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LINKING REINSURANCE TO SOLVENCY II
22nd June 2015
Munich
1
Willis Re – Role of the Broker (Past)
2
Reinsurance
Structure
Reinsurance
PriceReinsurer
Panel
Reinsurance
Contract Wording
Reinsurance
Placement
Reinsurance
Premium & Claims
Reinsurance
Price
Reinsurance
Contract Wording
3
Solvency II
challenges
Liability
Clash Scenarios
Run-Off
Management
Balance Sheet
Protection
Non-Modelled
Perils
Scenario-based
analyses
Retention
management
Capital
Management
Board directives
Regulatory
RequirementsShareholder
demands
Underwriting
Profitability
Combined Ratio < ???
Reinsurance
Structure
Reinsurer
Panel
Reinsurance
Placement
Reinsurance
Premium & Claims
Willis Re – Role of the Broker (Present)
From Risk Appetite to SII R/I decision making framework
In 2014 Willis Re initiated a journey with selected key clients in Europe, to share experience
and points of view on the following key themes:
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– The rising importance of the risk appetite concept
– How this is influencing reinsurance decisions
– Renewal strategies to achieve key objectives
– How to prepare for the Solvency II framework
Risk Appetite Survey
Key results
Performance
• Focus varies greatly – all performance measures are used by cedants
• Combined ratio marginally the most important
• ROE / ROC currently less focused on but this may change
Underwriting• Average underwriting result seen as the most important
• 1 in 20 year technical result receives more focus than 1 in 5 and 10 year
Capital• Most companies deem Economic and Regulatory Capital measure as the most
important
Most important performance / underwriting / capital measures for your reinsurance decisions.
5
Context
Solvency II, financial objectives and reinsurance (i)
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Solvency II is a
reality…
…changing how you
can reach your
financial objective
…and how
Reinsurance can
support them
Regulation enforcement has already changed behaviours of insurers and
reinsurers across Europe
More focus is put on Capital management and risk appetite
The achievement of Key Financial Goals needs to take into account the
regulatory capital requirements
R/I and alternative solutions can be used to optimise the use of your capital
Evaluating the impact is essential and increasingly more complex as
Solvency II guidelines allows for more flexibility
Defining objectives and
priorities
• C-suite workshops
• Analysis of annual reports /
shareholder concerns
• Deep knowledge of regulation and
rating agencies models (BCAR)
• Peer benchmarking with Willis Re
Risk Appetite Survey
Build a dashboard to support
decisions
• Set scope at Group, Company or
Line of Business level
• Balance capital requirements with
focus on earnings
• Measure against key targets,
thresholds and peer groups
• Stress test for further sensitivity
analysis
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Define risk
appetite
Craft a decision
making framework
Link to reinsurance
Average ROE16.90% 14.50% 18.00% 16.00%
Average UWR 127.00m 122.00m 130.00m 125.50m
1 in 5 UWR 82.00m 75.00m 74.60m 80.30m
1 in 10 UWR 50.00m 38.00m 35.00m 47.50m
1 in 200 VaR for UWR -210.50m -214.30m -220.10m -212.80m
SCR173% 162% 145% 165%
BCAR 133% 124% 110% 135%
Strategy 3 Strategy 4Metric Strategy 1 Strategy 2
Impact on metrics are
calculated and visualized
• Various reinsurance strategies
tested against the established
set of metrics
• Best strategies can be
recognized
• Trade offs clearly identified
Decision making framework
A route through the fog
Case study
Client context
Multiline bank insurer focussed on personal lines and SME
Defining and embedding risk appetite were a priority of top management and shareholders
“We need to be sure we have enough regulatory capital to support our growth”
Thresholds for RoE and SCR were used to identify best RI strategies
Context
Solvency II, financial objectives and reinsurance (ii)
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QIS 5 evidencesRisk mitigation areas for non-Life companies
Reinsurance in Solvency II
Insurance Risk Context
Premium
• Non-catastrophe active underwriting risk;
• Calculation applies a factor from 21% (legal expenses) to 42% (General liability) to net premium depending on LoB;
Natural
• Defined scenarios driven by 2 digit postcode net aggregate sums insured (Property and MOD);
• MOD aggregates need only to be considered for Flood and Hail scenarios;
• Not all countries will be exposed to all perils (e.g. IT Hail but not WS);
Man-made
• There are defined man-made catastrophe scenarios for: Motor, Fire, Credit/Surety, Aviation, General liability, Marine;
• Unlike natural catastrophe there is no explicit diversification by country;
Reserve
• Calculation applies a factor from 24% (MOD) to 60% (miscellaneous) to the best estimate of claims outstanding after allowance for reinsurance depending on LoB;
CAT risk
Premium and reserve
Some forms of reinsurance work well for some risk types but not for others in the
standard formula
Reinsurance Solutions
Quota Share/Co-insurance
12
Risk Type Year 1
Standard
Formula
Impact
Comments
Premium Reduces pro-rata to earned premium reduction
Natural Catastrophe Reduces pro-rata to cession percentage
Man-made Catastrophe Reduces pro-rata to cession percentage
Reserve Risk Reduces future years’ net best estimate reserve / SCR
Risk Type Year 1
Standard
Formula
Impact
Comments
Premium Other than proportionate impact on net premium
Natural Catastrophe Full benefit can be shown
Man-made Catastrophe Full benefit can be shown
Reserve Risk Can reduce future years’ net best estimate reserve/SCR
Excess of Loss
Reinsurance Solutions
Retrospective
13
Risk Type Year 1
Standard
Formula
Impact
Comments
Premium No Impact
Natural Catastrophe No Impact
Man-made Catastrophe No Impact
Reserve Risk Full or partial benefit can be shown
Risk Type Year 1
Standard
Formula
Impact
Comments
Premium But Premium risk charge counts towards cat recovery
Natural Catastrophe Full benefit can be shown
Man-made Catastrophe Full benefit can be shown
Reserve Risk Can reduce future years’ net best estimate reserve/SCR
Stop Loss
Examples of Analytics Support
Nat Cat Perils
Storm surge
Snow pressure
Avalanche
Rock fall
Subsidence
…
14
Man-made Perils
Terrorism
Liability Clash
Cyber risk
Conflagration
Pandemic
PA Clash
…
14
Sce
na
rio
Life
sto
ck
Sce
na
rio
Te
rro
r
Sce
na
rio
Rh
ine
Flo
od
If we don’t have a model, we build one!
Conclusion
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Solvency II is now a reality requiring insurers to formalise their approach to risk
appetite and capital management
Financial aspiration can still be reached together with regulatory requirements
Understanding the true value of your reinsurance has a critical part to play
Opportunities will arise to use reinsurance intelligently to meet capital
requirements while maintaining /improving the long term profitability of your
business
Reaching these goals in a Solvency II environment is a continuous process
requiring business acumen, analytical power and regulatory knowledge
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AN UNPREDICTABLE
“NOWHERE IS SAFE”
WORLD DEMANDS A
FIRST CLASS ADVISOR.