corrective TimelinesCorrective TimelinesStrategic FitStrategic FitGoals & ObjectivesGoals & Objectives
Parental Parental CommitmentCommitment
1717
Emerging Catastrophe Management Emerging Catastrophe Management StrategiesStrategies
Risk retention/containmentRisk retention/containment
Risk mitigationRisk mitigation
Risk transferRisk transfer
Risk financingRisk financing
1818
Risk Containment — Example: AllstateRisk Containment — Example: Allstate
Create separately capitalized Florida Create separately capitalized Florida
subsidiary to segregate exposures and subsidiary to segregate exposures and
demonstrate need for increased ratesdemonstrate need for increased rates
SolutionSolution
Excessive Florida cat exposureExcessive Florida cat exposureIssuesIssues
Difficult regulatory environmentDifficult regulatory environment
1919
SolutionsSolutions
IssuesIssues
Risk Mitigation — Examples: Nationwide, Risk Mitigation — Examples: Nationwide, Farmers, State FarmFarmers, State Farm
Increased cat lossesIncreased cat lossesNationwideNationwide
Tighten U/W criteriaTighten U/W criteriaPrem discounts for enforced bldg codesPrem discounts for enforced bldg codes
State FarmState Farm
Substantial CA EQ exposureSubstantial CA EQ exposureLinking CA law for HO & EQLinking CA law for HO & EQ
FarmersFarmers
Limited/non-renewal businessLimited/non-renewal businessNationwideNationwide
Implemented new mini-policy pre-CEAImplemented new mini-policy pre-CEAFarmersFarmers
Promote rating bldg codes’ effectivenessPromote rating bldg codes’ effectivenessState FarmState Farm
2020
Risk Mitigation — Example: FarmersRisk Mitigation — Example: Farmers
IssuesIssues
Substantial CA EQ exposureSubstantial CA EQ exposureLinking CA law for HO & EQLinking CA law for HO & EQ
FarmersFarmers
SolutionsSolutions
Implemented new mini-policy pre-CEAImplemented new mini-policy pre-CEAFarmersFarmers
2121
Risk Transfer — Example: USAARisk Transfer — Example: USAA
High cost of reinsuranceHigh cost of reinsuranceIssuesIssues
Access to capital markets/add. capitalAccess to capital markets/add. capital
SolutionsSolutions Non-affiliated, special purpose reinsurerNon-affiliated, special purpose reinsurer
Issued reinsurance contract/cat-linked Issued reinsurance contract/cat-linked
bonds tied to East Coast hurricane losses bonds tied to East Coast hurricane losses
($500 mil XS $1 bil layer)($500 mil XS $1 bil layer)
2222
Risk Transfer — Example: RLI/Centre Re - Risk Transfer — Example: RLI/Centre Re - Contingent EquityContingent Equity
IssuesIssues Large commercial property cat exposureLarge commercial property cat exposure
Augment traditional program with cost-Augment traditional program with cost-effective alternativeeffective alternative
Access capacity in capital markets & Access capacity in capital markets & avoid market risk of issuing securities avoid market risk of issuing securities after major eventafter major event
SolutionsSolutions Catastrophe Put OptionCatastrophe Put Option
Pre-negotiated sale of $50 mil convertible Pre-negotiated sale of $50 mil convertible preferred securities to Centre Re if losses preferred securities to Centre Re if losses exceed RLI’s cat reinsurance protectionexceed RLI’s cat reinsurance protection
2323
Cat Management Strategies —Cat Management Strategies — Non-Traditional Non-Traditional
RLI/Centre ReRLI/Centre ReCatastrophe equity putsCatastrophe equity putsEquityEquity
USAA, Swiss ReUSAA, Swiss ReWinterthurWinterthur
Catastrophe linked bondsCatastrophe linked bondsReinsuranceReinsurance
TravelersTravelersCatastrophe optionsCatastrophe optionsInvestmentInvestment
Arkwright, NationwideArkwright, NationwideContingent surplus notesContingent surplus notesDebtDebt
Standby line of creditStandby line of credit Nationwide, State Nationwide, State Farm, Florida JUAFarm, Florida JUA
2424
SummarySummary
Elevated lossesElevated losses
Catastrophe modelsCatastrophe models
Favorable trendsFavorable trends
Best’s RatingsBest’s Ratings
2525
Effectively managing catastrophe risk is one of the Effectively managing catastrophe risk is one of the major challenges for insurance companiesmajor challenges for insurance companies
E.W. Blanch plays a vital role in providing sound E.W. Blanch plays a vital role in providing sound advice and innovative risk transfer and risk advice and innovative risk transfer and risk
financing productsfinancing products
A.M. Best is focused on preventing A.M. Best is focused on preventing and detecting insurer insolvencyand detecting insurer insolvency
2626
Using Technology Using Technology As A Pricing Tool As A Pricing Tool To Understand Layering, Loss Costs, and To Understand Layering, Loss Costs, and
ProbabilitiesProbabilities To Create Practical SolutionsTo Create Practical Solutions Integrate with Overall Financial PerformanceIntegrate with Overall Financial Performance
Catastrophe Risk ManagementCatastrophe Risk Management
2727
E. W. Blanch E. W. Blanch CompanyCompany
Overview of Overview of E.W. Blanch holdings, IncE.W. Blanch holdings, Inc..
2929
E.W. Blanch Mission StatementE.W. Blanch Mission Statement
To make an identifiable and measurable To make an identifiable and measurable contribution to the success of our clients contribution to the success of our clients
through innovative concepts and through innovative concepts and unparalleled service.unparalleled service.
3030
How We Deliver SolutionsHow We Deliver Solutions
Post-lossMitigationServices
Primary Servcices
Risk TransferServices
Swire Blanch(International)
EWB Co.(N. America)
EWB Holdings, Inc.
Analytical Services
Relationship Executives -Linda Johnson
Scott Fest
3131
REVENUES:REVENUES: $167M (53% Increase From 1996)$167M (53% Increase From 1996)
GROWTH:GROWTH: Over 25% Compounded (Last 5 Years)Over 25% Compounded (Last 5 Years)
EPS:EPS: $2.03$2.03
ASSETS:ASSETS: $920M$920M
OWNERSHIP:OWNERSHIP: Publicly owned (NYSE = EWB)Publicly owned (NYSE = EWB)Approximately 25% Employee OwnershipApproximately 25% Employee Ownership
MARKETMARKETCAPITALIZATION:CAPITALIZATION: $446M$446M
EWB Holdings Financial Highlights: As of EWB Holdings Financial Highlights: As of 12/9712/97
3232
Global NetworkGlobal Network
Over 1,100 employees worldwideOver 1,100 employees worldwide
CHICAGO
MINNEAPOLIS
SAN FRANCISCO
LOS ANGELES
DALLAS
SAN ANTONIO
PHILADELPHIA
WILMINGTON
ATLANTA
NEW YORK HUDDERSFIELD
HANOI
SYDNEY
SINGAPORE
HO CHI MINH CITY
SHANGHAI
BEIJING
COPENHAGEN
LONDON
HONG KONG
MIAMI
SARASOTA
MEXICO CITY
BUENOS AIRES
DENVER
CINCINNATI
BOSTON
HOBOKEN
Primary Distribution
Swire Blanch
E. W. Blanch Co.
ASUNCION
RIO de JANIERO
3333
$64.6$80.7
$94.9$109.0
$167.0
$0$20$40$60$80
$100$120$140$160$180$200
1993 1994 1995 1996 1997
Historical RevenuesHistorical Revenues
3434
Sample Client ListSample Client List
Business Solutions:Business Solutions:Fireman’s Fund Insurance CompanyFireman’s Fund Insurance CompanyOrion Capital CompaniesOrion Capital CompaniesWausau Insurance CompaniesWausau Insurance Companies
Governmental:Governmental:California Earthquake Authority (CEA)California Earthquake Authority (CEA)Florida Hurricane Catastrophe Fund (FHCF)Florida Hurricane Catastrophe Fund (FHCF)Florida Windstorm Underwriting Association Florida Windstorm Underwriting Association (FWUA)(FWUA)Illinois Department of Insurance (Pine Top)Illinois Department of Insurance (Pine Top)Texas Wind PoolTexas Wind Pool
Insurers / ReinsurersInsurers / Reinsurers
Acceptance Insurance CompanyAcceptance Insurance Company
Allstate Insurance GroupAllstate Insurance Group
Alfa Insurance Corp.Alfa Insurance Corp.
Amica Mutual InsuranceAmica Mutual Insurance
CIGNA Insurance CompanyCIGNA Insurance Company
CNA GroupCNA Group
Frontier Insurance CompanyFrontier Insurance Company
Guidant Insurance GroupGuidant Insurance Group
Liberty Mutual Insurance CompanyLiberty Mutual Insurance Company
Orion InsuranceOrion Insurance
Reliance Insurance CompanyReliance Insurance Company
Renaissance Reinsurance, Ltd.Renaissance Reinsurance, Ltd.
St. Paul Cos.St. Paul Cos.
State Farm Insurance CompanyState Farm Insurance Company
W. R. Berkley CorporationW. R. Berkley Corporation
Catastrophe Management:Catastrophe Management:American Family Mutual Insurance Co.American Family Mutual Insurance Co.Gryphon Insurance GroupGryphon Insurance GroupHartford Insurance CompanyHartford Insurance Company
3535
BusinessBusinessSolutionsSolutions
ReinsuranceReinsuranceDistributionDistribution
CustomerCustomer
InsuranceInsuranceServicesServices
RiskRiskManagementManagement
What Specific Services Are AvailableWhat Specific Services Are Available