presentation to the seminar of the appointed actuary state of the reinsurance market | sept 21st,...

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


Agenda

Section 1 6 Key Trends that Impact Reinsurance in Canada

Section 2 State of the Market

Section 3 Conclusion


Section 1: Six Key Trends that Impact Reinsurance in Canada


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


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”


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


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


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


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):


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


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


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


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%


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


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


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


Section 2: State of the Market


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


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


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


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


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%


Exhibit 11: ABA Combined Ratio


-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


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


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%


Year to Date Price to Book Development (1/1/2012 vs 29/8/2012)


0.0

1.0

2.0August 29, 2012 January 1, 2012

Average Average


Invested Assets Portfolio


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


Peripheral EU Sovereign Debt Exposures


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


Ratings Distribution


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-


Building Damage Following February 22, 2011 Event

Source: Tonkin and Taylor


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


Section 3: Conclusion


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


Contact Information

François Dagneau

Senior Vice President

Aon Benfield Analytics

[email protected]

Or your favorite Aon Benfield broker….

mailto:[email protected]

presentation to the seminar of the appointed actuary state of the reinsurance market | sept 21st,...

Documents

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appointed actuary state

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canada section

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