Reinsurance and Personal Umbrella
Reinsurance and Personal Umbrella
Chuck Gegax FCAS Swiss Re CARe 2008
Reinsurance and Personal Umbrella
Introduction
Personal Umbrella from Both Primary and Reinsurance Perspectives
Basic and Advanced Topics
– Pricing, Understanding Exposure
– Types of Treaties
– Other Factors, Including UW Cycles
– Reinsurance Product Differentiation
My Background
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Introduction
My Background
Primary Personal Umbrella (2 Years) and Commercial Umbrella (5 Years) at FFIC
6 Years Reinsurance Pricing at 4 Different Reinsurance Companies, Small Regional and Large National Clients
Special Studies – Layer Optimization, ALAE, etc.
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Personal Umbrella Basics
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Personal Umbrella Basics
How Are Umbrella Policies Rated
Typically Unit Rates
– Per House, Per Car, etc.
– Different From Commercial Umbrella Which Is Often % of Underlying Premium
Other Rating Variables
– Underlying and Policy Limit
– Additional Exposures (Boats, Pools, Trampolines, Youthful Drivers, Business Operations, etc.)
– Varies by State/Territory
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Personal Umbrella Basics
NYT on Personal Umbrella
“… at companies dealing with rich clients, the first million in coverage is usually the most expensive, at perhaps $150 to $300 annually … [III] The rates per million decline as coverage increases. But at $10 million in coverage, the rate jumps because few customers buy that much, meaning insurers can spread their risk over only a relatively small group of customers.”
New York Times (Umbrella Coverage for Preventing Your Ruin, 3/18/08)
[III] source: Jeanne M. Salvatore, Insurance Information Institute
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Personal Umbrella Basics
NYT on Personal Umbrella (cont.)
“… The situation is often the reverse for the many insurers who specialize in middle- and lower-income clients. Often their rates shoot up after the first million in umbrella coverage because they have only a small group of buyers of umbrella policies larger than $1 million. A smaller pool of customers creates more risk per dollar of premium for an insurer, so the insurer charges more for the coverage…”
New York Times (Umbrella Coverage for Preventing Your Ruin, 3/18/08)
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Personal Umbrella Basics
UW Considerations
Depends on the Sophistication of the Company
Can Be Similar to PPA Exposure Profiling
– Credit Scoring, Other Coverages, etc.
Capacity Layer, So Loss Drivers are Further Removed
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Personal Umbrella Basics
How Do Rates Get Updated
Often They Don’t
Internal Analysis
Competitor Analysis
Consultants
Reinsurer Input?Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Reinsurer Perspective
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Reinsurer Perspective
Types of Primary Carriers
Large Personal Lines
Large Multi-Line Conglomerates
Small Regional Companies
Specialty Carriers
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Reinsurer Perspective
Types of Umbrella Portfolios
Fully Supported
Fully Unsupported
Mixed
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Reinsurer Perspective
Types of Treaties
Quota Share
– Most Common
Excess of Loss
– Often Combined with Other Underlying Coverages
– Becoming More Common
Surplus ShareReinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Experience
Higher Layers Often Have Little Experience
– Not Very Credible
– What Do You Compare Against?
Lower Layers from Large Books of Business Have Credible Experience, but Most Umbrella Portfolios Will Have Some Portion of the Business That Can Not Be Credibly Experience RatedReinsurance and
Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Exposure
Traditional “Exposure” Analysis Relies on Layering Ground Up Losses With Some Severity Distribution
This Does Not Work For Personal Umbrella
– No Way to Determine “Ground Up Losses”
– Pricing in the Umbrella Layer Is Not Directly Related to Underlying Pricing
– Severity Distributions May Not Be Reliable in the Upper Layers
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Peer/Competitor Comparison
Compare Rates of the Reinsured to Other Companies with Larger, More Credible Portfolios
Aggregate Data from Multiple Clients
– Assess Overall Portfolio Adequacy
– Develop Pricing Parameters
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Unit Pricing
Estimate Loss Costs for Various Exposure Components
– May Come From Peer Company Study, Large (Credible) Company Filings, Industry Sources
Compare These Loss Costs to Rates Charged
Will Be Difficult to Quantify Every Variable
– Select Key Loss Drivers
– Fill In Missing Elements with Estimates, Judgment
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Unit Pricing Example
From Allfarm’s Guam Filing:
– Primary Residence Loss Cost: $50
– Primary Auto Loss Cost: $100
– Additional Auto Loss Cost: $40
– Boat/RV Loss Cost: $30
– Pool Loss Cost: $20
– Trampoline Loss Cost: $10
– Business Use Loss Cost: $10-$100
Note: Figures and names are entirely fictitious
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Unit Pricing Example
From Client’s Rate Manual:
– Primary Residence Unit Charge: $75
– Primary Auto Unit Charge: $120
– Additional Auto Unit Charge: $30
– Boat/RV Unit Charge: $40
– Pool Unit Charge: $10
– Trampoline Unit Charge: $0
– Business Use Unit Charge: $30
Note: Figures and names are entirely fictitious
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Treaty Pricing Considerations
Unit Pricing Example
Compare Client’s Unit Charge to Base Loss Costs
Use Client’s Exposure Profile to Weight Various Combinations of Loss Ratios Together
May Need to Estimate or Use Samples to Get Exposure Profile
May Point Out Areas Where Client’s Rates Are Not Sufficiently Detailed
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Other Considerations
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Other Considerations
Changes in Book/Exposure
Growth/Expansion into New States
Expansion of Coverages/Exposure
Shifts in Underlying and Policy Limits
Changes in UW/Claims Handling Practices
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Other Considerations
Changes in Legal Environment
Could Impact Certain States or Nationwide
Jury Verdicts
Emerging Exposures/Issues
– Identity Theft
– Other Potential Cyber Issues
– Housing/Credit Crisis May Impact Claims ReportingReinsurance and
Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Other Considerations
Impact of Market Cycle/Economic Conditions
Manual Rates Typically Are Not Discretionary, Reducing Downward Pressure on Rates
Other Ways to Cut Rates
– Tiered Pricing
– “Overlooking” Exposures
Decision To Purchase Umbrella May Be Driven by Cost of All Personal Insurance
Economic Conditions May Influence Claims
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Differentiating Your Reinsurance Offerings
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Differentiating Your Reinsurance Offerings
General
Security/Stability
Relationships/Other Business with Client
Ease of Doing Business
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Differentiating Your Reinsurance Offerings
Services/Value Added
Rate/Filing Support
Data Management
Portfolio/Strategic Analysis
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008
Conclusions
Reinsurance and Personal Umbrella
Chuck Gegax Swiss Re CARe 2008