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Aggregation and Other Reinsurance IssuesReinsurance IssuesAndrew Guarnori
IMC PI Forum, Cambridge – July 2, 2013
Agenda
� Aggregation
� Dependencies� Dependencies
� Divergence
� Key Take Aways
� Questions?
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AggregationAggregation
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� Source of numerous disagreements over the years at both Insurance and
Reinsurance level:
Aggregation situation today
– Conflicts of interest can exist between the positions taken by the original
Insured, Insurer and Reinsurer
– Contract language typically not robust enough to respond to every eventuality
– Language doesn't always have a clear and universal interpretation in all
jurisdictions/territories
– Expectations are not always clear/realistic (on both sides) – hindsight adjusting!
– Pure "Risk" reinsurance covers will tend to rely on the original "per insured"
interpretation
IMC PII Conference | Reinsurance Issues | Andrew Guarnori - July 2, 2013
interpretation
– "Event" or other broader reinsurance covers present additional challenges
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� Attempted solutions have included:
– "Bolt-on" approaches
Solutions
– Concoction of new phrases which don't have existing legal meaning/precedent
– Use of set "Scenarios" to illustrate intended application of coverage
– Extremes such as use of "sole judge" and "follow fortune" provisions
� Reaction to these have been very mixed from both Insurers and
Reinsurers
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� Aggregations arise from a number of angles:
– Single "Risk" accumulations
Core issues around aggregation
– Visible (target risks)
– Invisible (unexpected)
– Multiple "Event" accumulations
– Clash of Insured or Clash of coverage situations
– Localised events (same issue effecting numerous insureds such as a
corporate failure or mis-selling scandal)
– "Systemic" accumulations
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– "Systemic" accumulations
– Global systemic events (financial crisis, cyber-virus, etc.)
– Macro economic trends (interest rates, inflation, etc.)
� Reinsurers must also deal with the further complications of inter-
reinsured accumulations
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Typical reinsurance aggregation language
� The definition of "Loss Occurrence" under reinsurance contracts is not
standard and contracts can offer widely different language around their
treatment of aggregation:treatment of aggregation:
– Event
– Common Cause
– Originating Cause
– Related Loss
– Causative Agency
– Business Disaster
Generic/common use
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– Business Disaster
– Claims Made Casualty Catastrophe
– Broad/Enhanced Trigger
– Integrated Occurrence
– Sole Judge, etc.
Proprietary/less common
use
Loose
Aggregate
XoL / Stop
Loss
Related
Loss
Typical Reinsurer risk appetite
Sp
ace
& T
ime
Common
Cause
Originating
Cause
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Tight
Scope of AggregationNarrow Broad
Event
Why can Property do it?- Some fundamentals
Attribute Property Casualty/PI
Time Sudden Sudden or gradual
Duration Limited Limited
or Extended
Space Localised Localised
or Global
Perils Named
or Physically Tangible
Legal Liability
or economic
Exposure Known values (TIV)
Known limits
Unknown values
Known limits
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Known limits Known limits
Modelling Commercially available
Sophisticated
Tested
PML calculable
Proprietary
Variable
Insufficiently tested
PML's unreliable
Advisor
1
Investor 1
Investor 2
Investor 3
Investor 4
Investor 5…
Investment A
Investment B
Investment C
Investment D
Investment E…
How hard can it be?Simplified exposure map – 1 Fund
Investment Fund
Advisor
2
Advisor
3
Investor 6
Investor 7
Investor 8
Investor 9
Investor 10…
Investor 11
Investor 12
Investor 13
Investor 14
Investment E…
D&O's
Auditors
Broker
1
Broker
2.....n
Lawyers
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Advisor
4.....n
Investor 14
Investor 15…
Investor 16
Investor 17
Investor 18
Investor 19
Investor 20…
Investment F
Investment G
Investment H
Investment I
Investment J…
Auditors Lawyers
� Expect far more interest/products in this area
� Industry and regulators increasingly aware of issues
So What Next?
� Industry and regulators increasingly aware of issues
– Limited benefit for traditional covers under Solvency II proposals
� New products are emerging in this area which try to meet "essential"
requirements;
– Predict/Model
– Quantify/Contain
– Know/Respond
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DependenciesDependencies
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� Reinsurers can have a high degree of dependency on a sometimes
lengthy chain of counter-parties:
Dependencies
� This goes much further than just usual notification issues
� Need to obtain adequate information and regular updates
� Market performance has been very variable in this area
Original Insured
BrokerPrimary Insurer
BrokerExcess Insurer
Broker Reinsurer
Time
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� Market performance has been very variable in this area
� It's challenging to predict development patterns or assess IBNR if there's
nothing there!
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DivergenceDivergence
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� Diversification of exposure is normally good – it usually reduces risk
� Divergence of interests normally isn't – it can lead to conflicts
Divergence
� Divergence of interests normally isn't – it can lead to conflicts
� Insurers are tending to retain more
� Over-riders and ancillary income can present conflicts to alignment of
interest
� Business ceded to Reinsurers is increasingly diverging from business
retained:
– Small limits business is usually retained: Tends to be mostly stable/safer
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– High limits business is usually ceded: Tends to be more volatile/peak risks
� Overall presents fundamental challenges to insurer/reinsurer
partnerships
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Divergence: "Picture of Perfection Ins Co"
Assume client buys layer of
£15M x/s £10M
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£15M x/s £10M
Take AwaysTake Aways
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Take Aways
Securing adequate Reinsurance coverage for aggregations is increasingly important as aggregations is increasingly important as Insurers retain more exposure "per risk"
Dependencies present threats to the ability of the market as a whole to accurately
assess and reserve for PI losses
Divergence is putting increasing pressure on
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Divergence is putting increasing pressure on traditional partnerships
Questions? & Thank you& Thank you
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IMC PII Conference | Reinsurance Issues | Andrew Guarnori - July 2, 2013
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