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