1. Reinsurance Session 3

2. Reinsurance CATASTROPHE (RE)INSURANCE 2 Examples from Caribbean Region: Monoline Property Insurer Multi-line Non-life insurer

3. Reinsurance CATASTROPHE (RE)INSURANCE 1.Aggregate Exposures Total sums insured by line of business & location. 2.Assess likely loss scenario Must be plausibly severe Preferably modeled by a reputable modeling agency 3.Does capital and reinsurance cover the loss scenario? The real issue for supervisors!

4. Reinsurance – Catastrophe Reinsurance A Caribbean Insurer Ltd. Aggregate Property Exposures – Y.E. March 31, 2008. A Caribbean Insurer Ltd. Abridged Balance Sheet – Y.E. March 31, 2007. 3,759,666,987 Aggregate Property Exposures 847,027,808USVI 160,551,133Turks & Caicos 325,000Trinidad & Tobago 6,158,620St. Vincent 70,676,148St. Maarten 6,779,389St. Nevis 22,141,125St. Kitts 36,008,407St. Lucia 91,490,811Jamaica 29,952,188Grenada 21,762,939Dominica 10,298,520Curacao 1,177,224,951Cayman 1,645,250BVI 1,648,750Belize 655,535,718Barbados 513,572,642Bahamas 82,534,118Antigua 24,333,470Anguilla US$ (net of fac) 33,391,454Shareholders Equity 3,747,124Retained Profits 29,644,330Share Capital 33,391,454Net Asset Value 31,779,228Total Liabilities 11,271,860Other Liabilities 20,507,368Insurance Liabilities 65,170,682Total Assets 63,194,128Other Assets 1,976,554Fixed Assets US$ US$3.8 billion risk backed by US$33.4 million assets

5. Catastrophe Reinsurance Aggregate Exposures Probable Maximum Loss PML – Reinsurance Cover – Capital ≥ Zero The Critical Business Process 1.Assess severity of probable loss 2.Inputs include sophisticated models & management’s judgment 3.Control underwriting based on PML - RI

6. Catastrophe Reinsurance Aggregate Exposures Analyze into cat-exposed portfolios (US$): 3,702,634,896880,380,0522,822,254,844 Total 1,708,468,339 Other 845,057,308290,795,370554,261,938 USVI 1,149,109,249589,584,682559,524,567 Cayman Is Total Commercial & Construction Homeowner / Residential Apply PML assumptions to these numbers

7. Catastrophe Reinsurance Aggregate Exposures to Probable Maximum Loss Cayman USVI Other Caribbean Is.Cayman USVI Other $1.7B $845M $1.2B Aggregate Exposures PMLs Business Assumptions Underwriting Discipline Further Reading: 1. A Probable Maximum Loss Study of Critical Infrastructure in Three Caribbean Island States Caribbean Disaster Mitigation Project http://www.oas.org/cdmp/document/pml/pml.htm# executive http://www.oas.org/cdmp/document/pml/pml.htm# executive 2. Natural Catastrophe Probable Maximum Loss Woo. British Actuarial Journal 2002. 1. Severity of Loss Scenario for year Modeled Scenario:1yr. in 50; 1yr. In 100 etc. 2. Underwriting Selection Criteria Windstorm Distance from shoreline Elevation above sea level Topography Retrofitting of buildings Quake Location, Location, Location Retrofitting of buildings

8. Non-life Reinsurance Types of Contract – A reminder Non-Proportional Excess of Loss Specified limit e.g. $65m. Specified deductible e.g. $5m. Specified line of business coverage Specified number of reinstatements. Proportional Quota share Traditionally, shares premiums and claims in the same proportions Specified line of business coverage BUT: Aggregate cession limits Event limits Risk limits

9. Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008 All layers 100% placed. 3 Reinstatements. 2 Reinstatements. 1 Reinstatement. All territories Cayman Is only Property Per Risk US$350k XS US$150k US$500k XS US$500k US$4million XS US$1million US$2.5million XS US$5million (Kicks in after all other reinsurances) (Reinsured decides what constitutes a risk) 100% placed. 1 Reinstatement. All territories.Umbrella Property Catastrophe US$110million XS 1.US$70m Residential, 2. US$35M Commercial, and 3. QS Event & Cession limits 100% placed. 1 Reinstatement. All territories.Residential Excess of Loss US$65million XS US$5million 100% placed. 1 Reinstatement. All territories.Commercial Excess of Loss US$30million XS US$5million 52% placed. (That is 39% r/i cover) Event limit is 15% of aggregate exposure, or 100% of PML. Cession limits US$4m per risk, but aggregate cession limit varies by territory. All territories excl. Cayman & USVI. 75% Quota Share Max. single risk limit US$4m of which 75% is ceded & 25% retained.

10. Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008 75% Quota Share Max. single risk limit US$4m of which 75% is ceded & 25% retained. All territories excl. Cayman & USVI. 52% placed. (That is 39% insurance cover) Event limit is 15% of aggregate exposure, or 100% of PML. Cession limits US$4m per risk, but aggregate limit varies by territory. Commercial Excess of Loss US$30million XS US$5million All territories. 100% placed. 1 Reinstatement. Residential Excess of Loss US$65million XS US$5million All territories. 100% placed. 1 Reinstatement. Umbrella Property Catastrophe US$110million XS 1.US$70m Residential, 2. US$35M Commercial, and 3. QS Event & Cession limits All territories. 100% placed. 1 Reinstatement. Property Per Risk US$350k XS US$150k US$500k XS US$500k US$4million XS US$1million US$2.5million XS US$5million (Kicks in after all other reinsurances) (Reinsured decides what constitutes one risk) All territories Cayman Is only All layers 100% placed. 3 Reinstatements. 2 Reinstatements. 1 Reinstatement. Aggregate limits per cover note: Northern Caribbean: $312m Southern Caribbean: $183m Compare to aggregate exposure (slide 5) of $1.7billion for non Cayman & USVI risk. The underwriting has overshot the cession limits, so reinsurance cover is “averaged” down in proportion (say by 1/3 rd ). Reinsured decides what constitutes one risk. That is, they can decide whether to aggregate it if its part of a catastrophe, or not.

11. Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008 US$5m US$35m US$70m Residential XL, $65m xs $5m & 1 Reinstatement Commercial XL, $30m xs $5m & 1 Reinstatement Quota Share. Max of US$0.79m per risk Umbrella Property Catastrophe $110m XS: 1.$70m Residential 2.$35m Commercial 3.QS Event Limits (15% Agg. Exp.) & 1 Reinstatement 15% Max. Agg. Exp. Zone B $27.45m US$180m Per risk XL $7.5m XS $150k Other RI to be used first. $4m per risk limit is reduced: 1.Contract is only 59% placed. 2.Averaged down by a factor of 3.

12. Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008 US$5m US$35m US$70m Residential XL, $65m xs $5m & 1 Reinstatement Commercial XL, $30m xs $5m & 1 Reinstatement Quota Share. Max of US$0.79m per risk Umbrella Property Catastrophe $110m XS: 1.$70m Residential 2.$35m Commercial 3.QS Event Limits (15% Agg. Exp.) & 1 Reinstatement US$180m Per risk XL $7.5m XS $150k Other RI to be used first. Loss Scenario Assume 3 hurricanes causing losses to residential book of business: 2 losses of $75m & 1 loss of $35m to the insurer. Gross incurred QS Recovery XL Recovery Risk XL Recovery Net Incurred 1 st Hurricane $75m$0.79m$70m$4.21m 2 nd Hurricane $75m$0.79m$70m$4.21m 3 rd Hurricane $30m$7.35m$22.65m $31.07m Compare to Net Asset Value $33.4m Net premium income for 2007 was US$22million, which improves the above outcome.

13. Non-Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008 US$5m US$35m US$70m Residential XL, $65m xs $5m & 1 Reinstatement Commercial XL, $30m xs $5m & 1 Reinstatement Quota Share. Max of US$0.79m per risk Umbrella Property Catastrophe $110m XS: 1.$70m Residential 2.$35m Commercial 3.QS Event Limits (15% Agg. Exp.) & 1 Reinstatement US$180m Per risk XL $7.5m XS $150k Other RI to be used first. Net premium income for 2007 was US$22million. Doesn’t help that much when you add in the attritional non-cat losses!

14. Non-Catastrophe Reinsurance Reinsurance Program for Y.E. March 31, 2008 US$5m US$35m US$70m Residential XL, $65m xs $5m & 1 Reinstatement Commercial XL, $30m xs $5m & 1 Reinstatement Quota Share. Max of US$0.79m per risk Umbrella Property Catastrophe $110m XS: 1.$70m Residential 2.$35m Commercial 3.QS Event Limits (15% Agg. Exp.) & 1 Reinstatement US$180m Per risk XL $7.5m XS $150k Other RI to be used first. Catastrophe losses have appropriate RI cover, but limited to two events Beware of attritional claims not covered by RI Don’t forget about net premium income

15. Non-Catastrophe Reinsurance The example was a monoline property insurer. Diversified insurer – reinsurance is usually designed to respond to a variety of business lines. PMLs & Loss Scenarios for all lines must be covered by reinsurance and capital.

16. Multi-line Reinsurance Another Insurer Y.E. 31 March 2009 1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re. All classes of business. Motor, Workers Comp., Employers Liability, Third Party and CAR Liability. $500k XS 500k (Annual aggregate limit: $6.0m) $4.0m XS $1.0m (Annual aggregate limit: $12.0m) $2.5m XS $5.0m (Annual aggregate limit: $7.5m) Motor XL 1. 100% placed: Lloyd’s (Chaucer)Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage). $7.5m XS $750k. 1 Reinstatement Catastrophe XL 1. Aggregate cession limit of $600m. Quake & Windstorm 2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure. 3. 100% placed: Everest Re. A)Property, Business Interruption, CAR (material damage). B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects. A)Cession limit: $4m any one risk B) Cession limit: $1m any one risk 90% Quota Share (non-obligatory) CommentsBusiness coveredCover Summary of Reinsurance Cover Notes

17. Multi-line Reinsurance Another Insurer Y.E. 31 March 2009 1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re. All classes of business. Motor, Workers Comp., Employers Liability, Third Party and CAR Liability. $500k XS 500k (Annual aggregate limit: $6.0m) $4.0m XS $1.0m (Annual aggregate limit: $12.0m) $2.5m XS $5.0m (Annual aggregate limit: $7.5m) Motor XL 1. 100% placed: Lloyd’s (Chaucer)Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage). $7.5m XS $750k. 1 Reinstatement Catastrophe XL 1. Aggregate cession limit of $600m. Quake & Windstorm 2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure. 3. 100% placed: Everest Re. A)Property, Business Interruption, CAR (material damage). B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects. A)Cession limit: $4m any one risk B) Cession limit: $1m any one risk 90% Quota Share (non-obligatory) CommentsBusiness coveredCover Summary of Reinsurance Cover Notes Aggregate sums insured are $550 million - within the cession limit. Note the event limit - if no other claims, responds to 6 events Per risk limits split by line of business - $4m per risk for property - $1m per risk for other LOBs Non-obligatory QS

18. 1m- 2m- 3m- 4m- 5m- 6m- 7m- 8m- “Motor XL”“Catastrophe XL” Multi-line Reinsurance Another Insurer Y.E. 31 March 2009

19. 1m- 2m- 3m- 4m- 5m- 6m- 7m- 8m- “Motor XL”“Catastrophe XL” $6.5m xs $1m Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability $500k xs $500k All lines of business 90% QS, $1m per risk limit Burglary, PA, Marine Cargo, Fidelity $7.5m xs $750k + 1 Reinstatement Fire, Homeowners, Motor, Business Interruption, CAR-material damage 90% QS, $4m per risk limit Property, Business Interruption, CAR-material damage

20. Multi-line Reinsurance Another Insurer Y.E. 31 March 2009 1m- 2m- 3m- 4m- 5m- 6m- 7m- 8m- “Motor XL”“Catastrophe XL” $6.5m xs $1m Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability $500k xs $500k All lines of business 90% QS, $1m per risk limit Burglary, PA, Marine Cargo, Fidelity $7.5m xs $750k + 1 Reinstatement Fire, Homeowners, Motor, Business Interruption, CAR-material damage 90% QS, $4m per risk limit Property, Business Interruption, CAR-material damage Interaction Between Contracts Reading all the contract wordings reveals: 1.Use Quota Share before XL 2.Use Motor XL before Catastrophe XL 3.CAT XL “Two Risk Warranty” for all covered lines of business. Two losses from one event are necessary before making a recovery. A Hurricane or Quake are not necessary. 4.Motor XL Motor (own physical damage) is only covered for hurricane / quake All other lines are covered on an “each & every loss” basis

21. Multi-line Reinsurance Another Insurer Y.E. 31 March 2009 1m- 2m- 3m- 4m- 5m- 6m- 7m- 8m- “Motor XL”“Catastrophe XL” $6.5m xs $1m Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability $500k xs $500k All lines of business 90% QS, $1m per risk limit Burglary, PA, Marine Cargo, Fidelity $7.5m xs $750k + 1 Reinstatement Fire, Homeowners, Motor, Business Interruption, CAR-material damage 90% QS, $4m per risk limit Property, Business Interruption, CAR-material damage 1 3 1 2 Two risk warranty e.e.l. except motor damage

22. Multi-line Reinsurance Another Insurer Y.E. 31 March 2009 CoverBusiness coveredComments 90% Quota Share A)Cession limit: $4m any one risk B) Cession limit: $1m any one risk A)Property, Business Interruption, CAR (material damage). B) Burglary, Personal Accident, Marine Cargo, Fidelity, Personal effects. 1. Aggregate cession limit of $600m. Quake & Windstorm 2. Event limit for Quake and Windstorm $90m or 15% of in force aggregate exposure. 3. 100% placed: Everest Re. Catastrophe XL$7.5m XS $750k. 1 Reinstatement Fire, Homeowners Comprehensive, Motor, Business Interruption, CAR (material damage). 1. 100% placed: Lloyd’s (Chaucer) Motor XL$500k XS 500k (Annual aggregate limit: $6.0m) $4.0m XS $1.0m (Annual aggregate limit: $12.0m) $2.5m XS $5.0m (Annual aggregate limit: $7.5m) All classes of business. Motor, Workers Comp., Employers Liability, Third Party and CAR Liability. 1. 100% placed: 40% Lloyd’s (Canopius), 60% Odyssey Re. Assume a catastrophe loss of $75million Gross loss $75m Quota Share recovery – 90% ($67.5m) Cat XL recovery ($7.5m) Net loss ZERO to Motor XL does not cover property. (assume 500 xs 500 is used up) A single claim recovery can be split into 90% QS & 10% XL. Within event limit of $90m. The reinsured can determine what constitutes a risk under QS. If justifiable, it can of adjust its recovery under the QS to take maximum advantage of the XL. QS is NON-OBLIGATORY 13

23. Non-life Supervisory Assessment Capital + Reinsurance cover > Loss scenario Summarize the reinsurance cover notes Catastrophe business: 1.Get aggregate exposures 2.Understand & assess PML assumptions 3.PML assumptions consistent with underwriting guidelines 4.Onsite walkthrough test underwriting Non-catastrophe business: 1.Compare loss ratio to prior years and market experience 2.Ensure that improved loss ratios are consistent with stricter underwriting 3.Onsite walkthrough test underwriting

24. Reinsurance CASE STUDY – ROUND 2 Contract Wordings Read the wording: Identify areas where clarification is required What questions would you ask the insurer? What suggestions do you have to improve the wording?