What is a 'Net' Quota Share?
I recently received an email from a reader asking a couple of questions :
"I'm trying to understand Net vs Gross Quota shares in reinsurance. Is a 'Net Quota Share' always defining a treaty where the reinsurer will pay ceding commissions on the Net Written Premium? ... Are there some Net Quota Shares where the reinsurer caps certain risks (e.g. catastrophe)?"
It's a reasonable question, and the answer is a little context dependent, full explanation given below.
Source: https://unsplash.com/@laurachouette, London
(As an aside, in the last couple of weeks, the UK has lurched from what was a rather pleasant summer into a fairly chilly autumn, to mirror this, here's a photo of London looking a little on the grey side.)
I wrote a quick script to backtest one particular method of deriving claims inflation from loss data. I first came across the method in 'Pricing in General Insurance' by Pietro Parodi , but I'm not sure if the method pre-dates the book or not.
In order to run the method all we require is a large loss bordereaux, which is useful from a data perspective. Unlike many methods which focus on fitting a curve through attritional loss ratios, or looking at ultimate attritional losses per unit of exposure over time, this method can easily produce a *large loss* inflation pick. Which is important as the two can often be materially different.
Source: Willis Building and Lloyd's building, @Colin, https://commons.wikimedia.org/wiki/User:Colin
Quota Share contracts generally deal with acquisition costs in one of two ways - premium is either ceded to the reinsurer on a ‘gross of acquisition cost’ basis and the reinsurer then pays a large ceding commission to cover acquisition costs and expenses, or premium is ceded on a ‘net of acquisition’ costs basis, in which case the reinsurer pays a smaller commission to the insurer, referred to as an overriding commission or ‘overrider’, which is intended to just cover internal expenses.
Another way of saying this is that premium is either ceded based on gross gross written premium, or gross net written premium.
I’ve been asked a few times over the years how to convert from a gross commission basis to the equivalent net commission basis, and vice versa. I've written up an explanation with the accompanying formulas below.
Source: @ Kuhnmi, Zurich
It's still very early days to understand the true fallout from Russia's invasion of Ukraine, but I thought it would be interesting to tally a few of the estimates for the insured loss we've seen so far, all of the below come from the Insider.
Please note, I'm not endorsing any of these estimates, merely collating them for the interested reader!
Kiv Perchersk Lavra Monastery, Kyiv. @Andriy155
Cefor Exposure Curves - follow up
The Cefor curves provide quite a lot of ancillary info, interestingly (and hopefully you agree since you're reading this blog), had we not been provided with the 'proportion of all losses which come from total losses', we could have derived it by analysing the difference between the two curves (the partial loss and the all claims curve)
Below I demonstrate how to go from the 'partial loss' curve and the share of total claims % to the 'all claims' curve, but you could solve for any one of the three pieces of info given two of them using the formulas below.
Source: Niels Johannes https://commons.wikimedia.org/wiki/File:Ocean_Countess_(2012).jpg
Cefor Exposure Curves
I hadn't see this before, but Cefor (the Nordic association of Marine Insurers), publishes Exposure Curves for Ocean Hull risks. Pretty useful if you are looking to price Marine RI. I've included a quick comparison to some London Market curves below and the source links below.
This post is a follow up to two previous posts, which I would recommend reading first:
Since our last post, the loss creep for the July 2021 German flooding has continued, sources are now talking about a EUR 8bn (\$9.3bn) insured loss.  This figure is just in respect of Germany, not including Belgium, France, etc., and up from \$8.3bn previously.
But interestingly (and bear with me, I promise these is something interesting about this) when we compare this \$9.3bn loss to the OEP table in our previous modelling, it puts the flooding at just past a 1-in-200 level.
Photo @ Jonathan Kemper - https://unsplash.com/@jupp
Here are two events that you might think were linked:
Every year around the month of May, the National Oceanic and Atmospheric Administration (NOAA) releases their predictions on the severity of the forthcoming Atlantic Hurricane season.
Around the same time, US insurers will be busy negotiating their upcoming 1st June or 1st July annual reinsurance renewals with their reinsurance panel. At the renewal (for a price to be negotiated) they will purchase reinsurance which will in effect offload a portion of their North American windstorm risk.
You might reasonably think – ‘if there is an expectation that windstorms will be particularly severe this year, then more risk is being transferred and so the price should be higher’. And if the NOAA predicts an above average season, shouldn’t we expect more windstorms? In which case, wouldn't it make sense if the pricing zig-zags up and down in line with the NOAA predictions for the year?
Well in practice, no, it just doesn’t really happen like that.
Source: NASA - Hurricane Florence, from the International Space Station
German Flooding - tail position
As I’m sure you are aware July 2021 saw some of the worst flooding in Germany in living memory. Die Welt currently has the death toll for Germany at 166 .
Obviously this is a very sad time for Germany, but one aspect of the reporting that caught my attention was how much emphasis was placed on climate change when reporting on the floods. For example, the BBC , the Guardian , and even the Telegraph  all bring up the role that climate change played in the contributing to the severity of the flooding.
The question that came to my mind, is can we really infer the presence of climate change just from this one event? The flooding has been described as a ‘1-in-100 year event’ , but does this bear out when we analyse the data, and how strong evidence is this of the presence of climate change?
Image - https://unsplash.com/@kurokami04
I received an email from a reader recently asking the following (which for the sake of brevity and anonymity I’ve paraphrased quite liberally)
I’ve been reading about the Poisson Distribution recently and I understand that it is often used to model claims frequency, I’ve also read that the Poisson Distribution assumes that events occur independently. However, isn’t this a bit of a contradiction given the policyholders within a given risk profile are clearly dependent on each other?
It’s a good question; our intrepid reader is definitely on to something here. Let’s talk through the issue and see if we can gain some clarity.
Normalized combined ratios
Financial Year 2020 results have now been released for the top 5 reinsurers and on the face of it, they don’t make pretty reading. The top 5 reinsurers all exceeded 100% combined ratio, i.e. lost money this year on an underwriting basis. Yet much of the commentary has been fairly upbeat. Commentators have downplayed the top line result, and have instead focused on an ‘as-if’ position, how companies performed ex-Covid.
We’ve had comments like the following, (anonymised because I don’t want to look like I’m picking on particular companies):
"Excluding the impact of Covid-19, [Company X] delivers a very strong operating capital generation"
“In the pandemic year 2020 [Company Y] achieved a very good result, thereby again demonstrating its superb risk-carrying capacity and its broad diversification.”
Obviously CEOs are going to do what CEOs naturally do - talk up their company, focus on the positives - but is there any merit in looking at an ex-Covid position, or is this a red herring and should we instead be focusing strictly on the incl-Covid results?
I actually think there is a middle ground we can take which tries to balance both perspectives, and I’ll elaborate that method below.
Exposure inflation vs Exposure inflation
The term exposure inflation can refer to a couple of different phenomena within insurance. A friend mentioned a couple of weeks ago that he was looking up the term in the context of pricing a property cat layer and he stumbled on one of my blog posts where I use the term. Apparently my blog post was one of the top search results, and there wasn’t really much other useful info, but I was actually talking about a different type of exposure inflation, so it wasn’t really helpful for him.
So as a public service announcement, for all those people Googling the term in the future, here are my thoughts on two types of exposure inflation:
FAQs about Lloyd’s of London
I sometimes get emails from individuals who have stumbled across my website and have questions about Lloyd's of London which they can't find the answers to online. Below I've collated some of these questions and my responses, plus some extra questions chucked in which I thought might be helpful.
A brief caveat - while I've had a fair amount of interaction with Lloyd's syndicates over the years, I have never actually worked within Lloyd's for a syndicate, and these answers below just represent my understanding and my personal view, other views do exist! If you disagree with anything, or if you think anything below is incorrect please let me know!
Are Lloyd’s of London and Lloyds bank related at all?
They are not, they just happen to have a similar name. Lloyd’s of London is an insurance market, whereas Lloyd’s bank is a bank. They were both set up by people with the surname Lloyd - Lloyds bank was formed by John Taylor and Sampson Lloyd, Lloyd’s of London by Edward Lloyd. Perhaps in the mists of time those two were distantly related but that’s about it for a link.
Two black swans? Or No Black Swans?
Dan Glaser, CEO of Guy Carp, stated last week that he believes that the current fallout from Coronavirus represents two simultaneous black swans.
Nassim Taleb meanwhile, the very guy who brought the term ‘black swan’ into popular consciousness, has stated that what we are dealing with at the moment isn’t even a black swan!
So what’s going on here? And who is right?
If you are an actuary, you'll probably have done a fair bit of triangle analysis, and you'll know that triangle analysis tends to works pretty well if you have what I'd call 'nice smooth consistent' data, that is - data without sharp corners, no large one off events, and without substantially growth. Unfortunately, over the last few years, motor triangles have been anything but nice, smooth or consistent. These days, using them often seems to require more assumptions than there are data points in the entire triangle.
I work as an actuary and underwriter at a global reinsurer in London.