Dynamics of the Reinsurance Market. James Beedle Chief Operating Officer Willis Reinsurance Australia Ltd

Transcription

1 Dynamics of the Reinsurance Market James Beedle Chief Operating Officer Willis Reinsurance Australia Ltd

2 Interesting Times. 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 Combined

3 Depends on Your Perspective

4 Reinsurance 101 Today Technical Considerations Demand for Reinsurance Supply of Reinsurance Near Future Implications for Insurers

5 Reinsurance 101

6 Technical Considerations 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

7 Technical Considerations Government Bond Yield 7.0% 6.0% Risk Free Rate 5.0% 4.0% 3.0% 2.0% 1-Oct Oct Aug % 0.0% Time to Maturity Yield at time of pricing more important than time of treaty inception during periods of significant yield movement. Example: consider a 1 October treaty renewal versus early August pricing & underwriting of treaty. Single rate versus duration specific to reflect mean settlement term (MST) of liability claims of given portfolio

8 Technical Considerations Example: $5M xs $5M medical malpractice layer Assume Mean Settlement Term of 6 years Actuarial risk premiums (i.e. expected ultimate claims cost of layer, fully discounted and subject to Index Clause): Based on selection of 6.25% discount = $14.9M Based on selection of 5.25% discount = $15.7M 6.25% selection during 2007 strong economic cycle, versus say, 5.25% selection during weak economic cycle = 20% discount rate reduction, but gives only 5% increase in price. Reasonably sensitive but is it a driver of price?

9 Technical Considerations Annual Non-Exceedance Probability 100% 90% 80% 70% 60% 50% 40% 30% 20% Distribution of Annual Aggregate Large Claims Exposing $5M Layer 80% prob. for 6.25% disc. Risk prem = $14.9M 76% prob. for 5.25% disc. Risk prem = $15.7M 53% prob. for nil discount. Risk prem = $21.3M Ultimate at 6.25% Discount Ultimate at 5.25% Discount Ultimate at Nil Discount 10% 0% Annual Large Losses $M

10 So What Are the Other Drivers of Price?

11 Demand Demand Curve Reinsurance Cost Reinsurance Capacity

12 Demand 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

13 Demand EQUITY TOUGH TO SOURCE DEBT EPENSIVE REINSURANCE RELATIVELY CHEAP EASY TO SECURE BUT VOLATILE

14 Demand - non-gfc Impacts Australian Market Catastrophe Losses ( present) > $300m (2007 Values) East Coast Storms (2/90) Sydney Hail (3/90) Sydney Storm (1/91) Sydney Hail (2/92) Canberra Bushfire (1/03) Cyclone Larry (3/06) Hunter Region Storms (6/07) Sydney Hail (4/99) Newcastle EQ (12/89) Sydney Hail (12/07) Mackay Storms (2/08) Brisbane Storms (11/08) Victoria Bushfires (2/09) $5,000 m $4,500 m $4,000 m $3,500 m $3,000 m $2,500 m $2,000 m $1,500 m $1,000 m $500 m $0 m

15 Supply Supply Curve Reinsurance Cost Reinsurance Capacity

16 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!

17 Munich Re Swiss Re Supply - Quality AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below General Re ERC Chubb Allianz Hannover Re L Re PartnerRe AA Re Transatlantic Re SCOR Gerling Global Re Everest Re W.R. B erkley Lloyd's of London Converium (Swtz) Axis Re Odyssey Re CNA Paris Re Endurance M ontpelier ACE Tempest IP C Trenwick Renaissance Re PRE Re Black lines denote movement between 9/11 and Sept 03 Standard & Poor Ratings

18 Supply - Quality AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below Munich Re Swiss Re General Re ERC Chubb Allianz Hannover Re L Re PartnerRe AA Re Transatlantic Re SCOR Gerling Global Re Everest Re W.R. B erkley Lloyd's of London Converium (Swtz) Axis Re Odyssey Re CNA Paris Re Endurance M ontpelier ACE Tempest IP C Trenwick Renaissance Re PRE Re Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05 Standard & Poor Ratings

19 Munich Re Supply - Quality AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below Swiss Re General Re ERC Chubb Allianz Hannover Re L Re PartnerRe AA Re Transatlantic Re SCOR Gerling Global Re Everest Re W.R. B erkley Lloyd's of London Converium (Swtz) Axis Re Odyssey Re CNA Paris Re Endurance M ontpelier ACE Tempest IP C Trenwick Renaissance Re PRE Re Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05 Green lines denote movement post-katrina to March 09 Standard & Poor Ratings

20 Supply 2000 Partner Re Life (USA) 2001 SOREMA (France) 2006 Revios (Germany) 2007 Converium (Swiss) 1997 SAFR (France) 1998 Winterthur Re (Swiss) 1998 Mid Ocean Re (Bermuda) 1999 NAC Re (UK) 2000 CGNU (US Surety Only) 2003 Le Mans Re (France) SCOR Group (France) Partner Re Group (Bermuda) L Group (Bermuda) 1996 Tempest Re (Bermuda) 1998 CAT Re (Bermuda) 1998 Cat Limited (Bermuda) 1998 Cigna (USA) 1999 Capital Re Corp. (USA) Combined Insurance 2008 Company of America (USA) Ace Group (Bermuda)

21 1996 American Re (USA) 1997 Reale Riassicurazioni S.p.A 1999 New Re (Swiss) 2000 CNA Life Re (USA) 2007 MSP Underwriting Ltd (UK) 2007 Bell & Clements (USA) 2008 Sterling Life Insurance (USA) 2008 Midland Company (USA) 2009 Hartford Steam Boiler (USA) 1996 M & G Re (UK) 1997 Union Re (Swiss) 1997 Unione Italiana (Italy) 1999 Underwriters Re (USA) 201 Bavarian Re (Germany) GE Insurance Solutions (USA) Barclays Life (UK) Supply Munich Re Group (Germany) Swiss Re Group (Switzerland) Nordisk Re (Norway) 1995 Frankona Re (Germany) 1995 Aachen Re (Germany) 1996 First & Excess Re (USA) 1998 Eagle Star Re (UK) 1998 Kemper Re (Belgium) Employers Re Group (member of GE Cap) GECapital (USA) GE Insurance Solutions (USA)

22 Supply Reduction in Alternate Sources Value of Catastrophe Bond Capacity LIBOR 14 Collateral Trust Total Return Swap Swap Counterparty USD 'bn Premium Proceeds Interest (LIBOR) Unused collateral paid back at Maturity Investment Income Funds from sale of notes Sponsor (usually the insured) Cover SPV Balance on Maturity LIBOR + Premium Investors Issued Outstanding Role of Investment Banking Withdrawal of Hedge Fund capacity Capital Reload occurred in mid-90s, 2001 and /09?

23 What Are The Reinsurers Thinking

24 Participants Domestic / Bermuda Ace Property& Casualty Insurance Company Allied World Reinsurance Company American Safety Arch Reinsurance Company Axis Reinsurance Company Catlin Insurance Co. Ltd. Endurance Reinsurance Corporation of America A.M Best Rating A+ Everest Reinsurance Company A+ IAT Reinsurance Company Ltd. A- Max Re Ltd. A- Montpelier Reinsurance Ltd. A- Munich Reinsurance America, Inc. A+ Odyssey America Reinsurance Corporation Partner Reinsurance Company of the U.S. Platinum Underwriters Reinsurance, Inc. Signet Star (Berkley Insurance Company) Swiss Reinsurance America Corporation Transatlantic Reinsurance Company L Reinsurance America Inc. A A A A A A A A+ A A+ A+ A A

25 Participants London / European A.M Best Rating Ace London Syndicate 2488 A (1) Amlin PLC Syndicate 2001 A+ ARK Underwriting Management Syndicate 4020 Aspen Re Atrium- Syndicate 570 Beazley Syndicates 2623 / 623 Catlin Insurance Co. Ltd. Syndicate 2003 Chaucer PLC A (1) Faraday Syndicate 435 A (1) Hannover Re Heritage Syndicate A (1) Liberty Syndicate 4472 A (1) Limit Underwriting Syndicate 566 A (1) Managing Agency Partners, Ltd. Syndicate 2791 A (1) (1) Lloyd s Paris of Re London Syndicated Rating A- A A A A A A

26 Market Conditions - How do you view frequency trends? 80.0% 70.0% 75.0% 67.7% 60.0% 50.0% Respondent Percentage 40.0% 30.0% 25.8% 18.8% 20.0% 10.0% 0.0% 0.0% 6.3% 6.5% 0.0% 0.0% 0.0% Signficantly Decresaing Decreasing Stable Increasing Significantly Increasing Hospital Physician and Surgeon Note: Hospital 33 total responses Physician & Surgeon 32 total responses

27 Market Conditions- How do you view severity trends? 80.0% 78.1% 76.70% 70.0% Respondent Percentage 60.0% 50.0% 40.0% 30.0% 20.0% 18.8% 23.30% 10.0% 0.0% 0.0% 0.00% 0.0% 0.00% 3.1% 0.00% Significantly Decreasing Decreasing Stable Increasing Signficatnly Increasing Hospital Physician and Surgeon Note: Hospital 33 total responses; Physician and Surgeon 31 total responses

28 Market Conditions Market Conditions How do you view treaty market capacity? Number of Responses Significantly Decreasing Decreasing Stable Increasing Signficantly Decreasing Hospital Physican and Surgeon Note: Hospital 33 total responses; Physician and Surgeon 33 total responses

29 How do you anticipate the current economic downturn will impact your firm s targeted return on equity in the coming year? 60.0% 50.0% 51.5% 40.0% 30.0% 30.3% 20.0% 18.2% 10.0% 0.0% 0.0% Significantly Decrease 0.0% Decrease Unchanged Increase Signficantly Increase Note: 34 total responses

30 Supply and Demand Demand Curve Supply Curve Reinsurance Cost Reinsurance Capacity

31 Where to From Here? Market Hardening - GFC - Other factors - Territory specific Market cycle impacted by regular one off events - LM, WTC, KRW, GFC, Swine Flu etc. etc. Flow of future capital key traditional, alternative, self-generated Reinsurance remains a resilient form of capital

32 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