recent trends in catastrophe risk pricing. 2 how do reinsurers price catastrophe risk ? trends in...
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Recent Trends in Catastrophe Risk PricingRecent Trends in Catastrophe Risk Pricing
Recent Trends in Catastrophe Risk Pricing2
Recent Trends in Catastrophe Risk Pricing
How do reinsurers price Catastrophe Risk ?
Trends in Catastrophe pricing in 2005
How has the market reacted to the Catastrophe losses of 2005 ?
Outlook for the global catastrophe market in 2006
Impact on the Catastrophe Bond Market
Recent Trends in Catastrophe Risk Pricing3
How do reinsurers price Catastrophe Risk Emerging Territories
Territories such as China, India and Eastern Europe are good examples of emerging territories from the perspective of catastrophe reinsurers
Although in many cases they are in development stage, there is often a shortage of credible catastrophe models that can be used for pricing in emerging territories
Reinsurers, therefore, generally rely on;
Information on aggregate values by zone at most detailed level available
Historical losses
A large amount of extrapolation and guesswork
This omits capacity from some more technical reinsurers and often leads to significant price corrections after a loss
Recent Trends in Catastrophe Risk Pricing4
How do reinsurers price Catastrophe Risk Developed Territories
The US,UK and Japan are good examples of Developed markets from a catastrophe reinsurance perspective
Catastrophe models have been the key underwriting tool for most reinsurers in these territories. The widespread use of RMS,AIR,EQE often leads to a narrow band of quotes from reinsurers.
Pricing is based on annual expected loss plus loading for volatility, un-modeled perils, expenses and profit
There is an increasing use of portfolio optimisation models by reinsurers giving them the ability to charge higher loadings in territories where they have heavy concentrations of exposure and lower loadings where they are light on exposures
Recent Trends in Catastrophe Risk Pricing5
How do reinsurers price Catastrophe Risk Global split of Catastrophe Premium
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How do reinsurers price Catastrophe Risk Why is writing business in emerging territories attractive to reinsurers?
There are only a few regions where the peak amount of traditional reinsurance may be too concentrated for the reinsurance market
Throughout most of the world the opportunity to diversify is attractive and cost-effective to resinsurers and cedants alike
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How do reinsurers price Catastrophe Risk Diversification Effect
In this example, a CAT reinsurer can meet its target return of 16% by charging less than 16% in each region due to favorable diversification effects (global spread)
Overall ROE 16%
UK 6%
Europe 8%
Japan EQ 2%-8%
Japan Typhoon 4%
Other Regions 6%
Florida 12%
CA EQ 11%
Other US 9%
Trends in Catastrophe Pricing 2005Trends in Catastrophe Pricing 2005
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Trends in Catastrophe Pricing in 2005 Situation prior to September 2005
Continued moderate softening in Global Catastrophe Rates but more disciplined than the soft market of the 1990’s due to:
4 large Hurricanes in the US,10 typhoons in Japan and Indian Ocean Tsunami in 2004, Hurricane Erwin in early 2005
Marketplace becoming more technical in pricing techniques
Investment returns still relatively low
The market for Retrocession support remained disciplined
The new entrants to the market had promised investors not to chase prices down
More significant reductions in non-peak territories
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Trends in Catastrophe Pricing in 2005 Pricing Index for Catastrophe Reinsurance business
Overall, Property Rates continued to decrease in 2005 except on the most severely loss affected business
*1990 = 100. Index constructed by Guy Carpenter & Company, Inc.
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Risk Adjusted ROL Change by Territory
Trends in Catastrophe Pricing in 2005
How has the Reinsurance Catastrophe Market changed following the 2005 losses
How has the Reinsurance Catastrophe Market changed following the 2005 losses
Capital entering and exiting the market Issues with Catastrophe Models Reaction from rating agencies
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How has the Reinsurance Catastrophe Market changed following the 2005 losses The Ten most Costly Natural Catastrophe Losses in history ($ US)
2005 Hurricane Katrina US Est $40 - $60bn
1992 Hurricane Andrew US Caribbean $21.5bn
1994 Northridge Earthquake US $17bn
2005 Hurricane Wilma US $8bn - $12bn (Est)
2004 Hurricane Ivan US Caribbean $11bn
2004 Hurricane Charley US Caribbean $8bn
1991 Typhoon Mireille Japan $7.8bn
1990 Winterstorm Daria France, UK et al $6.6bn
1999 Winterstorm Lothar France, Switz et al $6.5bn
1989 Hurricane Hugo US, PR, et al $6.4bn
Plus Hurricane Erwin, Swiss Floods, Mumbai Floods, Hurricane Rita!
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How has the Reinsurance Catastrophe Market changed following the 2005 losses Capital in and out
2004 was the costliest year on record for global catastrophic losses
2005 will eclipse 2004 with industry losses nearing $100bn at the top end of estimates
The Reinsurance market could pick up an estimated $40bn of loss from catastrophic events in 2005
Est $10bn new capacity is entering the market supporting existing insurers/reinsurers and creating new companies. Most new start up companies are based in Bermuda
Hedge Funds in particular have shown an appetite for writing Catastrophe Reinsurance business
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How has the Reinsurance Catastrophe Market changed following the 2005 losses Catastrophe Models 2005 hurricanes highlighted the
following issues: Demand surge is not included in models
for most countries Models in US that do include it
performed poorly Storm surge is not included in most models
Frequency as a result of increased sea temperature
Non modelled perils Flood
Effects of increased urbanization
Adequacy of river defences
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How has the Reinsurance Catastrophe Market changed following the 2005 losses Rating Agencies
A.M Best stated last week that ‘Man made and natural catastrophes are the most significant threat to the financial strength and credit quality of the property and casualty market’
Rating Agencies have downgraded many insurers and reinsurers since Sept 05. Monoline catastrophe writers are looking to diversify
Capital requirements for writing Catastrophe business are increasing as assumptions over frequency and severity are revised upwards
Capital requirements for Catastrophe reinsurers increasing to gain/maintain ‘A’ rating
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Reinsurers will have to take their medicine from the rating agencies
Outlook for the global catastrophe market in 2006Outlook for the global catastrophe market in 2006
Difference between 2006 and market WTC Summary of factors What should we expect for 2006
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Outlook for the global catastrophe market in 2006 Difference between this market and post WTC
WTC hit at bottom of cycle
WTC hit insurance rates first
Reinsurance market rode on the back of increasing insurance rates
Post WTC rates increased across all lines globally
WTC was more of a risk loss than a cat loss to the reinsurance market
WTC
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Outlook for the global catastrophe market in 2006 Summary of the Factors in Play
Factors Pushing Rates Up
Cat losses (Primarily US but also WW – eg Erwin,
India, Switzerland)
Destruction of capital
Uncertainty over models
Rating Agency actions
Retro market
Factors Mitigating Rate Increases
New capital entering market
Many reinsurers’ capital positions remain strong
Many loss free territories
Existing price levels
Need for mono-line reinsurers to diversify their books both in terms of territory and
line of business
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Outlook for the global catastrophe market in 2006 What should we expect?
Significant increases for loss affected territories, especially in the US and for clients with Gulf of Mexico exposure
Mild increases (5 – 15%) in other peak zones eg European Wind and Japan for loss free programmes
Neutral to small (0 – 10%) increases for non-peak areas including emerging territories for loss free territories
Large capacity programmes that need significant support from the international market will pay more than smaller programmes
Top layers paying minimum capacity premiums may see the largest % increases as capital charges are increased
Impact on the Catastrophe Bond MarketImpact on the Catastrophe Bond Market
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Impact on the Catastrophe Bond Market
First loss to a Cat Bond as a result of Katrina
Investor appetite does not appear to have been negatively impacted
Increased interest from clients, especially in peak zones due to;
Increasing traditional prices in peak zones
Clients concerns over credit risk
Stability of cover over multi year period