2006 General Meeting Assemblée générale 2006 Chicago, Illinois 2006 General Meeting Assemblée générale 2006 Chicago, Illinois Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

Group Disability Quota Share Reinsurance Pascal Verrette, FSA, FCIA Director, Group Actuarial and Financial Analysis Munich Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Agenda –Overview of Reinsurance Methods –Scope of Quota Share Reinsurance –Benefits of Quota Share Reinsurance –Reinsurance Services expected with Quota Share Arrangements

Overview of Reinsurance Methods

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Overview of Reinsurance Methods –Quota Share –High Amount Excess –Extended Wait (Duration Excess) –Aggregate Stoploss –Catastrophe –Combinations

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Overview of Reinsurance Methods high low Capital Relief Risk Tolerance highlow Quota Share with/without Profit Sharing Combination of Quota Share/Excess with/without Profit Sharing Aggregate Stoploss Extended Wait High Excess of Loss Catastrophe

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Overview of Reinsurance Methods Deciding on a Reinsurance Method and Level –Insurer’s knowledge of itself: current financial and operational situation, financial and business objectives, risk tolerance –Determining actual financial needs/objectives first, then establishing desired reinsurance solution

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Overview of Reinsurance Methods Deciding on a Reinsurance Method and Level –Performing projection impact analysis of I/S, B/S, EV, MCCSR, tax implications, administrative (processes and people) requirements –Based on needs and analysis, reinsurer can provide input into appropriate/optimal reinsurance approach –Re-evaluate reinsurance needs/solution periodically

Scope of Quota Share Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Scope of Quota Share Reinsurance Premiums –Coinsurance basis – aligned with gross premium –Partners both share in group discounts / loads Expense Allowances – linked to insurer’s expenses –Usually flat % of premium, % of paid claims –Reinsurer’s share of out of pocket expenses – rehab, legal, etc.. Claims –Reinsurer’s Quota Share of any claim –Net of CPP, COLA and any other adjustments

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Scope of Quota Share Reinsurance Issuing New Business –Automatic treaty thresholds agreed to by partners Set to obtain optimal cost/benefit ratio for partners Updated periodically as partners see fit –Special Acceptances For business not meeting automatic criteria which partners agree to reinsure according to existing treaty terms –Facultative Acceptances Non automatic business reinsured based on unique terms

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Scope of Quota Share Reinsurance Paying Claims –Automatic threshold agreed to by partners Set to obtain optimal cost/benefit ratio for partners Updated periodically as partners see fit –Claims exceeding treaty threshold Reinsurance input obtained Mutual agreement is reached re claim decision

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Scope of Quota Share Reinsurance Reinsurance Profit Sharing with Insurer –Can be provided depending on type and size of business reinsured –Applies to pooled / non refund accounted business –Partners determine whether to include other than Quota Share coverages –Profit sharing enhances alignment of interests

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Scope of Quota Share Reinsurance Refund Accounted Business –Typically reinsured in conjunction with other pooled business –Excluded from treaty level profit sharing –Profit sharing applied at group level based on Quota Share based on gross policyholder retention formula –Expense allowance also based on policyholder retention formula, net of reinsurance expenses

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Scope of Quota Share Reinsurance Inception and Termination –Reinsurance on an Incurral basis –Applies to all claims incurred from treaty inception –For all existing groups and groups issued after inception

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Scope of Quota Share Reinsurance Inception and Termination –Upon termination of agreement, newly issued groups no longer reinsured –Inforce groups can be recaptured subject to target treaty duration and profitability –Claims incurred prior to termination / recapture remain reinsured until claim termination / expiry unless negotiated otherwise

Benefits of Quota Share Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Benefits of Quota Share Reinsurance Risk Relief / Earnings Volatility Management –Adverse claim frequency and claim severity protection –All risks shared from 1st dollar Includes investment income and expense risks –Reduced overall result volatility

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Benefits of Quota Share Reinsurance Capital Relief / Management –Maximized capital relief –Reduced new business strain

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Benefits of Quota Share Reinsurance Access to reinsurance services and market intelligence –Full access to reinsurer’s services Access to additional industry knowledge via reinsurer Expertise and credibility gained from industry experience Reinsurer can act as a consultant across all functional areas Services provided at no extra cost

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Benefits of Quota Share Reinsurance Best alignment of insurer / reinsurer interests results in full partnership –Insurer and reinsurer have same interests, same problems, same opportunities –Similar accounting, reserving and capital measurements –i.e., insurer and reinsurer speak the same language and work together to meet market and insurer’s needs and to solve arising insurer’s issues –Reinsurer’s objective is to provide support without interfering in management of the business

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Benefits of Quota Share Reinsurance Additional benefits of / reasons for quota share reinsurance –Easily combined / topped up with additional reinsurance cover –Simpler reinsurance administration –Increased capacity for rapid growth –Increased competitive market position

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Benefits of Quota Share Reinsurance Quota Share is appropriate: –For volatile benefits –For high growth business –When launching new products –When entering new markets –When acquiring new companies –For small, medium and large insurers… …many ways to structure and customize needs-based reinsurance solutions; adequate analysis is critical

Reinsurance Services Expected with Quota Share Arrangements

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Reinsurance Services Reinsurer: –Acts as a consultant to insurer, a partner, an extension to insurer’s staff –Follows insurer’s lead, insurer manages its business, not reinsurer –Focuses on sound practices which can improve insurer’s results

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Reinsurance Services Services: –Group Underwriting –Medical Underwriting –Actuarial / Product –Claims

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Reinsurance Services Group Underwriting –Annual reviews –Special and facultative acceptances –Consultations on challenging / complex cases –Training –Assistance with group level pricing –Market information

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Reinsurance Services Medical Underwriting –Approvals for high amounts –Consultations on challenging / complex cases –Access to online manuals Ongoing medical research to update manuals

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Reinsurance Services Actuarial / Product –Pricing / rate review assistance –Valuation assumptions and methods review –Financial experience / trend analysis –Product development –Contract wording

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Reinsurance Services Claims –Annual reviews –Training –Consultations on challenging / complex / litigated cases –Industry seminars –Access to online claims education and training modules

Questions?