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Alabama Affordable Homeowners Insurance Commission

Alabama Affordable Homeowners Insurance Commission. Reinsurance Education Discussion November 21, 2011. Hurricane Ivan - 2004. Tuscaloosa, AL Tornado Damage (4/2011). Tuscaloosa: Wood Square Shopping Center BEFORE. Tuscaloosa: Wood Square Shopping Center AFTER.

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Alabama Affordable Homeowners Insurance Commission

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  1. Alabama Affordable Homeowners Insurance Commission Reinsurance Education Discussion November 21, 2011

  2. Hurricane Ivan - 2004 Proprietary & Confidential

  3. Tuscaloosa, AL Tornado Damage (4/2011) Tuscaloosa: Wood Square Shopping Center BEFORE Tuscaloosa: Wood Square Shopping Center AFTER Proprietary & Confidential

  4. The Twenty Most Costly PCS Cats – Last 50 Years – U.S. Proprietary & Confidential

  5. Loss Occurrence Definition – Real-Life Example • Hurricane Andrew, 1992 Mid-day – Aug 28 – Began to Dissipate 8:30am – Aug 26 – Landfall in LA 8:50am Aug 24 – Landfall in FL Proprietary & Confidential

  6. 2011 PCS Combined Peril Catastrophe Losses through September Proprietary & Confidential Alabama is up 897% based upon long-term trend-adjusted averages Total All States up 165%

  7. Avoid Avoid Reduce Avoid Reduce Avoidance Retain Control Retain Transfer Retain Transfer Retention Transfer Transfer Risk Management Options: Individuals Example: Owning a Home Elect not to purchase a home Utilize smoke detectors, burglar alarms, careful maintenance, construction standards, manage deductibles, etc. Rely on personal resources in case of loss Insurance Proprietary & Confidential

  8. Avoid Avoid Reduce Avoid Reduce Avoidance Retain Reduce Retain Control Transfer Retain Transfer Retention Transfer Transfer Risk Management Options: Insurance Companies Example: Company Writing Homeowners Insurance Elect not to write any policies Tighten underwriting standards, add exclusions, charge more for policies not utilizing loss mitigation features, etc. If abundant capital – retain 100% of risk Reinsurance Proprietary & Confidential

  9. Avoid Avoid Reduce Avoid Reduce Avoidance Retain Reduce Retain Control Transfer Retain Transfer Retention Transfer Transfer Risk Management Options Individuals Insurance Company • Elect not to purchase a home • Utilize smoke detectors, burglar alarms, careful maintenance, construction standards, manage deductibles, etc. • Rely on personal resources in case of loss • Insurance • Elect not to write any policies • Tighten underwriting standards, add exclusions, charge more for policies not utilizing loss mitigation features, etc. • If abundant capital – retain 100% of risk • Reinsurance • Transfer If: • You do not have financial resources to retain • There are geographic, peril, or line of business concentrations • Another party can hold it for less cost than you can Proprietary & Confidential

  10. Premium Capacity and Exposures • The amount of premium and exposures a company can write is limited by the amount of capital they have on hand • This is a measure of financial strength used by most Departments of Insurance and Rating Agencies Proprietary & Confidential

  11. Premium Capacity and Exposures • Leverage Ratio = Net Written Premium to Policyholders’ Surplus • Closely watched by state regulatory and rating organizations Proprietary & Confidential

  12. Definition of Reinsurance The process by which an insuring organization cedes all or part of the risk it has assumed to another organization (the reinsurer) Insurance Company Reinsurance Company RISK The pooling of risks of many insuring organizations to pay for the losses of a few Insurance Company Insurance Company Insurance Company Insurance Company Insurance Company Proprietary & Confidential

  13. Forms of Reinsurance Reinsurance Facultative Treaty Pro Rata Excess Quota Share Surplus Share Property Per Risk Casualty Excess Excess Catastrophe Stop Loss Per Occurrence Aggregate Excess Proprietary & Confidential

  14. Treaty • Covers an entire class or line of business • Obligatory contract for both parties • The treaty is the contract specifying the agreement Reinsurance Treaty Excess Excess Catastrophe Per Occurrence Aggregate Excess Proprietary & Confidential

  15. General characteristics: Protection against depletion of capital from accumulation of loss from a single occurrence (hurricane, earthquake, tornado) or a series of occurrences within a specified time frame Typically a flat dollar retention and limit Coverage is frequently placed on a layered basis to build capacity Coverage limited – usually a maximum of one reinstatement allowed (generally for an additional premium) Ceded premium based on negotiated % rate (typically of subject premium) Catastrophic Perils commonly covered under reinsurance, include: Windstorm Hurricane Tornado/Hail Earthquake Fire/Brush fire Riot Excess Catastrophe Reinsurance Treaty Excess Excess Catastrophe Per Occurrence Aggregate Excess Proprietary & Confidential

  16. Excess Catastrophe – Per Occurrence • Indemnifies cedent after an accumulation of losses from a single event, i.e. Per Occurrence • Protects PHS from sudden drain • Levels results and large fluctuations in earnings Reinsurance Treaty Excess Excess Catastrophe Per Occurrence Aggregate Excess Proprietary & Confidential

  17. 5% Co-Participation $500M xs $300M ROL 5.0% Premium $25,000,000 95% Placed $200M xs $100M ROL 9.0% Premium $18,000,000 95% Placed $60M xs $40M ROL 20.0% Premium $12,000,000 95% Placed Retention Excess Catastrophe – Per Occurrence Example Reinsurance Treaty Excess Excess Catastrophe Per Occurrence Aggregate Excess Proprietary & Confidential

  18. Excess Catastrophe – Per Occurrence Example Example: • Company Policyholders’ Surplus = $450,000,000 • Company sustains $650,000,000 of loss from an accumulation of property losses caused by a hurricane • Catastrophe Excess of Loss: $760,000,000 xs $40,000,000 UNL per occ Reinsurance Treaty Excess Excess Catastrophe The first $40,000,000 retained by Company Per Occurrence Aggregate Excess $610,000,000 ceded to Reinsurers The Company retains a net loss of only $40,000,000and remains solvent. Proprietary & Confidential

  19. Aggregate Excess • Reinsurance is based on the Aggregation of catastrophe losses over a period of time, generally 12 months Reinsurance Treaty Excess Excess Catastrophe Per Occurrence Aggregate Excess Proprietary & Confidential

  20. Aggregate Excess Reinsurance 10% Co-Participation Treaty $200M xs $300M ROL 24.0% Premium $48,000,000 90% Placed Excess Excess Catastrophe Per Occurrence Aggregate Excess Retention Proprietary & Confidential

  21. Responds to a frequency of “smaller” catastrophe events Includes a limit, retention and a trigger Coverage for frequency and some severity Provides assurance to Rating Agencies and Capital Markets by reducing earnings volatility Protect capital needed to support underwriting franchise Increase efficiency and responsiveness of reinsurance coverage Macro perspective vs. a silo approach to coverage Generally cannot be reinstated Aggregate Excess Reinsurance Treaty Excess Excess Catastrophe Per Occurrence Aggregate Excess Proprietary & Confidential

  22. There are 4 respected catastrophe models available: Applied Insurance Research (AIR) Risk Management Solutions (RMS) EQECAT (EQE) Impact Forecasting Excess Catastrophe Reinsurance Models Proprietary & Confidential

  23. Catastrophe modeling results: Probable Maximum Loss (PML) or Exceedance Probability (EP): How high is high? Return times Average Annual Loss (AAL): On average, how much loss? Pure premium: How much loss in a layer? Insurance in force Excess Catastrophe Reinsurance Proprietary & Confidential

  24. Reinsurance Market Update • Multiple significant insurance events have stirred thoughts of a global market hardening • Meaningful regional price adjustments have occurred outside the US, but as yet no global effect • Despite the fact that 1H 2011 catastrophe events are the second most costliest in history for the insurance industry the 2011 events are still at level of an earnings event – less than or equal to expected full year income, after tax for most reinsurers – not a capital event • Share buy-back programs impacted • Reinsurer capital remains abundant despite recent catastrophe events in Japan, Australia, New Zealand and U.S. Proprietary & Confidential

  25. Aon Benfield Aggregate1 Combined Ratio Comparison Source: Individual Company Reports, Aon Benfield Analytics1 The ABA is a group of 28 of the world’s leading reinsurers; latest ABA study can be found at http://thoughtleadership.aonbenfield.com/ThoughtLeadership Proprietary & Confidential Major events in Japan, Australia and New Zealand increased the catastrophe loss impact to the combined ratio from 10.9 percent for H1 2010 to 34.1 percent in H1 2011

  26. Select Reinsurer 1H2011 Combined Ratios Proprietary & Confidential

  27. Impact Of Catastrophe Losses On Shareholders’ Funds Source: Individual Company Reports, Aon Benfield Analytics Proprietary & Confidential

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