Understanding the Reinsurance Market Insurance Accounting and Systems

Understanding the Reinsurance Market Insurance Accounting and Systems Association (IASA) November 2018 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. In addition, this presentation contains the results of a survey conducted by Deloitte. The information obtained during the survey was taken “as is” and was not validated or confirmed by Deloitte Risk and Financial Advisory. Copyright © 2017 Deloitte Development LLC. All rights reserved. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. 1

Reinsurance overview

Executive summary Reinsurance is typically one of the most significant financial transactions for companies, and historically minimal investment has been made to modernize reinsurance administration functions The industry cedes billions of dollars of premiums and claims annually Current reinsurance portfolios are growing in complexity and are—on average—being administered leveraging a mix of aging technology and manual processing The reinsurance market is considered significant and is being leveraged to assist insurers and reinsurers transfer risk, expand capacity, and reduce volatility Investment and focus on Reinsurance Administration is critical to maximize profitability, enhance analytics, strengthen controls, and reduce leakage 3 Copyright © 2018 Deloitte Development LLC. All rights reserved.

Basic example Reinsurance can be extremely complicated and involve a number of different parties within the same transaction Insured Risks Auto Home Life/Health Business Catastrophe Other Risks Third-Party Administrators Brokers Insurers Capital Markets Other Reinsurers Reinsurer 1 Reinsurer 2 Reinsurer 3 Reinsurer 4 4 Copyright © 2018 Deloitte Development LLC. All rights reserved.

Types of reinsurance There are two main types of reinsurance agreements—facultative and treaty—which can be administered in two main ways: Pro rata (proportional reinsurance) and excess of loss (non-proportional reinsurance) Reinsurance Agreement Characteristics Facultative Treaty • Individual risks • Ability to accept/reject each risk • Profit expected by reinsurer in both short/long term depending on risk selection process • Can reinsure risks typically excluded from a treaty • Protects a treaty from adverse underwriting results • No individual risk accepted by reinsurer • Accepts all covered business within treaty • Long-term relationship in which profitability is expected by reinsurer but measured and adjusted over time • Less costly than per risk reinsurance Advantages Pro Rata Excess of Loss • Easy to administer • Good protection against frequency and severity potential • Permits recovery on smaller losses • Strong protection against frequency or severity potential depending on retention levels • Allows for greater net premium retention • More economical in terms of reinsurance premiums and administration costs Types and Benefits Type Stabilize Losses Improve Capacity Catastrophe Protection Surplus Relief Main Purpose Pro Rata Quota Share No Yes Surplus relief Pro Rata Surplus Share No Yes Large-line capacity and surplus relief Excess of loss per risk/policy Yes Yes No Large-line capacity and stabilize losses Excess of loss per occurrence Yes No Protect against single event catastrophe loss Excess of loss aggregate Yes Yes No Stabilize losses Copyright © 2018 Deloitte Development LLC. All rights reserved. 5

Strategic use of reinsurance There are varying strategic objectives that drive organizations to participate in the reinsurance market Risk transference and risk limits Capacity expansion Corporate capital management Diversification Product exit strategy Insurance risk is shared from the reinsured to the reinsurer Allows the reinsured to increase the volume of written insurance Use of financial tools to maximize operating results from year to year Spreads loss exposure over diverse set of products and/or markets Provides the insurer a way to reduce / eliminate a product while potentially earning a profit Neither Life nor P&C insurance companies expect significant change in the foreseeable future relating to their strategic uses of reinsurance, but both promote the importance of the strategic use of reinsurance for catastrophe, corporate capital management, reducing 1 earnings volatility, and the need to manage risk limits 6 1. “Reinsurance and capital management: Emerging strategies and operating models. ” 23 May 2017, Deloitte Dbriefs series Copyright © 2018 Deloitte Development LLC. All rights reserved.

Survey results

Reinsurance administration survey Deloitte Advisory’s reinsurance administration survey looked to gain a better understanding of the operational effectiveness and efficiency of ceded reinsurance functions across four dimensional areas Governance / Organization • How should my reinsurance administration function be organized and governed to achieve our full potential? Ø By identifying activities that support greater efficiency and potential cost reduction, reinsurance function can strengthen their organizations People / Capabilities • What resources and capabilities do I need for my reinsurance administration function to efficiently and effectively operate? Governance / Organization Process / Controls • What changes/improvements could be made to my processes and controls to increase the efficiency of my operations? Ø Reducing and streamlining manual processes (reinsurance administration systems, robotics, cognitive technology, etc. ) is commonly an important step to reduce costs and enhance controls Reinsurance Administration People / Capabilities Ø Recruiting new professionals and developing succession planning are typically critical to ensuring new capabilities and historical knowledge are maximized Technology • What are the emerging trends/ technologies my company should consider in the near term to address my current technology gaps? Ø New technology is emerging in the marketplace to better administer, report, and control your reinsurance program 8 Copyright © 2018 Deloitte Development LLC. All rights reserved.

What we heard from the survey responses Companies are facing similar issues relating to their reinsurance administration; and while they are aware of the issues, many struggle to successfully address and fix the root cause We have had numerous internal discussions to determine if efficiencies can be gained by solely reporting into the risk function vs. finance function or if we should identify an appropriate balance between the two We organized our Reinsurance Strategy/Pricing /Acquisition team and our Reinsurance Admin team under one leader Analytics are a key activity we perform, but my leadership team and I often wonder if we are performing the right analytics to derive the most value out of our reinsurance function and position us for success Given the pivotal role our underwriting team plays in the placement of our reinsurance business, we prefer the risk function to be responsible for our reinsurance administration function Improving our reinsurance technology coupled with enhanced analytics will provide us with the business insights we need to be dangerous in the marketplace I have the right team in place; however, due to significant manual processes, my team can’t spend time completing ‘value add’ activities Given our dependencies on other functional areas and lack of ownership for financials during the close process, we struggle to determine how we can more efficiently complete our close process in order to meet leaderships goals and expectations Enhancing our reporting capabilities will not only allow us to gain a better understanding of our performance as a reinsurance function but will also allow us to set the tone regarding management reporting for the company Aggregating data across multiple systems and manual data stores is a major effort Determining the best technology, that will enable us to more efficiently and effectively process our reinsurance data, is the number one priority for our organization The complexity and volume of our treaties requires a more sophisticated tool or filing shelf than a simple shared folder Copyright © 2018 Deloitte Development LLC. All rights reserved. 9

Survey demographics A mix of Property and Casualty (P&C) and Life and Annuities (L&A) companies participated in the survey, representing different backgrounds [CATEGORY NAME] [VALUE] Country of operation Industry [CATEGORY NAME] [VALUE] [CATEGORY NAME] 33% [CATEGORY NAME] [VALUE] Size [CATEGORY NAME] 67% Technology Large 25% Small 42% >$10 B [CATEGORY NAME] [PERCENTAGE] <$1. 5 B $1. 5 -10 B Medium 33% [CATEGORY NAME] [PERCENTAGE] 10 Copyright © 2018 Deloitte Development LLC. All rights reserved.

Key survey points Despite varying backgrounds, each responded with similar needs in terms of major pain points, including technology and analytics Key takeaways: • Manual processes and a lack of sufficient technology continue to challenge survey respondents in their reinsurance function • Insurers are lacking strong, quality and robust data, as well as fully integrated technology solutions that can assist in processing as well as lead to potential cost reduction • Data warehouse, technology implementation, and predictive analytics are potential future enhancement opportunities that may support companies’ desires to have better information and make more informed strategic decisions >$10 B • Surveyed companies believe they can significantly increase efficiency by automating the transaction process and streamlining the preparation of their financial statements $1. 5 -10 B • While a significant number of surveyed companies use some degree of automation, half of the companies also rely on spreadsheets • Spreadsheet reliance, while predominant across respondents, can increase operational cost and risk of error. There is no single dominant software solution • The use of third parties remains prevalent as surveyed companies continue to look for ways to gain efficiencies while also reducing total cost • Other potential future enhancements include alternative capital, blockchain, outsourcing, and robotics in order to support the company’s goal of reducing operating cost 11 Copyright © 2018 Deloitte Development LLC. All rights reserved.

Current and future state capabilities Respondents were asked to rate current and desired future state across several key areas of focus. Based on the survey results, responding companies would like to—and are continuing to—improve and drive toward a more efficient and effective operating model, with the largest gaps to close relating to technology, process, and data 12 Copyright © 2017 Deloitte Development LLC. All rights reserved.

Pain points Based on the results of the survey and multiple in-market conversations, organizations are consistently seeking solutions to four main areas affecting their reinsurance business: technology, data, analytics and operations Data Inefficient data automation prohibits effective data management Analytics Limited ability to utilize insightful analytics and a reliance on standard reports Technology Outdated technology and the prevalence of manual spreadsheets Operations Manual processes can result in error-prone and inefficient operations 13 Copyright © 2017 Deloitte Development LLC. All rights reserved.

Data Many surveyed reinsurance functions find data to be problematic, whether not having enough of it, not having the right kind, or not having the right tools to leverage it Manual integration and consolidation of data from multiple systems Managing large historical volumes of data Lack of data governance and structure across multiple sources Insufficient granularity 2/3 of organizations believe data quality is a main point Many surveyed organizations have difficulty collecting complete and accurate data; once obtained, they fail to realize the full range of insights driven by analytic capabilities 14 Copyright © 2017 Deloitte Development LLC. All rights reserved.

Analytics Many surveyed organizations view analytics as a top enhancement opportunity to unlock the value of reinsurance data 1 Lack of quality data can prevent the reinsurance function from taking advantage of analytics 2 3 Unfamiliarity with analytics and a lack of proper technology can create barriers for the reinsurance function to rely on analytics Siloed functions and processes can limit the capacity to explore and develop insightful analytics Enhanced reinsurance analytics can help organizations to improve negotiations with reinsurers and provides the business insights to preserve and improve margins 15 Copyright © 2017 Deloitte Development LLC. All rights reserved.

Technology A lack of sufficient technology or a mismatch between a company’s needs and what it has in place for technology can lead to inefficiencies and increased potential for error Significant investment deficit relating to reinsurance technology spend Heavy reliance on manual processes given technology pitfalls Dependence on tools and spreadsheets given complexities of reinsurance business Integration of reinsurance data and technology is difficult and cumbersome Challenges with Technology Inability to unlock full technology capabilities given lack of consistent/clean data Volume of historical data and lack of alignment within systems 16 Copyright © 2017 Deloitte Development LLC. All rights reserved.

Operations A combination of manual processes and unclear governance can lead to difficulty in properly executing the activities of the reinsurance function Create clear policies and procedures for employees to follow Establish an effective governance program that is accountable to senior management Enhance hiring and retaining practices to keep and grow the most value-add team members Reduce inefficiencies by breaking down silos and encouraging increased transparency 17 Copyright © 2017 Deloitte Development LLC. All rights reserved.

Opportunities for enhancement Companies can capitalize on multiple strategic enhancement areas with targeted investment Enhanced reporting Improved decisionmaking Improved reporting can provide the ability to analyze different facets of the business to determine overall success Faster administration and reconciliation Through more efficient administration and reconciliation, companies can avoid unnecessary lag times, improve capacity, and increase overall customer satisfaction Utilizing enhanced analytic capabilities, companies will be better positioned to make more informed/improved decisions regarding the direction and performance of the business Business driver insights Companies can better understand the main drivers of the business and focus more resources on the underperforming areas Capital management Improvements to capital management can allow companies to better balance profitability, growth and liquidity Increased transparency With greater transparency, companies can gain better insights into overall performance Copyright © 2017 Deloitte Development LLC. All rights reserved. 18

Reinsurance value chain

Reinsurance value chain There a number of common activities/tasks associated with both ceded and assumed reinsurance functions, often resulting in pain points/opportunities across each of the key activities Subprocess Activities Key Tasks Reinsurance Initiate Reinsurance Treaties • Identify reinsurance needs • Communicate Negotiate Reinsurance Contracts Manage Reinsurance Relationships • Obtain inputs from • Manage various teams (UW, Claims, Legal) insurance needs to various reinsurers • Assess and (via RFPs) recommend the best reinsurance • Review options option for the from various company reinsurers • Make counteroffer to reinsurer / revisions to exposure if necessary relationships for new business activities • Manage relationships for inforce activities • Support business Perform Treaty Governance • Review whether rates and other variables are input correctly • Perform quality assurance on existing and new treaty administration development e. g. new sales, process • Identify and improvement remediate issues with administration • Document formal reinsurance contract Perform Reinsurance Administration • Review reinsurance agreements and any amendments • Administer reinsurance agreements (Billing) • Pay premiums to reinsurers • Administer aggregation, analytics • Manual process/ treaty complexities, timeliness • Manual process, data aggregation, transaction recording reconciliation (e. g. , system recon) • Review reconciliations • Remediate reconciliation issues • Collect claim Reporting Schedules (Sch. F, Sch. P, etc. ) and Footnotes reimbursements • Manual process/ • Perform • Record entries / and audits • Data quality and • Cash application reinsurance agreements (Collections) • Manage disputes Common Pain Points Perform Reinsurance Accounting • Manual process, data aggregation, transaction recording • Data Quality and Aggregation, analytics accruals in GL • Prepare Financial Provide Reinsurance Reporting and Analysis • Gather, validate and manipulate the data required for the reports • Produce and assemble reports • Perform analysis and investigation (Quarterly, mortality analysis etc. ) • Manual process, data aggregation, transaction recording • Data Quality and Aggregation, analytics 20 Copyright © 2018 Deloitte Development LLC. All rights reserved.

Reinsurance value chain, cont. There a number of opportunities for enhancement across each of the key activities within reinsurance Simplification and Standardization § Process redesign and streamlining should be considered for key activities within reinsurance. Redesigned processes serve to enable the business to operate as effectively as possible following resource reductions Technology Enablement § Improved technology can significantly reduce the need for manual intervention, often resulting in more efficient and effective processing across all reinsurance functions (i. e. , billings, collections, disputes) Automation § Reducing manual processes, touchpoints, and calculations can result in more efficient, effective, and accurate processes § Automation, including robotics and streamlining of processing, can reduce headcount and increase cost effectiveness of the organization Organization Design Advanced Analytics § Enhanced analytic capabilities can provide organizations with the ability to make more informed/improved decisions regarding the direction and performance of the company § Provide the ability to analyze different facets of the business to determine success Data Quality/Conformance § A streamlined organizational structure can assist in reducing § Conformed and aligned reinsurance data can better enable § Unnecessary layers can significantly reduce headcount needs, § Improved data quality will allow organizations to tap into operating costs through outsourcing certain processes and/or functional areas particularly in light of outsourcing decisions and location changes organizations to understand their performance as well as reduce processing and potential financial errors technology solutions that weren’t achievable with unaligned/confirmed data Outsourcing Control Enhancements § Efficiencies can be gained from sourcing work within specific LOB, § Enhancements to the reinsurance control environment can allow captive, or COE § Outsourcers have the capabilities and scale to effectively execute at a lower cost and are maturing to take on more value-added functions, and may: for increased efficiency and effectiveness while also providing organizations with the understanding there aren’t any current issues or financial leakages within the reinsurance space − Provide immediate benefits − Create an infrastructure “investment” for process improvements − Provide salary arbitrage through low cost locations 21 Copyright © 2018 Deloitte Development LLC. All rights reserved.

Appendix: Contact information Member firms and DTTL: Insert appropriate copyright [To edit, click View > Slide Master] Presentation title [To edit, click View > Slide Master] 22

Contact information Jeff Mullen Senior Manager | Deloitte Risk and Financial Advisory Deloitte & Touche LLP jefmullen@deloitte. com Ryan Potts Manager | Deloitte Risk and Financial Advisory Deloitte & Touche LLP rypotts@deloitte. com Jason Zeman Senior Consultant | Deloitte Risk and Financial Advisory Deloitte & Touche LLP jazeman@deloitte. com 23 Copyright © 2017 Deloitte Development LLC. All rights reserved.

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