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Aggregation and Clash: New Exposures, New Tools. Aggregation and Clash: New Exposures, New Tools. MODERATOR: David Bradford, Executive Vice President & Editor-in-Chief, Advisen, Ltd. PANELISTS: Scott C. Belden, ACAS, Senior Vice President, Reinsurance, Travelers Companies, Inc.
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Aggregation and Clash:New Exposures, New Tools MODERATOR: David Bradford, Executive Vice President & Editor-in-Chief, Advisen, Ltd. PANELISTS: Scott C. Belden, ACAS, Senior Vice President, Reinsurance, Travelers Companies, Inc. Daniel E. Greer, FCAS, MAAA, Senior Vice President, Aon Re Services Sean P. Whelan, Executive Vice President, Willis Re
Global Financial Crisis • What Types of Lawsuits are Being Filed? • Will they survive motions to dismiss? • Who is Being Sued? • What Coverages are Involved? • Is This One Clash Event or Multiple Events?
4% 6% 3% 5% 4% Breach of contract 14% ERISA class action Fraudulent trade practices Securities class action 20% Securities fraud Shareholder derivative suit Underwriting malpractice Other malpractice 6% Other securities related 31% Other 7% Subprime/Credit Crunch Suits Source: Advisen MSCAd
Overview • Types of “Clash” Events • Classification Scheme • Assessing, Monitoring, Modeling • Capital Adequacy Implications • Potential Risk Mitigants • Clash Reinsurance: Evolution and Issues • Legal Theories and Key Cases • Q&A
Types of “Clash” Events • Within a Policy, Multiple Related Events • Single Event, Multiple Policies for a Single Insured • Single Event, Multiple Insureds • Multiple Events, Multiple Insureds – Widely Sold Service or Product is Found to be Faulty • Extra-Contractual Obligations or Excess of Policy Limit judgments
Assessing And Monitoring Aggregations By “Clash” Type • Know and Track Exposures* By: • Industry and/or profession • Operational focus of the business • Size of customer • Financial structure • Public, Private, Partnership • Leverage ratio • Geography * Exposures = Limits, attachment point, premiums, exposure bases
Assessing And Monitoring Aggregations By “Clash” Type • Know and Track Exposures* By: • Type of coverage (D&O ABC vs. Side A) • Occurrence or claims-made layers (pricing adequacy depends on accuracy of ILFs) • Aggregated attachments (pricing adequacy depends on accurate loss modeling) • How many more criteria may be relevant? * Exposures = Limits, attachment point, premiums, exposure bases
Pricing for Clash Exposure • Pricing Should Reflect Capital Requirement • More capital needed to add exposure to an area of concentration
Modeling Example • Multiple Events On Single Policy (A2 Clash) • Aggregate limits cap exposure – by how much? • How much do aggregated SIRs / underlying limits add to the exposure ? • Pricing must contemplate this potential • Effect is compounded across a portfolio • Sensitive to underwriting in soft/hard market • Occurrence pricing models are not sufficient in a claims-made environment
Capital Adequacy Implications • Typically Include Benefit of Lack of Correlation Where Assumed: • Among policies • Among lines • Between Premium risk and Reserve Risk • Between Asset and Liability Risk
Potential “Clash” Risk Mitigants • Limits Management • Per policy as well as aggregations across exposure criteria • Diversification vs. Correlation • Reinsurance
Reinsurance Issues • Definitions of Coverage • Wording can be critical – test against database of historical events as well as prudent “what if” scenarios • Pricing • Post-event Reconstruction
Reinsurance Issues • Reinsurance Structures Vary in Their Effectiveness of Protection: • Excess of loss will protect against severity impacts, but not frequency • Caps shift impact of extreme events back to cedant • Cat covers/ Aggregate Stop Loss can be most effective, but carry elevated capacity charges
Legal Theories and Key Cases • Directors’ and Officers’ Liabilities Under ERISA • Post-Enron phenomenon • Ds & Os as functional fiduciaries • Misleading disclosures a breach of fiduciary duty under ERISA
Legal Theories and Key Cases • “Aiding and Abetting” • Central Bank of Denver • “Scheme Liability” • Stoneridge • Investor reliance on secondary actors • Newby v. Enron • Push cases into state courts?
Many Thanks to • David Bradford • Scott C. Belden, ACAS • Daniel Greer, FCAS, MAAA • Sean P. Whelan