Seminar on ReinsuranceJune 2, 2003
Michael Kerner
Ceded Reinsurance -Analyzing Reinsurer’s Financial Security
Analyzing Reinsurer’s Financial Security
• Credit Quality - Current Events
• Security Review Process
• Other Issues - Terrorism
Why Is Security Important?
• Primary Company Capitalization• Under Pressure• Capital is Expensive - Providers Demanding High ROEs• Opportunities driving Capital Demand
• Increase in Reinsurance Recoverables
Why Is Security Important?
• Ability To Pay
• Willingness to Pay• Focus on Contracts• Increase in Disputes
Why Is Security Important?
• Large Number of Rating Downgrades
– 70% of World’s Reinsurance Premium Suffered Downgrade in Past Year
• Large Amount of Premium on Negative Outlook
• Buffet Comments
• V.J. Dowling Newsletter
Global Premium/Rating Shift
% Premium % PremiumRating 2001 Current DifferenceAaa/AAA 61.9% 11.9% -50.1%
Aa/AA 28.3% 68.8% 40.5%
A 9.8% 14.1% 4.3%
Below A 0.0% 5.2% 5.2%
Total 100.0% 100.0% 0.0%
Negative Outlook 69.3%
Source: Morgan Stanley
Reinsurers’ Balance Sheets Stressed• Published Results are Generally Poor (through 12/02).
• Where has all the Ceded Gone?– Reserve Strengthenings
– Insolvencies and Stressed Primaries
• “We simply think it unlikely that U.S. reinsurer’s $6 billion + adverse reserve development in calendar year 2002 fully captures these adverse underlying claim trends” -- Morgan Stanley
Not all Reinsurers Will Survive• Balance Sheet Repair Efforts will be Hindered
• New Capacity
• Market Showing Signs of Flattening
• Ample Capacity Available at the Right Price
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3 -M o n th T -B ill 1 -Y r . T -B ill 1 0 -Y e a r T -N o te
United States: Interest Rates
Source: Guy Carpenter
Availability - New Capital Post 9/11 (as of May 21, 2002)
$ Billions
• Capital Raised:
– 2001 $20.5
– 2002 $4.1
• Total $24.6
• Bermuda Start-ups: $8.5
Source: Guy Carpenter
Security Process
Security Review Process
• Group Level Activity
• Multidisciplined Team– Finance– Risk Management– Ceded Reinsurance
• Exception Process
Focal Points of Security Review
• Analysts Ratings– A.M. Best– Standard & Poor’s– Moody’s– Other
• Strengths– Independent Evaluation– In Depth Knowledge of Company– Relatively Consistent
• Weakenesses– Not All Companies Have Ratings– The Shifting “Bar”
Focal Points of Security Review
• Detailed Proprietary Financial Analysis
• Strengths– Consistent Evaluation– Process Promotes an In Depth Analysis of the Reinsurer– Customizable Based on Our View of the World
• Weakenesses– Resource Intensive– Generally doesn’t benefit from Non-Public Information
Focal Points of Security Review
• Other Items– Size
– Experience & Longevity of Organization
– Experience & Longevity of Management and Underwriting Team
– Organizational Structure
– Current Relationship
Security Review - Other Considerations
• New Capital Vs. Old Capital– The devil you know vs. the devil you don’t
• Short-Tailed Vs. Long-Tailed
• Collateralization– Partial or Full
• Line Size Limitations
Terrorism
U.S. Terror Bill
• Retention
• Quota Share
• Terror Definition– Foreign Vs. Domestic
– Fire Policy Issue
Outline of Legislation
• Key Features
– Run by Department of Treasury
– Act is Triggered when Secretary of Treasury, Secretary of State and Attorney General Certify an Event as an Act of Terrorism
– Covers Acts of International Terrorism Only
– Act terminates 12/31/2005
– Also covers Acts of War but only for Workers Compensation
– Losses must exceed $5MM for Act to be triggered
– Only Acts of Foreign Terrorism (eg. Excl. Oklahoma Federal Building)
Outline of Legislation
• Structure of Act
– All Commercial Insurers must participate and must offer Terrorism Coverage during first 2 years of program
– Insurer Deductibles are a Percentage of Direct Premiums from Previous Calendar Year
– 1% in Transition Period– 7% in Year One (2003)– 10% in Year Two (2004)– 15% in Year Three (2005
– Above Insurer Deductible, Federal Government Share is 90% and Insurers’ Share is 10%
– Losses Capped at $100 Billion
Terror Risk: Modeling
1. First Wave - Risk Analysis
2. Second Wave - Accumulation Controls
3. Third Wave - Probabilistic Models- Hazard Module- Vulnerability Module- Exposure Module
Terrorism - Market Reaction
• Inconsistent
• Stand Alone Covers Available, but Expensive
• Some Coverage Available in LOB Placements
• Certified Vs. Non-Certified
• NCB
QUESTIONS ?