Reinsurance

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Glasgow Caledonian University MSc Insurance and Sustainable Risk Management

Module: Reinsurance, Risk Financing and Securitisation of Insurance Risks

Coursework 2 topics: Reinsurance Programme Design and Risk Securitisation Issues

THIS COURSEWORK CONSISTS OF 70% OF OVERALL EXAMINABLE COMPONENT

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 to as

Limestreet). The Limestreet requires 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.

1) Per Risk Excess of Loss Treaty Summary

Ceding Company

Limestreet Insurance Company Ltd

Agreement This agreement between the ceding company and the reinsurer consists 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 January 2022. 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

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Table 1: GNPI

Fiscal Year GNPI (estimated) in US$

2022 900,000,000

2021 750,000,000

2020 690,455,000

2019 610,500,000

2018 500,100,000

2017 480,000,000

2016 404,400,000

2015 366,500,000

2014 310,300,000

2013 255,800,000

2012 247,200,000

2011 238,000,000

Table 2: Projected Income for 2022

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

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Table 3: Risk Profile by Sum Insured [All policies in force on 31 December 2021]

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

2) 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 January 2022. 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

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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 have 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 January 1, 2022.

DEDUCTIONS Brokerage 10% (0% on reinstatement)

Note: This brokerage rate is for general guidelines 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 based on market reality and circumstances

Table 4: Big Losses - Home and Foreign Account

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

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2.6% 1.9% 3% 1.5% 3.2% 2.5% 2.2% 2.6% 3.2% 4.25% 4.5%

The average Future Annual Inflation is 3.5%.

Table 6: Loss Development Factors

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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 spillover 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 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 has been outstanding since 2011 and was revised

upwards from an initial claim of US$25 million. Using the loss development factors above

evaluate an alternative risk financing instrument you would use to transfer the risk and

determine the price which your company would pay for the transferred portfolio.

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Allocation of Marks

Question No. Marks

a 20

b 10

c 20

d 10

e 10

f 10

g 20

Total 100

The detailed assessment criteria are added on the table at pages 8and 9 of this document.

Further information is available on Module Handbook.

PLEASE NOTE:

SUBMISSION DEADLINE AND LINK: The students (both on-campus and distance learning) must submit this electronic version of the coursework (Word Version of the Report) via “Turnitin” on GCU-Learn using the appropriate link and the associated EXCEL worksheets (if necessary) by email to the module tutor on or before Tuesday, 10 May 2022 at 18:00 BST. Before final submission, you may use the trial submission link available on GCU Learn to check the similarity index of your report (word Version Only).

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.

Any coursework not submitted by the due date will be zero marked unless an approved MITS

is submitted for consideration by the Assessment Board.

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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.

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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

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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