Reinsurance and Personal Umbrella Chuck Gegax FCAS Swiss Re CARe 2008

Reinsurance and Personal Umbrella Introduction Personal Umbrella from Both Primary and Reinsurance Perspectives Basic and Advanced Topics –Pricing, Understanding Exposure –Types of Treaties –Other Factors, Including UW Cycles –Reinsurance Product Differentiation My Background Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Introduction My Background Primary Personal Umbrella (2 Years) and Commercial Umbrella (5 Years) at FFIC 6 Years Reinsurance Pricing at 4 Different Reinsurance Companies, Small Regional and Large National Clients Special Studies – Layer Optimization, ALAE, etc. Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Personal Umbrella Basics Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Personal Umbrella Basics How Are Umbrella Policies Rated Typically Unit Rates –Per House, Per Car, etc. –Different From Commercial Umbrella Which Is Often % of Underlying Premium Other Rating Variables –Underlying and Policy Limit –Additional Exposures (Boats, Pools, Trampolines, Youthful Drivers, Business Operations, etc.) –Varies by State/Territory Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Personal Umbrella Basics NYT on Personal Umbrella “… at companies dealing with rich clients, the first million in coverage is usually the most expensive, at perhaps $150 to $300 annually … [III] The rates per million decline as coverage increases. But at $10 million in coverage, the rate jumps because few customers buy that much, meaning insurers can spread their risk over only a relatively small group of customers.” New York Times (Umbrella Coverage for Preventing Your Ruin, 3/18/08) [III] source: Jeanne M. Salvatore, Insurance Information Institute Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Personal Umbrella Basics NYT on Personal Umbrella (cont.) “… The situation is often the reverse for the many insurers who specialize in middle- and lower-income clients. Often their rates shoot up after the first million in umbrella coverage because they have only a small group of buyers of umbrella policies larger than $1 million. A smaller pool of customers creates more risk per dollar of premium for an insurer, so the insurer charges more for the coverage…” New York Times (Umbrella Coverage for Preventing Your Ruin, 3/18/08) Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Personal Umbrella Basics UW Considerations Depends on the Sophistication of the Company Can Be Similar to PPA Exposure Profiling –Credit Scoring, Other Coverages, etc. Capacity Layer, So Loss Drivers are Further Removed Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Personal Umbrella Basics How Do Rates Get Updated Often They Don’t Internal Analysis Competitor Analysis Consultants Reinsurer Input? Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Reinsurer Perspective Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Reinsurer Perspective Types of Primary Carriers Large Personal Lines Large Multi-Line Conglomerates Small Regional Companies Specialty Carriers Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Reinsurer Perspective Types of Umbrella Portfolios Fully Supported Fully Unsupported Mixed Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Reinsurer Perspective Types of Treaties Quota Share –Most Common Excess of Loss –Often Combined with Other Underlying Coverages –Becoming More Common Surplus Share Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Experience Higher Layers Often Have Little Experience –Not Very Credible –What Do You Compare Against? Lower Layers from Large Books of Business Have Credible Experience, but Most Umbrella Portfolios Will Have Some Portion of the Business That Can Not Be Credibly Experience Rated Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Exposure Traditional “Exposure” Analysis Relies on Layering Ground Up Losses With Some Severity Distribution This Does Not Work For Personal Umbrella –No Way to Determine “Ground Up Losses” –Pricing in the Umbrella Layer Is Not Directly Related to Underlying Pricing –Severity Distributions May Not Be Reliable in the Upper Layers Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Peer/Competitor Comparison Compare Rates of the Reinsured to Other Companies with Larger, More Credible Portfolios Aggregate Data from Multiple Clients –Assess Overall Portfolio Adequacy –Develop Pricing Parameters Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Unit Pricing Estimate Loss Costs for Various Exposure Components –May Come From Peer Company Study, Large (Credible) Company Filings, Industry Sources Compare These Loss Costs to Rates Charged Will Be Difficult to Quantify Every Variable –Select Key Loss Drivers –Fill In Missing Elements with Estimates, Judgment Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Unit Pricing Example From Allfarm’s Guam Filing: –Primary Residence Loss Cost:$50 –Primary Auto Loss Cost:$100 –Additional Auto Loss Cost:$40 –Boat/RV Loss Cost:$30 –Pool Loss Cost:$20 –Trampoline Loss Cost:$10 –Business Use Loss Cost:$10-$100 Note: Figures and names are entirely fictitious Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Unit Pricing Example From Client’s Rate Manual: –Primary Residence Unit Charge:$75 –Primary Auto Unit Charge:$120 –Additional Auto Unit Charge:$30 –Boat/RV Unit Charge:$40 –Pool Unit Charge:$10 –Trampoline Unit Charge:$0 –Business Use Unit Charge:$30 Note: Figures and names are entirely fictitious Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Treaty Pricing Considerations Unit Pricing Example Compare Client’s Unit Charge to Base Loss Costs Use Client’s Exposure Profile to Weight Various Combinations of Loss Ratios Together May Need to Estimate or Use Samples to Get Exposure Profile May Point Out Areas Where Client’s Rates Are Not Sufficiently Detailed Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Other Considerations Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Other Considerations Changes in Book/Exposure Growth/Expansion into New States Expansion of Coverages/Exposure Shifts in Underlying and Policy Limits Changes in UW/Claims Handling Practices Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Other Considerations Changes in Legal Environment Could Impact Certain States or Nationwide Jury Verdicts Emerging Exposures/Issues –Identity Theft –Other Potential Cyber Issues –Housing/Credit Crisis May Impact Claims Reporting Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Other Considerations Impact of Market Cycle/Economic Conditions Manual Rates Typically Are Not Discretionary, Reducing Downward Pressure on Rates Other Ways to Cut Rates –Tiered Pricing –“Overlooking” Exposures Decision To Purchase Umbrella May Be Driven by Cost of All Personal Insurance Economic Conditions May Influence Claims Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Differentiating Your Reinsurance Offerings Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Differentiating Your Reinsurance Offerings General Security/Stability Relationships/Other Business with Client Ease of Doing Business Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Differentiating Your Reinsurance Offerings Services/Value Added Rate/Filing Support Data Management Portfolio/Strategic Analysis Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008

Conclusions Reinsurance and Personal Umbrella Chuck Gegax Swiss Re CARe 2008