reinsurance application presented by alice shumba head- underwriting fbc reinsurance

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Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

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Page 1: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Reinsurance Application

Presented By Alice Shumba

Head- Underwriting FBC Reinsurance

Page 2: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Training Objectives

By the end of the course, we should be able to:

•Define and understand the purpose of Reinsurance•Identify Types and Forms of reinsurance•Appreciate Application of Facultative Reinsurance•Appreciate Application of Treaty Reinsurance •Design a reinsurance Program

Page 3: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

What is reinsurance?......

• The business of insuring an insurance co. or underwriter against suffering too great a loss from their insurance operations. Robert & Stephen Kiln- Reinsurance in Practice

• Transfer of part of the hazards or risks that a direct insurer assumes by way of insurance contract or legal provision on behalf of an insured, to a second insurance carrier, the reinsurer, who has no direct contractual relationship with the insured.’ M Grossmann, Reinsurance – An Introduction

• A relationship between two consenting adults.

Page 4: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

……What is reinsurance?The Insurance Chain

Page 5: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

What is reinsurancePURPOSE OF REINSURANCE

• Spreading risks recall the insurer’s risk transfer options

• Increasing Capacity• Stabilizing results• Managing Accumulations • Providing Expertise• Facilitating entry into new lines or territories• Tax advantage• Providing Security• Increasing stakeholder confidence• Managing Solvency to meet regulatory requirements• Cash-flow advantages- proportional treaties

Page 6: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Types of Reinsurance

• Facultative Reinsurance• Treaty Reinsurance• Facultative Obligatory

Business can be place on a proportional or Non Proportional basis

Page 7: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

FORMS OF REINSURANCE

Page 8: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Types of ReinsuranceFACULTATIVE

• Facultative– It’s the oldest form of reinsurance– Optional– Ideally preserved for individual reinsurance

of large or hazardous single risks lets examine the following

• Motor? Engineering Plant? House owners? Mine assets?

– Risks usually ceded on original terms.– Traditionally placed on proportional basis

but non- prop now more common.

Page 9: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Types of ReinsuranceFACULTATIVE

• We opt for Fac when:– Original risk is hazardous- pollution– The risk exceeds the insurer’s treaty capacity-

Large risk– The risk is excluded from insurer’s treaty- territorial

scope, hazardous, more specifically insured elsewhere E.G Terrorism

– A risk has been accepted by the cedant for unique commercial, financial or political reasons. Otherwise it would be unacceptable because of its nature and size. THINK OF SUCH RISKS

Page 10: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

FACULTATIVE

ADVANTAGES OF FAC DISADVANTAGES OF FACFreedom on whether or not to offer risk to a reinsurer of choice

Insurer can’t be certain of placement if there is no automatic cover. There can be delays in confirming cover until placement is done

Opportunity for reinsurer and cedant to build a relationship and understand each other’s underwriting styles

Reinsurer may require too much detail where if they are a competitor, insurer may be uncomfortable

Insurer may gain expertise on underwriting particular risks

Labor intensive & high admin costs- Errors (you may forget to place risk)

Protects treaty performance Reinsurer may take over control of underwriting and claims processes. Warranties, Surveys, appointment of assessors etc.

Fac Reinsurer may eventually get accepted as a treaty security

Reinsurer may exercise influence on the insurer’s standard assessment of risk. Insurer rates Motor 3% but reinsurer rates it 10%.

Page 11: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Types of reinsuranceTREATY REINSURANCE

• Treaty reinsurance is obligatory in nature for both parties to the contract

• Business is placed as a bouquet unlike fac where placement is on a single risk

• Limits, terms and conditions are set for the whole bouquet.

• Terms are agreed in advance usually at the beginning of the year.

• Sometimes labeled blind cover

Page 12: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Types of reinsuranceTREATY REINSURANCE

• Insurers use treaty when:– Risks are homogenous or have similar

exposures……not hazardous– There is a large number of such risks –

volume– S/I can be confidently placed within range

of each other…..size– there is reinsurance capacity for the types

of risk…..terrorism treaty

Page 13: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Treaty reinsurancePROPORTIONAL TREATIES

• Two main types in use are Quota Share and Surplus.

• Prop treaties directly compensate acquisition costs through commissions.

• Reinsurers cap liability using cession limit as well as event limit.

• Reinsurers follow usually original terms• Accounting usually done in arrears and on an

offset basis through submission of a monthly or quarterly return with or without a bordereaux

Page 14: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Treaty reinsuranceProportional treaty

• Contents of a bordereaux– Insured’s Name– Period of Insurance & Period of Reinsurance– Sum Insured– Reinsurer’s proportion /Retention– Reinsurer’s amount /Ceded risk– Gross Premiums allocated by class of business – Premium split between cedant and reinsurer– Deductions

Page 15: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Proportional treatiesCOMMISIONS

• Pricing of prop treaties is basically on the commission level.

• The more profitable and balanced an account is the more the commission.

• Types of commission– Flat commission– Sliding scale commission- Linked to loss ratio

– Profit commission

Page 16: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Quota Share• Risk, premiums, and losses are allocated between

cedant and reinsurer in the same fixed share.• Reinsurers participates in every risk and loss • Note - a quota share is usually named by the amount

ceded i.e a 60% quota share means 60% has been ceded and 40% retained.

• Mostly used when the S/I in a portfolio are relatively uniform e.g in motor or households

• Quota shares carry the highest ceding commissions• More ideal when fronting, entering new lines or

territory• Most ideal for reciprocal business• Ideal example of follow the fortunes.

Page 17: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Quota ShareCOMPONENTS OF QUOTE

Motor QS Retention(80%) 100% LimitMotor Own Damage 48,000.00 60,000Motor TPPD 48,000.00 60,000Motor TPBI 48,000.00 60,000Sum Insured Basis As per Original PolicyCash Loss Limit 4,000.00 Flat Commission 27.5%Profit Commission 15% (7.5%)

ME and LCFTEUnderwriting Year Basis As originalCo-Insurance 100%Facultative Inwards 100%Est. Prem Income for 100% 709,000

Page 18: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Surplus• Cessions only done for risks that exceed the set

retention level (line size)• Cessions will be done in multiples of the line up to the

agreed cession limit• Reinsurers only participates on losses from the ceded

risks i.e cedant carries all losses coming out from the retained risks

• Usually subjected to table of retentions• Ideal when portfolio contains a mixture of large,

medium and small size risks• Cedant retains more premium than under Quota share• The risk of unbalanced treaty is high

Page 19: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Surplus TreatyCOMPONENTS OF QUOTE

FIRE AND ENGINEERING SURPLUS

Retention 4,000,000Capacity 24,000,000Lines 6.00EML 50% min

33%(Referal)Facultative Inwards 50%Co Insurance 50%Event Limit 72,000,000Provisional Commission 36.50%Slide Comm-Fire 25%-45%

forLoss ratios 60%-40%Cash loss 45,000 Accounts Monthly EPI 3,500,000

Page 20: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Comparison of Q/S & Surplus

• Q/S generally has higher commissions• More premium is usually ceded under Q/S• You cannot vary the retention % on a Q/S• Reinsurer & cedant’s fortunes are similar under Q/S but

may be different under Surplus i.e one can make profit while the other makes a loss

• Surplus treaty has better cat protection• With surplus, the insurer either stands or falls by the

retention level chosen

Page 21: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Some Maths +÷×-SUM INSURED

PREMIUM LOSS 1 LOSS 2

RISK A 10,000,000 100,000 12,000,000 8,000,000

RISK B 12,000,000 120,000 10,000,000 200,000

RISK C 4,000,000 400,000 800,000 1,500,000

RISK D 800,000 80,000 600,000 2,500,000

DO THE ALLOCATION OF RISK, PREMIUM AND LOSSES UNDER THE FOLLOWING PROGRAMES1.90% QUOTA SHARE ARRANGEMENT WITH $9M CESSION LIMIT2.9 LINE SURPLUS TREATY WITH A RETENTION OF $1,000,000

Page 22: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Risk A answerRetained Risk %

Retained Risk Amt

Ceded Risk %

Ceded Risk Amt

90% Q/S 10% $1,000,000 90% $9,000,000

9 Line Surplus

10% $1,000,000 90% $9,000,000

Premium allocation Q/S retention= 10% X $100,000= $10,000Q/S cession= 90%X $100,000=$9,000,000Surplus retention= 1/10 X $100,000= $10,000Surplus cession= 9/10 X $100,000=$9,000,000Loss Allocation Q/S retention= 10% X $10,000,000 (limit) = $1,000,000Q/S cession= 90%X $10,000,000=$9,000,000Surplus retention= 1/10 X $10,000,000= $1,000,000Surplus cession= 9/10 X $10,000,000=$9,000,000•The risk is for $10m so there maybe underinsurance•The same calculation applies for 2nd loss

Page 23: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Risk B answerRetained Risk%

Retained Risk Amt

Ceded Risk %

Ceded Risk Amt

Fac % Fac Amt

90% Q/S 8.33% $1,000,000 75% $9,000,000 16.67% $2,000,000

9 Line Surplus

8.33% $1,000,000 75% $9,000,000 16.67% $2,000,000

• Note the inclusion of facultative. Risk is above treaty capacity ( More when we do designing) How did we get 75% on a 90% quota share treaty???

• If quota share did not have cession limit which is highly unlikely, then the Q/S contribution will remain 90%

Premium allocation Straight forwardLoss Allocation Use the same % distribution even for the $200k claim. Note fac

reinsurers still participate on the $10m claim with 16.67% share

Page 24: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Risk C answerRetained Risk %

Retained Risk Amt

Ceded Risk %

Ceded Risk Amt

90% Q/S 10% $400,000 90% $3,600,000

9 Line Surplus

25% $1,000,000 75% $3,000,000

Premium allocation Q/S retention= 10% X $400,000= $40,000Q/S cession= 90%X $400,000=$360,000Surplus retention= 25% X $400,000= $100,000Surplus cession=75%X $400,000=$300,000Loss Allocation Q/S retention= 10% X $800K = $80K And Loss 2 10% x $1m= $100kQ/S cession= 90%X $800k=$720k and Loss 2 90%x $1m=$900kSurplus rtn= 25% X $800k= $200k and loss 2 25% x $1m= $250kSurplus cession= 75% X $800k=$600k & loss 2 75%x $1m=$750kNote treaties have similar 100% capacities but operate differently because of movement in retention % on surplus

Page 25: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Risk D answerRetained Risk %

Retained Risk Amt

Ceded Risk %

Ceded Risk Amt

90% Q/S 10% $80,000 90% $720,000

9 Line Surplus

100% $800,000 0% $0

Premium allocation Q/S retention= 10% X $80,000= $8,000Q/S cession= 90%X $80,000=$72,000Surplus retention= 100% X $80,000= $80,000Surplus cession= NILLoss Allocation Q/S retention= 10% X $600K = $60K And Loss2 10% x $800k= $100kQ/S cession= 90%X $600k=$540k and Loss 2 90%x $800K(limit) =$720kSurplus rtn= 100%X $600k= $600k and loss 2 100% x $2.5m= $2.5mSurplus cession= NILNote- even if a claim is above the surplus retention point, The cession of the risk guides the allocation of losses.

Page 26: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Non Proportional Treaty• Unlike prop treaties, premium paid is not proportionally related to

risk carried.• Premiums usually paid in advance as Minimum and/or Deposit

Premium. There is no cession per risk rather the premium is for the whole portfolio.

• Distribution of Liabilities is based on losses rather than sum insured. So no need for cession bordereaux

• Losses only get paid once they exceed the excess point/deductible.• Reinsurers limit their horizontal liabilities through Reinstatements.• There is usually a limit on cover to cap reinsurers’ vertical liability.

If the excess of loss is protecting a prop treaty, its maximum retention can be used as the cover limit for Excess of loss.

• No commissions paid under non proportional treaties

Page 27: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Non prop treatiesPRICING

• Pricing of Non Prop treaties can be done using– Exposure rating

• Size, volume and nature of book• Average S/I in comparison with Cover Limit• Level of deductible• Volatility of claims in the reinsured class

– Experience rating• Burning cost based on e.g - 5 year Loss Ratio +

loading for inflation, costs and profit margin• Claims experience can warrant an increase or

reduction in loss ratio

Page 28: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Non Proportional treatiesPRICING

• Resultant Rate is applied to EGNPI to get provisional premium/ MDP.

• An Adjustment premium is paid at the end of the year when the AGNPI is known.

• GNPI (Gross Net Premium Income) is the Gross premium before deducting commissions but net of other reinsurances.

• The treaty can be Layered and priced according to exposure to losses

• The 1st layer is usually the working layer hence will attract a higher rate.

Page 29: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Non Proportional TreatiesExcess of Loss

• Excess of loss can be used to protect the following :– Risk Exposure– EML error exposure– Catastrophe Exposure – Know definition of event

e.g 72 hrs clause– Clash Exposure- Accumulation of different risk

classes in one event– One program may offer all this protection

Page 30: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Non Proportional TreatiesComponents of XL Quote

FIRE AND ENGINEERING XL TERMS

LAYER LIMIT DEDUCT RATE REINS MDP ROL EGNPI1st layer 1,650,000 350,000 5.94% 3 @ 100% amt 267,300 18.00% 5,000,0002nd Layer 2,000,000 2,000,000 2.00% 3 @ 100% amt 90,000 5.00% 5,000,0003rd Layer 4,000,000 4,000,000 0.80% 2 @ 100% amt 36,000 1.00% 5,000,0004th Layer 12,000,000 8,000,000 0.60% 2 @ 100% amt 27,000 0.25% 5,000,000Total 19,650,000 350,000 9.34% 420,300

Page 31: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Non Proportional TreatiesALLOCATION OF LOSSES

• In the quote above. Losses are paid once they exceed deductible.

• The Xl treaty covers the Ultimate Net loss to insured i.e loss that remains for the insured’s net account after other reinsurances have paid their proportions.

• Reinstatement premium is immediately deducted from the claim amount using this formula:– (Loss to layer ÷ Cover Limit for layer) X Premium…..if it is

100% pro-rata to amount only– X (days remaining in the year/365) ……if it is pro-rata

amount and time

Page 32: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

XL Losses worked Example

• Using Risk A Loss 1: details were as follows– Retained Risk $1m which is the cover limit on XL – Retained loss was $1m. Using the above XL

program Recovery will be calculated as follows:– Loss to 1st layer $1,000,000- $350,000= $650,000– Reinstatement Premium ($650,000/$1,650,000) X

$267 300= $105 300– When paying the claim deduct reinstatement

premium i.e ($650k- $105,3k)= $544 700

Page 33: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Work to do

• Using the above XL program. Calculate amount paid to insurer on the following losses UNL. Assume Limit per risk of $4million– Sum Insured $3m Loss $200,000 D.O.L. 05/01/14– Sum Insured $2m Loss $1,500,000 D.O.L 25/01/14– Sum Insured $4m Loss $2,500,000 D.O.L 30/03/14– Sum Insured $8m Loss $4,000,000 D.O.L 28/08/14* how

far are you with reinstatement premium?– Sum Insured $700k loss $600,000 D.O.L 15/10/14* do you

still have enough cover?

Page 34: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Stop Loss & Aggregate XL• Stop Loss operates on pre agreed % while

Aggregate XL cover is expressed as fixed limits.• They are used to protect losses in a particular class

or an aggregation of an event. The insurer’s loss ratio is limited to a particular level and reinsurer will kick in up to the agreed limit.

• Most suitable in businesses where losses can have unpredictable spikes e.g in weather related covers like Hail insurance.

• Losses are only recoverable when the aggregate exceeds the deductible

Page 35: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Stop LossQUOTATION EXAMPLE

LAYER LIMIT DEDU RATE MDP EARNINGS EGNPI

1st Layer 120% of EGNPI or $3,600,000 90% of EGNPI or $2,700,000 1.5% 40,500 45,000 3,000,000(whichever is higher) (whichever is higher)

2nd Layer 150% of EGNPI or $4,500,000 120% of EGNPI or $3,600,000 0.5% 13,500 15,000 3,000,000(whichever is higher) (whichever is higher)

150% of EGNPI or $4,500,000 100% of EGNPI or $3,000,000Total (whichever is higher) (whichever is higher) 2.0% 54,000 60,000 1,500,000

Page 36: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Basis of Reinsurance

• Treaties can be placed using any of the following Basis:– Risk attaching during- Reinsurance in force when

policy commenced and received the ceded premium will pay claim.

– Losses Occurring During- Reinsurance in force at date of loss

– Claims made during- reinsurance in force when the insurer is first made aware of the claim will respond.

Page 37: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

REINSURANCE DESIGNINGCONSIDERATIONS

• You want to determine whether you buy fac, prop or non prop treaty or a combination of all. Look at:

• Nature of the portfolio– Volume- Do you have sufficient numbers to have a treaty– Mix- Is there homogeneous exposure in your book, it may all be motor

but 50% could be excluded risks in your treaty– Size- Can you chose XL or quota share- Are the sums insured within

same range or vary significantly– Are there policies with unlimited Liability– Is portfolio subject to wide fluctuations in its annual results

Page 38: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Considerations• Capacity required- Do you really need it, is there automatic

reinsurance capacity for your risks. A treaty should at least cover the majority of risks written.

• Retention- your capital and risk appetite can determine this. Market norms can be a guide. No retention at all poses moral hazard

• Reinsurance costs- For XL you pay upfront, for prop you may cede more premiums

• How claims will be shared.• Exposure to accumulations• Loss experience• Cost of operating the reinsurance program

Page 39: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Considerations

• Reinsurers will require the following information to make a judgment on required cover as well as to price it.– Risk profiles– 5 year losses statistics– Required capacity/ Cat Limits– Estimated Income– Desired retention level by cedant– Classes of business covered– Potential accumulation for Reinsurer- Fac Inwards

Page 40: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Consideration

• Reinsurer will also make a judgment on– Standard of Management style– Experience of underwriters– Geographical distribution of business written– Financial standing of cedant– Past underwriting results– Exclusions, terms and conditions on the requires

treaty.

Page 41: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Lets DesignUsing Risk Profile

No. Of Risks

Total Sum Insured Premium

0 250,000 630 52,236,359 1,255,523

250,001 500,000 140 50,780,121 534,444

500,001 750,000 54 33,342,342 353,745

750,001 1,000,000 45 40,336,206 313,314

1,000,001 1,250,000 10 11,345,595 158,305

1,250,001 1,500,000 15 20,735,541 206,335

1,500,001 1,750,000 8 12,813,678 215,027

1,750,001 2,000,000 9 17,131,237 163,276

2,000,001 2,500,000 9 20,396,891 244,464

2,500,001 3,000,000 5 15,000,000 57,559

3,000,001 6,000,000 22 94,981,954 442,534

6,000,001 10,000,000 3 26,990,933 282,215

10,000,001 15,000,000 1 11,447,793 110,379

15,000,001 20,000,000 1 15,342,000 727,812 1 320,000,000 3,200

953 742,880,649 5,068,131

>20 000 000

Totals

Treaty Size

Page 42: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Designing

• Reinsurer May insist on deductible of at least $250,000.

• Insurer may want treaty cover up to $6,000,000– Is insurer willing to pay upfront XL premium for $6 million

cover in that case $5.75m Xs $250K. Will reinsurer be able to give you that and at what price? Note deductible is 4% of limit.

– Insurer may combine XL , Surplus and Fac. So you have 5 line surplus with retention of $1m. Giving total treaty capacity of $6m. Retention will be protected by XL of $750k Xs $250k. All risks above $6m will be placed on Fac basis

Page 43: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

Another Example

No. Of Risks

Total Sum Insured Premium

0 5,000 39 142,280 7,546

5,001 10,000 91 750,691 31,755

10,001 15,000 36 463,047 48,611

15,001 20,000 36 667,660 47,303

20,001 30,000 41 1,034,512 92,423

30,001 40,000 44 1,638,535 73,732

40,001 50,000 35 1,635,448 105,885

50,001 60,000 27 1,456,920 99,907

60,001 70,000 19 1,245,429 37,306

70,001 90,000 24 1,896,796 89,825

90,001 120,000 29 2,944,180 159,205

120,001 200,000 16 2,606,308 91,115

200,001 250,000 1 250,000 3,334 3 1,188,833 50,810

441 17,920,639 938,757

>250,001

Totals

Treaty Size

Page 44: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

• This example consists of balanced spread of small risks. An XL might be ideal

• There may be need for proportional cover protected by an XL. However, will the deductible amount remain reasonable?

• There really isn’t much need for Fac except for the 4 risks above $200k

• Most likely a motor account

Page 45: Reinsurance Application Presented By Alice Shumba Head- Underwriting FBC Reinsurance

THE END