In Re we trust Aspects of Reinsurance Gerlof Wiersma, 6 March 2018
Disclaimer: Views and opinions expressed in this talk belong solely to me, and do not necessarily reflect views or opinions of De Nederlandsche Bank.
2017: catastrophic year
Gross Written Premiums (GWP)
Domination of large reinsurers from DE, CH, FR, UK, US
Welcome to Bermuda
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What is reinsurance? Reinsurance made simple (https://youtu.be/gAaZNPOQ0D4)
Reinsurance = Insurance Insurance
Reinsurance
Policy holder
Insurer: ceding party or cedant
Insurer
Reinsurer
Deductible
Retention or attachment point
Sum insured/maximum cover
Limit or detachment point
No-claims bonus
Profit sharing
Reinsurance ≠Insurance Insurance
Reinsurance
Consumer protection
Business to business
Simple policy (no small print)
Complicated agreements
Policy holder & 1 insurer
Insurer & 1 or more reinsurers
General risk cover
Risks defined and excluded
Local/national
Global
Policy holder ďƒłInsurer ďƒłreinsurer
premiums Policy holder
premiums Reinsurer
Primary insurer claims
claims
No contact or relation between policy holder and reinsurer
Re-contracts: Quota share & Excess of loss Quota share 40% => Re
• Quota share Re takes over a percentage of the risk
40% 60%
Insurer
Reinsurer
€50 mln. Reinsurer
• Excess of loss Cover for losses exceding specific threshold
Insurer
€10 mln.
XL threshold €10 mln.
Re-contracts: Treaty & Facultative • Treaty
• Facultative
(Re)insurance is about diversification Individual risks
Diversify: Number & type
Primary insurer
Diversify: Region & sub-type
Risks spread out globally
Primary insurer
Primary insurer
Reinsurer
Another Reinsurer
Capital Market Solutions
Why buy reinsurance? • Traditional - Protect against extreme claims - Reduce fluctuation in claims costs - Increase capacity to grow • Non-traditional - Capital optimization
Reinsurance pricing â&#x20AC;˘ Experience Price <= statistical properties of own loss history
â&#x20AC;˘ Exposure Price <= exposure combined with general (statistical) principles
Reinsurance pricing: excess of loss example • Portfolio: • Premium:
10,000 0.1%
Income • Premiums:
10
Claims • Mean: • SD: • 99.5%
5 8 48
(claims <= log-normal distribution)
Reinsurance layers • Reinsurance BE: 5 SD: 8 • Reinsurance cover retention: 13 limit: 48
• Reinsurance layers - layer 3: [30, 48] - layer 2: [20, 30] - layer 1: [13, 20]
99.5%: 48
Reinsurance layers probabilities
Pricing of reinsurance layers • Layer risk premium = E[X] + λ SD[X] • λ : subjective, layer-dependent factor (λ > 0)
Reinsurance pricing: Science or Art?
Reinsurance programs > 48
200 mln. umbrella cover 100 mln.
30-48
80 mln. 20-30
13-20 10 mln.
< 13 Simple example More lines of business
Reinsurance and capital optimization • 1/200 capital buffer: SCR = Loss99.5% - LossBE
Our example: Loss99.5% = 48 - Gross (pre-Re) buffer - Net (apres-Re) buffer
and
LossBE = 5
SCRgross = 48 - 5 = 43 SCRnet = 13 – 5 = 8
• Risk moved to reinsurers => ∆SCR = -35
Reinsurance and capital optimization • Insurer side:
risk to reinsurer
• Reinsurer side: risk from insurer
• -
=> ∆SCRinsurer = -35 => ∆SCRRe
= +35
This ain't necessarily so: Reinsurer more diversified Reinsurer has an internal model Different rules for insurer and reinsurer Reinsurer domiciled in relaxed supervisory climate
?
Booming Bermuda (re)insurance market â&#x20AC;˘ Tax system - Reinsurance business cycle and corporation tax â&#x20AC;˘ Solvency 2 equivalence - Bermuda since 2016 Solvency 2 equivalent - Bermuda Monetary Authority less strict on risk transfer issues, etc.
Actuary on Bermuda: pros
Actuary on Bermuda: cons
Reactionary culture: Bermuda becomes world's first country to repeal same-sex marriage