1. KPMG ACTUARIAL SERVICES
Illustration of Typical Structured Reinsurance Products
ADVISORY / ACTUARIAL SERVICES
Bradley LeBlond Manager Actuarial Services Hartford, Connecticut September 11-12, 2006

2. Common Structured Reinsurance Products
Loss Portfolio Transfer / Adverse Development Cover
Aggregate Stop Loss Cover
Financial Quota Share
Blended Occurrence Cover

3. Loss Portfolio Transfer / Adverse Development Cover
Typical Motivations
Transfer the liabilities of an exited line of business or business segment – full risk transfer.
Reduce the cost of adverse development protection on a block of liabilities.
Absorb the financial impact of adverse development in a purchase using the discount embedded in liabilities.
Increase statutory surplus, improve solvency ratios.

4. Aggregate Stop Loss Cover
Typical Motivations
Utilize future investment income to:
Protect financial plan loss ratio at a low cost (attaching at expected loss ratio)
Reduce the upcoming year loss ratio (attaching below expected loss ratio)
Include hard to place coverage elements on a limited basis

5. Financial Quota Share Typical Motivation
Reduce underwriting leverage while retaining most risk and reward on a book of business.
Protect combined ratio by utilizing sliding scale ceding commissions.

6. Blended Cover Typical Motivation
Spread the financial impact of one event over multiple years with risk coverage for second and sometimes third event.
Lower the cost of catastrophe reinsurance by retaining risk in a measured way.

7. LPT – Example Illustration
Goal: Absorb the financial impact of a $200 million reserve increase on an $800 million block of expected liabilities as part of an acquisition.
Actuarial Assumptions
Expected Undiscounted Liabilities = $1 billion
Lognormal Distribution with a 10% Coefficient of Variation
Payout Pattern
Risk Free Discount Rate = 7%
Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 %

8. LPT – Example Illustration
Possible Structure
Attachment Point = $800 million
Limit = $300 million
Premium = $93 million comprised of:
$85 million in Deposit Premium – placed into Funds Withheld Experience Account credited with 8% interest
$8 million in Margin paid to Reinsurer
Potential Benefit
$200 million – $93 million = $107 million

9. LPT – Example Illustration Loss Scenario: 1,000,000,000
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Experience
Time
Reinsurer
Deposit
Cumulative
Incremental
Acct Interest
Account
Years
Margin
Premium
Paid Loss
Paid to Cover
8.0%
Balance
NPV Result -
8,000,000
85,000,000
0.5
100,000,000
3,334,591
88,334,591
1.5
190,000,000
7,066,767
95,401,358
2.5
270,000,000
7,632,109
103,033,467
3.5
340,000,000
8,242,677
111,276,145
4.5
400,000,000
8,902,092
120,178,236
5.5
450,000,000
9,614,259
129,792,495
6.5
500,000,000
10,383,400
140,175,895
7.5
550,000,000
11,214,072
151,389,966
8.5
600,000,000
12,111,197
163,501,163
9.5
650,000,000
13,080,093
176,581,257
10.5
700,000,000
14,126,501
190,707,757
11.5
750,000,000
15,256,621
205,964,378
12.5
800,000,000
16,477,150
222,441,528
13.5
850,000,000
50,000,000
17,795,322
190,236,850
14.5
900,000,000
15,218,948
155,455,798
15.5
940,000,000
140,000,000
40,000,000
12,436,464
127,892,262
16.5
970,000,000
170,000,000
30,000,000
10,231,381
108,123,643
17.5
990,000,000
20,000,000
8,649,891
96,773,534
18.5
1,000,000,000
200,000,000
10,000,000
7,741,883
94,515,417
Total

10. LPT Example Illustration Loss Scenario: 1,100,000,000
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Time
Reinsurer
Deposit
Cumulative
Incremental
Acct Interest
Account
Years
Margin
Premium
Paid Loss
Paid to Cover
8.0%
Balance
NPV Result -
8,000,000
85,000,000
0.5
110,000,000
3,334,591
88,334,591
1.5
209,000,000
7,066,767
95,401,358
2.5
297,000,000
7,632,109
103,033,467
3.5
374,000,000
8,242,677
111,276,145
4.5
440,000,000
8,902,092
120,178,236
5.5
495,000,000
9,614,259
129,792,495
6.5
550,000,000
10,383,400
140,175,895
7.5
605,000,000
11,214,072
151,389,966
8.5
660,000,000
12,111,197
163,501,163
9.5
715,000,000
13,080,093
176,581,257
10.5
770,000,000
14,126,501
190,707,757
11.5
825,000,000
25,000,000
15,256,621
180,964,378
12.5
880,000,000
80,000,000
55,000,000
14,477,150
140,441,528
13.5
935,000,000
135,000,000
11,235,322
96,676,850
14.5
990,000,000
190,000,000
7,734,148
49,410,998
15.5
1,034,000,000
234,000,000
44,000,000
3,952,880
9,363,878
16.5
1,067,000,000
267,000,000
33,000,000
749,110
(22,887,012)
22,887,012
(7,494,743)
17.5
1,089,000,000
289,000,000
22,000,000
(1,830,961)
(46,717,973)
(6,732,968)
18.5
1,100,000,000
300,000,000
11,000,000
(3,737,438)
(61,455,411)
(3,146,247)
Total
55,887,012
(9,373,959)

11. LPT – Example Illustration
CDF of Reinsurer NPV Result
Expected NPV Result: $3.1 million

12. Aggregate Stop Loss – Example Illustration
Goal: Lower and protect loss ratio for upcoming year
Actuarial Assumptions
Expected Gross Loss Ratio = 75%
Lognormal Distribution with a 15% Coefficient of Variation
Payout Pattern
Risk Free Discount Rate = 7%
Year 1 2 3 4 5 6 7 8 9 10 11 % 15 20

13. Aggregate Stop Loss – Example Illustration
Possible Structure
Attachment Point = 65% Gross Loss Ratio
Limit = 25% of Gross Premium
Premium = 8% of Gross Premium
7% Deposit Premium – placed into Funds Withheld Experience Account credited with 8% interest
1% in Margin paid to Reinsurer
Additional Premium
70% of Losses above a 75% Gross Loss Ratio
Maximum Additional Premium = 3% of Gross Premium

14. Aggregate Stop Loss – Example Illustration Loss Scenario: 75% All Figures Shown as % Gross Earned Premium
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Experience
Time
Reinsurer
Deposit
Cumulative
Incremental
Additional
Account
Exper. Acct
Years
Margin
Premium
Paid
Paid to Cover
Interest
8.0%
Paid Loss
NPV Result -
1.0%
7.0%
0.0%
0.5
11.3%
0.3%
7.3%
1.5
26.3%
0.6%
7.9%
2.5
41.3%
8.5%
3.5
48.8%
0.7%
9.2%
4.5
52.5%
9.9%
5.5
56.3%
0.8%
10.7%
6.5
60.0%
0.9%
11.5%
7.5
63.8%
12.5%
8.5
67.5%
2.5%
11.0%
9.5
71.3%
6.3%
3.8%
8.1%
10.5
75.0%
10.0%
5.0%
11.5
0.4%
5.4%
12.5
5.8%
13.5
0.5%
14.5
6.8%
15.5
16.5
17.5
8.6%
18.5
Total

15. Aggregate Stop Loss – Example Illustration Loss Scenario: 90% All Figures Shown as % Gross Earned Premium
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Experience
Time
Reinsurer
Deposit
Cumulative
Incremental
Additional
Account
Exper. Acct
Years
Margin
Premium
Paid
Paid to Cover
Interest
8.0%
Paid Loss
NPV Result -
1.0%
7.0%
3.0%
10.0%
0.0%
0.5
13.5%
0.4%
10.4%
1.5
31.5%
0.8%
11.2%
2.5
49.5%
0.9%
12.1%
3.5
58.5%
13.1%
4.5
63.0%
14.1%
5.5
67.5%
2.5%
1.1%
12.8%
6.5
72.0%
4.5%
9.3%
7.5
76.5%
11.5%
0.7%
5.5%
8.5
81.0%
16.0%
1.5%
9.5
85.5%
20.5%
0.1%
-2.9%
2.9%
-1.5%
10.5
90.0%
25.0%
-0.2%
-7.6%
-2.2%
11.5
-0.6%
-8.2%
12.5
-0.7%
-8.9%
13.5
-9.6%
14.5
-0.8%
-10.4%
15.5
-11.2%
16.5
-0.9%
-12.1%
17.5
-1.0%
-13.1%
18.5
-14.1%
Total
7.4%
-2.7%

16. Aggregate Stop Loss – Example Illustration

17. Aggregate Stop Loss – Example Illustration
CDF of Reinsurer NPV Result
Expected NPV Result = 0.4%

18. Presenter’s contact details Bradley LeBlond KPMG LLP 860-297-5090
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.