Transcript Global Reinsurance Division

2008 Cat Market Update
Ken Radigan
(212) 266 – 5992
[email protected]
Global Reinsurance Division
2008 Cat Market Update
2007 and 2008 Catastrophes
Global Reinsurance Division
Swiss Re: Natural catastrophes in 2007
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More than 20,000 fatalities
Losses of roughly $70bn (US$)
$28bn insured losses.
142 natural catastrophes and 193 man-made disasters.
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Swiss Re: Natural catastrophes in 2007
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PCS: Natural catastrophes in 2007
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PCS: Natural catastrophes in 2008
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2008 Natural catastrophes
 Myanmar Cyclone Nargis
 China Earthquake
AIR Worldwide estimates that total losses to insured and uninsured
property from the M7.9 earthquake that struck near Chengdu, China
will likely exceed $20 billion USD
Global Reinsurance Division
2008 Cat Market Update
2008 Reinsurance Market Update
Global Reinsurance Division
Guy Carpenter: 2008 Reinsurance Market Review
 Casualty treaty reinsurance market is softening in many areas.
 Driven by 5 years of underwriting profits.
 Difficult lines still subject to tough rating environment.
Global Reinsurance Division
Guy Carpenter: 2008 Reinsurance Market Review
 Global Reinsurance capital increased to $129B in 2007.
 20.4% higher than end of 2005.
 Retained earnings increased from $40.5B in 2005 to $59.3B in 2007.
Global Reinsurance Division
Guy Carpenter: 2008 Reinsurance Market Review
 Stable Outlook from all rating agencies
 Strong balance sheets with record profits in 2006 and 2007.
 Threats: underwriting cycle, increase cat activity, subprime crisis
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Reinsurance Discussion
2008 Reinsurance Market Expectations
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AON: Reinsurance Market Update Sept 2007
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AON: Reinsurance Market Update Sept 2007
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Reinsurance Discussion
Capital Markets
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Capital Markets (cat bonds and sidecars)
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$7.2 billion issued in 2007, $6.2 billion issued in 2006.
Insulated from turmoil of broader credit markets.
Diversifying perils
Willing to support indemnity
Global Reinsurance Division
Capital Markets (cat bonds and sidecars)
 How do they work?
• Based on modeled statistics.
• Investors assume risk and expect to make a profit.
• ROL is multiple of estimated loss.
• “Secured” reinsurance, ceded limit held in trust.
 Example
• $100M X $500M
• Probability of attachment 1.0%.
• Probability of exhaustion 0.75%
• Expected loss 0.875M (LOL 0.875%)
• Premium 5.0% + LIBOR,
• ROL = 5.7 * LOL
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Capital Markets (cat bonds and sidecars)
 Insurer Motivation
• Access to additional capacity
• Multiyear terms
• “Secured” reinsurance
• Ideal for short term, high cat exposures
 Investor Motivation
• High returns
• Uncorrelated Exposure
• “Modelable” Exposure, easy to analyze and compare statistics
• Easy to monitor aggregate exposures
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Capital Markets (cat bonds and sidecars)
 Higher Costs
• Secured Program
• No Leverage
• No Reinstatements
• Third Party Modeling
• Structure Fees (SPV)
• “Uncertainty” charge
 Time commitments
Indemnity vs parametric vs PCS
• Timing concerns with Indemnity
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Reinsurance Discussion
Miscellaneous Topics
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Miscellaneous
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Reinsurance spreads narrowing, worldwide credit spreads and
equity spreads are widening. Insurers more likely to use
reinsurance to finance risk.
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Capital Markets are currently providing 10 to 25 percent of their
catastrophe capacity. This is expected to expand.
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Regulatory, rating agency, investor and management emphasis
on ERM.
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Reference Sources:
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Swiss Re: “Natural catastrophes and man-made disasters in
2007.”
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Guy Carpenter: “2008 Reinsurance Market Review”
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AON: “Reinsurance Now Materially Reducing Insurer Cost of
Capital, Reinsurance Market Update, September 2007”
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Deutsche Bank: “2007 Year-end Catastrophe Market Review”
Global Reinsurance Division
Reinsurance Discussion
Open discussion
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