Supplemental IE Report RSAI Sun & Marine - Royal and Sun Alliance

Milliman Client Report
6. POST-TRANSFERS REINSURANCE ARRANGEMENTS
AGGREGATE EXCESS OF LOSS AGREEMENTS
6.1 As described in my Reports, following the completion of the Schemes, RSAI will wholly reinsure each of Marine and
Sun under aggregate excess of loss reinsurance arrangements. The final draft terms of these arrangements have
now been agreed.
6.2 The premium to be paid by each of Sun and Marine will be the booked value of net Technical Provisions to be
reinsured as at 31 December 2011 less deferred acquisition costs plus any future premiums (on the business
reinsured), plus a 5% margin on the aforesaid net Technical Provisions.
6.3
6.4
A margin is included in the premium in order to ensure that the reinsurance arrangements are deemed to be priced at
“arm’s length”, and that RSAI receives an adequate return on capital for entering into the agreements. The margin will
be paid up-front to RSAI and will not form part of the funds withheld account. All of the rest of the premium will be paid
into the funds withheld account.
Both the Sun and Marine will receive additional capital to cover the respective margins payable to RSAI either prior to
or as part of the Schemes becoming effective.
6.5 Under the terms of the aggregate excess of loss reinsurance arrangements, as the premium is withheld, the amount
(calculated on quarterly settlement dates) which RSAI is due to pay to the reinsured by way of reinsurance claims will
be calculated by reference to the claims which the reinsured company has settled with its policyholders in the
preceding quarter. That amount will be netted against the amount of premium in the funds withheld account. In
between the quarterly settlement dates, each of Marine and Sun will seek to settle claims of its policyholders from its
own assets and, as a result, each would be exposed to the risk that the value of its assets may not be sufficient to
meet the claims of its policyholders. In order to address this risk, RSAI has agreed to enter into a deed of indemnity
with each of Marine and Sun, under which RSAI will indemnify the relevant company against the risk that its assets
are insufficient to settle, when due, that company’s policyholder claims in respect of which the aggregate excess of
loss agreement covers the company. Therefore, the existing and transferring policyholders of Sun and Marine will,
post-transfer, enjoy a level of security that is not materially different from that currently enjoyed under the current
internal risk transfer arrangements (including the DMG).
CREDIT RISK INSURANCE AGREEMENT
6.6 Following the completion of the Schemes, RSAI will also enter into a “credit risk insurance agreement” with RSA Re.
RSA Re currently has nil net liabilities and much of its reinsurance asset is held within the RSA Group (including
some RSA Group companies not party to the DMG), but some is held with external reinsurers. RSA Re is currently
party to the DMG and, as such, if it suffered difficulties as a result of the failure of an external reinsurer or reinsurer
not party to the DMG, RSAI and the other parties to the deed would be required to meet its policyholder obligations.
Following the implementation of the Schemes the DMG will be terminated. In order that the security of policyholders
of RSA Re is not adversely affected as a result of the termination of the DMG, RSAI will insure RSA Re’s reinsurer
credit risk in respect of reinsurers other than RSAI, Sun and Marine.
6.7 RSA Re’s current external reinsurers consist mainly of highly rated major international reinsurers. Over 95% of the
external reinsurance asset (based on 30 June 2011 figures) is held with reinsurers with a credit rating of A+ or higher
(i.e. higher than RSAI’s own rating). A+ rated reinsurer HDI-Gerling is the largest reinsurer, with more than 80% of the
external asset.
6.8 RSA Re will pay an initial premium to RSAI of 1.4% of its reinsurers’ share of Technical Provisions in respect of
reinsurers other than RSAI, Sun and Marine, at the Effective Date to cover the credit risk. This will be paid out of the
capital of RSA Re; however the overall solvency capital ratio of RSA Re will remain strong based on the position as at
30 September 2011.
QUOTA SHARE REINSURANCE AGREEMENTS
6.9 As described in the Reports, following the implementation of the transfers, in addition to the reinsurance
arrangements covering the existing business of Marine and Sun, RSAI will also reinsure the future (new/renewed)
insurance liabilities net of inuring reinsurance of each cedant company on a 100% quota share basis.
Supplemental Report of the Independent Expert 13
November 30, 2011