Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows...
Transcript of Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows...
![Page 1: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/1.jpg)
SEMINAR ON REINSURANCE STUDENT PROGRAM
BROOKLYN, NY | JUNE 2018
DANIEL E. FERNANDEZ, FCAS, MAAA
Introduction toReinsurance
![Page 2: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/2.jpg)
Agenda
• Who am I?
• Insurance vs. Reinsurance
• Types of Reinsurance
• Functions of Reinsurance
• Role of the Actuary
1
![Page 3: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/3.jpg)
Who am I?
2
![Page 4: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/4.jpg)
3
Daniel E. Fernandez, FCAS, MAAA
• Education- B.S. in Economics, University of Pennsylvania,
Wharton School of Business, 2010
• Internship- Endurance Re in NYC – Summer 2008 and 2009
• Career- Berkley Re America (a W.R. Berkley Company),
2010-2014- Navigators, 2014-Current
• Volunteer- CAS Diversity Committee- CAS Committee on Reinsurance Research
• Extracurricular- Co-Founder and Member of Board of Directors,
Organization of Latino Actuaries (OLA)- Member of Board of Trustees, Summer on the Hill
![Page 5: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/5.jpg)
Insurancevs.
Reinsurance
4
![Page 6: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/6.jpg)
Insurance
5
Personal Insurance Commercial Insurance
The insurer insures the individual or the corporation.
![Page 7: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/7.jpg)
Reinsurance
6
The reinsurer insures the insurance company.
![Page 8: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/8.jpg)
Reinsurance Placement Mechanisms
7
Direct Broker
![Page 9: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/9.jpg)
Typesof
Reinsurance
8
![Page 10: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/10.jpg)
9
Treaty Reinsurance Facultative Reinsurance• Covers a specific or an individual
risk
• Cession is optional
• The reinsurer retains the right toaccept or reject each risk
• The one insured/policy is knownto the reinsurer at inception
• Typical uses:- Insure unique/hazardous exposures- Insure large exposures- Insure a particular class or risk excluded
from a treaty
• Covers a book or a class ofbusiness
• Cession is obligatory
• Automatic reinsurance
• Insured policies are unknown atinception, but become knownsubsequently
• Typical uses:- Provide stability- Insured risks are homogeneous- High volume of risks
![Page 11: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/11.jpg)
Types of Reinsurance
10
Proportional Excess of Loss
ReinsuranceCompany
ReinsuranceCompany
CedingCompany
CedingCompany
CedingCompany
CedingCompany
ReinsuranceCompany
ReinsuranceCompany
![Page 12: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/12.jpg)
Proportional: Quota Share
• A fixed percentage of every risk is ceded to the reinsurer
• Reinsurer pays ceding commission to insurance company to cover expenses
• Can be tailored to add contractual features that limit losses to thereinsurer or vary the commission based on the level of loss activity
11
![Page 13: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/13.jpg)
Proportional: Surplus Share
• The percentage ceded for each risk is based on:- Insured Value- Retained Line- Reinsured amount
• Used mostly for larger risks
• Typically used for property insurance
• Reinsurer pays ceding commission to insurance company to cover expenses
• Can be tailored to add contractual features that limit losses to the reinsureror vary the commission based on the level of loss activity
12
![Page 14: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/14.jpg)
Surplus Share Example
13
![Page 15: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/15.jpg)
Excess of Loss: Per Risk
• The subject loss is definedto be the sum of all claimsarising from one coveredloss event or occurrencefor a single subject policy
• Example:- Commercial Building- $8M Insured Value- $6M Loss- $5M Retention- $5M Limit- What is the reinsured loss?
14
ReinsuranceCompany
ReinsuranceCompany
CedingCompany
CedingCompany
Retention + Limit
Retention
![Page 16: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/16.jpg)
Excess of Loss: Per Occurrence
• The subject loss is defined to be the sum of all claims arising from onecovered loss event or occurrence for all subject policies.
• Example:- Tornado fully destroys 25 homes worth $400K each- $5M Retention- $5M Limit- What is the reinsured loss?
15
![Page 17: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/17.jpg)
Excess of Loss: Aggregate/Stop Loss
• The subject loss is the accumulation of all subject losses during aspecified time period, usually one year.
• Popular for agriculture insurance companies
• Example:- 2017 Loss Ratio = 120%- Retention = 100%- Limit = 50%- Premium = $1M- What is the reinsured loss?
16
![Page 18: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/18.jpg)
Functionsof
Reinsurance
17
![Page 19: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/19.jpg)
Functions of Reinsurance
• Capacity
• Catastrophe Protection
• Stabilize Loss Experience
• Surplus Relief
• Facilitate Withdrawal From a Market Segment
• Provide Guidance
18
![Page 20: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/20.jpg)
Capacity
• Reinsurance allows insurance companies to offer higher policy limits whilemaintaining a manageable risk level
• Net retained loss per policy can be kept in line with amount of surplus- State regulations may prohibit more than a certain percentage of surplus on any one
loss exposure
• Smaller insurers can compete with larger insurers
19
![Page 21: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/21.jpg)
Catastrophe Protection• Minimize the financial impact from large events such as hurricanes,
earthquakes, tornadoes, wildfires, and more.
• Excess of Loss
• Quota Share
• Securitization (Cat Bonds)
20
![Page 22: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/22.jpg)
HIM
• Hurricane Harvey- Made landfall on 8/25/17- Estimated Insured Loss of $17.1B
• Hurricane Irma- Made landfall on 9/6/17- Estimated Insured Loss of $18.7B
• Hurricane Maria- Made landfall on 9/19/17- Estimated Insured Loss of $25.3B
21
![Page 23: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/23.jpg)
Stabilize Loss Experience
• Protect the insurance company’s surplus against shocks from large,unpredictable losses
• Retain smaller, predictable claims
• Underwriting and financial effects of large claims or accumulations of claimscan be spread out over many years- Decreases probability of financial ruin for the insurance company
22
![Page 24: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/24.jpg)
Surplus Relief
• Due to conservative statutory accounting principles, insurance companiesare to maintain acceptable premium to surplus ratios
• For growing companies, this may limit the business they can write
• Proportional contracts provide the most benefit since the cedingcommission that the reinsurer pays the insurance company is a directbenefit to surplus
23
![Page 25: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/25.jpg)
Facilitate Withdrawal From a Market Segment
• The insurance company may want to withdraw from a market segment thatis unprofitable, undesirable, or does not fit into the strategic plan
24
Provide Guidance
• Reinsurers work with a wide variety of insurers and consequentlyaccumulate a great deal of expertise- Underwriting- Marketing- Pricing- Loss Prevention- Claims Handling- General Issues & Trends
![Page 26: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/26.jpg)
Role of theActuary
25
![Page 27: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/27.jpg)
CAS Members by Type of Employment
26
![Page 28: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/28.jpg)
Experience Rating
• Using historical losses to estimate the losses in the prospective period
27
Exposure Rating
• Using industry loss curves to estimate the losses in the prospective periodusing underlying exposures, independent of the insurance company’s claimsexperience
• Use a weighted combination of experience and exposure rating todetermine final estimated losses
![Page 29: Introduction to Reinsurance - Casualty Actuarial Society · 2021. 3. 13. · • Reinsurance allows insurance companies to offer higher policy limits while maintaining a manageable](https://reader036.fdocuments.in/reader036/viewer/2022062417/613730480ad5d20676487574/html5/thumbnails/29.jpg)
28