Economic Perspectives on the Future of Reinsurance

Transcription

1 Economic Perspectives on the Future of Reinsurance Re Underwriting: Facing the Future Emerging, Issues, Risks, and Opportunities New York, NY September 13, 2016 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 The Growth of the Reinsurance Industry Depends on The Growth of the Global Exposure Base GDP growth Increased premium penetration New lines of business (e.g., flood, cyber?) Inflation => Claims, Rates The Experience and Capital Position of the Primary Insurance Industry The Experience and Capital Position of the Reinsurance Industry The Extent and Attractiveness of Alternate Sources of Capital 2

3 Reinsurance is a Global Business Global Economic Outlook: Regional and Major Economy Perspectives Strength of Economies and Pace of Recovery Varies Greatly Important Consequences for Insurer and Reinsurer Growth Opportunities 3

4 Shares of Global Output, Advanced vs. Developing Economies, 2015 China is the world s largest economy.* The EU will be third after the UK leaves. Largest economies (% of world GDP) China 17.1% Euro Union 16.9% U.S. 15.8% India 7.0% Japan 4.3% Germany 3.4% Developing Economies 57.6% Advanced Economies 42.4% *Based on GDP adjusted for purchasing power parity Sources: (citing the International Monetary Fund, as updated 30 June 2016); Ins. Info. Institute 4

5 Forecast Shares of Global Output, 5 Largest Economies, % 18.1% 18.5% 18.9% 19.4% 16.7% 16.5% 16.2% 15.9% 15.6% 15.7% 15.6% 15.4% 15.1% 14.9% 7.3% 7.6% 7.9% 8.2% 8.5% 4.1% 4.0% 3.9% 3.8% 3.7% 25% 20% % 10% 5% 0% China E.U. U.S. India Japan China and India are forecast to produce larger shares of global output, while the European Union (including the U.K.), the U.S., and Japan though growing will produce smaller shares of global output Sources: (citing the International Monetary Fund, as updated 30 June 2016); Ins. Info. Institute

6 GDP Growth (%) Past Global GDP Growth: Advanced vs. Emerging Economies, From 1970 to 1982, emerging economies grew significantly faster than advanced economies. From 1983 to 1994, advanced economies grew roughly as fast as emerging economies. Advanced economies Emerging and developing economies Sources: International Monetary Fund, World Economic Outlook, October 2012, Table 1.1; Ins. Info. Institute.

7 F 17F Recent & Forecast GDP Growth: Advanced vs. Emerging Economies, F GDP Growth (%) (1.0) (2.0) (3.0) (4.0) Advanced economies Emerging and developing economies Emerging economies (led by China at 6.2% and India at 7.4%) are expected to grow by 4.6% in Advanced economies are forecast to grow slowly (+1.8%) in 2017 Sources: International Monetary Fund, World Economic Outlook Update, July 2016 and July 2014, Table 1; Ins. Info. Institute.

8 But on the heels of the Brexit vote, the Uncertainty About Growth is High 1.8% 1.8% 1.5% 1.4% 1.5% 1.0% Whether the negative effect of Brexit is moderate or severe, the advanced economies are expected to be affected to a greater extent than the emerging/developing economies 4.1% 4.0% 3.9% 4.6% 4.4% 4.2% The IMF said in mid-july that both scenarios are now less likely since the markets have settled down since the vote 8

9 Forecasts of GDP Growth of Selected Advanced Economies 3% 2% 1% 2.5% 2.2% 1.4% 2.1% 1.7% 1.3% % 1.5% 1.2% 1.2% 0.9% 1.0% 2.6% 2.1% 0% United States Canada United Kingdom 0.3% 0.1% Germany France Italy Spain Japan The July 2016 IMF report forecasts growth in advanced economies in generally under 2% in Europe, around 2% in North America. Except for North America, slight deterioration generally forecast for Sources: International Monetary Fund, World Economic Outlook Update, July 2016, Table 1; Ins. Info. Institute. 9

10 Forecasts of GDP Growth of Selected Developing Economies % 6% 4% 2% 0% -2% -4% -3.3% 7.4% 7.4% 6.6% 6.2% 4.8% 5.1% 2.5% 2.6% 1.0% 0.5% -1.2% Brazil Russia India China Mexico ASEAN-5* IMF forecasts that growth in emerging/developing economies will continue to outpace advanced economies growth. Brazil and Russia will recover from their slump, posting weak but positive growth. *Indonesia, Malaysia, the Phillipines, Thailand, and Vietnam Sources: International Monetary Fund, World Economic Outlook Update, July 2016, Table 1; Ins. Info. Institute. 10

11 World Trade Volume: F Percentage Change 14% 12% 12.9% After a slowdown in growth in 2015 and 2016, global trade volume is expected to be stronger in % 8% 6% 4% 6.0% 2.5% 3.1% 3.7% 2.6% 2.7% 3.9% 2% 0% F 2017F The spurt of trade growth in 2010 was a rebound from the global recession. Growth in world trade volume (Imports + Exports) has slowed but the volume is still rising. Sources: IMF World Economic Outlook Update, July 2016, Table 1; Insurance Information Institute. 11

12 World Trade Volume: EXPORTS F F 2017F F 2017F Growth (%) 16% 14% 12% 10% 8% 6% 4% 2% 0% 12.2% 5.3% Advanced Economies Export growth in advanced economies should hold steady in % 3.4% 2.5% 3.5% 2.1% 2.3% 14.7% Emerging Economies Export growth in emerging economies matches advanced economies 6.7% 4.2% 4.4% 3.8% 3.9% 3.1% 1.7% Sources: IMF World Economic Outlook (April 2016); Insurance Information Institute. 12

13 World Trade Volume: IMPORTS F F 2017F F 2017F Growth (%) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 11.5% Advanced Economies Import growth in Advanced Economies is expected to hold steady in % 4.3% 3.5% 3.4% 4.1% 1.1% 1.4% 15.3% Emerging Economies 8.8% Import growth in emerging economies is rebounding from a very weak % 5.6% 3.7% 0.5% 3.0% 3.7% Sources: IMF World Economic Outlook (April 2016); Insurance Information Institute. 13

14 Global P/C Insurance Snapshot Developing Economies are Severely Under-insured; Will Faster GDP Growth Translate into Significant Premium Growth? 14

15 Nonlife Premium: Advanced vs. Emerging Economies, 2015 Premium Growth Facts Nonlife premiums in the emerging economies grew 7.8% in 2015, after inflation adjustment. In the advanced economies, nonlife premiums grew by 2.6% in Industrialized Economies $1, , US$ Billions 79.9% 20.1% Emerging Markets $405.7 Sources: Swiss Re Sigma No 3/2016 World Insurance in 2015: steady growth amid regional disparities ; Insurance Information Institute research. Developing economies now produce over half of global GDP but just 20% of nonlife premiums 15

16 Non-life Premium/GDP* (Penetration) for Advanced Economies, % 5.14% 4.20% 4.50% 4.30% 4.22% 3.45% 3.68% 3.00% 2.90% 2.80% 2.44% 2.22% 2.25% 2.10% 2.10% 2.30% 2.55% 2.85% 3.14% 3.00% 3.10% 3.20% 3.09% 3.59% 3.86% 3.60% 3.70% 3.60% 3.36% 6% % 4% 3% 2% 1% 0% U.S. U.K. Japan France Germany Year-to-year comparisons of the penetration percentage indicates the degree to which premium growth is keeping up with exposure growth (as proxied by GDP). *both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes

17 Non-life Premium/GDP* (Penetration) for the BRIC Economies, % 1.62% 1.60% 1.50% 1.80% 1.80% 1.51% 2.22% 2.40% 2.30% 1.10% 1.19% 0.56% 0.64% 0.60% 0.70% 0.80% 0.72% 0.86% 1.05% 1.10% 1.30% 1.40% 1.63% 6% % 4% 3% Non-life premium growth faster than GDP growth. This is remarkable considering how fast China s and India s economies were growing. 2% 1% 0% Brazil Russia India China Although the Penetration ratio in Brazil was essentially flat, that means premium growth basically kept pace with exposure growth. In Russia, the economy has struggled, and non-life premium growth struggled even more. *both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes

18 $39.51 $25.76 $13.40 $43.90 $46.83 $33.50 $65.86 $70.24 $50.25 $87.81 $93.65 $67.01 $ $ $ $ Non-life Premium if Penetration in BRIC Economies Equaled Advanced Economies $US, billions $400 $300 What it was 2% (Japan) 3% (UK, France) 4% (US, Canada) $200 $100 $0 Brazil Russia India China Sources: Swiss Re Sigma, various volumes; I.I.I. calculations

19 Penetration (%) As Economies Grow Wealthier, Insurance Market Penetration Grows Also 14% 12% Some wealthy countries have penetration rates of 10% and over 10% 8% 6% 4% U.S.? 2% 0% $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 GDP per capita Source: A.M. Best.

20 Penetration (%) Greater Insurance Market Penetration Possibilities in Higher-Risk Countries 14.0% 12.0% 10.0% 8.0% 6.0% Low risk countries have high insurance penetration rates and afford fewer growth opportunities Higher risk countries have low insurance penetration rates and often offer more growth opportunities 4.0% 2.0% 0.0% Low Risk Country Risk Score (from lower to higher risk) High Risk Source: A.M. Best.

21 Catastrophe Update 21

22 Swiss Re: Definition of a Catastrophe Source: Swiss Re Sigma No. 1/2016 «Natural catastrophes and man-made disasters in 2015: Asia suffers substantial losses». 22

23 The number of natural catastrophe events continues to trend up Number of catastrophe events, was the first year that the number of man-made nat-cat events passed 150. It has happened virtually every year since then Record high number of natural cats in 2015, continuing upward trend Source: Swiss Re Sigma No. 1/2016 «Natural catastrophes and man-made disasters in 2015: Asia suffers substantial losses».

24 Swiss Re: Man-Made Catastrophes in 2015 Catastrophe # of Deaths Boat sinking off Libyan coast 800 Stampede at pilgrimage in Saudi Arabia 769 Germanwings airplane crash 150 Egyptair airplane crash 224 Other aviation disasters 311 Major fires, explosions, other 1,123 Total 7,000 Source: Swiss Re Sigma No. 1/2016 «Natural catastrophes and man-made disasters in 2015: Asia suffers substantial losses». 24

25 Total losses outpaced insured losses Source: Swiss Re Sigma No. 1/2016 «Natural catastrophes and man-made disasters in 2015: Asia suffers substantial losses».

26 $5.0 $8.2 $3.9 $9.1 $6.3 $13.0 $11.3 $14.8 $11.9 $7.8 $16.8 $10.9 $7.7 $14.4 $11.8 $14.9 $13.1 $15.5 $15.2 $11.0 $27.2 $35.8 $34.7 $30.1 $38.9 $34.6 $36.1 U.S. Insured Catastrophe Losses ($ Billions, $ 2015) $80 $70 $60 $ was the 3 rd most expensive year ever for insured CAT losses $50 $40 $30 $20 $10 $ * 2013/14/15 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History Is Off to a Costlier Start. $11.0B in insured CAT losses though 6/30/16 *Through 6/30/ figure stated in 2016 dollars. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 26

27 Combined Ratio Points Associated with Catastrophe Losses: E* Combined Ratio Points 12 Avg. CAT Loss Component of the Combined Ratio by Decade Catastrophe losses as a share of all losses reached a record high in s: s: s: s: s: s: 5.46* The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades *2010s represent E. Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO ( ); A.M. Best ( E) Insurance Information Institute. 27

28 Inflation-Adjusted U.S. Catastrophe Losses by Cause of Loss, Winter storm losses were much above average in 2014/15 and will push this share up Winter Storms, $26.9 Tornado share of CAT losses is rising Wind/Hail/Flood (3), $21.4 Geological Events, $ % 5.4% Terrorism, $ % 0.1% 6.2% Events Involving Tornadoes (2), $ % 39.2% Fires (4), $6.0 Other (5), $ % Insured cat losses from totaled $395.6B, an average of $19.8B per year Hurricanes & Tropical Storms, $161.2 Wind causes the most catastrophe losses by far, even if hurricanes/ts are excluded. 1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO s Property Claim Services Unit. 28

29 $Billion $120 $100 Global CATs in the First Half of 2016 vs. 2015:1H and 10-year average Thunderstorms were the costliest type of insured event in both years $110B $80 $60 $52B $71B $40 $80 uninsured losses insured losses $40 $31 $20 $0 $31 $30 $ :1H 2016:1H 10-yr avg In 2016:1H, insured losses were 44% of total CAT losses, compared to 40% in 2015:1H. The insured losses were a higher percent of total losses in these years than the 10-year average. Sources: Swiss Re Sigma; Insurance Information Institute. 29

30 Investments: A Key Driver of Profitability Depressed Yields Will Necessarily Influence Underwriting & Pricing 30

31 U.S. P/C Insurer Portfolio Yields, % 4.44% 4.03% 4.59% 4.50% 4.49% 4.20% 3.93% 3.73% 3.83% 3.68% 3.43% 3.65% 3.18% 6% 5% 4% 3% 2% 1% 0% P/C carrier yields have been falling for over a decade, reflecting the long downtrend in prevailing interest rates. Even as prevailing rates rise in the next few years, portfolio yields are unlikely to rise quickly, since low yields of recent years are baked in to future returns. Sources: NAIC, via SNL Financial; Insurance Information Institute. 31

32 US Treasury Note 10-Year Yields: A Long Downward Trend, * 7% 6% 5% Yields on 10-Year US Treasury Notes have been below 3% for 5 years: bonds bought in 2006 at 5% will be reinvested at 1.50% for 10 more years 4% 3% 2% 1% 0% Recession 10-Yr Yield US Treasury yields plunged to historic lows in 2013, then rebounded but are sinking again '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Since roughly 80% of P/C bond/cash investments are in 5-to-10-year durations, most P/C insurer portfolios will have low-yielding bonds for years to come. *Monthly, constant maturity, nominal rates, through July Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates); Insurance Information Institute. 32

33 Distribution of Bond Maturities, P/C Insurance Industry, % 35.8% 33.7% 9.0% 5.1% % 37.1% 30.8% 9.6% 5.7% % 38.8% 29.3% 9.8% 5.7% % 40.4% 27.6% 9.8% 5.7% Under 1 year % 16.0% 41.2% 39.5% 27.3% 27.1% 10.4% 11.2% 6.2% 6.2% 1-5 years 5-10 years years % 36.4% 29.0% 11.9% 7.1% over 20 years % 32.4% 31.2% 12.7% 8.1% % 30.0% 33.8% 12.9% 8.1% % 29.5% 34.1% 13.1% 7.4% 0% 20% 40% 60% 80% 100% Two main shifts over these years. From 2008 to , from bonds with longer maturities to bonds with shorter maturities. But beginning in 2013, the reverse. Note, however, that the percentages in bonds with maturities over 10 years continues to drop. Sources: SNL Financial; Insurance Information Institute. 33

34 P/C Insurers: Below-Investment-Grade (BIG) Bonds as a Percent of Total Bonds, % 4% % 2% % 0% Chasing Yield? As a Group, P/C Carriers Have Increased the Percentage of Bond Investments in Riskier Instruments. Since 2006, That Percentage Has Risen About 250 Basis Points. As Interest Rates Rise, Will This Percentage Return to Pre-recession Levels? Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

35 P/C Insurer Groups Holdings of BIG** Bonds as a Percent of Total Bonds, 2014 Under 0.1% 0.11% %% 1% % 2% % 3% % 4% % 5% % 6% % 7% % 8% % 9% % 10% % 11% % 12% % 13% % 17% and over Number of Groups 15 The 67 groups graphed are those with over $3 billion in cash & admitted assets as of year-end P/C industry average There is a wide disparity among insurance groups regarding holdings of below-investment-grade bonds. Some hold none (or almost none); a few have over 10% of their bond portfolio in BIGs. *Below Investment Grade Sources: NAIC, via SNL Financial; Insurance Information Institute. 35

36 0.15% 0.20% 0.25% 0.30% 0.40% 1.35% 1.40% 1.55% 1.30% 1.60% 1.40% 1.50% 1.96% 1.75% 1.60% 1.75% 2.03% 2.12% 2.23% 2.39% Forecasts for 10-Year Government Bond Yields, Quarterly, 2016:Q3-2017:Q3 2016:Q3 2016:Q4 2017:Q1 2017:Q2 2017:Q3 3.0% 2.5% Forecast as of June 8, 2016 (before the Brexit vote) 2.0% 1.5% 1.0% 0.5% 0.0% U.S. Germany U.K. Canada As noted, inflation in these nations is forecast to remain at 2% or lower through With real growth also low, bond yields aren t likely to rise much more than 1/3 of a percentage point by 2017:Q3. Sources: Wells Fargo Economics Group, Global Chartbook, June 2016, p. 26; I.I.I.

37 Other Things That Could Affect the Course of Interest Rates Prices of world currencies (the value of the US Dollar vs. the Euro, the Yen, the Yuan and other major world currencies) Prices of a number of commodities (especially oil) Prevailing interest rates in other countries (determined, in part, by those countries central banks) The demand for, and the supply of, loanable funds 37

38 The Growth, Profitability, and Capital Position of the Primary P/C Insurance Industry 38

39 Net Premium Growth: Annual Change, F 25% 20% 15% 10% 5% 16 Years 16 Years? Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3- Year Decline Since F: 4.5% 2015: 3.4% 2014: 4.2% 2013: 4.6% 2012: 4.3% 0% -5% Shaded areas denote hard market periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. 39

40 P/C Insurance Industry Combined Ratio, * Insurers Paid Nearly $1.16 for Every $1 in Earned Premiums Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Best Combined Ratio Since 1949 (87.6) Heavy Use of Reinsurance Lowered Net Losses * Excludes Mortgage & Financial Guaranty insurers Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = Sources: A.M. Best, ISO. 40

41 Property/Casualty Insurance Industry Investment Income: ($ Billions) Investment $60 $50 $49.5 $52.3 $54.6 $51.2 income is still below its 2007 pre-crisis peak $47.1 $47.6 $49.2 $48.0 $47.3 $46.4 $47.2 $40 $38.9 $37.1 $36.7 $38.7 $39.6 $ Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.9%) increase in 2015 a trend that may continue. 1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.

42 P/C Industry Net Income After Taxes $14, $5, $19, $10, $20, $24, $36, $30, $21, $20, $3, $30, $38, $44, $65, $62, $3, $28, $35, $19, $33, $63, $55, $56, $ Millions $80,000 $70,000 $60,000 $50, ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS 1 = 3.5% 2012 ROAS 1 = 5.9% 2013 ROAS 1 = 10.2% 2014 ROAS 1 = 8.4% 2015:ROAS = 8.4% $40,000 $30,000 $20,000 $10,000 $0 -$10,000 -$6,970 ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for Sources: A.M. Best, ISO; Insurance Information Institute.

43 Profitability Peaks & Troughs in the P/C Insurance Industry, F ROE 25% 1977:19.0% 1987:17.3% History suggests next ROE peak will be in , but that seems unlikely 20% 1997:11.6% 2006:12.7% 15% 9 Years % 2015=8.4% 2016F=6.3% 10% 5% 0% 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% % -5% *Profitability = P/C insurer ROEs figures are estimates based on ROAS data. Note: Data for exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning

44 PP Auto Total Homeowners MP Other Liability Workers Comp Commercial MP Comm Auto Total Inland Marine Allied Lines Fire Med Prof Liab A & H Farm MP Return on Net Worth (RNW) Largest Lines: Average Percent 16 Commercial lines have tended to be more profitable than personal lines over the past decade Source: NAIC; Insurance Information Institute. 44

45 Policyholder Surplus, 2006:Q4 2016:Q1 $ :Q4 $ :Q1 $ :Q2 $ :Q3 $ :Q4 $ :Q1 $ :Q2 $ :Q3 $ :Q4 $ :Q1 $ :Q2 $ :Q3 $ :Q4 $ :Q1 $ :Q2 $ :Q3 $559.2 $ :Q4 11:Q1 $ :Q2 $ :Q3 $550.3 $ :Q4 12:Q1 $ :Q2 $ :Q3 $ :Q4 $ :Q1 $ :Q2 $ :Q3 $ :Q4 $ :Q1 $ :Q2 $ :Q3 $ :Q4 $ :Q1 $ :Q2 $ :Q3 $ :Q4 $ :Q1 ($ Billions) $750 $ :Q3 Pre-Crisis Peak Drop due to near-record 2011 CAT losses $650 $600 $550 $500 $450 Surplus as of 3/31/16 stood at $676.3B $400 The industry now has $1 of surplus for every $0.77 of NPW, close to the strongest claims-paying status in its history. 2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer s investment in a noninsurance business. The P/C insurance industry entered 2016 in very strong financial condition. Sources: ISO, A.M.Best. 45

46 Alternative Capital New Investors Are Changing the Reinsurance Landscape 46

47 Global Reinsurance Capital (Traditional and Alternative), (Billions of USD) $600 $500 $400 $300 $ Total reinsurance capital is at a new high, just above the 2014 level $100 $ Q1-16 Alternative Capital Traditional Capital Total Alternative capacity has grown 284% since In just the past four years it more than doubled. Aon projection: $180 Billion by Source: Aon Benfield Analytics; Insurance Information Institute.

48 Growth of Alternative Capital Structures, (Billions of USD) $35 $30 Collateralized Re s Growth Has Accelerated in the Past Seven Years. $25 $20 $15 $10 $5 $ Q1-16 Cat Bonds Sidecars ILWs Collateralized Re Collateralized Reinsurance and Catastrophe Bonds Currently Dominate the Alternative Capital Market. Source: Aon Benfield Analytics; Insurance Information Institute.

49 Growth of Alternative Capital Structures, (Billions of USD) $35 Collateralized Re s Growth Has Accelerated in the Past Seven Years. $30 $25 $20 $15 $10 $5 $ Q1-16 Cat Bonds Collateralized Re Collateralized Reinsurance and Catastrophe Bonds Currently Dominate the Alternative Capital Market. Source: Aon Benfield Analytics; Insurance Information Institute.

50 Catastrophe Bonds Issued, Risk Capital ($ Millions) $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $1,142.8 $1,499.0 $4,614.7 $7,187.0 Volume grew slowly from $3,009.9 $3,396.0 Volume soared from $4,599.9 $4,107.1 $5,855.3 $7,083.0 $8,026.7 $7,898.2 Volume doubled from * Trailing 12-month average Sources: Willis Capital Markets, Insurance Information Institute. 50

51 Catastrophe Bonds Outstanding, Risk Capital ($ Millions) $30,000 $25,000 $20,000 $15,000 $13,416 Volume unchanged from $12,539 $12,508 $12,196 $12,343 $14,839 $18,577 $22,868 $25,961 Volume doubled from $10,000 $5,000 $0 $4,289 $5,085 $7,677 Volume tripled from * Trailing 12-month average Sources: Willis Capital Markets, Insurance Information Institute. 51

52 Conclusion Economic Issues Facing the Reinsurance Industry 52

53 Near-Term Issues Effects of the near-stagnation of the major European economies Tight monetary/fiscal policy => Slow/No Growth Other headwinds affecting European growth: Population aging A Return to Tariffs/Trade Wars? Inflation is not a concern currently, but it could become one quickly Helpful and Harmful: Inflation affects claims (bad) and investment income (good) 53

54 IMF Inflation Forecast for Selected Advanced Economies, % % 1.5% 2.0% 1.9% 1.4% 1.5% 1.3% 1.2% 1.3% 1.1% 1.6% 1% 0.8% 0.8% 0.7% 0.7% 0.5% 0% -0.2% -1% United States Canada United Kingdom Germany France Italy Spain Japan The July 2016 IMF report forecasts 1% inflation in advanced economies in 2016 and a little higher growth in prices in Sources: International Monetary Fund, World Economic Outlook Update, July 2016, Table 1; Ins. Info. Institute. 54

55 IMF Inflation Rate Forecast for for Selected Emerging Economies 7.1% 6.0% 7.9% 5.9% 5.1% 5.4% 1.8% 2.0% 10.9% 6.5% 6.9% 5.8% 3.3% 3.0% 12% % 8% 6% 4% 2% 0% Brazil Russia India China Turkey South Africa Mexico Inflation is forecast to be 6% or more in in some major emerging economies. Inflation there can spread to advanced economies through imports. The IMF forecasts a slight decrease in inflation in Sources: International Monetary Fund, World Economic Outlook, April 2016; Ins. Info. Institute.

56 Longer-Term Issues (a partial list) 1. Persistently Low Interest Rates 2. Currency Market Instability 3. Strong Capital Flows to Emerging/Developing Economies => Asset Price Bubbles? 4. Regulatory Backlash/Developments 5. Terrorism 56

57 Insurance Information Institute Online: Thank you for your time and your attention! 57