Vital Insurance Purchasing In The 21st Century

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Key Insurance Purchasing In The 21 st Century ASTIN & Casualty Actuarial Society Seminar on Reinsurance July 12, 2001 1:15 – 2:00 PM Kevin Bingham 860.543.7345 John Slusarski 860.543.7366 Deloitte & Touche

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Introduction Background Target group of onlookers Authors Evolution of Insurance Purchasing Decision Strategic Insurance Purchasing, Why Now Convergence: Options and Insurance Dynamic Financial Analysis and Reinsurance Strategic Insurance Purchasing in the 21 st Century Closing Thoughts

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Evolution of Insurance Purchasing Decision

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Evolution Limited survey of association's real information Purchase ensured cost approaches Retain hazard/mirror association's own experience utilizing distinctive protection programs Large deductibles Retrospectively evaluated arrangements Benchmarking Anticipated misfortune rate x finance Multiple of timetable installments Limited situation testing (deterministic) Captives "Imagine a scenario in which" situations for protection buys Insurance presentation demonstrating (stochastic) Frequency/seriousness displaying 21 st Century.

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Strategic Insurance Purchasing, Why Now?

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Strategic Insurance Purchasing, Why Now? Money related group Value At Risk (VaR), Economic Value Added (EVA TM ) BASLE Accord – Expansion of Pillar 1 CFA exams (quantitative techniques, Monte Carlo recreation) CNBC, Bloomberg, CNN FN , Internet Clients (and evaluators) requesting certainty levels High profile illustrations/remarkable capital market arrangements Bowie securities Arby's securitization Innovative protection arrangements Hardening market Convergence of monetary administrations industry Dynamic Financial Analysis (DFA)

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Convergence: Options and Insurance

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Convergence: Options and Insurance Convergence of Financial Services Industry and wording Actuary CFA Leverage the developing budgetary information of most hazard directors, boss hazard officers and corporate leaders to clarify the similitudes of protection and speculation choices. Alternately

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Convergence: Options and Insurance A call choice is the privilege, yet not the commitment, to purchase a security at a predetermined cost (practice cost) prior to a predefined date. Table 1 shows the estimation of a call choice with a $70 practice cost (barring exchange costs).

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Convergence: Options and Insurance projects can be seen as mixes of acquired and sold call choices: The practice cost of the call choice is equivalent to the customer's SIR, deductible or reinsurance connection point For EOL and AEOL gets, the practice cost of the sold call choice is equivalent to the connection point in addition to as far as possible The call alternatives keep going for one year, with the termination date equivalent to the most recent day of the mishap year

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Convergence: Options and Insurance Table 2 shows a $250,000 SIR or vast deductible utilizing a call choice with a strike cost of $250,000.

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Convergence: Options and Insurance Much simpler for most speculation and hazard supervisors to comprehend the significance of obtaining protection deliberately utilizing the choice similarity. Albeit genuine change is troublesome, understanding protection as far as choices is a useful practice for hazard chiefs and statisticians. KEY POINT – Just as the essentials basic stock and security speculations change every year, so do the protection dangers confronting an association (e.g., solidifying market, acquisitions, new exposures, and so forth)

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Dynamic Financial Analysis and Reinsurance

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DFA and Reinsurance - Background The term DFA started in the property-setback protection industry. The goal was to give a coordinated framework to assessing significant hazard components influencing an organization's general money related execution and financial esteem. Why the term DFA ? D ynamic: cooperation of key factors under various situations and administration activities. F inancial: utilize present day monetary financial matters to venture factors A nalysis: look at effect on both the monetary esteem and budgetary explanations 1 of the firm. 1. Safety net providers get ready financials under two separate bookkeeping techniques; U.S. GAAP and Statutory bookkeeping standards.

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100 DFA and Reinsurance - Background Past v.s. Future Deterministic v.s. Stochastic: Expected Value 100 v.s. Appropriation Around Expected Value Fragmented v.s. Incorporated Approach to Risk Analysis Integration of Internal and External Risk Factors Time Horizons of Over One Year

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Deterministic DFA # Policies 100 # Policies 100 Premium/Policy 20 X Premium/Policy = Total Premium 2,000 20 X 1 - Operating Ratio X 1-Oper. Proportion .13 0.13 = Operating Profit 260 = Operating Profit 260 DFA and Reinsurance - Background

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DFA and Reinsurance - Background Investments Underwriting Management Interventions Business Strategies Reinsurance

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Financial Forecast 99% Confidence Level Historical Plan DFA and Reinsurance - Background x Premiums 0 Ending Capital

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DFA and Reinsurance - Variables In straightforward terms, DFA models consider an arrangement of outside factors and an arrangement of inside factors. Outside factors - value takers: Interest rate levels Inflation rates Capital market costs and aggregate returns Pricing cycles and value versatilities Natural disasters Changes in misfortune levels from case law, jury grants, claims cognizance, and so forth. Inward Variables - administration choices: Premium rate levels activities Reinsurance program Underwriting rules Marketing arrangements and dissemination instrument Outstanding obligation save hones Investment technique Expense administration

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DFA Applications Reinsurance enhancement Reinsurance module from DFA display Majority of DFA work done to date Asset and obligation supporting methodologies Investment portfolio administration Demutualization Credit chance demonstrating Operational hazard displaying SBU operational procedures and arranging Strategic choices examination for mergers and acquisitions Risk balanced capital administration Rating office administration New items and market improvement Tax streamlining

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Strategic Insurance Purchasing in the 21 st Century

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Strategic Insurance Purchasing in the 21 st Century Mathematical displaying of all hazard components (DFA) Enterprise chance administration mitigates fluctuation in budgetary results from ALL the association's real dangers (i.e., not simply protection) Insurance exposures Asset returns (e.g., Intel illustration) Projected deals Production costs Tax income Examples Captives Insurance organizations Unique undertakings Efficient wilderness

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SIP in the 21 st Century Efficient Frontier

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Strategic Insurance Purchasing in the 21 st Century Answer key administration questions Insurance Specific What is the association's yearly protection cost and the certainty level bolstering money related arrangement? What is the cost/advantage examination for the protection alternative chose versus different choices (e.g., XOL versus AEOL, 250 SIR versus 500 SIR)? What is the inconstancy of the association's protection costs? How well is the organization secured against cataclysmic misfortunes? Undertaking wide center What is the certainty level bolstering monetary arrangement for all dangers? What conditions may bring about the organization's money related proclamations to be debilitated (e.g., resource portfolio decay, best line income drop, various occasions happening all the while)? What venture blend and reinsurance security creates the most noteworthy return for the least level of hazard (i.e., effective wilderness)?

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Closing Thoughts "In the event that it ain't broke, don't alter it" chance administration approach no more extended adequate Hardening market Financial weight from administration/shareholders Technology Computer preparing speed @Risk, Crystal Ball, Excel Ability to influence monetary "thought product" RiskMetrics and VaR Investment people group learning Demand for quantitative venture chance administration Applying and utilizing DFA examine/attention

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Closing Thoughts Manufacturing Insurance Banking Retail DFA EPD VaR EVA RAROC Ruin RBC BCAR