A Reinsurance Perspective

Ty Birkett – Willis Re Australia

The U.S. Federal Government has pledged more money to bail out the

financial services industry than it spent on:

• the Louisiana Purchase

• the New Deal

• the Marshall Plan

• the Race to the Moon

• the Savings and Loan Crisis

• Operation Iraqi Freedom

• and NASA’s lifetime budget…

Other Governments including China are also making

unprecedented efforts to stimulate their economies

Source: Slide from someone’s presentation and I have not done the Maths!

Interesting Times ….

Depends on Your Perspective

• Technical Considerations

• Demand for Reinsurance

• Supply of Reinsurance

• Near Future

• Implications for Insurers

Today

Covered today in detail

BUT FOR REINSURANCE ….

• Longer claims tail than direct business

• More uncertainty around pricing

• Leveraged impact of large claims

• Lag nature of proportional business

• Larger exposure to systemic risks

Technical Considerations

Demand↑

Reinsurance

Cost

Reinsurance

Capacity

Demand Curve

2008 → 2009

Demand for Capital or Need for Preservation

• Asset-side Impairment

- Equity and fixed interest

• Increased volatility

• Reduced risk appetite

• Increased regulatory scrutiny

• Potential increase losses

Demand↑

Demand↑

Sources of Capital

EQUITY

DEBT

REINSURANCE

TOUGH TO SOURCE

EXPENSIVE

RELATIVELY CHEAP

EASY TO SECURE

BUT VOLATILE

Demand↑- non-GFC Impacts Australian Market Catastrophe Losses (1989 - present) > $300m (2007 Values)

New

castle E

Q (

12/8

9)

East

Coast

Sto

rms (

2/9

0) Sydney H

ail

(3/9

0)

Sydney S

torm

(1/9

1)

Sydney H

ail

(2/9

2)

Sydney H

ail

(4/9

9)

Canberr

a B

ushfire

(1/0

3)

Cyclo

ne L

arr

y (

3/0

6) H

unte

r R

egio

n S

torm

s (

6/0

7)

Sydney H

ail

(12/0

7)

Mackay S

torm

s (

2/0

8)

Brisbane S

torm

s (

11/0

8)

Vic

toria B

ushfire

s (

2/0

9)

$0 m

$500 m

$1,000 m

$1,500 m

$2,000 m

$2,500 m

$3,000 m

$3,500 m

$4,000 m

$4,500 m

$5,000 m

Supply↓

Reinsurance

Cost

Reinsurance

Capacity

Supply Curve

2009 ← 2008

Supply↓

Demand for Capital or Need for Preservation

• Asset-side Impairment

- Equity and fixed interest

• Increased volatility

• Reduced risk appetite

• Increased regulatory scrutiny

• Potential increase losses

SAME ISSUES FOR REINSURERS!

Standard & Poor Ratings

Supply↓- Quality AAA AA+ AA AA- A+ A

M unich Re

Swiss Re

General Re

ERC

Chubb

Allianz

Hannover Re

XL Re

PartnerRe

AXA Re

Transatlantic Re

SCOR

Gerling Global Re

Everest Re

W.R. Berkley

Lloyd's o f London

Converium (Swtz)

Axis Re

Odyssey Re

CNA

Paris Re

Endurance

M ontpelier

ACE Tempest

IPC

Trenwick

Renaissance Re

PXRE Re

A- BBB+ BBB BBB- Below

X

X

XX

X

XX

X

X

Black lines denote movement between 9/11 and Sept 03

X

X

Standard & Poor Ratings

Supply↓- Quality AAA AA+ AA AA- A+ A

M unich Re

Swiss Re

General Re

ERC

Chubb

Allianz

Hannover Re

XL Re

PartnerRe

AXA Re

Transatlantic Re

SCOR

Gerling Global Re

Everest Re

W.R. Berkley

Lloyd's o f London

Converium (Swtz)

Axis Re

Odyssey Re

CNA

Paris Re

Endurance

M ontpelier

ACE Tempest

IPC

Trenwick

Renaissance Re

PXRE Re

A- BBB+ BBB BBB- Below

X

X

XX

X

XX

X

X

Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05

X

X

Standard & Poor Ratings

Supply↓- Quality AAA AA+ AA AA- A+ A

M unich Re

Swiss Re

General Re

ERC

Chubb

Allianz

Hannover Re

XL Re

PartnerRe

AXA Re

Transatlantic Re

SCOR

Gerling Global Re

Everest Re

W.R. Berkley

Lloyd's o f London

Converium (Swtz)

Axis Re

Odyssey Re

CNA

Paris Re

Endurance

M ontpelier

ACE Tempest

IPC

Trenwick

Renaissance Re

PXRE Re

A- BBB+ BBB BBB- Below

X

X

XX

X

XX

X

X

Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05Green lines denote movement post-Katrina to March 09

X

X

Supply↓Reduction in Alternate Sources

• Role of Investment Banking

• Withdrawal of Hedge Fund capacity

• “Capital Reload” occurred in mid-90s, 2001 and 2005. 2008/09 ?

0

2

4

6

8

10

12

14

97 98 99 00 01 02 03 04 05 06 07 08 09

US

D 'b

n

Issued Outstanding

Value of Catastrophe Bond Capacity

Sponsor

(usually the insured)InvestorsSPV

Cover

Funds from sale of notesPremium

Balance on Maturity

LIBOR + Premium

Investment Income

LIBOR

Pro

ceeds

Inte

rest (L

IBO

R)

Unused c

olla

tera

l paid

back a

t M

atu

rity

Collateral Trust Swap CounterpartyTotal Return Swap

Sponsor

(usually the insured)Investors

Sponsor

(usually the insured)InvestorsSPV

Cover

Funds from sale of notes

SPV

Cover

Funds from sale of notes

Cover

Funds from sale of notesPremium

Balance on Maturity

LIBOR + Premium

Premium

Balance on Maturity

LIBOR + Premium

Investment Income

LIBOR

Investment Income

LIBOR

Pro

ceeds

Inte

rest (L

IBO

R)

Unused c

olla

tera

l paid

back a

t M

atu

rity

Collateral Trust

Pro

ceeds

Inte

rest (L

IBO

R)

Unused c

olla

tera

l paid

back a

t M

atu

rity

Collateral Trust Swap CounterpartyTotal Return Swap

Swap CounterpartyTotal Return Swap

Supply↓1996 American Re (USA)

1999 New Re (Swiss)2000 CNA Life Re (USA)

1996 M & G Re (UK)1997 Union Re (Swiss)1997 Unione Italiana (Italy)1999 Underwriters Re (USA)

Munich Re Group

(Germany)

20062008

GE Insurance Solutions (USA)Barclays Life (UK)

1988 Nordisk Re (Norway)1995 Frankona Re (Germany)1995 Aachen Re (Germany)1996 First & Excess Re (USA)

Employers Re Group

(member of GE Cap)

1998 Eagle Star Re (UK)1998 Kemper Re (Belgium)

GECapital

(USA)

2006

2008 Midland Company (USA)

201 Bavarian Re (Germany)

1997 Reale Riassicurazioni S.p.A

2008 Sterling Life Insurance (USA)2007 Bell & Clements (USA)2007 MSP Underwriting Ltd (UK)

2009 Hartford Steam Boiler (USA)

Swiss Re Group

(Switzerland)

GE Insurance Solutions

(USA)

Supply↓

2000 Partner Re Life (USA)2001 SOREMA (France)

SCOR Group(France)

2007 Converium (Swiss)

1997 SAFR (France)1998 Winterthur Re (Swiss)

1998 Mid Ocean Re (Bermuda)1999 NAC Re (UK)2000 CGNU (US Surety Only)

Partner Re

Group (Bermuda)

XL Group(Bermuda)

1996 Tempest Re (Bermuda)1998 CAT Re (Bermuda)1998 Cat Limited (Bermuda)1998 Cigna (USA)1999 Capital Re Corp. (USA)

Ace Group (Bermuda)

2008Combined InsuranceCompany of America (USA)

2006 Revios (Germany)

2003 Le Mans Re (France)

Supply↓- non-GFC

Source: Swiss Re Sigma 2/09 – most costly insurance losses 1970-2008

BUT some positive signs:

• Improved results – underwriting and investment

• Less required by some – e.g. Florida and Texas schemes

• Signs of new capital

• Insurance Linked Securities regaining some momentum

• General reduction in EQ models

• Non-peak versus Peak (US EQ+ WS, Jpn EQ, Eur WS)

Supply

Supply and Demand

Reinsurance

Cost

Reinsurance

Capacity

Supply Curve

2009 ← 2008Demand Curve

2008 → 2009

2008

2009

20082009

Where to From Here?

• Market Hardening

- GFC

- Other factors

- Territory specific

• Market cycle impacted by regular “one off” events

- LMX, WTC, KRW, GFC, etc. etc.

• Flow of future capital key – traditional, alternative, self-generated

• Reinsurance remains a resilient form of capital

Issues for Insurers

• Capacity for Australia and NZ remains strong

BUT

• Need clear understanding of purpose of reinsurance:

- Capital, earnings, compliance, etc.

- Recent years: retain more manage volatility capital source

• Locked in well price capacity where possible

• Ensure large loss potential feeds through into pricing

- all losses not just RI costs

Will remain a key risk / capital management tool