Calculated Risks, Measurable Results
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Calculated Risks, Measurable
Results
Sylvain Goulet, fcia, fsa
Developing New Risks,
Developing New Solutions
New Reinsurance Solutions
• 1 - Retakaful
– From “Takaful” or Shari’ah compliant
insurance
– How can reinsurance help?
• Traditional Risks, New Reinsurance
– 2 - Increasing client retention
– 3 - Vary Reinsurance portions (e.g. CI
products)
– 4 - Reinsurance derivatives
New Reinsurance Solutions
• New Insurance Risks, New
Reinsurance Solutions?
– 5 - Avian Inluenza / Pandemic Risk
1 - Takaful Insurance - Potential
• Muslim Population
– Between 1/5 and 1/4 of the world
population
– Mainly Asia, Africa and Middle East
– About 1.6 million Muslims in Canada (5%)
– About 3.0 million Muslims in the USAUnited States of America (1%)
• Growth
– One of the fastest growing segments in
North America, particularly Canada
1 - Takaful Insurance
• Insurance in Compliance with Shari’ah
Law (Islam)
• Shari’ah Law
– Legal framework based on Muslim
principles of jurisprudence
– Legal theory established before the 19th
century, or
– Changing body and reflect current politics
and economic realities
1 - Takaful Insurance
• Insurance that is permissible under
Shari’ah Law
• Takaful
– Arabic word: “joint guarantee” or
“guarantee each other”
– Although “insurance” is technically
forbidden because it includes uncertainty,
“mutual cooperation” and “pool
contributions” are allowed for mutual
benefits
1 - Takaful Insurance
• Non-Permissible Elements
– Uncertainty (“Gharar”): timing of payment,
amount, or whether made or not
– Gambling (“Maisir”): premiums could be
seen as small when compared to the
potential payout
– Usury (“Riba”): not permitted under
Shari’ah Law (note: does not contradict
profits & capital gains)
1 - Takaful Insurance
• Some Structural Solutions
– Uncertainty (“Gharar”): ensure that some
payments are made in one form or another
– Gambling (“Maisir”): factor in some
guarantees, Return of Premiums,
participation in profits, etc.
– Usury (“Riba”): use Shari’ah compliant
funds (increasingly available)
1 - Takaful Insurance
• Other Characteristics of Takaful
– Must have a Shari’ah Board to uphold
Islamic Law, and connection with an
external Islamic Institute
– Full disclosure of contract terms and profits
distribution between the participants and
the “Operator”
– Reinsure with a Retakaful if available
– “Window Operations” may be permitted
1 - Takaful Insurance - Potential
Potential Takaful Distribution
Malaysi
a Pakista Singapor
n e
Indonesi Thailand
a 1% Sri Lanka
0%
Bahrain
1%
Jorda
n
Kuwait
3%
Oma
n
Qata
r
Saudi Arabia
Bangladesh United 17%
6% Yemen Syria
Arab 3%
0%
Emirate
1 - Takaful Insurance - Wakalah Model
1 - Takaful Insurance - Mudharabah
1 - Takaful Insurance - Potential
• Opportunities for Reinsurance
– Takaful has been small but growing rapidly
abroad
– Growing demand because of “Shari’ah
compliance” and increasing wealth
– If Retakaful is available, then must use it
– Retakaful has been almost non-existent,
and therefore limiting the growth of Takaful
– Canadian banks and credit unions already
working on Shari’ah-compliant investments
Traditional Risks,
New Solutions
2 -Increasing Client’s Retention
• Increasing Client’s Retention
– By calendar year (built-in annual
recapture)
– Reduce reinsurance costs
– Increase the partnership between the
ceding co. and the reinsurer
2 -Increasing Client’s Retention
2,200
Traditional Net Amount at Risk "A"
2,000
1,800
1,600
Funds & Face Amount ($000)
1,400
1,200
1,000
800
600
400 Ceded Amount
Cedant Retention
200 Fund
0
50 55 60 65 70 75 80 85 90 95
2 -Increasing Client’s Retention
2,200
Projection of Net Amount at Risk "A"
2,000
1,800
1,600
Funds & Face Amount ($000)
1,400
1,200
1,000
800
600
400 Ceded Amount
Cedant Retention
200 Fund
0
50 55 60 65 70 75 80 85 90 95
2 -Increasing Client’s Retention
4,500
Projection of Net Amount at Risk "B"
4,000
3,500
Funds & Face Amount ($000,000)
3,000
2,500
2,000
1,500
1,000
Ceded Amount
Cedant Retention
500 Fund
0
50 55 60 65 70 75 80 85 90 95
2 -Increasing Client’s Retention
• For the Cedant:
– Reduce reinsurance costs
– Retain participation in future mortality
gains
• For the Reinsurer
– Increase the commitment of the reinsurer
towards the cedant over the long-term
3 - Vary Reinsurance Portions
• For Example: Critical Illness
– Reduce reinsurance costs
• Higher incidence, more predictable costs
(Heart Attack, Stroke, Cancer)
• Cedant could retain more
– Reduce uncertainty
• Lower incidence, more variable costs
(Alzheimer’s disease, Renal disease,
Parkinson’s disease)
3 - Vary Reinsurance Portions
3 - Vary Reinsurance Portions
• For Example: Critical Illness
– Could migrate to the same basis over time
(10 years)
• Can afford more risk over time
• Create more harmonization over time
• Develop more company experience
3 - Vary Reinsurance Portions
4 - Reinsurance Derivatives
• Derivatives - Oxford:
– (of a financial product) having a value
deriving from an underlying variable asset :
equity-based derivative products
– (often derivatives) an arrangement or
instrument (such as a future, option, or
warrant) whose value derives from and is
dependent on the value of an underlying
asset
• “Reinsurance” is a derivative
4 - Reinsurance Derivatives
Insurer “A” Insurer “B”
Reinsures with Reinsures with
“R” Positive CFs “R” Negative CFs
Reinsurer “R” mixes CFs from “A”
& “B”, optimizes ALM, and return
better derivatives in costs
Reinsurer “R” retains profit as well
4 - Reinsurance Derivatives
• Any Other Ideas of Reinsurance
Derivatives:
– Designed for Capital Efficiency
– To optimize buying power
– Use of captive capital markets (off-shore)
– Etc.
New Insurance Risks,
New Reinsurance Solutions
5 - Avian Influenza / Pandemic Risk
• pan=all / demos=people
• Past Pandemics
– Spanish Flu in 1918-19: ~40 m deaths
– Asian Flu 1957: 1 million deaths
– Hong Kong Flu 1968: 700,000 deaths
• SARS
– 8,098 people infected in 25 countries
– 774 deaths
– Large economic impact
5 - Avian Influenza / Pandemic Risk
• 3 Conditions for a Pandemic
– A new influenza virus for which there is no
immunity among people
– It must infect humans and cause illness
– It must spread easily and be sustainable
among humans
5 - Avian Influenza / Pandemic Risk
• Mortality Gains
– With possible cure of cancer and other
critical illnesses, life expectancy could
reach 120 years or more
– Reinsurers can potentially realize huge
mortality gains by deferral of payment or
lapses
– Huge asset base (reserves) on which to
earn investment income
5 - Avian Influenza / Pandemic Risk
• Mortality Losses
– However, an Avian Influenza / Pandemic
could easily eliminate mortality gains
– A Gamble? The two risks are essentially
different:
• “Normal” day-to-day mortality, improving
chances, slow process, or
• “Abnormal” spike in death rates that last 2-3
years (Spanish Flu in 1918-19:~40 million
deaths in 60 countries, incl. 700,000
Americans - that’s a 7/1000 death rate, or 1 in
150!)
5 - Avian Influenza / Pandemic Risk
• Because of lower financial resources,
low to medium income may be more
affected
– Smaller life insurance policies
– Significant portion below retention
• Can it be reinsured?
– Much like “catastrophe” risks
THANK YOU !
