Actuarial role/
contributions/ challenges in
Reinsurance
Jyoti Majumdar, 19 May, 4th Seminar on Current Issues in General Insurance
Agenda
•The big problem
•One of the solutions
•Expanding the horizon
•Q&A
Jyoti Majumdar | 4th Seminar | Current Issues in General Insurance
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What is the ‘big’ problem?
Insured vs uninsured losses 1970–2016
in USD billion, at 2016 prices

Increasing values

Concentration in
exposed areas

Insurance penetration

Changing hazard

climate variability

climate change
Jyoti Majumdar | 4th Seminar | Current Issues in General Insurance
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Regional overview
Source: Cat Perils and Swiss Re Institute.
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Risk Assessment: Risk premium for natural perils?
Natural Catastrophes…
 Are rare
 Are random
 Affect vast areas – thousands up to
millions of risks affected at the same
time; heavy accumulation
 No sufficient loss experience!
 Need for scientific risk assessment
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Nat Cat risk assessment: Natural (Cat) Perils vs. other Perils
Fire
Natural perils
Risk size
single building
large portfolio
Frequency
high
low
Loss potential
low-moderate
moderate-very high
Risk assessment
experience
scientific/exposure
based
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Exposure rating vs. Experience rating
Main differences of the two rating methods
Characteristics
Experience
Driving a car by
looking (mainly)
in the rear mirror
Exposure
Is the actual exposure
considered?
Are specific risk characteristics
considered?
Do we consider the loss history
Are we applying market
assumptions?
Are changes in the portfolio
considered?
Jyoti Majumdar | 4th Seminar | Current Issues in General Insurance
Assisted driving ???
Jyoti Majumdar | 4th Seminar | Current Issues in General Insurance
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Definitions of Catastrophe Model/Modelling
• A Cat Model determines the potential loss to a client’s exposure from
natural perils like - wind, earthquake, flooding [Aon Benfield]
• Catastrophe modeling is the process of using computer-assisted
calculations to estimate the losses that could be sustained due to a
catastrophic event such as a hurricane or earthquake [Wiki/Swiss Re]
• A cat model is a computerized system that generates a robust set of
simulated events and estimates the magnitude, intensity, and location of the
event to determine the amount of damage and calculate the insured loss as
a result of a catastrophic event such as a hurricane or an earthquake
[Lloyd's Market Association]
Jyoti Majumdar | 4th Seminar | Current Issues in General Insurance
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Catastrophe models
•Catastrophe covers are large and
complex
•Data is the key
•Multidisciplinary approach is required
•All models are wrong, some of them
are useful
Jyoti Majumdar | 4th Seminar | Current Issues in General Insurance
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Four Elements to Model Losses – Four Box Principle
Hazard
Vulnerability
How often?
How strong?
How well built
and protected?
Value
distribution
Coverage
conditions
What is covered?
Where?
How?
Four box model – simplified
 1. What’s the chance of an earthquake occurring?
 2. What’s the chance that it does damage?
 3. What’s the chance that it affects me?
 4. How much will it cost me?
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Four Box Principle: A multidisciplinary approach
Natural Hazard
Example
Hurricane
“Charley”
Aug 2004
Vulnerability
Where and how often and with what intensity do events occur.
Natural sciences
Extent of damage to exposed values at a given event intensity.
Civil and structural engineering
Distribution of
property values
Insurance
conditions
Location of Insured objects and how high is their value.
Geoinformatics
Limit
What proportion of loss is insured
Mathematics, Statistics
Deductible
Jyoti Majumdar | 4th Seminar | Current Issues in General Insurance
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Expanding the horizon
• Insurance Linked Securities (ILS)
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Insurance Linked Securities (ILS)
Since its inception in 1996, the market for insurance-linked securities (ILS) as
witnessed robust growth worldwide. Re/insurers, governments and corporations
continue to access capital market solutions to finance growth, manage capital and
transfer risk related to extreme events. Swiss Re is a pioneer in the development
of transparent and tradable insurance-linked securities.
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What are Insurance Linked Securities (ILS)?
• Natural catastrophe bonds (cat bonds) and other types of ILS are issued in order to
provide re-/insurance protection to insurers, reinsurers, governments, and
corporations
• Cat bonds allow companies to obtain reinsurance protection from a new pool of
capital separate from traditional reinsurers
–
Money managers, hedge funds, and pension funds represent a new pool of
capital for insurers and reinsurers to gain protection from
• Investor capital provides collateralized cover
–
Investor capital sits in a segregated collateral account, meaning that if an
event occurs, dedicated funds are available to make a payment
–
This virtually eliminates the credit risk inherent in traditional re-/insurance
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Why do sponsors consider cat bonds?
• Concern about counterparty credit risk in case of a large event
• Shortage/pricing of available traditional capacity
–
e.g. companies with large reinsurance programs, peak perils
• Diversifying sources of capacity
–
Reducing dependency on one just one market
• Structural features that the traditional markets have difficulty providing in size at the right
price
–
Aggregate, second event, drop down, etc.
• Multi-year pricing stability (3 – 5 year term is typical for cat bonds)
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Cat bond: triggers
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