CARe 2006: Marine Reinsurance Lee Tookey Underwriter, Marine and Aerospace Aspen Re London (and nearly an actuary) Thank you Observations of someone doing the underwriting and actuarial role at the same time

Introduction: review of the basics Objectives: what the actuary can do Marine Reinsurance: Introduction: review of the basics Objectives: what the actuary can do Some typical questions Some observations on specific classes Hull Cargo Energy Closing remarks

Marine Reinsurance: Introduction Significant Actuarial involvement for at least 15 years Slow improvement in data Always has been plenty of it but little consistency and difficult to model. Little interest from commercial modelling companies In house development and discussion papers Significant involvement beyond reserving. Serious discussion papers in UK and US in late 80s. No Hurricane Andrew type event to pull market together. No real interest from modellers and no obvious standards to follow.

Proportional and Non-Proportional Facultative and Treaty Introduction (2) Proportional and Non-Proportional Facultative and Treaty Pure and Composite “Marine” Classes include Hull Cargo & Specie Offshore Energy Liability (Marine and Energy) Wind back, what is the range of products

Introduction (3): Non Proportional Treaty (pre 2005) Risk and event common. Attachment point of programme a function of maximum risk line. Combined or “Whole Account” layers above specific class layers Concentrating on no proportional treaty, regular excess of loss

Introduction (4): Rating Non-Proportional Treaty Usually experience and exposure rating Experience from actual and “as-if” losses Attritional risk losses Headline risk losses Catastrophes (natural and man made) Exposure from Risk profile and size of loss curve for risk losses Market share and market loss return periods Possibly stochastic models

Introduction (5): Where is the experience? Attachment point for excess of loss typically 10% of maximum line. Usually few losses at this level Money swap layers generally avoided Low level backup layers in softer market Frequency/severity approach would usually need to look at layer below programme

An aside on attachment points Of 68 marine programmes seen in 2006.. 12 had a ROL>50% for first layer Of these, 9 were domiciled in Americas or led by US reinsurers All attached below 10% of maximum line Possibly Lloyd’s influence Underwriting capacity measured in terms of written premium

Using information we have, provide guidance to underwriters on Objectives Using information we have, provide guidance to underwriters on Pure premium Volatility of result Changes to exposure over time Claims inflation Accumulations

Understanding the business from an insurance perspective Objectives (2) Understanding the business from an insurance perspective Understanding what information is collected and why Understanding effects of changes in the market Understanding the results of our analysis in light of the actual experience. Whole new language: barratry – fraudulent act committed by master or crew, general average. Not as simple as, say, property Information from insured, government agencies, registers (eg Lloyds confidential) mostly to aid in marine operation rather than to provide information for reinsurers – too distant from the process. But we don’t see all the rating information collected by the insurers Changes in trade pattern, ship design, containerisation, port control as well as liability awards, international regulation Experience and exposure rating may appear miles apart and inconsistent with the market price

Why is the experience rate so different to the exposure rate? Common Questions Why is the experience rate so different to the exposure rate? What has changed over the experience period and how can I quantify it? How homogeneous is the exposure data and does that cause a problem? What more is there to know and can the underwriter tell me? Credibility issue…. If a method comes out with a number very different to the experience and the view of the market, need to offer credible reasons why.

Marine Hull Excess of Loss Information Typically loss experience given excess of 50% of attachment point last year. Several years data usually available but what is the effect of… Change in mix of vessel types Change in lines size Changes in policy conditions and coverage Inflation

Marine Hull Excess of Loss Information (2) Risk Profiles Gross or Net of reinsurance By type of vessel ? In force or risks written, what period 9 month written profiles not uncommon Premium, sum insured and count Losses by band as well?

Range of ocean going vessels Very large container ships Tankers Bulk carriers Passenger vessels Car Carriers Fishing vessels Service boats Hyundai fortune loss (not picture)

Where is the value? Container Vessel Cruise ship Mostly in hull and engines, some machinery Little else of value (apart from cargo) Cruise ship Hull and engines smaller percentage of value Upper, accommodation decks high value

So what if there is a fire? Fire is a significant risk, even with all that water around. The fire on the Star Princess in March is likely to cost 15% of the total insured value. Actual fire damage costs overshadowed by smoke and water damage repair costs est 70m but experience suggests will go up

Underwriting approaches to book building vary For larger vessels, percentage line, dollar line or both, smaller vessels 100% writing “Normal” maximum line Use of proportional treaty Facultative reinsurance Proportional or excess Territorial considerations Special acceptances

All hull insurance is not the same Standard coverage include Hull and machinery (H&M) Total Loss / Increased Value (IV) Mortgagees Interests (MI) Loss of Hire (LOH) Collision Liability But we rarely see the claims or the exposure broken down like this

Hull Interest Example H&M $200m IV $50m LOH $20m In a risk profile, this may appear as three entries (200, 50, 20), one entry of $250m or one of $270m Maximum partial loss $220m (H&M + LOH) Maximum total loss $250m (H&M + IV)

Hull and Machinery versus Total Loss In some markets, TLO coverage is limited to certain percentage of total insured value Premium rate significantly different TLO may be 30% of all risk rate Size of loss curves different for H&M and TLO TLO pro rata

Inflation Very unpredictable Salvage Labour Steel Reflected to some extent by ship-owner revaluing vessel and we get rate on sum insured

Price for the experience of the account What we should aim to do Price for the experience of the account Adjusted for quantifiable changes in the account from re-underwriting or market changes Allowing for events that haven’t happened If the reinsured is getting premium for the risk, we should get our share

A risk profile is so versatile…. Exposure rating – obviously Number of vessels and TSI Average rate by band Level and utilisation of maximum line size Last three useful in experience rating if we have a history of profiles.

Adjusting Experience Change in line size Change in reinsurance strategy Territory % line, adjust losses and subject premium Dollar line, harder to adjust. Need risk profiles to help Ideally work from gross losses and apply current RI Cat risk and usual perils of the sea Adjusting %... Still use risk profile to see if across the board reduction or just cut off top Dollar size… look at reductions in premium where risk count drops RI – net profiles hard unless simple pro rata reinsurance available. Use of surplus rarely transparent Territory – ex GOM, Brazil – little marine nat cat

Adjusting experience (2) Usually use on level premium to adjust historic frequency / avg severity Can use historic risk profiles Index for frequency based on exposed vessels count to layer Index average severity based on average exposed sum insured to layer

Current risk profiles gives indication of exposure Exposure rating Current risk profiles gives indication of exposure Assume size of loss curve appropriate Underlying loss ratio assumption key. But this may vary through risk profile With all adjustments, often significant difference between experience and exposure At level, few losses?

Historic risk profiles usually are Commentary on line size What is available? Historic risk profiles usually are Commentary on line size Commentary on reinsurance Fleet mix But no use asking 2 days before renewal Profiles may not be consistent year on year

Policy limit or shipment How long is exposure on risk A few cargo issues Policy limit or shipment How long is exposure on risk Where is most of trade What sort of commodity Accumulation risk Start and end of exposure Annual policy / maximum Not all exposed at same time but premium should represent risk Perils and cargo type – may be local market stats eg Japan Nat cat: cars, containers Kobe Storage risks, manufacturing process clause.

Energy – the opportunity After 2005 windstorm, full review Great time to question Every aspect of coverage under review Significant change in data presentation Sub limits in GOM for wind Per policy not per platform Does not effect risk rate Increased modelling

Do not stick to basic methods What else can we use data for Closing Do not stick to basic methods What else can we use data for Learn subject Engage underwriter and client Demonstrate use Cannot work like property account Ready to work outside standard models to improve Learn the language, understand the coverage, ask the questions, pull files Show what you plan to do, get feedback