Operating & Financial Review
Underwriting – focused on risk and return
Managing exposures within risk appetite
The advances made in recent years in the capture and recording of risk aggregate data and the modelling of catastrophe risk proved extremely beneficial in 2006. With the start up of Amlin Bermuda, combined exposures needed to be monitored.
A significant reshaping of Syndicate 2001’s exposures was required when we decided that it would be better to reduce peak catastrophe exposures rather than renew much of our retrocessional and overlying umbrella cover which had protected Syndicate 2001 in recent years.
While we renewed our direct account reinsurance programmes on satisfactory terms for 2006, it made little financial sense for us to pay the hugely increased price being quoted for retrocessional protection, as we did not believe the cost reflected the risk being transferred.
Taking account of this change to our business plan, we set about bringing our exposures within our risk appetite, which for a very significant catastrophe, such as a US$100 billion windstorm, we set at £325 million. This was to be achieved by bringing Syndicate 2001’s maximum event loss down by £60 million to £200 million and reducing Amlin Bermuda’s maximum event limit by US$50 million from its initial plan limit of US$300 million.
Risk appetite as a % of net tangible assets |
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Actions taken to reduce our potential catastrophe losses included:
- Reducing Syndicate 2001 catastrophe reinsurance exposures in north-east US, Florida and the Gulf of Mexico by 21%, 20% and 29% respectively relative to 2005;
- Imposing tighter limits on direct property exposures in coastal US regions, and writing more business which was further inland; and
- Repositioning Gulf of Mexico energy exposures so that the maximum net energy modelled hurricane loss was reduced by 42%, relative to 2005, to US$79 million.
Also, to compensate for the increased potential volatility resulting from significantly less retrocessional cover, insurer retentions were increased and higher layers written so that modest hurricanes similar to those experienced in 2004 would have incurred significantly less claims than in 2004.
By 1 July, considered to be the start of the US windstorm season, our maximum modelled event loss, which was then a US$65 billion north-east US multi zone windstorm had been brought down to £330 million. Other active modelled potential multi zone event losses were less than £315 million and all major single zone event losses were less than £220 million.
North-east US hurricane event track – one of our largest modelled losses
European wind storm zone – another major modelled loss
Having taken this position, our maximum risk appetite of £325 million, at 45% of net tangible assets at 31 December 2005, was similar as a percentage of prior year net assets to previous years. Also the increased volatility was compensated for by:
- The outwards reinsurance cost savings we were making having decided not to purchase a retrocessional reinsurance programme;
- The additional premiums we expected to generate, especially in Amlin Bermuda, for catastrophe exposed risk; and
- Our high levels of confidence in the profitability of non catastrophe exposed business which was supported by our analysis model.
When taking accountof these factors, there was a low probability of a single major event resulting in significant impairment of Amlin’s consolidated balance sheet and significant upside in the absence of material catastophe activity.
Having successfully restructured Amlin’s catastrophe exposures in 2006, and with significant growth in the Group’s net tangible assets, our 1 January 2007 largest modelled catastrophe is down to 41% of net tangible assets.
Further information on the manner in which Amlin actively manages its underwriting risks is provided in the Risk Disclosures which form part of the notes to the financial statements.
Continually improving our capabilities
We continued to invest in 2006 in our risk aggregation modelling and systems. This has involved:
- Further development of our location mapping software so that it is able to more accurately pinpoint exposure values written in the property, energy and war accounts;
- Applying updated software from major modelling agencies which better capture the damage and loss characteristics of hurricanes such as those in 2004 and 2005, including (for example) so called demand surge which drives repair costs up; and
- A reduction in the time taken to report modelled aggregate event losses across the Group.
Another area of focus was our delegated authority underwriting where we provide agents with the authority to write risks within predefined limits and pricing guidelines on Amlin’s behalf. In 2006 premium from this source was some £150 million. We believe that this could provide a good source of growth as long as controls are tight and with more efficient communication channels that are becoming possible with technology. Work in this area in 2006 has included:
- Redesigning due diligence of new agents;
- Building a delegated underwriting database and dashboard to improve ongoing monitoring and reporting of agents’ performance;
- Improved audit processes for existing agents; and
- Steps to capture agents’ premium and risk data more quickly.
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