catastrophe excess of loss event

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20210318100919reinsurance_assignment1.docx

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MSc Risk Management

Module: Reinsurance

Analytical Report

You work for The Stan Reinsurance Company (hereinafter referred as Stan Re), located in Bermuda. Your company has received an inward reinsurance business proposal from a UK based primary insurer named Limestreet Insurance Company (hereinafter referred as Limestreet). The Limestreet requires the Stan Re to be the lead underwriter of its Property, Liability and Accident businesses.

A summary of the Treaty Slips for (1) per risk Excess of Loss; and (2) catastrophe Excess of Loss including the relevant information necessary to carry out the assessment are available below.

Per Risk Excess of Loss Treaty Summary

Ceding Company	Limestreet Insurance Company Ltd
Agreement	This agreement between the ceding company and the reinsurer consist of two parts being the specific conditions specified in the treaty summary including any appendix and the general terms and conditions.
Period	12 months commencing 1st of July 2021. Losses occurring irrespective of attachment dates of original policies.
Type	Excess of Loss cover
Class	Property, Liability and Accident businesses
Territory	Worldwide
Limits and Deductibles	1st Layer: To pay US$ 25,000,000 ultimate net loss each and every risk in excess of US$ 50,000,000 ultimate net loss each and every risk.
	2nd Layer: To pay US$ 25,000,000 ultimate net loss each and every risk in excess of US$ 75,000,000 ultimate net loss each and every risk.
Reinstatements	1st layer: four free
	2nd layer: one free
Premium and rates	As a part of this coursework you are required to calculate the Minimum Deposit Premium [see question (b) below].
Brokerage	The advisable brokerage commission is 10% (0% on reinstatements). However, it is expected that students should use another rate based on their judgement on the basis of practical circumstances.
General conditions	See Questions (a) and (c) below.
Data	Supplied in Tables 1, 2, 3, 4 and 5 below

Table 1: GNPI
Fiscal Year	GNPI (estimated) in US$
2021/22	900,000,000
2020/21	750,000,000
2019/20	690,455,000
2018/19	610,500,000
2017/18	500,100,000
2016/17	480,000,000
2015/16	404,400,000
2014/15	366,500,000
2013/14	310,300,000
2012/13	255,800,000
2011/12	247,200,000
2010/11	238,000,000

Table 2: Projected Income for 2021/22

Country/region		Projected Income (in US$)
North America		205,000,000
Europe		250,250,000
Japan		102,000,000
Asia		170,250,000
Middle East		161,100,000
South America		100,000,000
Australasia		110,150,000
Caribbean		60,300,000
Africa		40,950,000
	Total	1,200,000,000

Table 3: Risk Profile by Sum Insured [All policies in force on 31 December 2020]

Sum Insured in US$ 000	Number of Risks	Premium in US$ million
0 – 10,000	1,300	250
10,000-20,000	1040	200
20,000 – 30,000	850	120
30,000 – 40,000	300	130
40,000 – 50,000	210	110
50,000 – 60,000	150	150
60,000 – 70,000	100	145
70,000 – 80,000	72	100
80,000 – 90,000	50	90
0ver 90,000	120	165
Total	4,192	1460

Catastrophe Excess of Loss Treaty Summary

SLIP DETAILS
CEDING COMPANY	Limestreet Insurance Company Ltd
AGREEMENT FORMAT	This agreement between the ceding company and the reinsurer consist of two parts being the specific conditions specified in the treaty summary including any appendix, and the General Terms and conditions specified in the attached document.
PERIOD	12 months commencing 1 July 2021. Losses occurring irrespective of attachment dates of original policies.
TYPE	Catastrophe Excess of Loss Cover
CLASS	1) The reinsured’s net retained account of direct insurance and facultative reinsurances in respect of a) Home and overseas business written in overseas fire department b) Its participation in the business of international oil insurers written in its fire department 2) Fire and allied perils written in the home personal department in respect of the reinsurer’s householders comprehensive and private house policies including small craft and caravans
TERRITORY	Worldwide, excluding risks situated in the USA
EXCLUSIONS	Note: As a part of your answer you are required to advise on the exclusions to include and create the schedule
LIMIT AND DEDUCTIBLES	1st Layer To pay US$50,000,000 Ultimate Net Loss each and every loss occurrence IN EXCESS OF US$100,000,000 Ultimate Net Loss each and every loss occurrence
	2nd Layer To pay US$50,000,000 Ultimate Net Loss each and every loss occurrence IN EXCESS OF US$150,000,000 Ultimate Net Loss each and every loss occurrence
GROWTH OF LINE LIMITS	Note: Line limits has gone up at equal intervals 50% in the past five years
WARRANTY	Two Risk warranty.
REINSTATEMENT	Applicable to both layers. One full reinstatement at 100% additional premium as to time, pro-rata as to amount reinstated only.
PREMIUM	RATES 1st layer – Adjustable Rate: 2.25% of GNPI 2nd Layer Adjustable Rate: 1.10% of GNPI DEPOSIT PREMIUMS Minimum and deposit premium ( *please calculate* ), payable in half yearly in advance. PREMIUM ADJUSTMENT BASIS Both layers: Average net retained aggregate sums insured for earthquake, windstorm for the 12 months period commencing July 1, 2020.
DEDUCTIONS	Brokerage 10% (0% on reinstatement) Note: This brokerage rate is for general guideline only. However, it is expected that students should use the brokerage rate based on market reality and circumstances.
GENERAL CONDITIONS	Not supplied [students need to decide] Note: It is expected that the students should advise on the general conditions on the basis of market reality and circumstances
Table 4: Big Losses - Home and Foreign Account

Note: Although Tables 1, 2, 3 and 5 are same for all students, Table 4 is different and allocated separately to each individual student. You are required to use the allocated data in your analysis.

Table 5: Inflation rates

2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
2.6%	1.9%	3%	1.5%	3.2%	2.5%	2.2%	2.6%	3.2%	4.25%	4.5%

Average Future Annual Inflation is 3.5%.

Table 6: Loss Development Factors

Year

1 to 2

2 to 3

3 to 4

4 to 5

5 to 6

6 to 7

7 to 8

8 to 9

9 to 10

Loss

Development

Factor

1.9

1.5

1.3

1.25

1.15

1.1

1.08

1.02

1.01

Note that the Discount Rate is 5%, Ultimate Development of the Loss for the next five years is 1.24 (10 to ultimate).

REQUIRED:

In considering the above information, you are required to produce an analytical report that helps your manager to (a) underwrite, (b) price and (c) redesign the reinsurance programme to make the treaties more effective to manage Limestreet’s risk exposures.

In the report you should address the following issues:

a) An analysis (pricing of the layers to the per risk excess of loss - determine an adjustable Minimum Deposit Premium and Catastrophe excess of loss) and assessment of the appropriateness and acceptability of the terms of this business proposition. (Assume the average delay in claim settlement for the liability claims is about three years).

b) Given that the nature of the per risk excess of loss book has no territorial limit, suggest and justify the rationale behind the contractual conditions that you would like to put in place to make this business less risky and acceptable.

c) Given that the chance of exhausting the catastrophe cover is high:

i. Evaluation and price an alternative top and drop cover for catastrophe losses up to a coverage amount of US$50,000,000 (size of the top and drop layer);

ii. Explore how you can use a collateralised insurance linked security in one of the territories to bridge the gap for the spill over layer that will give catastrophe cover of up to a limit of US$500 million.

d) An assessment of how implementing a 40% quota share with a limit US$100 million instead of the per risk excess of loss, alongside the catastrophe excess of loss structure similar to the one above will impact on the price and terms of the Catastrophe excess of loss treaty. (Assume that there is a per event accumulation limit of US$60 million on the Quota Share and that all the losses are incurred at 100%).

e) Also discuss how you can control the impact of inflation on the treaty pricing arising from liability claims.

f) Given the nature of the book, critically evaluate why it might be beneficial to arrange the excess of loss treaties by region or introduce a buffer excess of loss for certain problematic perils. In your answer provide historical statistical evidence on the main drivers of regional claims.

g) The Fukushima employers’ liability loss which has been outstanding since 2010 and was revised upwards from an initial claim of US$25 million. Using the loss development factors above evaluate and alternative risk financing instrument you would use to transfer the risk and determine the price which your company would pay for the transferred portfolio.

PLAGIARISM: Please refer to the University Guidelines on plagiarism. You are advised to consider this issue very seriously.

WORD COUNT: 3,000 (+/- 10%). This excludes references and appendices.

GLOSSARY OF KEY WORDS

Analyse

Find the relevant facts and examine these in depth. Examine the relationship between various facts and make conclusions or recommendations.

Asses

To judge or decide the amount, value, quality, or importance of something

Construct

To build or make something; construct a table.

Critically analyse

The analysis of information by comparing and contrasting their strength and weakness through arguments and counterarguments.

Describe

Give an account in words (someone or something) including all relevant characteristics, qualities or events.

Devise

To plan or create a method, procedure or system.

Discuss

To consider something in detail; examining the different ideas and opinions about something, for example to weigh up alternative views.

Explain

To make something clear and easy to understand with reasoning and/or justification.

Identify

Recognise and name.

Justify

Support an argument or conclusion. Prove or show grounds for a decision.

Outline

Give a general description briefly showing the essential features.

Recommend with reasons

Provide reasons in favour.

State

Express main points in brief, clear form.

University of Liverpool

ASSESSMENT CRITERIA

	CRITERION	70% & More	60-69%	50-59%	FAIL – 49% or Less
1	Presentation of assignment	Shows a polished and imaginative approach to the topic	Carefully and logically organised	Shows organisation and coherence	Disorganised/ incoherent
2	Clarity of expression including accuracy, spelling, grammar, punctuation	Fluent writing style appropriate to document. Grammar and spelling accurate.	Language fluent Grammar and spelling accurate	Language mainly fluent Grammar and spelling mainly accurate	Meaning unclear and/or grammar and/or spelling contain frequent errors
3	Communication and presentation	Can engage effectively in debate in a professional manner and produce detailed and coherent project reports	Can communicate effectively and report practical procedures in a clear and concise manner with all relevant information in a variety of formats	Can communicate effectively in a format appropriate to the discipline and report procedures in a clear and concise manner with all relevant information	Communication is unstructured and unfocused and/or in a format inappropriate to the discipline
4	Logical Structure	Clear, imaginative, logical structure	Clear, basic, logical structure	Structure is not logical
5	Presentation	Material is imaginatively presented resulting in clarity of message and information	Material is carefully structured with clear message and visual effect	Material included is relevant to topic and has been structured. Visual aspect of presentation is limited	Not all material is relevant and/or is presented in a disorganised manner
6	Conforming with instructions (e.g. word length)	Work has been submitted within time boundaries and within prescribed parameters	Work has been submitted late or deviates significantly from parameters

7	Attention to purpose	Has addressed the purpose of the assignment comprehensively and imaginatively	Has addressed the purpose of the assignment coherently and with some attempt to demonstrate imagination	Has addressed the main purpose of the assignment	Fails to address the task set
8	Question understanding	Answer comprehensively addresses the key components of the question	Answer consistently addresses the key components of the question	Answer does not consistently addresses the key components of the question
9	Content and range	Comprehensive/detailed knowledge of key issues	Reasonable knowledge of key issues	Has given a factual and/or conceptual knowledge base and appropriate terminology	Lacks evidence of knowledge relevant to the key issues and/or significantly misuses terminology
10	Critical reasoning	Consistently demonstrates application of critical analysis well integrated in the text	Clear application of theory through critical analysis/critical thought of the topic area	Demonstrates application of theory through critical analysis of the topic area	Lacks critical thought /analysis / reference to theory
11	Use of literature/ evidence of reading	Has developed and justified using own ideas based on a wide range of sources which have been thoroughly analysed, applied and discussed	Able to critically appraise the literature and theory gained from variety of sources, developing own ideas in the process	Literature is presented uncritically, in a purely descriptive way and indicates limitations of understanding	Either no evidence of literature being consulted or irrelevant to the assignment set
12	Referencing	Referencing is consistently accurate	Referencing is mainly accurate	Some attempt at referencing	Referencing is absent/ unsystematic

END