Reinsurance Pricing and Reserving CAS Foundations of Casualty Actuarial Science Chapter 7:Reinsurance

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Reinsurance Pricing and ReservingCAS Foundations
of Casualty Actuarial ScienceChapter
7Reinsurance

• Gary Patrik
• Christian Svendsgaard
• William Belvin
• ASTIN/Casualty Actuaries in Reinsurance
• Washington, DC
• July 11, 2001

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Outline of Presentation

• Topic\Speaker
• Introduction\Gary Patrik
• Reinsurance Pricing\Chris Svendsgaard
• Reinsurance Reserving\Bill Belvin

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Outline of Patriks Presentation

• Why a new edition of FCAS
• Why a rewrite of the Reinsurance chapter
• General ideas in the Reinsurance chapter
• Section headings

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Why a new edition of FCAS

• Original published 1990
• Unclear focus
• Very mixed level of difficulty
• Not enough editing
• Some parts needed update

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Why a rewrite of the Reinsurance chapter

• Original was too advanced.
• Original was too difficult for actuarial
  students.
• Original writing was often unclear.
• Original had too many reader exercises.
• Rewrite is designed for actuarial students.
• Methods and writing are more straightforward.

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General ideas in the Reinsurance chapter

• Reinsurance is part of the insurance business.
• Discuss reinsurance similarities with and
  differences from primary insurance.
• Assume reader knows some primary insurance.
• Key off of and use primary insurance methods.
• Assume reader knows some PC insurance actuarial
  methods and techniques.

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General ideas in the Reinsurance chapter

• Define and use reinsurance categories
  (classification) of business.
• Focus on risk.
• Recognize stochasticity of experience and the
  future.
• Recognize uncertainty in pricing and reserving.
• Use many methods.

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General ideas in the Reinsurance chapter

• Focus on the most important parts of a problem-
  dont worry about unnecessary decimal places.
• Expect teamwork, with underwriters, marketing
  people, claims people, accountants, etc.
• Expect close tie-in between pricing and
  reserving.
• Use only actuarial estimates- no funding
  periods, minimum per mil, etc.

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General ideas in the Reinsurance chapter

• Pricing focus on bottomline economic return.ER
  Economic Return (random variable)TER Target
  Economic Return
• Pricing focus on estimation of discounted loss
  cost, DF EL and FL cdf.
• Simple exemplary distributions.N Negative
  BinomialX ParetoL Gamma

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General ideas in the Reinsurance chapter

• Recognize the market.

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Section headings

• INTRODUCTION
• What Is Reinsurance?
• The Functions of Reinsurance
• The Forms of Reinsurance
• A Typical Reinsurance Program
• The Cost of Reinsurance to the Cedant
• Balancing Costs and Benefits

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Section headings

• REINSURANCE PRICING
• General Considerations
• Reinsurance Pricing Methods
• A Flat Rate Reinsurance Pricing Formula
• Thirteen Step Program to Reinsurance Pricing
  Happiness
• Facultative Certificates
• Property Certificates
• Casualty Certificates
• Facultative Automatic Programs

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Section headings

• REINSURANCE PRICING
• Reinsurance Treaties in General
• Property Proportional Treaties
• Property Quota-Share Treaties
• Evaluating an Ongoing Treaty
• Property Surplus Share Treaties
• Casualty Quota-Share Treaties
• Working cover Excess Treaties
• Alternative Estimation Methods and Some Potential
  Problems

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Section headings

• REINSURANCE PRICING
• The Standard Risk Theoretic model for the
  Distribution of Aggregate Loss
• Higher Exposed Excess Layer Treaties
• Clash Treaties
• Property Catastrophe Treaties
• Aggregate Excess, or Stop Loss, Treaties
• Aggregate Excess Cover on an Excess Layer
• Finite, or Non-Traditional, Reinsurance Covers

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Section headings

• REINSURANCE LOSS RESERVING
• General Considerations
• Reinsurance Loss Reserving Problems
• Components of a Reinsurers Loss Reserve
• A General Procedure
• Claim Report and Payment Lags
• Methods for Short-tailed Exposure Categories
• Methods for Medium-tailed Exposure Categories
• Methods for Long-tailed Exposure Categories
• Monitoring and Testing Predictions