reinsurance and personal umbrella chuck gegax fcas swiss re care 2008

Reinsurance and Personal Umbrella


Chuck Gegax FCAS Swiss Re CARe 2008


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


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.



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




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




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)




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




How Do Rates Get Updated

Often They Don’t

Internal Analysis

Competitor Analysis

Consultants

Reinsurer Input?Reinsurance and Personal Umbrella


Reinsurer Perspective




Types of Primary Carriers

Large Personal Lines

Large Multi-Line Conglomerates

Small Regional Companies

Specialty Carriers




Types of Umbrella Portfolios

Fully Supported

Fully Unsupported

Mixed




Types of Treaties

Quota Share

– Most Common

Excess of Loss

– Often Combined with Other Underlying Coverages

– Becoming More Common

Surplus ShareReinsurance and Personal Umbrella


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



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




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




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




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





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





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



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




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



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



Differentiating Your Reinsurance Offerings




General

Security/Stability

Relationships/Other Business with Client

Ease of Doing Business




Services/Value Added

Rate/Filing Support

Data Management

Portfolio/Strategic Analysis



Conclusions



reinsurance and personal umbrella chuck gegax fcas swiss re care 2008

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