Casualty Loss Reserving Seminar Finite Reinsurance

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Casualty Loss Reserving SeminarFinite
Reinsurance

• Alan Speert
• September 23, 2002
• Arlington, VA

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Agenda

• Background on Finite
• Why Traditional Methods Dont Work
• What Does Work
• Two Examples
• Who Does the Review?
• Other Issues

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Finite Characteristics

• Multi-year
• Aggregate limits
• Limited downside
• Reinsureds participation in results
• Variety of exposures

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Traditional Methods Inappropriate

• Small number of accounts
• Relatively large transactions
• Lack of homogeneity
• Each transaction is unique

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Accounts Individually Reviewed

• Reflect contract terms
• Original pricing analysis
• Experience to date
• Subsequent internal external analyses
• Input from Claims Department

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Options in Booking a Transaction

• Statutory Accounting
• Non-Reinsurance Accounting (Deposit)
• Loss Reserve Discounting
• Other GAAP Reinsurance Accounting

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Retrospective Example

• Loss Portfolio Transfer
• Aggregate Limit 150
• Expected Nominal Loss 100
• Present Value of Expected Loss 60
• Margin 10
• Assumed Premium 70

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Retrospective Example

• Statutory Accounting
• Balance Sheet
• Assets 70 Loss Reserves 100
• Surplus -30
• Non-Reinsurance (Deposit) Accounting
• Balance Sheet
• Assets 70 Deposit Payable 70

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Retrospective Example

• Loss Reserve Discounting
• Balance Sheet
• Assets 70 Loss Reserves 60
• Deferred Income 10
• Other GAAP Reinsurance Accounting
• Balance Sheet
• Assets 70 Loss Reserves 100
• Deferred Asset 30

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Prospective Example

• Three year program incepting Jan. 1st
• Year 1 Annual Deposit Premium 10
• Year 1 Annual Margin 3
• Expected Loss Ratio 80
• EAB is credited with 3 interest per year
• Reinsurance Company earns 6 on assets

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Prospective Example at July 1st

• Experience Account 10 - 3 .1 7.10
• Reinsurance Accounting
• Balance Sheet
• Assets 10.3 Loss Reserves 4
• UPR 5
• Surplus 1.3
• Non-Reinsurance (Deposit) Accounting
• Balance Sheet
• Assets 10.3 Deposit Payable 9
• Surplus 1.3

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Who Does the Review?

• Pricing Actuary
• Another Pricing Actuary
• Reserving Actuary
• Committee Approach
• External 3rd Party

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Other Issues

• Audit / Claims Administration
• Letter of Credit / Trust Adjustments
• Profit Sharing / Commutation
• Profitability Studies