5. Discussion of Budjet Proposals

At this point, the head of the Treaty Underwriting Department speaks up:

Many reinsureds do find it tough to buy as much Clash as they wish at a price they want to pay. We are a great example. I have enough trouble protecting our facultative and working casualty books. I just cannot find reasonably priced retro sessions today to add capacity to our Clash offerings. We would be paying more than we could take in.

Since we are keeping our clash business net, I should analyze the impact of the CEO's "challenges" on our capacity formulas.

The Clash and Higher Layer WC Department today contributes $50 Mn., or about 15% of our total volume. If we grow Clash as much as suggested and reduce the other four departments we would dilute our current spread of risk. Then we would have to manage the Clash Department's risk to meet, the overall Corporate 1-in-500 year standard, not the Department's current 1-in-100 year standard.

The head of Treaty Underwriting continued her analysis:

With our current accounts, even if we could double our lines to a maximum 0f $20 Mn. per account, we wouldn't double R-O-Ls . Some accounts won't buy any more.

So, it would take fewer than fifteen accounts with total losses to lose $200 Mn. The probability of losing Hypothetic Re's surplus would rise, not fall.

To meet a 1-in-500 year standard writing Clash alone, with a $20 Mn. line limit, I could only keep 90 of my 150 current accounts. Even with the higher premiums per account, overall Clash writings (and profits) would fall by 10%.

Clash Pricing

We have seen detailed analyses of how some reinsurers analyze Clash and High Layer WC coverages.

However, there are great uncertainties around all of the actuarial parameters, both because of the long development lags associated with these high layers, and because of very low claim frequencies.

Reinsurers often rely on other, broader, approaches in analyzing Clash prices, including:

• Maximum line for any one cedant


• Minimum rates-on-line

The head of Treaty Underwriting then called on the head of the Clash Sales Department.

"I know that you see many individual submissions that argue for exception prices below our current per-million minimums. Obviously, the exceptions must be few if we are to maximize our profits with those tight capacity constraints.

But if we do decide to grant exceptions to accounts, what do you tell the rest?"

6. Votes on Budget Proposals - All Members

Challenge #1 - Why don't we significantly increase the production targets for Clash and correspondingly decrease our target for other products? We will replace low ROE products with high ROE products. This will raise out total ROE.

Challenge #2 - Why don't we sell more to the clients who need more? We should raise our line limits.

Challenge #3 - Why don't we eliminate or reduce our current minimum rates-on-line. We have shown we have the discipline to run this product profitability. We don't need management imposed "handcuffs" to do this.

7. Conclusions by CEO

Clash is probably very profitable, but the results are extremely uncertain.

Clash uses huge amounts of capacity for relatively small premiums. It is difficult to write except as a small part of a diversified portfolio.

Larger lines use capacity faster than writing additional accounts.

Capacity is expensive. Minimum rates-on-line put a practical price on our capacity.

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