Technical Pricing in Reinsurance
Workshop on Recent Development in
Insurance-Finance
16 April 2015
Insurance vs reinsurance
• Behavior of market trends:
– Insurance
• Much established market trend, not much ups and
down in short tem
– Difficult to implament radical actions against results
– Reinsurance
• Catastrophic or man made events affect reinsurers
much heavily than insurers
– Reinsurers can act immediately, short term cycle
What is Price in Reinsurance
• Expected loss(EL)+loadings
• How to calculate EL
• What affects to the loadings
Facultative Reinsurance
• Pro rata placement:
– edequacy of primary risk price
– loss history of the risk
– Exclusions if any, etc.
Price: Commission offered
Facultative Reinsurance
• Xl Basis placement:
– Establish EL(premium)+loading
Exposure Rating:
• Use first loss scales/tables out of long statistical view
For instance: TSI 100 M, Premium 250k
Layer: 80 xs 20, what will be fair price?
all claims up to 20 M are kept at the retention, whereas
(according to first loss scale) 65% of premiums is
related to retention, so 35% (87.5k) goes to reinsurance
Treaty Reinsurance
• Pro rata: premiums and claims are shared
with the same proportion of the TSI(with
some exclusios, limitation). i.e. original
premiums and losses
• Analyze the statistics
• Consider the management and market
dynamics
• Price: comission offered for the mentioned
portfolio
2014 Fire&Dask(million TL) LR
Gross Portfolio
Retained
Ceded
Premium
3.846
1.322
2.524
Return UP
1.612
668
944
UP
1.848
784
1.064
Earned Premium
3.610
1.206
2.404
Losses
1.080
501
579
OS Losses
1.107
386
721
772
277
495
1.415
610
805
Return OS Losses
Incurred loss
Loss Ratio
Source: Turkish Insurance Association
39,20
50,58
33,49
Treaty Reinsurance
• Non proportional: no link with the original
premium and original losses
• Premium set by the reinsurer
• How to set the price?
– Risk XL
– Cat XL
Risk XL pricing
• Calculating EL
– Burning cost
• Loss history; losses to the layer
– Exposure rating
• Same as first loss scales but this time to whole portfolio
of the ceeding company
• However, reinsurers may see it differently; adecuate
price?
Cat XL Pricing
• How to calculate EL?
– Commercial models(RMS, AIR, RQE, etc.)
– Internal(reinsurers) models
However, all these models produce very different
results
Exceedance Prob & Return Period
Net Loss Pre Cat
Portfolio
Fire+Engineering
Fire Engineering
Loss Amplification
No
No
No
As of
30.09.2014
30.09.2014
30.09.2014
Exposure
17.000.000.000 16.000.000.000
1.000.000.000
Modelled Exposure
17.000.000.000 16.000.000.000
1.000.000.000
% Modelled
100,0%
100,0%
100,0%
0,10%
1000
480.000.000
465.000.000
17.000.000
0,20%
500
378.000.000
365.000.000
14.000.000
0,40%
250
280.000.000
270.000.000
11.000.000
0,50%
200
252.000.000
245.000.000
10.000.000
1,00%
100
165.000.000
160.000.000
7.000.000
2,00%
50
97.000.000
95.000.000
4.500.000
4,00%
25
46.000.000
45.000.000
2.000.000
10,00%
10
15.100.000
15.000.000
500.000
20,00%
5
7.200.000
7.000.000
150.000
Average Annual Loss
10.200.000
10.000.000
350.000
Standard Deviation
38.000.000
37.000.000
1.500.000
Coefficient of Variation
3,75
3,75
4,18
CAT XL PRICING-MODEL VIEW
EL
SD
Risk Factor Premiums
Rol %
5.000.000
xs
5.000.000
550.000
1.500.000
10,00%
700.000
14%
10.000.000
xs
10.000.000
600.000
2.000.000
10,00%
800.000
8%
30.000.000
xs
20.000.000
300.000
4.500.000
10,00%
750.000
3%
50.000.000
xs
50.000.000
250.000
3.500.000
10,00%
600.000
1%
95.000.000
xs
5.000.000
2.850.000
3%
WHY ROLs DIFFERS
• Global Rol: 6%
• US Rol:10%
• Europe:6%
• Turkey Rol:2%
• Why it differs to region/country?
WHY ROLs DIFFERS
Capacities
• US Rol:10%, 200 B USD
• EUROPE:6%, 90 B USD
• Turkey Rol:2%, 8.5 USD
• Why it differs to region/country?
– Capacity requirement
– Diversification
Pre-Summary:Cat XL Pricing
•
•
•
•
suply and demand determines the price
Cat prices are cyclical
It is a much like a “commodity”
Except loss affected layer(s), the price are
derived from the global equilibrium
Local Market Environment2015 Renewals
• Cat XLs
– Majority renewed with varying risk adjusted reductions
– Pressure on signings even on top layers
– Very few new reinsurers; majority of programmes renewed with
expiring markets offering increased capacity
• Pro Rata
– Increased interest in pro rata treaties
– Modest to moderate increase in capacity and retentions
– Some increase in lower EQ event limits
– Stable commissions
16
Concludings
• Reinsurance as a general concept, we can call
it as a replacement of capital,
• Pro rata&risk xl& fac placements are much
related to the original risks and the market
environment, therefore it is more local
• Cat XL: what can desribe best the “cat xl
pricing”, considering its cyclical nature?
Concludings
•
•
•
•
•
Opportunity cost of capital
Diversification
Spreading the risk
Uncorrelation
Commodity
• Brokers bring the price!