Exhibit 3: DFAIC's Gross Loss Ratios by Line of Business
Penc~l~la -- r'175ff~ to ~ l h
BSOth to 75th
m25th to 50~h
O5th to 25~
Gross Loss Ratios b y Une Accident Year 2
NI Una Combln~
Une of Buslneu
Referring to Table 7, we compared net loss ratios to aetermine if the various programs were reasonably priced. Then we eliminated structures 2 and 3 from further consideration in the case study because they were not significantly different from the existing program. Finally, we selected structure 4 as the alternative structure for the case study because it produced a significant reduction in net losses' variability. The alternative reinsurance structure (structure 4) replaced the company's per risk and per occurrence coverage with an accident year aggregate stop loss; the catastrophe coverage was unchanged.
In our third and final approach, we reviewed the risk/reward profile of the current and alternative reinsurance programs. The process is illustrated herein .using one alternative to the current reinsurance program, but there is no limit on the number of such alternatives that could be considered. Our risk/reward analysis is based on the economic value of the company's surplus (reward) and the standard deviation of the same (risk). We plot these figures on a simple graph with risk on the X-axis and reward on the Y-axis (see Exhibit 4). Points that are up (greater reward) and to the left (lower risk) are preferable to those that are down and to the right (lower reward/greater risk).