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Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 1
State of the Market
François Dagneau
Senior Vice President
Aon Benfield Canada
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 2
Agenda
Section 1 6 Key Trends that Impact Reinsurance in Canada
Section 2 State of the Market
Section 3 Conclusion
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 3
Section 1: Six Key Trends that Impact Reinsurance in Canada
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 4
Trend 1 – Domestication of Insurers
Not too long ago, aside from the mutuals, P&C insurance in Canada was essentially owned by foreign interests
Since then:– ING Canada, Axa Canada forming Intact– TD Meloche purchased Liberty– Co-op buying Cumis
Impact on reinsurance? Local purchase
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 5
Trend 2 – De-domestication of Reinsurers
Since 2000, the following local reinsurers have disappeared– CNA– Gerling Re– Hartford Re– Rhine Re – Alea– Sorema– ERC– Terra Nova
A reversing trend?– Arch Re opened a local office in 2011– Catlin (2011)
Impact on reinsurance? Dramatic reduction in supply of reinsurance for “local” reinsurance coverages– Surplus treaty– Low XOL treaties– Other “special needs”
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 6
Trend 3 – Shift Towards Non-Proportional Reinsurance
This is a trend similar to what has been experienced all over the world– Canada lagging behing the USA, but ahead of rest of the world
Aon Benfield Market Study of Proportional Treaties– 2003: 26 treaties worth $428m in premium– 2006: 19 treaties worth $426m in premium (on the decline)– 2007: 17 treaties worth $329m in premium (on the decline)– 2012: 12 treaties worth $150m in premium ??
Why?– Consolidation - Capitalization– Reinsurers pricing now reflects Cat risk and per risk exposure embedded in proportional cover
Proportional Treaties are still indicated in some situations:– Large Cat exposure– Large per risk capacity required– Capital relief
Impact on reinsurance? Dramatic reduction in premium volumes
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 7
Trend 4 – Unlocking of US and International Reinsurance Markets
“Peak capital user” vs “non-peak Capital users– After 1998-1999: prices barely moved in Canada if you did not have a loss– After WTC: pricing went up 50% in Canada– After Katrina: +5 to +10% in Canada vs +50% in US+Retro
• The marginal required capital theory– After 2011: pricing outside US under pressure
• The minimum required capital “adjustment”
Impact on reinsurance? Top layers moving from 1.75% ROL to 2.00 ROL– No differentiation between clients, layers– Very little by peril
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 8
Canadian Catastrophe Rate Changes
Aon Benfield Canada Proprietary & Confidential
Sources: Canadian - RRC; US – RAA; Global - Aon Benfield Estimate
-50%
-30%
-10%
10%
30%
50%
70%
90%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1991 Calgary Hailstorm
1998 Ice storm
2001 WTC
2005 KRW
1992Andrew
2005 Ontario August Rain Storms
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 9
Trend 5 – Consolidation of Reinsurance Brokers
Over the past few years:– Late 90’s: First round of consolidation– Past 5 years: Benfield, Gallager, HSBC and Collins
Driven by consolidation in the insurance market and growth in analytics requirements (trend #6):
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 10
Trend 6 – Explosion in the use of Analytics
– Around 1990: First Cat model developed after Hugo– In 1994: there was one P&C actuary in reinsurance in Canada– In 2001: Aon Re had 4 people in analytics– In 2008: 12 – In 2011: 16– In 2012: Aon Benfield Canada has an staff in analytics of 20 people
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 11
Trend 6.1 – Actuarial
– Key tasks• Benchmark Pricing• Reinsurance Optimization
But also assist in:• Economic Capital Modeling• Capital Allocation• Entreprise Risk Management
Provide insurers with a full understanding of the metrics of the transaction Impact on regulatory capital Impact on rating agencies Impact on economic capital and internal models Cost of the reinsurance
• Tailor-made reinsurance that meets optimally the needs of the clients
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 12 11
50000 55000 60000 65000 70000 75000 80000 85000 900000
200
400
600
800
1000
1200
1400
1600
1800
2000
1398.62192402903
600
1800
1100
1400
2012 Reinsurance Program - Risk/Reward
Risk: Net Capital Required
Re
wa
rd:
Ex
pe
cte
d N
et
U/W
Re
su
lt
Increasing Risk
Increasing Reward
Better scenarios: More reward,
less risk
Aon Benfield Analytics | AMA – 29 February 2012
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 13
Trend 6.1 – Actuarial: All this from 35,000 feet
Asset Risk
Non-Cat
Catastrophe
Market
Credit
Underwriting Risk
Net U-WResults
Rein
suran
ce
Reinsurance Optimization
Eco
no
mic C
apital M
od
eling
En
terprise R
isk M
anag
emen
t
Operational + StrategicRisks
Reserves
Cap
ital Allo
cation
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 14
Return, Volatility and Valuation – US Listed Company Experience Aon Benfield Hit/No Hit Price to Book Regression Study
No earnings hits >150% of average quarterly operating income: 1 point increase in prospective ROE increases P:B by 5.7 points
1 or more earnings hits: 1 point increase in prospective ROE increases P:B by only 2.9 points
Valuation differential has persisted through time
0
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Prospective 2011 ROE
Pri
ce to
Bo
ok
Ra
tio
No Hit 1+ Hit
Price to Book, Prospective ROE Link
Prospective
ROE 1+ Hits No Hits Delta
7.5% 0.76 0.97 27.3%
10.0% 0.83 1.11 33.2%
12.5% 0.91 1.25 38.2%
15.0% 0.98 1.39 42.5%
20.0% 1.12 1.68 49.3%
Price to Book Assuming
Price to Book Regression HistoryValuation Differentials
Dec '10 May '10 Feb '10 Nov '09 Aug '09 Apr '09 Nov '08 Mar '08 Dec '07 May '07 Nov '06At a 10% ROE 33.2% 28.5% 17.2% 15.4% 24.0% 33.6% 42.0% 31.1% 12.1% 11.0% 12.5%At a 15% ROE 42.5% 54.3% 32.4% 36.0% 31.8% 48.4% 40.7% 48.8% 30.3% 44.5% 26.8%
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 15
Trend 6.2 – Catastrophe Modeling
– Primary tasks• Scrub data, know your data (do you know your cat modeler?)• Model PMLs (RMS, ReCat, AIR, EQE)• Prepare files for submission to reinsurers• Benchmark relative to peers
– Helping pricing Cat risk• Cat Cost Allocation - Various levels of sophistication – this is evolving very very fast
Allocated based on property premium Allocation to BC then based on BC property premium Based on expected loss (AAL) loaded for cost of reinsurance Next Step
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 16
Trend 6.3 – Capital Management
Tech
nic
al F
inan
ce
Regulatory Capital Management & Analysis
• Regulatory Guideline Advisory
• Financial Analysis and Modeling
• Peer Review Study
• Mergers & Acquisitions
Reinsurance Market Analysis & Security
• Licensed/Unlicensed Markets
• Reinsurer Credit Rating Management
• Market Securities
Research & Development
• Regulatory Changes & Updates
• Accounting and Reporting Developments
Rating Agency Advisory Practice
• Full Rating Agency AdvisoryServices
• Rating Agency Capital Model
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 17
Trend 6.3 – Capital Management: Key Federal Regulatory Changes – 2010 to 2014
Proprietary & Confidential January 18, 2011
Guideline E18 - Stress Test, December 2009
Guideline E4A - Role of Canadian Chief Agent & Record Keeping Requirements, Dec 2009
MCT/BAAT Capital Framework, 2010 – 2014
Amendments to Part XIII, effective 1st January 2010
OSFI’s Regulatory and Supervisory Reform for Reinsurance, March 2010
Guideline A4 - Internal Target Capital Ratio for Insurance Companies, May 2010
Guideline B3 - Reinsurance Security Agreement, effective 1st July 2011 (new agreements); effective 1st January 2012 (existing agreements)
IFRS Guidelines – Phase 1, 2011
Internal Capital Modeling, 2012 – 2013
Corporate Governance – Sound Business and Financial Practices, August, 2012
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 18
Section 2: State of the Market
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 19
2011 Catastrophe Losses
Date Peril LocationUSD Loss
(Economic)USD Loss (Insured)
11 March Earthquake Japan 210.00bn 35.50
22 February Earthquake New Zealand 30.00bn (*) 13.50
June-November Flood Thailand 45.00bn 10.78
22-28 April Severe Weather USA 10.20bn 7.30
21-27 May Severe Weather USA 9.10bn 6.50
22-30 August Hurricane Irene USA 8.55bn 4.30
21 December Flood Australia 30.00bn (*) 2.20
2 – 5 March Severe Weather USA 2.80bn 2.00
1 June Earthquake New Zealand 30.00bn (*) 1.80
14 – 16 April Severe Weather USA 2.50bn 1.70
Other Losses 85.16bn 19.84
Total 433.31bn 106.12bn
(*) The New Zealand Government has only released a combined USD30bn economic loss for the Sept 2010, Feb 2011 and June 2011 earthquake events.
19
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 20
Non-US Catastrophe Insured Market Losses (2010/11)
Year Event Region Insured Loss
2010 Maule Quake Chile $8,500m
2010 Xynthia France $4,000m
2010 Darfield Quake New Zealand $6,000m
2010 Queensland Floods Australia $5,500m
2011 Littleton Quake New Zealand $11,000m
2011 Tohuku Quake Japan $35,500m
2011 Denmark Cloudburst Denmark $1,000m
2011 Thailand Floods Thailand $10,780m
2010 - $24,000m
2011- $58,280m
20
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 21
Top Canadian Catastrophe Losses in 2011 - 2012
Canada did not avoid Catastrophe activity More than $1.6bn of insured losses Slave Lake is the 2nd largest catastrophe loss in Canadian history
21
Time Type of Event Location Insured Loss Estimate
April, 2011 Windstorm Ontario $210M
May, 2011 Wild Fire Slave Lake $700M
Spring, 2011 Flooding Manitoba and Saskatchewan Minimal (>$800M economic loss)
July, 2011 Hail Alberta $185M
August, 2011 Tornado Goderich $200M
August, 2011 Hurricane Irene Eastern Canada $150M
November, 2011 Windstorm Alberta $200M
May, 2012 Flood, Hail, Wind Thunder Bay – Montreal $200M
August, 2012 Flood, Hail, Wind Calgary $500M
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 22
Insured Catastrophe Losses
Source: Aon Benfield Analytics
2012 loss activity is on pace to be well below the loss activity experienced in 2010 and 2011, especially if the US hurricane season produces low insured losses
Catastrophe loss activity to date is approximately half of the recent years average activity for the same period
-
20
40
60
80
100
120
140
2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD2012
2003 -2011
Average
US
D B
illio
ns
Winter Weather
Wildfire
Tropical Cyclone
Severe Weather
Other
Flooding
EU Windstorm
Earthquake
22
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 23
Exhibit 1: Global Reinsurer Capital
23Aon Benfield Analytics | Market AnalysisProprietary & Confidential
410
340
400
470 455480
0
100
200
300
400
500
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 1H 2012
US
D (b
illio
ns)
-17% 18%
18%
-3% 5%
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 24
Exhibit 11: ABA Combined Ratio
24Aon Benfield Analytics | Market AnalysisProprietary & Confidential
-4.7% -3.2%
30.6% 31.0%
60.1% 59.9%
31.8%
2.5%
117.8%
90.1%
-10%
10%
30%
50%
70%
90%
110%
130%
1H 2011 1H 2012
Natural catastrophe losses
Attritional loss ratio
Expense ratio
Prior year reserve adjustment
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 25
Reinsurers Combined Ratio Comparison
80.0%
85.0%
90.0%
95.0%
100.0%
105.0%
110.0%
115.0%
120.0%
125.0%
130.0%
135.0%
140.0%
145.0%
150.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q2
Global
Canadian
US
Sources: Canadian - RRC; US – RAA; Global - Aon Benfield Aggregate for Mid Year 2012 Canadian from MSA
25
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 26
Year to Date Share Price Development (1/1/2012 vs 29/8/2012)
Aon Benfield Analytics | Market Analysis Proprietary & Confidential 26
11%
-20%
-10%
0%
10%
20%
30%
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 27
Year to Date Price to Book Development (1/1/2012 vs 29/8/2012)
Aon Benfield Analytics | Market Analysis Proprietary & Confidential 27
0.0
1.0
2.0August 29, 2012 January 1, 2012
Average Average
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 28
Invested Assets Portfolio
28Aon Benfield Analytics | Market AnalysisProprietary & Confidential
63%12%
9%
5%
11%
December 31, 2011: USD946 billion
Fixed interest investments Equity investments Cash and cash equivalents Funds held by cedants Other investments
ABA Invested Assets
62%12%
9%
6%
11%
June 30, 2012: USD984 billion
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 29
Peripheral EU Sovereign Debt Exposures
Aon Benfield Analytics | Market Analysis Proprietary & Confidential 29
Company
Reporting Currency (millions) Greece Ireland Italy Portugal Spain Total
As % of Shareholders’
Funds
Amlin GBP 1 0 20 0 18 39 2.6%
Arch USD 0 0 6 0 0 6 0.1%
Berkshire USD nd nd nd nd nd nd nd
Fairfax* USD 244 0 0 0 0 244 2.9%
Hannover Re EUR 0 27 17 17 85 147 2.4%
Munich Re^ EUR 0 1,000 2,400 0 1,200 4,600 18.1%
Platinum USD 0 5 0 0 0 5 0.3%
Swiss Re^ USD 0 0 0 31 0 31 0.1%
XL USD 0 0 17 0 0 17 0.2%
^ Potential (disclosed or inferred) participation by life insurance companies* Sovereign debt exposure as of December 31, 2011Source: Company reports, Aon Benfield Market Analysisnd = not disclosed
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 30
Ratings Distribution
Aon Benfield Analytics | Market Analysis Proprietary & Confidential 30
A.M. Best Standard & Poor’s
3% 1%
62%
52%
30%
42%
5% 5%
June 30, 2011 Current
A++
A+
A
A-
10% 7%
19%19%
31%
26%
35%42%
5% 5%
June 30, 2011 Current
AA+
AA-
A+
A
A-
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 31
Building Damage Following February 22, 2011 Event
Source: Tonkin and Taylor
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 32
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 33
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 34
Factors Impacting Reinsurance Supply and Demand
Source: Aon Benfield Analytics
Global Factors Influencing Reinsurance Supply
+ Record reinsurer capital
+ Low ceded catastrophe loss activity
+ Growing investor interest in catastrophe bonds or similar collateralized facilities
- Continued low market valuations of reinsurers’ shares
= High reinsurance market supply
Global Factors Influencing Reinsurance Demand
- Strong insurer capital
- Sluggish insurance demand growth for insurance in difficult economic environment
- Continued decline in loss frequency in casualty lines
- Very competitive insurance landscape in nearly all markets
- Low investment returns
+ Low insurer market valuations and associated accretive share repurchase math
+ Sovereign debt related issues
= Stable to weak growth in reinsurance demand
34
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 35
Section 3: Conclusion
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 36
Conclusion – Closing Comments
There is more to reinsurance than what meets the eye• Largest budget item • Greatest risk to capital
Reinsurance capital is excellent– Very affordable– It has shown its resilience
Reinsurance broking is not a commodity– Analytical tools are growing in importance – “We have a simple portfolio”– Be proud to be Canadian
Questions
Presentation to the Seminar of the Appointed ActuaryState of the Reinsurance Market | Sept 21st, 2012 38
Contact Information
François Dagneau
Senior Vice President
Aon Benfield Analytics
francois.dagneau@aonbenfield.com
Or your favorite Aon Benfield broker….
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