Alternative Risk Markets

Transcription

1 Alternative Risk Markets Alison Drill Swiss Re APRIA 2008 Conference University of NSW, Sydney

2 Disclaimer The contents of this presentation do not purport to be comprehensive or to render expert financial, actuarial or other specialist advice. It is intended only to provide a summary of the subject matter provided. No reader should act on the basis of any matter contained within this Presentation without first obtaining specific expert advice. The presenter is an employee of Swiss Reinsurance Company Ltd (SRC) and is not an employee of Swiss Re Capital Markets Limited ("SRCML"). Material in this presentation from SRCML is used for references purposes and no representation on behalf SRCML is made. SRCML is exempt from the requirements to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) (the "Act") in respect of any financial services provided to you. SRCML is authorised and regulated by the Financial Services Authority under the laws of the United Kingdom; UK laws differ from Australian laws. In addition, for the purposes of sections 925A(3) and 925A(4) of the Act, both SRC and SRCML do not hold, and have never held, an Australian Financial Services license. Slide 2

3 Alternative Risk Markets Scope Accessing the Capital Market Cat Bonds Sidecars ILWs Derivatives (OTC & Exchange Traded) Club Deal/Private Deal Slide 3

4 ILS Market Size Non-traditional Investors Quota Share/ Side Car Vehicles 25 to 30 USD billion 16 USD billion outstanding Cat Bonds Private Deals Collateralized Insurance, ILWs and Futures New Perils? Life Cat Embedded Value Life Settlements Traditional Fixed Income Investment Grade Investors Credit and Motor Insurance Surplus Relief e.g. Reg XXX 35 to 40 USD billion Non - life Life Slide 4 As of May 30, 2008 Source: Swiss Re Capital Markets

5 Market Segmentation: Basic Terms Cat Bond: source of collateralized excess of loss (re)insurance capacity raised in a private placement offering Sidecar: source of proportional (re)insurance capacity raised in a private placement offering Industry Loss Warranty or ILW: catastrophe protection where the payoff depends in whole or in part on whether industry losses from an event exceed a predetermined amount Club Deal/Private Deal: Transaction with either a handful investors or even a single capital markets investor Investors take risk on in derivative, securities or reinsurance form Slide 5

6 ILS Market Capacity ential future growth of ILS outstanding ctions using 75% of actual historical CAGR Total non-life bonds outstanding, by year Risks Securitized from * in USD billions Total ILS outstanding, by year 18,000 15,000 40,000 35,000 30,000 12,000 7,663 25,000 24,167 9,000 12,684 20,000 15,631 34,995 6,000 3, ,657 3,541 7,721 2,206 3,102 4, ,412 1,812 1,988 2,138 2, , , Issued Outstanding 15,000 10,000 5, ,014 6,465 9,749 13,729 10,111 3,062 5,289 1,899 4,487 5, ,367 1,174 1,635 2,795 3,100 1,771 2, Issued Outstanding Slide 6 As of July 1, 2008 Not including Sidecars Source: Swiss Re Capital Markets

7 Diversity of Risks Risks Securitized from * in USD billions 14% 19% Life XXX (USD 8.9bn) 13% Embedded Value (USD 9.3bn) Other Life (USD 2.6bn) 7% 20% Extreme Mortality (USD 2.1bn) Multi-peril (USD 7.8bn) California EQ (USD 3.2bn) US Wind (USD 5.9bn) Others (USD 6.8bn) 17% 4% 6% Total 100% (USD 46.7 bn) *As of 5 March 2008 Not including sidecars Source: Swiss Re Capital Markets Slide 7 securitization, ILW, collateralised quota shares and sidecars add to the flexibility of capital in the industry

8 Who Participates in the ILS market? A diverse range of institutional investors participate in the ILS sector Dedicated Fund 3% Insurer 4% Reinsurer Money Manager 44% 22% 13% 14% Bank Hedge Fund Market size USD 15.4 bn Slide 8 As of May 30, 2008 Not including sidecars Source: Swiss Re Capital Markets

9 Focus on Cat Bonds: Typical Structure Investments 3 1. The Sponsor enters into a financial contract with a Special Purpose Vehicle (SPV) SPONSOR Premium Contingent claim payment Investment earnings SPV Principal & interest 1 2 Investment earnings 4 Scheduled interest Notes Cash proceeds Investors 2. The SPV hedges the financial contract by issuing Notes to investors in the capital markets 3. Proceeds from the securities offering are invested in high quality securities and held in a collateral trust Swap Counterparty 4. Investment returns are swapped to a LIBOR - based rate by the Swap Counterparty Slide 9

10 Focus on Cat Bonds: Trigger Types Transparency for Investor Indemnity Parametric Index Modeled Loss Industry MITT Index Pure Parametric Basis Risk to Issuer An indemnity transaction is based on the actual losses of the sponsor An industry index transaction is based on an industry-wide index of losses (e.g., Property Claim Services or PCS in the United States) A pure parametric trigger is based on the actual reported physical event (i.e., magnitude of earthquake or wind speed of hurricane) A parametric index is a more refined version of the pure parametric trigger using more complicated formulas and more detailed measuring locations In a modeled loss transaction, losses are determined by inputting actual physical parameters into an escrow model which then calculates the loss In a Modeled Industry Trigger Transaction ( MITT )*, industry index weights are set post-event using modeled loss techniques increased acceptance of indemnity triggers Slide 10 * Developed and patented by Swiss Re

11 SpreadoverLIBOR Swiss Re Secondary Trading & Cat Bond Returns January 1, 2007 May 31, , Secondary Trading Volume (USD in millions) Trading Volume (USD in millions) 3,500 3,000 2,500 2,000 1,500 1, % Total Return 3.12% Total Return 130 Index Values /01/ /11/ /20/ /28/ /05/ /15/ Lehman BB High Yield Corporate Swiss Re Secondary Trading Volume* SRBBTRR Index** Slide 11 * Source: Swiss Re Capital Markets. Both Life and Nat Cat perils represented. ** SRBB Cat Bond Index, calculated by Swiss Re Capital Markets, is an equally-weighted basket of nat cat BB-rated cat bonds traded by Swiss Re Capital Markets, calculated on a weekly basis; past performance is no guarantee of future results Underlying data for Lehman BB Index provided by Lehman Brothers Underlying data for SRBB Cat Bond Index is based on indicative prices only

12 ILS Developments Closer to traditional reinsurance Structural improvements Use by government and PPPs New perils Slide 12