oamic property catastrophe presentation...dupont roe decomposition formula the dupont corporation...
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February 16, 2012
OAMIC – Property Catastrophe Presentation
Lou Vivenzio Senior Vice President
Gen Re Intermediaries
Proprietary and Confidential | © General Reinsurance Corporation
Predicated on the assumption that there has been some
recent dislocation, disruption, and even disappointment in
the process and results.
1
1. Try to provide a better understanding of
how we arrived at this point.
2. Suggest some ways to better cope with a
disruptive environment.
My Objectives
Proprietary and Confidential | © General Reinsurance Corporation
The Anatomy of Catastrophe Pricing
2
The Four “E’s” of Catastrophe Pricing
Experience - Company and/or Industry loss experience
Expense - Reinsurer’s cost of capital, underwriting overhead,
brokerage, and profit margin
Economics - Simple principles of supply and demand
Exposure - What you write and where you write it
+ = Catastrophe
Program Cost
Experience Economics
Exposure
Expenses
Proprietary and Confidential | © General Reinsurance Corporation
The Perfect Storm and it’s aftermath
3
3
Economics Supply of Peak Zone Aggregate Diminished
/Demand for Cat Aggregate Up
• Changes in modeled expected loss (D&S)
• Rating Agency pressure held new capital in check and influenced old capital. (D&S)
• Lloyds RDS (S)
Experience Significant Losses Sustained
• No chance to recover from 2004 Losses (Charley, Francis, Ivan, Jeanne)
• Concerns over shift in frequency and severity of loss experience (Cyclical?)
• Dislocation between the ability for primary companies and reinsurance companies to get rate.
Expense Cost of Doing Business Increased Dramatically
• Rating Agency pressure forces companies to write less business against higher capital positions
• Capital suppliers are requiring increased ROE’s
• Cost of Retrocession (when available) increased considerably.
Exposure What You Write And Where You Write Business
• Peak zone supply crunch
• Questions of valuation and Data Quality (accuracy and depth)
• Modeling Inadequacy (commercial vs. personal)
• Un-modeled or poorly modeled perils
Renewal Season 2006
Proprietary and Confidential | © General Reinsurance Corporation
Summer 2008
4
Greetings From Greetings From
OhioOhio
Hey Lou,
Having fun making things wet Wish you were here!
Hurricane Ike
Proprietary and Confidential | © General Reinsurance Corporation 5
Market Metamorphosis
Then Now
Purchasing Decision
Ceded Re Mgr / U/W Department Head
CEO / CFO & Actuaries
Cedent / Market Dynamic
Relationship Oriented (Controlled By Broker)
Cedent /Broker Dynamic
Bottle of Johnny Black and a round of Golf
Value added driven Price Hypersensitivity
Relationship Relationship Oriented?Oriented? “Transaction P&L”“Transaction P&L”
Broker / Market Dynamic
Relationship Oriented (“Potentially Levered”)
Effectiveness dictated by Technical Arguments
Proprietary and Confidential | © General Reinsurance Corporation
Now that we have some idea as to why,
how do we deal with it?
Presentation for [client/prospect] | [date] 6
Proprietary and Confidential | © General Reinsurance Corporation
-5%
0%
5%
10%
15%
20%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
RO
E Average = 8.4%
U.S. Property / Casualty Industry
Source: Highline Data
Proprietary and Confidential | © General Reinsurance Corporation
DuPont ROE Decomposition
Formula the DuPont Corporation Started Using in the 1920s
Breaks Down ROE Into Three Parts
> Operating Efficiency
> Asset Use Efficiency
> Financial Leverage
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Proprietary and Confidential | © General Reinsurance Corporation
DuPont ROE Decomposition
ROE = (Net Profit) / (Equity)
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Net Profit
Sales
Sales
Assets
Assets
Equity
ROE =
x
x
ROE = (Profit Margin) x (Asset Turnover) x (Equity Multiplier)
ROE = Operating Asset Use Financial
Efficiency Efficiency Leverage
x
x
Proprietary and Confidential | © General Reinsurance Corporation
Financial Leverage = Assets / Equity
Source: Highline Data
U.S. Property / Casualty Industry
Proprietary and Confidential | © General Reinsurance Corporation
Asset Use Efficiency = Sales / Assets
Source: Highline Data
U.S. Property / Casualty Industry
Proprietary and Confidential | © General Reinsurance Corporation
Operating Efficiency = Profit Margin
Source: Highline Data
U.S. Property / Casualty Industry
Proprietary and Confidential | © General Reinsurance Corporation
Profit Margin = Net Profit / Sales
Source: Highline Data
U.S. Property / Casualty Industry
Proprietary and Confidential | © General Reinsurance Corporation
How do I Cope With Such a Fluid Environment?
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View yourself as a Supplier of Risk to the global reinsurance marketplace
Not a Consumer of property catastrophe capacity.
You are competing with other firms for Capacity and Terms
How do you gain and sustain a competitive advantage?
Cost Leader Differentiation
Focus your negotiation from a technical perspective
1. What differentiates you from other firms? 2. Why does your firm deserve optimal Terms and Conditions?
Change the Way You Think About the Catastrophe Purchasing Transaction
February 16, 2012
OAMIC – Property Catastrophe