“where’s the money?” - wsia where's the...2017 excess & surplus lines june 4 - 7,...

2017 Excess & Surplus Lines

June 4 - 7, 2017

Phillip S. McCrorieExecutive Vice President

RSUI Group, Inc.

“Where’s the Money?”THE IMPORTANCE OF REVIEWING

FINANCIAL STATEMENTS ANDACCOUNTING PROCEDURES

www.napslo.org

Learning Objectives

Understand the:

1. Major Risk Areas for Insurers

2. Major Risk Areas for MGAs and Brokers

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School Update

• Instructor

• Curriculum

• Please stop and ask if I use any term you are not familiar with.

• No question should go unasked.

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Course Outline

• Quick Field Trip to a Cemetery

• Major Risk Areas for Insurers

• Major Risk Areas for Brokers and MGA’s

• Q & A

Wrap-up

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Field Trip to the CemeteryLook for the tombstones of…….

Kemper

Frontier

Reliance

Legion

How about… The Royal... The Home… Quanta..

Anyone ever hear of “Mission Insurance”?

Clarendon (Exhibit A) -- Take a minute to review.

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What does that mean?

Is it free?

Better or worse?

Run-off

Wind-down

Claims Service

Exhibit A

Clarendon

CNA Re (then)….. CX Re (now)

Real Life Example

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Conclusions from the Cemetery

The products (policies) were not p____ properly

The companies growth was too r____

Their loss reserves were ultimately i__________

riced

apid

nadequate

What went wrong?

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Conclusions from the Cemetery (continued)

I_______

Third-party c_______

P_______

R_______

S__________

C________ (via g______ f____)

E________

nsureds

laimants

roducers

einsurers

tockholders

onsumers

mployees

uaranty unds

Who gets hurt?

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Cyclicality of Insurance and Reinsurance Industry

Unforeseen Catastrophic Losses

Agents’ Balances

Investment Portfolio Performance

Reinsurance Recoverable

Loss Reserves – Science or Art?

Major Risk Areas for Insurers

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Economic reference to cycles

Effect on insurance industry cycles of:

Capital – plentiful or scarce?

Participants – many or few?

Underwriting capacity – a lot or a little?

Price competition – a lot or a little?

Policy terms and conditions – broad or narrow?

How do Reinsurers fit in?

MAJOR AREAS OF RISK FOR INSURERSCyclicality of Insurance & Reinsurance Industry

9

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Severity

Gross Losses

Used to be “Acts of God” Now also man-made

Incidence, frequency and severity are inherently unpredictable

MAJOR AREAS OF RISK FOR INSURERS

Unforeseen Catastrophic Losses

Doesn’t “modeling” mitigate all this?

Gross Losses Exposure Duration

Net Losses Reinsurance

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Severity

Gross Losses

Used to be “Acts of God” Now also man-made

Incidence, frequency and severity are inherently unpredictable

MAJOR AREAS OF RISK FOR INSURERS

Unforeseen Catastrophic Losses

Doesn’t “modeling” mitigate all this?

Gross Losses Exposure Duration

Net Losses Reinsurance

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MAJOR AREAS OF RISK FOR INSURERS

Unforeseen Catastrophic Losses

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‘Know thy customer’ (and their customer)

Agent vs. Broker states

Statutory penalty on Schedule of Non-Admitted Assets

Reserving practices

MAJOR AREAS OF RISK FOR INSURERS

Agents’ Balance

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Concept of float

For how long? Short-tail vs. Long-tail liabilities

Duration and laddering

Invest in what?

▪ Marketable Securities

• Fixed Income (Investment Quality vs. Junk Bonds)

• Equities

▪ Other (Real Estate, etc.)

MAJOR AREAS OF RISK FOR INSURERS

Investment Portfolio Performance

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Reinsurance recoverables are recorded as assets, not a reduction to the related liability.

Amounts recoverable are estimated based on the:

• Reinsurance contract (treaty, facultative)

• Nature of the underlying claim liability

• Insurance company’s assessment of collectability

Monitoring Reinsurers’ credit worthiness

• Periodic evaluation of their financial condition

• Watching concentration risk

MAJOR AREAS OF RISK FOR INSURERS

Reinsurance Recoverable

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• Exhibit B: Alleghany

• Focus on the section titled “Reinsurance” (Exhibit B.1)

– Be ready to answer questions on:

• Types of reinsurance

• Treaty vs. Facultative

• Pro-rata vs. Excess of Loss

MAJOR AREAS OF RISK FOR INSURERS

Buzz Group Session

Take 15 minutes, break into informal groups.

Prepare to answer questions on the following:

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• Treaty - all of a class or product line

• Facultative - individual risks

• Pro-rata, quota-share and surplus share - share in premium and losses

• Excess of Loss - cover loss excess of an underlying limit– Catastrophe - more than one risk– Per Risk - single risk coverage

MAJOR AREAS OF RISK FOR INSURERS

Exhibit B – Major Reinsurance Terms

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• Exhibit C: Berkshire Hathaway

• Be ready to answer:– What is a “10K”? (Exhibit C)

– IBNR What is it? (Exhibit C.1)

– Reasonable and adequate What does that mean?

– Find the triangles

– Deficiency vs. redundancy?

– What happened in 1998?

Prepare to answer questions on the following:

MAJOR AREAS OF RISK FOR INSURERS

Buzz Group Session

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• 10K’s (also Yellow Perils and Best’s reports (Exhibit G)) – Good places to find information

• IBNR- incurred but not reported (Exhibit C.1)

• “Loss triangles” and “development”

• Reserves are required to be “reasonable & accurate”

• “GAAP” vs. “STAT”

MAJOR AREAS OF RISK FOR INSURERS

Exhibit C – Berkshire Hathaway

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What Happened?

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• Exhibit D: Markel

• Be ready to answer:

– Find the triangles

– What happened in 2002? In 1997?

– When did the soft market begin and end?

– Redundancy vs. Deficiency

MAJOR AREAS OF RISK FOR INSURERS

Buzz Group Session

Prepare to answer questions on the following:

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• “Loss triangles” and “development”

• “Redundancy vs. Deficiency”

• Soft market - usually lead to deficiency in loss reserves

– Hard markets build back reserves (“if the company is lucky”)

• Why?

MAJOR AREAS OF RISK FOR INSURERS

Exhibit D - Markel

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What happened

here?????

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Components

• Reported claims

• Incurred but not reported (IBNR) claims

• Loss adjustment expenses (both)

• Any salvage or subrogation amounts

Calculation based on:

• Actual amounts

• Estimates for the unknown

Differences between estimates and ultimate costs are recorded in the period when they become known- critical concept.

MAJOR AREAS OF RISK FOR INSURERS

Loss Reserves – Science or Art?

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“Selected financial loss ratio” What is it

Bad pricing makes inadequate reserves worse Why

What happens when the company is “deficient”

Quick, simple example…

MAJOR AREAS OF RISK FOR INSURERS

Loss Reserve Questions

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Assume GL Portfolio of $200 million

Year Premium Price Selected Actual Needed

Change L/R Reserves Reserves

1 200 55% 110 110

2 190 -5% 55% 105 110

3 171 -10% 55% 94 110

Total 561 309 330

Deficiency 171 21 13%

MAJOR AREAS OF RISK FOR INSURERS

Loss Reserve Example

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RESERVING - according to A.M. Best - the major reason insurance companies fail.

Uncollectible premiums will sink any company.

Reinsurance - availability and whether or not it can be collected has a huge impact on an insurance company.

The “Promise To Pay” is what we all are selling.

It’s your reputation on the line with the customer if the company does not deliver on the promise.

MAJOR AREAS OF RISK FOR INSURERS

Takeaways

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Reconciliation to Insurer’s Risks – some risks not applicable

Cyclicality of Insurance and Reinsurance Industry

Adequate Capitalization

Accounts Receivable from Agents

Segregation of Trust Funds

Short Term Investments

Adequate E & O Program

Major Risk Areas for Brokers & MGA’s

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Quantity of submissions to markets

Policy pricing (inverted effect on commissions)

Policy terms and conditions

Programs and binding authorities

MAJOR AREAS OF RISK FOR BROKERS & MGA’s

Cyclicality of Insurance and Reinsurance Industry

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Initial equity

Ongoing working capital• Internally generated

• Bank facilities

MAJOR AREAS OF RISK FOR BROKERS & MGA’s

Adequate Capitalization

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Know thy agent (and the insured)

Requirement to advance premiums, even if not collected

Reserving practices

MAJOR AREAS OF RISK FOR BROKERS & MGA’s

Accounts Receivable from Agents

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What’s in that dollar coming in the door?

Agent’s commission deducted

Net amount remaining

•Premium itself

•Third-party taxes, fees

•Broker commission

Legal requirements

Market-specific requirements

MAJOR AREAS OF RISK FOR BROKERS & MGA’s

Segregation of Trust Funds

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Liquidity (duration compared to insurance company)

Quality

MAJOR AREAS OF RISK FOR BROKERS & MGA’s

Short Term Investments

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Insurer quality

Limits

Deductible

Terms and Conditions

MAJOR AREAS OF RISK FOR BROKERS & MGA’s

Adequate E&O Program

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MAJOR AREAS OF RISK FOR BROKERS & MGA’s

Takeaways

Bad debt and its impact on your firm’s profitability.

Responsibility to maintain separation of funds.

E&O…..you don’t want to be the one to use the deductible.

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Q & A

ANY financial or business-related question is fair game !!!

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Wrap-up

•Alleghany Corporation (Exhibit E) “Critical Accounting Estimates”

–More than you wanted to know about reserving.

•Couple of current examples of financial issues and ethics to review quickly.

Please complete the assessment forms. They really help us structure the presentation.

2017 Excess & Surplus Lines

June 4 - 7, 2017

Phillip S. McCroriehttps://www.surveymonkey.com/r/McCrorie17

“Where’s the Money?”THE IMPORTANCE OF REVIEWING

FINANCIAL STATEMENTS ANDACCOUNTING PROCEDURES