Bill Hodson – Executive Vice President, USA Risk Intermediaries, LLC Joseph Meli – Senior Vice President, General Reinsurance Corporation Garry Bright – Director of Operations, Besso Re •To age prematurely, and become obese & gray haired… WARNING: Side effects may include… 2 •Stabilization – reinsurance can smooth operating results over time. •Capacity – reinsurance can improve a NWP/PHS ratio. •Surlpus Relief – reinsurance can ease the strain on PHS during rapid growth. •Catastrophe Protection – reinsurance can back-stop a company’s financials in case of a natural or man-made catastrophic event. • Market Entrance/Market Withdrawal – reinsurance can provide capacity/expertise to write a new line, and provide an exit strategy for running business off or exiting a line. 3 Facultative – reinsurance indemnification of standalone risks/policies. The ceding insurer is not obligated to submit a particular policy, and the reinsurer is not obligated to assume any risk/policy submitted; each party has the “faculty” or option of submission or acceptance. Treaty – reinsurance indemnification for a pool or “book” of policies from one or more specific classes of insurance. 4 Facultative: Treaty: 5 *This session is just a synopsis of the most common terms/conditions of a reinsurance agreement. To do the subject any justice, we would need to be here for at least two to three days. And honestly who wants to sit in a freezing room listening to the three guys up front drone on…and on…and on…about reinsurance? I mean really. And your phone only has so much battery left, right? So after the first couple of hours playing Candy Crush or Angry Birds, you’re back to square one bored to tears and looking like this guy above…but I digress……. 6 Risks Attaching/Policies Attaching – subject policies having inception/renewal dates falling within the effective dates of the reinsurance cover. Losses Occurring – dates of loss within the effective dates of the reinsurance on in-force policies 7 Written Premium – reinsurance premium is calculated using Written Premium. This is more appropriate/equitable when there is a stable or declining book of business, as the premium vs. exposure is matched more evenly. Earned Premium – reinsurance premium is calculated using Earned Premium. This is more appropriate/equitable when a book of business is growing. Generally used for Excess of Loss agreements, however when used with Quota Share this helps with a cedant’s cash flow. A variation would be to cede using collected premium as the basis for calculation. 8 Pro Rata – a percentage or stated amount sharing of liability with reinsurers. Excess of Loss – a stated amount of reinsurers’ liability above a specified amount retained net by the cedant. Reinstatements of limits are either provided “free”, for a pro-rata additional premium, or a combination of both. Surplus Share – a hybrid of the above, where a limit is ceded pro rata above a predetermined retention (or “line”). 9 Pro Rata Cession (Quota Share) – a straight sharing of original policy premium with the reinsurers. Flat Rate (Excess of Loss) – specific stated percentage of Subject Premium (either GNWPI or GNEPI) charged for contract period. Usually obtainable when the cedant has a stable/mature book of business and reinsurers can price using the cedant’s historic developed loss data. 10 Swing or Variable Rate (Excess of Loss) – a percentage range against which the Subject Premium is applied and the reinsurance premium for the contract period is calculated. The specific percentage applied is derived by first calculating the specific experience (loss ratio) of the reinsurance. The higher the loss ratio, the higher the reinsurance rate and vice versa. Excess Cession Rate (Excess of Loss) – a rating mechanism whereby each reinsured policy is ceded to reinsurer individually (or on a collective basis) based on the exposure of the policy limits to the reinsurance limits (usually based on Increased Limit Factors). 11 Ceding Commission - an amount deducted from the reinsurance premium to compensate a ceding company for its acquisition and other overhead costs, including premium taxes. Contingent (or Profit) Commission - an allowance by the reinsurer to the cedant based on a predetermined percentage of the profit realized by the reinsurer on the business ceded. 12 Actual (Monthly/Quarterly in Arrears) – the reinsurance premium for ceded policies is paid to reinsurers monthly or quarterly as prescribed by the reinsurance agreement (i.e. “x” days following the end of the month/quarter…). Advance Deposit – the reinsurance premium is paid on an estimated basis monthly, quarterly or semi-annually, and adjusted to the actual premium due after the end of the Agreement Year. Commonly a percentage of the “developed” premium divided by 12/4/2, etc. 13 If a broker is involved in the placement, best practices dictate that a Reinsurance Brokerage Agreement/Intermediary Agreement be signed between the Ceding Company and their broker. 14 15 16 Topics For Today… Certificate Overview The Declarations Page Reinsurance Terms and Conditions We will discuss common provisions of facultative reinsurance As Facultative is “one off” specific of contracts may differ from company to company and risk to risk 1 Certificate Overview Binding contract between reinsurer and ceding company Evidence of reinsurance coverage Insured is NOT a party to the contract Reinsurer and cedent are only parties to the contract 1 The Declarations Page Entire Agreement Parties to the contract Insured Information Schedule of reinsurance Countersignature Endorsements 1 The Declarations Page Entire Agreement Clause Certificate constitutes the entire agreement of the parties Parties to the contract • Reinsurance company name • Certificate number • Certificate period • Retroactive date (for Clams Made) • Policy information [number, period, retro date (CM)] Insured information • Name and Location 2 Schedule of reinsurance Type of insurance Policy limit Company Retention Reinsurance provided Basis of acceptance Premium Certificate modifications, if any 2 Type of insurance > Policy coverage > Commercial General Liability BI and PD Policy Limit > Each Occurrence Limit > Products Completed Operations Aggregate Limit > Personal Injury and Advertising Injury Limit Company Retention > Part of the limit retained by the company > Specific percentage or dollar amount 2 Reinsurance Provided Part of the limit ceded to the reinsurer Specific percentage or dollar amount Basis of Acceptance Excess of loss or contributing excess Concurrent or non-concurrent Premium Flat or adjustable Basis: sales, payroll, units, etc. Certificate Modifications Any correction to the certificate information 2 Countersignature Authorized representative signature Endorsements Audit of exposures Policy cancelled by company 2 Common Reinsurance Certificate Terms and Conditions Preamble Retention and limit Term Claims and losses Adjustment expenses Rights Inspection Definitions Recoveries Premium Tax Insolvency of the company Offset Termination 2 Preamble Evidence of a contract Specific reference to company policies Retention and Limit Company to retain Retention net Reinsurance follows the policy Company to send reinsurer copy of policy and advise of any coverage changes 2 Term The term of the policy Claims and Losses Company notice to reinsurer Company estimate of value of injury or damages sufficient to involve certificate One third of retention Reinsurer right to associate (not handle claims) All settlements by company within terms of policy are binding on reinsurer subject to proof of loss 2 Adjustment Expenses, Rights, Inspection, Non-Concurrent Terms, Definitions,Recoveries, Premium Tax, Insolvency, Offset, Arbitration… …Wait for it…(Garry will cover that) 2 Termination Cancellation of company policy terminates reinsurance Company/reinsurer cancellation with notice Reinsurer cancellation for non-payment of premium 2 Treaty Reinsurance 30 All clauses in A treaty reinsurance contract are important but which are significant and can affect the coverage? 31 •As we have heard, facultative reinsurance protects a Company for their individual risks that perhaps will not fall into their reinsurance treaty. •A treaty reinsurance protects the Company for all risks in a given portfolio, with the Reinsurer not able to pick and choose which risks are included. •Therefor, it is a partnership between Company and Reinsurer, and so it is important to get the terms and conditions of the contract correct, to ensure the protection of the portfolio is as required. We will look at some of the important clauses and coverage options. 32 ARTICLE I Business Covered: The Reinsurer agrees to indemnify the Company as set forth herein in respect of the net excess liability which may accrue to the Company under all policies, contracts, binders and other evidences of insurance, whether oral or written (hereinafter called “Policy” or “Policies”), classified by the Company as……………… ENSURE THAT EVERYTHING THAT IS TO BE COVERED IS INCLUDED. 33 ARTICLE III Commencement and Termination: This Contract shall incept at 12:01 A.M., Local Standard Time, at the location of the risk, April 1, 2014 and shall remain in force until 12:01 A.M., Local Standard Time at the location of the risk, April 1, 2015, as respects all claims made on new and renewal Policies with attaching during this period, including Extended Reporting Endorsements on such Policies. Upon expiration of this Agreement, the Company may elect to “run-off” or “cutoff” the remaining liability of the treaty. Should the Company elect a run-off termination, the Reinsurer will continue to cover all policies within the scope of this Agreement including those written and renewed during the period of notice, until the natural expiration or anniversary of such policies, whichever comes first but in no event longer than 12 months from the date of termination, plus odd-time (18 months). Should the Company elect a cut-off termination, the Company shall terminate the Reinsurer’s liability for all losses occurring subsequent to expiration, and Reinsurers shall return unearned premium to the Company. 34 ARTICLE VIII Allocated Loss Adjustment Expenses: “Allocated Loss Adjustment Expense” as used herein means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including post-judgment interest. Allocated Loss Adjustment Expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, and office and other overhead expenses. If the original policy is costs inclusive, the treaty should include ALAE within the Ultimate Net Loss and the treaty limit. If the original policy is costs in addition, the treaty should include ALAE as pro rata costs in addition to the indemnity. 35 ARTICLE X Extra Contractual Obligations and Losses in Excess of Policy Limits: This Contract shall cover Extra Contractual Obligations, as provided in the definition of Ultimate Net Loss. "Extra Contractual Obligations" shall be defined as those liabilities not covered under any other provision of this Contract and that arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. 36 ARTICLE X Extra Contractual Obligations and Losses in Excess of Policy Limits: This Contract shall cover Loss in Excess of Policy Limits, as provided in the definition of Ultimate Net Loss. "Loss in Excess of Policy Limits" shall be defined as Loss in excess of the Policy limit, having been incurred because of, but not limited to, failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. 37 Extra Contractual Obligations and Losses in Excess of Policy Limits - continued: An Extra Contractual Obligation and/or Loss in Excess of Policy Limits shall be deemed to have been incurred on the same date as the loss covered under the Company's Policy, and shall constitute part of the original loss. For the purposes of the Loss in Excess of Policy Limits coverage hereunder, the word "Loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy. In no event shall coverage be provided to the extent not permitted under law. 38 Swing rated Flat rated Adjustable Reinstatements – paid or free Multi year or single year 39 Rights Contract between company and reinsurer only parties with rights under agreement Insolvency of company Liquidator steps in shoes of cedent Inspection Reinsurer right to review records related to underwriting the reinsured risks and claim documents 4 Definitions: Non-Concurrent When the certificate is not reinsuring the exact same coverage provided in the policy Hazards BI only, Products only, PD only) Risk of loss Specific exposure units, designated products, dates of coverage Reinsurance carves out only part of the hazards or risks of loss 4 Definitions Prejudgment Interest Time lapse between date of accident and date of judgment 4 Recoveries (Subrogation and Salvage) Reinsured loss reduced by recoveries made Excess of loss reinsurer first to benefit Contributing excess benefit is proportional to coverage Premium tax: Responsibility of the company Insolvency of the company Reinsured payments determined in insolvency proceedings Paid to liquidator Reinsurer retains right to investigate and defend Offset Applies to either party 4 Termination Cancellation of company policy terminates reinsurance Company/reinsurer cancellation with notice Reinsurer cancellation for non-payment of premium Arbitration Differences between company and reinsurer resolved through arbitration Binding on parties 4 45 Additional Material for Reinsurance Enlightenment... 46 Capacity (Higher Limits) Treaty protection Treaty exclusion New line of business New hazard or coverage Access to expertise and services Opportunity for a dialog (underwriting, pricing, market conditions, etc.) Tough piece of otherwise acceptable account Accommodation business for an important producer 4 “Carve Out” Exceptional volatility in one area of the program Operations in a highly litigious environment (USA, UK, Australia) Sales of an exposed product (toys, bicycle helmets, fork lifts, etc.) New insurance product Volatile line of business (Product Recall) 4 Treaty Treaty covers all risks which are not excluded Treaty is obligatory Insurer must cede the risk Reinsurer must accept the risk Premium is a rate on base, adjustable Limited Reinstatements, usually (NP) Some “balance” Payback desired Facultative Covers individual risks which are ceded individually Not obligatory Insurer decides whether to cede Reinsurer free to decide if to accept Fixed price Unlimited free reinstatements No balance, rather anti-selection! No payback 4 Definitions Excess of loss Reinsurer pays for that portion of loss in excess of the company retention and within the policy limit Where Loss Adjustment Expenses are in addition to the policy limit Reinsurer pays its proportionate share of expenses Same proportion as reinsured loss bears to gross company loss No indemnity loss=no expense obligation to reinsurer 5 Excess of Loss Example Policy Limit: $5,000,000 ea occ / agg Our reinsurance: $4,000,000 xs $1,000,000 Total (ground up) loss: $2,000,000 Indemnity ($1,000,000 to the reinsured layer.) $500,000 Allocated Loss Adjustment Expense (ALAE) Formula for calculating the reinsurance Allocated Loss Adjustment Expense payment: $1,000,000 (Reinsurance Loss Payment) $2,000,000 (Company Gross Loss Paymen) 1,000,000 = 0.50 X 500,000 = 250,000 (reinsured ALAE) 2,000,000 5 Definitions Contributing Excess Applies to those cession that attach directly excess of either other valid insurance of self-Insurance Applies “first dollar” within the company’s policy Reinsurer contributes proportionately to all loss within the policy limit and adjustment expenses 5 Contributing Excess Example Excess Policy Limit: $5,000,000 ea occ / agg; excess $1,000,000 ea occ / agg Reinsurance: 80% of the Policy Limit Total (ground up) loss: $2,000,000 Indemnity Excess Policy Loss: $1,000,000 Indemnity $500,000 total Allocated Loss Adjustment Expense (ALAE) $100,000 ALAE tendered (attributed) to excess policy underlying Formula for calculating the reinsurance Allocated Loss Adjustment Expense payment: • • Loss Payment) 80% of $1,000,000 = $ 800,000 (Reinsurance $1,000,000(Company Gross Loss Payment) = .80 x $100,000 = $80,000 Reinsurance ALAE Payment 5 PRIMARY EXCESS OF LOSS This protects the Company for their whole portfolio at a low attachment point, giving predictability to the Company. The reinsurance will follow closely the original policy terminology and typically will be key to the regulators and rating agencies, as applicable. Most new Companies will require a working layer reinsurance to allow them to write business. It is often that the retention is around 10% of surplus at the outset. Primary reinsurance allows the Company to write more business, with 4 x the net retained premium being deemed reasonable. RATED EXCESS This is for coverage excess of the primary whereby the Reinsurer will charge a price, based on the overall premium block. This can mean variable original limits covered by Reinsurers within the reinsurance treaty with original pricing flexibility by the Company. 54 AWARDS MADE – Sample Language: The Reinsurer agrees to indemnify the Company as set forth herein in respect of Awards Made during the term of this Contract under all policies, contracts, binders and other evidences of insurance, whether oral or written (hereinafter called “Policy” or "Policies"), classified by the Company as Medical Professional Liability Business, including Surgery Centers, Walk In Clinics, and Ancillary staff, and as General Liability, written on a claims made basis only, in respect of Surgery Centers and Walk In Clinics. The Reinsurer shall be liable for of $3,000,000 Ultimate Net Loss, each and every Award Made, each insured excess of the applicable underlying excess of loss reinsurance, each and every Award Made, each insured. It is hereby warranted that the Company shall retain 10% of the Ultimate Net Loss hereunder net and unreinsured. It is further warranted that the Company's underlying inuring reinsurance shall be deemed to be in-force for the duration of this Contract. 55 EXCESS CESSION – A cession reinsurance contract differs from a rated excess programme as the Reinsurer only covers limits that are exposed (ceded) to the Reinsurer. ECO and XPL may only be covered if a policy has been ceded. The Reinsurer will typically have to agree the pricing for each policy limit that is to be ceded, although of course, not each risk. The excess cession treaty is inherently more volatile and so can be more restrictive. The Reinsurer will usually allow the Company a commission, which helps to reduce the costs of running the business. 56 QUOTA SHARE The quota share reinsurance is where the Reinsurer agrees to take a percentage share of the portfolio, and is therefore a partner in the outcome. The Reinsurer will allow a commission against the costs of writing the business, which can be very important, but the Company needs to ensure that this is actually enough to cover expense. Quota share works well when the Company is small and would find it difficult to take the first part of loss as a retention. The downside is that the Reinsurer takes a large percentage of profit and this can slow down any growth of surplus for the Company. In addition, the Reinsurer may want to impose a number of restrictions on how the Company underwrites and what business can be included, so may be more restrictive than excess of loss. 57 STOP LOSS This is a very specialised market, with only a few reinsurers willing to take on this risk. Stop loss covers the Company for all losses excess of a pre-determined percentage or $ figure (which will typically be based on an estimated percentage of premium), and will give a limit to the Company. This will give the Company (hopefully) a known ultimate loss ratio as the Reinsurer will take the downside beyond the percentage attachment. The problem for Reinsurers is that they take a significant downside potential for a limited premium, but we do have some who are willing to take on this risk, usually to assist clients who have built a good relationship with Reinsurers. 100% of USD5,000,000 Ultimate Net Loss in the aggregate excess of USD10,000,000 Ultimate Net Loss in the aggregate. 58 ADVERSE DEVELOPMENT COVER This is again a specialised coverage, similar to stop loss in that it will protect the Company from any downside above a certain figure, and so gives certainty to the Company. The significant difference is that ADC is put in place at some point after the end of the treaty period, where the Company has concerns over the development of the book or where the actuary has a worse view of the business than the Company does. Therefore, the Company can purchase protection above a percentage of $ figure, to flatten the result. This is a limited reinsurance market, and typically for a Company with who the Reinsurer has a good partnership, and where there is a strong incentive to have a good result. “Losses paid during the term of the reinsurance only on risks attaching during years 2009 through 2012. The Company obligates itself to cede to the Reinsurer, and the Reinsurer obligates itself to accept, the difference between the Company’s paid losses of USD20,000,000 and the Company’s paid losses of USD15,000,000 in respect of Incurred and Incurred but not reported losses that are paid during the period of the reinsurance but only ever in respect of a maximum of USD250,000 arising from each and every original policy.” 59 SYSTEMIC/COMMON CAUSE REINSURANCE This coverage is seen in medical professional liability treaties, as an additional section to the primary reinsurance treaty, although is usually purchased when the Company is large or is a single specialty Company where they could easily have a number of losses related to the same common conditions. For example, we have in the past seen a large numbers of claims from one or more doctors involved in a particular type of practice (heart stents). This could be critical to a Company as each individual claim could be within the retention but the total of a large number of retained losses could be terminal to the Company. “Common Loss as used herein shall mean the aggregate of all Loss or Losses under all policies of the Company, arising out of, caused by or attributable to one of the following Covered Perils...” 60