1. 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

2. 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

3. 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.

4. 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

5. 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

6. 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

7. 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

8. An aside on attachment points
Of 68 marine programmes seen in
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

9. 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

10. 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

11. 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.

12. 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

13. 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?

14. 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)

15. 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

16. 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

17. 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

18. 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

19. 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)

20. 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

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

22. 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

23. 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.

24. 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

25. 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

26. 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?

27. 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

28. 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.

29. 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

30. 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