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Reinsurance Marketplace Trends

Rob Collins, Guy Carpenter & Company

Todd Cunningham, Zurich

Steve McElhiney, EWI Re, Inc.

Moderated by Garry Bright, Besso Re

August 10, 2016

© 2016 VCIA; Speaker materials used by VCIA under license.

Agenda

• State of the Market

• Rob Collins

• Market Trends

• Todd Cunningham

• Captive Owners’ Perspective

• Steve McElhiney

2

3

Rob Collins, Guy Carpenter & Company

State of the Market

4

Today’s Discussion

STATE OF THE

MARKET

INFLUENCE OF

NEW MONEY

OPPORTUNITIES

2016 Casualty Reinsurance Market Recap

Typical Reinsurance Price and Program Changes

5

Alternative Sources of Capital Are

Influencing the Reinsurance Market

6

Increase in Convergence/Collateralized

Capital

7

Dedicated reinsurance

capital remained flat YOY;

traditional market capital

declined by ~3% offset by

increase in collateralized

capital

Convergence capital grew

13% YOY; primary focus

continues to be property

catastrophe with emphasis

in U.S. and Retrocessional

markets

Source: Guy Carpenter

$ in billions

$287

Excess Capacity Continues Despite

Pricing Decreases

8

13%

6%

1%

7%8% 8%

7% 7%

13%14%

15%

19%

23% 23%

20%

26%

30%

21%

24%

17%

26%

31%

11%

19%

16%

27%

0%

5%

10%

15%

20%

25%

30%

35%

To

tal U

nu

tiliz

ed

Ca

pac

ity

4 Period Moving Average

*March renewals include February, June renewals include May

TRADITIONAL

Efficient, creative reinsurance capacity

Ability to improve reinsurance terms and

conditions

• Broader basket and clash

coverage or aggregate protection

• Increased Ceding Commissions

Expansion of coverage / Coverage for

emerging risks (i.e. cyber)

Abundant capacity from highly rated

companies

NON-TRADITIONAL

Loss portfolio transfer (LPT)

Collateral “replacement” solutions

9

Opportunities in the Reinsurance Market

Illustrative Example of a

“Non-Traditional” Opportunity

Background

• Captive Company XZY

partners with ABC Insurance

Company to issue several

years of casualty insurance

coverage

• XZY maintains reserves on

several prior underwriting

years

• Reserves on these prior

years have developed as

expected

• Investment results

supporting this portfolio have

been “bumpy”

• XZY continues to post

collateral to support many of

these prior years

Solution

XYZ, its consulting actuary and a

broker/reinsurer develop an

opinion of the ultimate value of

these claims

A reinsurance structure is designed to

attach at the current reserve level

and “replace” the carried reserves

Reinsurer receives discounted amount

of the agreed ultimate value of the

claims and accepts all volatility

from losses and investment results

Accelerates the distribution of excess

capital from the reserves and (if

security is acceptable to ABC) will

replace collateral requirements of

XZY

10

11

Todd Cunningham, Zurich

Market Trends

• Multi-line, multi-year solutions

• Basket Aggregates

• Structured Programs

• Dual Triggers

Strategic trends in Captive

Management

12

Multi-year, Multi-line Solutions

13

Overview

Multi-year programs that allow a captive to spread

a single block of coverage across multiple lines of business

3 Years

XS Coverage

Property

TowerCasualty

Tower

WC Casualty EPL D&OCrime Fiduciary Property E&O Basket

Aggregate

Integrated capacity

Embedded Property

Insured Retention

Other Coverage

Integrated solutionsValue proposition

14

Why would captives be interested? How do integrated programs deliver?

• Multi-year/Multi-line policies

• More efficient use of insurance capacity

• Catastrophic limits spread across multiple lines

• Coverage for a myriad of exposures in a single

solution

• Creates a strategic risk financing platform for

capital management

• Basket aggregate coverage provides protection

across retentions

• Administrative efficiency

• Optimization of retentions

• Single or reduced Insurer relationships

• Knowledge, people and products to address

tough risk management challenges

Flexibility Innovation

Reduced

volatility

Increased

stability

Limit: $50mm/$100mm/$100mm

Integrated example: ‘Super Umbrella’

(with basket aggregate)

15

$1M PD $2M BI

$50M

SRS

$50M

Property

$1M $1M

GL EPLI

$145M

SRS

$40M

$100M

SRS

$25M

$1M

$95M

SRS

$25M

$1M

D&O

(Side A

$10mm

DIC)

FID

$60M

SRS

$25M

SRS

Basket Agg

$10mm Annual

Benefits• Significant administrative

efficiencies as SRS reduced

15 renewal submissions/ policies

down to 1.

• Allowed client to concentrate to

focus carrier relationships down

to a handful.

• Stop loss provided ‘sleep at

night’ coverage to Treasurer and

provided him/her with ability to

know when to ‘stop writing a

check’ for losses.

• Fixed multi-year term provided

budget stability/certainty.

Integrated example: various attachment

points

16

Others Others

WC GL AL D&O Fiduciary Crime EPL Property Basket E&O

$1MM

$3MM

$51MM

$31MM

$10MM

$76MM

$41MM

Local Deductible

SRS Integrated ProgramOther Underlying Programs

Others SRS$10MM

SRS$20MM

SRS$10MM

Others

OthersSRS$10MM

SRS$15MM

SRS$15MM

SRS$50MMInte-

grated

Benefits• Significant administrative efficiencies as SRS reduced 21 renewal submissions/ policies down to 1.

• Client key driver was lead umbrella. Providing $50m in capacity on a multi-year basis for the lead, allowed for leveraging to incorporate other lines into the program.

• Integrated coverage allowed SRS to incorporate additional $15m of E&O capacity.

• Fixed multi-year term provided budget stability/certainty.

$100MM

SRS$50MM

SRS$50MM

Limit: $50m/$100m/$150m

Basket aggregateAn Enterprise Solution for Captives

17

• A basket aggregate coverage provides

protection excess of aggregate attachment for

SIR/Deductible combined for multiple LoBs

• If the combined losses within the retentions

exceeds the basket aggregate attachment, than

Zurich pays the difference

• Other names – Aggregate Stop Loss, Multi-line

Stop Loss, Cross Class Aggregate, Second

Event Coverage

• Drop down provision is similar to having an

aggregate stop loss

• The basket aggregate can be used to optimize

insurance retentions:

– With a basket aggregate in place customers

can safely increase per line deductibles

without creating too much risk

– Premium savings and a lower total cost of risk

Just like a basket aggregate, but in the context of a captive

can be even more valuable

• Can safely increase company retentions ceded to the captive.

• Can make a captive more efficient from a capital perspective: less

need

to hold excess capital and potentially reserves with sufficient

protection.

• For captives with a credit rating, reinsurance may help enhance the

credit rating.

• For captives in tax advantaged jurisdictions it reduces the

possibility of retaining non-deductible losses.

Captive aggregate

18

When combined with a dual trigger programs (presented later) it

supports the captive to retain and consolidate non-traditional risk

• Supports the risk manager in larger Enterprise Risk Management

solutions.

Optimizing Risk in a Captive

19

Retention level

Costs

Risk transfer cost

(Insurance premiums, lost interest,

etc., frictional expenses)

Retained losses and cost of

capital

Total cost of risk

Optimal

retention...in order to efficiently allocate the captive’s capital to the most

adequate risk carriers and to minimize the total cost of risk

Evaluation of the optimal retention level...

Employing an Aggregated Risk view

20

Retention level

Costs

Risk transfer cost

(Insurance premiums, lost interest,

etc., frictional expenses)

Retained losses with new capital costs

New lower total cost of risk

New optimal retention

...with protection against total losses not just large losses

less capital is needed lowering capital costs

Retaining more losses, cutting frictional costs, but lower capital usage…

Programs are highly tailored to

address specific customer needs

and may have:

• Customized limits, retentions, and coverage

• Flexible premium payments

• Multi-year policy terms with guaranteed rates

• Blend of risk retention, financing, and transfer

• Provisions for profit sharing

• Incorporation of capital market instruments

(e.g. dual trigger policies)

• Customized claims administration and risk

engineering services

Structured programsDesign elements

21

Structured programs

Loss sensitive solutions

Common features

• Multi year programs and premium

financing to diversify losses over a

longer period

• Experience account balances to fund

losses, to track profit sharing and as

a source of funding future risk

management plans

• Commutation clauses for termination.

• Swing plans for premiums – better

experience means lower premium

• No claims bonuses

• Aggregate deductibles and limits to

optimize risk sharing

23

Multi

line

retained

losses

Zurich led

program

Multi

line

retained

losses

Zurich led

program

Specific defined event

occurs to result in

a reduction to the SIR

Triggers include:

Weather

Commodity Price

Increase

Equity Index Decline

Zurich led

program

‘stretches down’

to lower SIR;

resulting in

Zurich

increasing

capacity during

this specific time

Dual trigger illustration

24

24

Tall Pines Insurance Company

Steve McElhiney, CPCU, ARe

CEO & Chairman

EWI Re, INC & EWI Re (UK), Ltd.

(Subsidiaries of NL Industries: NYSE

Dallas, Texas & London, UK)

Our Captive Story

25

Why form the Captive?-

Tall Pines Insurance Company

26

• Risk management evolution

• Insures only the risks of affiliated companies

• Premiums are based on the loss experience, not overall industry rates

• Eliminates insurance company overhead

• Offers potential for lower, more stable premiums

• Captures investment income on premium and capital contributions

• Manuscripted policies-useful in energy niche

• Economic value accretion – tax neutral since inception

• Set deductibles – drives risk management culture at business units

• Some insurance outside of captive

• Allows direct access to international reinsurance markets which

normally have lower costs and a greater willingness to underwrite risk

TPIC Business Strategy

27

• Independent profit center• Fundamental premise –

managed in manner consistent with external P&C companies

• Managed on a ROE basis –capital management

• Preservation of Capital• Business model is

exclusively focused on internal risks at this point

• Experience with third party assumed business was poor (early 80’s)

• Placement strategy (reinsurance or primary insurance) is based on market conditions

• Periodically examine potential to retain more risk within the captive

Differentiators

Embedded loss control, claims,

legal and insurance

All risk management activities for

disparate business units are

centralized into one cost center

Cost of Risk metric

TPIC- Business Model

28

Global Property

Global Casualty

Avoid WC

No third party business (legacy)

Property/Casualty Opportunistic (Bond Story)

CAT Modeling/DFA

Balanced Program (US/UK/Bermuda)

VT approved RI

Risk Transfer Analysis

Strategic Partners

EWI Re (UK)

Foreign Risks-locally admitted

Reinsurance Placement

Claim recoveries –cash call process

TPA’s

Claims In-take

RSG Claim database

Forensic accountants (BI –Rita)

Risk into CaptiveReinsurance

OverviewReinsurance

Process

TPIC- Our Success Factors

29

• A long-term focus

• Insurance Operators involved with captive• Run like an insurance company

• Tax neutral – not a consideration – Risk

Management tool/platform

• Active involvement in our state of domicile

• Cultivate long-term partnerships with our carrier

supporters

• Alignment of interests

• Risk Management & Safety are in our DNA

TPIC Global Property Program

Structure- July 1, 2016-2017

30

Lib

erty M

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Allia

nz

Lloyd

’s S

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Lloyd

’s S

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dic

ate

Lloyd

’s S

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Partner

ReChubb

BDA

SC

OR

Lloyd’s Syndicate

Lloyd’s

Syndi-

cate

FA

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Llo

yd

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Syn

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Ge

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Llo

yd

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Syn

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CHUBB

Bermuda

ZU

RIC

H

SW

IS

S R

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LEXINGTON

Deductible

Placed via

EWI/US

Placed via

EWI/UK

TPIC Global Excess Casualty Program

Structure- July 1, 2016-2017

31

Placed via

EWI/US

Placed via

EWI/UK

AIG

Swiss Re

Swiss Re

XL/Catlin AIG Apollo

XL/Catlin AIG

Argo

Nova

e

Underlying/Self Insured Retention

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Disclaimer

33

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