1 / 53

Marine Reinsurance in 2008

Marine Reinsurance in 2008. 21 January 2008. TABLE OF CONTENTS. 1 Reinsurance Market. 2 Basic Principles of Reinsurance.

carol-mcleod
Download Presentation

Marine Reinsurance in 2008

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Marine Reinsurance in 2008 21 January 2008

  2. TABLE OF CONTENTS 1 Reinsurance Market 2 Basic Principles of Reinsurance 3 Issue’s and Trends 4 Pricing in the Future

  3. The Insurance Industry – Simplified 1 Reinsurance Market REINSURERS INSUREDS R/I BROKERS LLOYDS INSURERS Broker / Agent / Producer

  4. 1 Reinsurance Market Top Ten Global Property/Casualty Insurance Companies, by Revenues, 2006 US$ millions (1) Based on an analysis of companies in the Global Fortune 500. Includes stock and mutual companies. (2) Revenues include premium and annuity income, investment income and capital gains or losses, but exclude deposits; includes consolidated subsidiaries, excludes excise taxes. Source: Fortune.

  5. 1 Reinsurance Market World Largest Reinsurance BrokersSource: Business Insurance, October 24, 2005

  6. 1 Reinsurance Market Top 10 Global Reinsurers by total net written reinsurance premium – 2006 Source: S&P Global RI Highlights ( Sept 2007) * Property & Casualty + Life Premiums

  7. 1 Reinsurance MarketRatio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006 Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense for every $1 in written premium since 1985 Sept. 11 Katrina, Rita, Wilma Hurricane Andrew Liability Crisis

  8. S&P Financial Strength Rating Changes 1 Reinsurance Market AAA AA+ AA AA- A+ A A- BBB+ Watch / Outlook Berkshire / General Re X Stable Swiss Re X Watch - Negative Chubb Re (Federal) X Stable AXA Re X Positive Everest Re X StableHannover Re XNegative Partner Re X Stable Transatlantic Re X Stable XL Re X Stable ACE Tempest Re X Stable W.R. Berkley X Stable Munich Re / American Re X Stable Renaissance Re X Stable Aspen Re X Negative Axis Specialty X Stable Employers Re / GE Re X Watch - Positive IPC Holdings X Negative Lloyd’sX Stable Endurance Re X Positive Montpelier Re X Negative PXRE X Stable SCOR X Stable Alea X Stable Converium ReXStable This chart was created by Gen Re solely for its use and that of its clients and should not be reproduced or distributed further Source: standardandpoors.com Ratings as of January 2006

  9. Development of Corporate Capital at Lloyd’sPricewaterhouseCoopers Review 2002, updated 2005 1 Reinsurance Market % of Lloyd’s capacity

  10. 1 Reinsurance Market Suppliers of Lloyd’s Capital (2005)PricewaterhouseCoopers Review, 2002 updatedLloyds Annual Review, 2005 62 Syndicates 1625 “Names” (Individual)

  11. 2 Basic Principles of Reinsurance WHAT IS “REINSURANCE ?” • A way to spread risk • A contract of indemnity between an Insurer and a Reinsurer • Original Insured - no contractual right or privity • Contract between two informed parties • Always transfer of risk

  12. 2 Basic Principles of Reinsurance FACULTATIVEHYBRIDTREATY Pro Rata Excess of Loss Quota Share Surplus Share Per Risk Per Occurrence Aggregate Excess of Loss Per Risk Excess of Loss Per Risk Aggregate Excess of Loss Major Types of Reinsurance Facultative and Treaty Facultative • separate reinsurance contract negotiated on each risk • No obligation on either party’s behalf to place or accept the risk Treaty • certain group or class of business reinsured under a single contract • Obligatory nature – if it “fits” the contract it must be ceded, and accepted.

  13. 2 Basic Principles of Reinsurance Reasons to Buy Treaty Reinsurance • Spread of risk • Stabilization of underwriting results • Catastrophe relief (one occurrence affecting multiple policies, i.e., Hurricane Andrew) • Underwriting assistance • Premium capacity • Ease of use

  14. 2 Basic Principles of Reinsurance Reasons to Buy Fac Reinsurance • Large line capacity • Treaty-excluded business • Treaty protection • Accommodation for a good agent or insured • Catastrophe (a large loss affects one policy versus five) • Underwriting expertise • Flexibility

  15. 2 Basic Principles of Reinsurance FACULTATIVE HYBRID TREATY Pro Rata Excess of Loss Quota Share Surplus Share Per Risk Per Occurrence Aggregate Excess of Loss Per Risk Excess of Loss Per Risk Aggregate Excess of Loss Major Types of Reinsurance Pro Rata • also known as Proportional reinsurance • insurance amount, premium and losses under a primary contract are shared between the ceding company and the reinsurer in an agreed proportion Pro Rata and Excess of Loss Excess of Loss • also known as NonProportional reinsurance • reinsurer agrees to indemnify the ceding company for losses that exceed a specified retention up to an agreed-upon limit

  16. 2 Basic Principles of Reinsurance Pro Rata and Excess of Loss Non-Proportional or Excess of Loss Reinsurance Proportional or shared Reinsurance Cession Retention Cession (% or Line) Retention

  17. 2 Basic Principles of Reinsurance Pro Rata Reinsurance (Proportional) Quota Share Pro Rata • How It Works • Three Types of Pro Rata Reinsurance • Quota Share • Surplus Share • Contributing Excess Reinsurer Participation 40% Company Participation 60%

  18. 2 Basic Principles of Reinsurance Reinsurer Participation 75% Company Participation 25% Pro Rata Reinsurance (Proportional) Surplus Share • Retention expressed in $$. • Often referred to as a “line.” • Insurer retains 100% of risks up to the $$ amount of their “line.” • Cede all amounts in excess of that.

  19. 2 Basic Principles of Reinsurance Reinsurer Participation Company Participation Excess of Loss (XOL or Non-Proportional) • The reinsurer promises to reimburse the ceding company for losses that exceed the ceding company's retention • The reinsurer reimburses the ceding company up to the reinsurance limit stipulated in the reinsurance contract • In return for this promise, the reinsurer charges the ceding company a premium

  20. 2 Basic Principles of Reinsurance Excess of Loss Reducing the volatility. How does that work? Jumbo Losses: Rare, random, and virtually unpredictable.; usually relatively few exposures in portfolio Medium Losses: Some years more, some years less; can afford cost over time but need smoothing Small Losses: Large # of relatively predictable losses; very manageable with right tools Ideal is to keep the predictable and cede the volatile / unpredictable.

  21. 2 Basic Principles of Reinsurance Excess of Loss – marine pyramid view of a risk Total Loss Fire/Lightning/Explosion Machinery damage/small fire Theft/small fire/shortage

  22. 2 Basic Principles of Reinsurance Excess of Loss - Layering Often non proportional reinsurance coverage is layered, whereby the deductible of one layer is the sum of deductible and limit of liability of the underlying layer

  23. 2 Basic Principles of Reinsurance Excess of Loss – Layering - reasons • it is easier to place liabilities in smaller amounts • some smaller reinsurers specialise in particular levels of cover • lower/“working” layers, or • higher/“catastrophe” layers (“sleep easy”) • the nature and extent of risk is different at different levels of cover

  24. 2 Basic Principles of Reinsurance Excess of Loss – layering - reasons • layering therefore allows more accurate assessment of the appropriate XL premium • inclusions/ exclusions of specific classes (e.g. CXL treaties covering PA, WC/EL, MTPL, MOD etc) • different conditions for several layers • scope of protection • annual aggregate limits • reinstatements

  25. 2 Basic Principles of Reinsurance Excess of Loss - reinstatements • The limit of liability can be provided more than once e.g. 3 reinstatements for a risk layer and 1 for a cat layer • There is a maximum annual limit equal to the limit of liability plus the limit multiplied by the number of reinstatements • The reinstatement functions automatically when the original limit of liability or any part thereof is consumed by a loss • An additional premium is often charged for this reinstatement

  26. 2 Basic Principles of Reinsurance Excess of Loss – basis of coverage • The basis of coverage is specified in the contract and determines which losses the reinsurer is liable for: - Losses occurring during the reinsurance year - Risk attaching, i.e. losses arising under policies issued or renewed during the reinsurance year.

  27. 2 Basic Principles of Reinsurance Excess of Loss – basis of coverage • Losses occurring basis: all reinsurers involved from 1.1.2000 to 31.12.2000 are liable • Risk Attaching basis: all reinsurers involved from 1.1.99 to 31.12.99 are liable Loss date 8.1.2000original policy period: 1.4.99 - 31.3.2000

  28. 2 Basic Principles of Reinsurance Pro Rata Reinsurer Participation 40% Company Participation 60% Limit $5M Reinsurer Participation Reinsurer Participation 75% Company Participation 25% EXCESS OF LOSS vs PRO RATA REINSURANCELoss Treatment Comparison Excess Company Retention $ 250,000 Excess of Loss Surplus Share (3 Lines Retention) Quota Share

  29. 2 Basic Principles of Reinsurance Pro Rata Reinsurer Participation 40% Company Participation 60% Limit $5M Reinsurer Participation Reinsurer Participation 75% Company Participation 25% $1,500,000 Loss $2M $800,000 Reinsurer $1,750,000 Company Participation $250,000 $1,200,000 $500,000 EXCESS OF LOSS vs PRO RATA REINSURANCELoss Treatment Comparison Excess Company Retention Excess of Loss Surplus Share (3 Lines Cession) Quota Share

  30. 3 Issue’s and Trends • Catastrophes • Security (Basel II) • Securitization

  31. 3 Issue’s and Trends U.S. Insured - Catastrophe Losses ($ Billions) $ Billions $100 Billion CAT year is coming soon 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute

  32. 3 Issue’s and Trends Share of Losses Paid by Reinsurers, by Disaster Reinsurance is playing an increasingly important role in the financing of mega-CATs; Reins. Costs are skyrocketing

  33. 3 Issue’s and Trends S&P Financial Strength Rating Changes AAA AA+ AA AA- A+ A A- BBB+ Watch / Outlook Berkshire / General Re X Stable Swiss Re X Watch - Negative Chubb Re (Federal) X Stable AXA Re X Positive Everest Re X StableHannover Re XNegative Partner Re X Stable Transatlantic Re X Stable XL Re X Stable ACE Tempest Re X Stable W.R. Berkley X Stable Munich Re / American Re X Stable Renaissance Re X Stable Aspen Re X Negative Axis Specialty X Stable Employers Re / GE Re X Watch - Positive IPC Holdings X Negative Lloyd’sX Stable Endurance Re X Positive Montpelier Re X Negative PXRE X Stable SCOR X Stable Alea X Stable Converium ReXStable This chart was created by Gen Re solely for its use and that of its clients and should not be reproduced or distributed further Source: standardandpoors.com Ratings as of January 2006

  34. 3 Issue’s and Trends Distribution of Capital Requirements Source: Moody’s Special Comment, Growing Reinsurance Risk Weighs on P & C Insurance Market Recovery, August 2003

  35. 3 Issue’s and Trends Increased Reinsurance Leverage Reinsurance Recoverables as % Industry Surplus Source: Moody’s Special Comment, Growing Reinsurance Risk Weighs on P & C Insurance Market Recovery, August 2003

  36. 3 Issue’s and Trends “ In the aftermath of a prolonged soft market for property and casualty insurance, the exposure of primary insurers to counterparty risk on reinsurance assets has become a key credit risk for the industry. Insurers that once gorged themselves at the trough of cheap reinsurance are finding their meal was anything but a free lunch. The ultimate tab has yet to be determined, but could well be much higher than insurers bargained for.” Moody’s

  37. 3 Issue’s and Trends Moody’s “ In the face of these emerging concerns over reinsurance exposure, Moody’s is increasing analytic attention on reinsurance risk in our evaluation of ceding insurance firms, most notably in the context of assessing capital adequacy.” Source: Moody’s Special Comment, Growing Reinsurance Risk Weighs on P & C Insurance Market Recovery, August 2003

  38. 3 Issue’s and Trends Securitization: Or, why would an Insurer Securitize ? • Alternative to catastrophe reinsurance • Non-existent (reinsurance of last resort) • Scarce • Expensive • Multi-year nature • Collateralized : minimal / no credit risk • May seek no payback – “winner” takes all • Access to Capital markets • Motivated (intermediaries) determined to make a market

  39. 3 Issue’s and Trends Securitization – what is it? Two Common Examples • CAT Bonds (Ins. Linked Securities ) • Converts Ins risk to Securities form (capital market) • Indemnity based - parallels reinsurance • Indexed : (Industry L/R or Total Loss $$) = easier investor evaluation • Parametric loss = f (event magnitude, location) • EQ of magnitude 7.5 in California… • Windstorm w/ sustained windspeed of XX kph in … • Sidecars • Proportional structure

  40. 3 Issue’s and Trends CAT Bonds (ILS) • Sponsor – Insurer / Reinsurer* / Corporation • Issuer – • Bankruptcy remote Special Purpose Vehicle • R/I contract w/ Issuer • Issues CAT bonds & places proceeds in collateral account • Swap Counterparty – swaps investment returns to a LIBOR based rate. • Investors • Receive coupons (interest pmt) quarterly • No “event” = receive principal @maturity • “Event” = receive any remaining principal @ maturity

  41. 3 Issue’s and Trends SIDECARS • Capital market backing • Little / no infrastructure – easy to dismantle • Rely on other R/I’s to “manage” business • Quota Share structure (proportional) • Capital relief • “Flexibility”

  42. 4 Pricing in the Future Global Marine Premium 1999-2005 (US$ Million), as reported

  43. Combined Ratio: Ocean Marine vs. All Lines 4 Pricing in the Future

  44. 4 Pricing in the Future Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F

  45. 4 Pricing in the Future Effects of pricing Strategy • Scenario 1 Scenario 2 • (no reduction) (10% reduction) • POPeye the Sailor man Des Arster ex Ocean Marine Underwriter 2004 • ------------------------------------------------------------------- --------------------------------------------------------------- • NWP US$23m NWP US$20.7m • Expenses US$6m Expenses US$6m • Expected Losses US$13m Expected Losses US$13m • Expected Profit US$4m (83% CR)Expected Profit US$1.7m (92% CR) • Result • A 10% decrease in rates results in a 57% decrease ( diff between $1.7 & $4m) in expected • profit.

  46. 4 Pricing in the Future Effects of pricing Strategy • Scenario 3 Scenario 4 • (Hold rate but lose 10% of business due to price) (Hold rate but losses 24% of business due to price) • ----------------------------------------------------------------------- ----------------------------------------------------------------------- • NWP US$20.7m NWP US$17.5m • Expenses US$6m Expenses US$6m • Expected Losses US$11.7m Expected Losses US$9.9m • Expected Profit US$3m (85.5% CLR)Expected Profit US$2m (90% CLR) • Result • Better to lose 10% of your book and keep rates the same than to discount yourbook by 10%. • Would need to lose 24% of your book to match the expected profit from a 10% decrease in rate.

  47. 4 Pricing in the Future Burning Cost versus Exposure BURNING COST An estimate of the future loss cost based on the experience of solely one account. How it’s used Premium = Total claims over period divided by period = average loss cost + profit + expenses. Problem = net/gross/claims paid/outstanding/IBNR ? Pricing error = Ignoring similar account large losses (one account is too small a basis) .

  48. 4 Pricing in the Future Burning Cost versus Exposure Original Insured: Costa Lot Fleet. 5 bulkers, youngest 2001, oldest 1980. Year Premium Claims L/R 2001 300,000 200,000 67% 2002 250,000 300,000 120% 2003 310,000 250,000 81% Total 660,000 750,000 114% Renewal premium = Total claims 750,000 divided by 3 = ALC 250,000 250,000 + 35% (profit 15%, expenses 20%) = 337,500. Therefore renewal premium = 337,500

  49. 4 Pricing in the Future Burning Cost versus Exposure EXPOSURE RATING 1 An estimate of the future loss costs based on the experience from a large group of similar risks. How it’s used Statistical claims data over a “book” of similar risks+profit+expenses = rate. Problem = Selection error; Hull - vessel type, flag, large enough group.

  50. 4 Pricing in the Future Burning Cost versus Exposure Original Insured: Costa Lot Fleet. 5 bulkers, youngest 2001, oldest 1980. 2001 bulker, value 20,000,000 statistical (exposure) rate = 0.2% Prem. = 40,000 2000 bulker, value 17,500,000 statistical (exposure) rate = 0.222% Prem. = 38,850 1995 bulker, value 15,000,000 statistical (exposure) rate = 0.35% Prem. = 52,500 1985 bulker value 10,000,000 statistical (exposure) rate = 0.85% Prem. = 85,000 1980 bulker, value 5,0000,000 statistical (exposure) rate = 1.25% Prem. = 62,500 Total loss cost = 278,850 + 35% = 376,447.

More Related