PERSPECTIVES
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2016 2014 UK Government Largest Catastrophe Bond issued outlined proposal by Citizens Property Insurance for developing the Corp (Governmental Related region into an 2017 entity in Florida), alued at ILS hub Alternative Capital $1.5 billion Market reaches $27 billion
2012 2017 2011 Superstorm Hurricane Harvey, 1.2 Tohoku Sandy Irma, Maria Overall losses 1.2 earthquake Swiss Re* Insured losses 2011 in Japan 0.9 Catastrophe Munich Re, 0.8 Bonds rejoin Swiss Re* growth trends 2005 Hurricane 2.7 Katrina Zurich* Major 1998 2008 catastrophe Shrink of Catastrophe 2.1 Nephila – The first events Specialized Cat bonds Bonds and sidecars and Weather-related 2004 due to the Financial ILS company. Sidecar Crisis gained Major popularity 2000 developments Notable growth of Catastrophe in the market Bonds Canada 1992 1994 Hurricanes Northridge Andrew and Earthquake Iniki Catastrophe events
Winter Storm Burglind (January) 1992 1997 2002 2007 2012 2017 2.2 Storm Friedrike (January)
Winter Europe 1.6 Storm (March) Storm, frost (April) Mid 1990s 2000 2005 2008 Late 2000s 2014 2017 Structuring of Cat bonds begins U.S. Winter Fuel depot Lehman Greenline Hedge Fund Collateralized Mexico 1.4 as a sideline activity by insurers USA explosion Brothers launched their own reinsurance Earthquake Severe Storm and reinsurers. Koch Energy* (NYC Street Bankruptcy gained (May) Storm, hail companies to write (March) Collapse) momentum Aspen Re, Munich collateralized 1.0 to reach Re, Catlin, Allstate* reinsurance Catastrophe Bonds sponsor Oil Casualty* $26 billion
2018 Worldwide Notable Events as at H1 2018
Losses from Natural Catastrophe (in $ billion) 1.3 65 1.0
33 25.5 17
1.2 2017 2017 2018 2018 Overall losses 1.2 Overall Insured Overall Insured Insured losses losses losses losses losses 0.9 Source: Natural Catastrophes First Half of 2018 0.8 Source: Natural Catastrophes First Half of 2018 – Munich Re (July 2018) – Munich Re (July 2018) 2.7 02 03 2.1
Canada
Winter Storm Burglind (January)
2.2 Storm Friedrike (January)
Winter Europe 1.6 Storm (March) Storm, frost (April) 1.4 USA Severe Storm (May) Storm, hail 1.0 (March)
1.3
1.0 Losses mostly in Germany, Winter - heavy snowfalls in China the Netherlands, Belgium, (January and April the United Kingdom and Poland - $2 billion)
Cyclone Mekunu Main Events as at H1 2018 struck Yemen and Oman causing widespread devastation Weather losses (May) ($1.4 billion)
Winter Storm in March Europe ($2.2 billion) Earthquake North America struck Osaka, Japan olcanic eruptions (June) in Hawaii and Extensive rainfall in Guatemala Kenya led to devastating floods Asia Tonga, Samoa, (March) American Samoa, Fiji and New ealand hit by Cyclone Gita
Africa (February - $230 million)
32 events South America Severe weather events Minor earthquakes New South Wales, in Peru, Ecuador and Indonesia and Papua Australia hit by drought, New Guinea were low humidity, high Columbia Tropical storm in May: Australia hit by several temperatures - Cyclone Sagar in East Africa tremors ($300 million) - Cyclones Ava and Eliakim on (March - $100 million) Madagascar - Cyclone Berguitta on the islands of Mauritius and R union Source: Natural Catastrophes First Half of 2018 – Munich Re (July 2018)
Insurance Linked Securities (ILS) ILS supporting insurance resilience Global reinsurance market dynamics have changed, Global Reinsurance Capital Structure Managers Distribution shared between traditional and alternative capital. 600 511 514 516 490 493 Based on Aon Benfield estimates, global reinsurance 461 Reinsurance capacity is well positioned to handle 13% London 13% Switzerland capital stood at $600 billion as at September 2017, 400 high losses supported by the Alternative Capital compared with $82 billion of alternative capital. Market By the end of 2017, the non-life ILS capital in the 200 89 reinsurance market reached $88 billion. By H1 2018, 64 72 81 Natural catastrophe events were one of the reasons 44 50 the ILS market registered 20 new deals with an in $ Billion 0 for major losses which hit the global reinsurance 2012 2013 2014 2015 2016 2017 11% USA average deal size of roughly $ 365 million. Overall, Traditional Capital Alternative Capital market in 2017, causing economic losses of around Source: Aon Benfield Reinsurance Market Outlook Report, April 2018 $320 billion that year. Both the private market notional outstanding in the ILS market was USD 29.11bn at the end of 1H 2018, up 8.39% from the and government programs covered the insured 2018 H1 ILS issuance by Peril 7% year-end total in 2017 of USD 26.85bn. ILS and New York losses of up to $128 billion, as estimated. Hence, Financial guarantee risks alternative capital providers have helped reinsurers U.S named storm the insurance coverage ratio for NATCAT showed Louisiana multi-peril Mortgage insurance risks 4%Luxembourg because more varied risks are covered, and are 40% only, highlighting protection gaps. The year Florida multi-peril better spread into the capital markets, as well as 4% France of 2017 highlights that traditional reinsurers were Florida named storms 2% Finland among traditional reinsurers. Institutional investor International 37% Bermuda well-capitalized in such events, whereby most of multi-peril 2% Singapore capital has helped spread eventual losses more the risk was retained by primary insurers and the Unknown property 2% Sweden 2% Israel catastrophe exposure had been waived to the capital widely, thus alleviating volatility from the overall catastrophe risks reinsurance market capital. Operational 2% Hong Kong markets. The supply of reinsurance benefits through risks U.S property traditional capital and alternative capital covered the Operational risks Source: Artemis losses and boosted the reinsurers’ capacity. Texas multi-peril U.S multi-peril 04 Source: ARTIMES Q2 2018 Catastrophe Bond & ILS Market Report 05 Alternative Capital Arrangements Innovators reshaping the market through innovative solutions
Industry loss Warranty (ILW) | Size as of 2014: $4 Billion Protection against catastrophe through a derivative contract, which will indemnify the insured only if the loss exceeds the amount set in the contract
o al I ar e rad n volu e or e 12 on s end n une 0 201 as es a ed a 2 ll on a ross o olla eral ed and rad onal or s
PGGM AP3 Nephila Capital to be 100% acquired Reinsurance Sidecar | Size as of 2014: $6 Billion by Markel An Investor in a traditional reinsurance company, taking a portion of the risk alongside the reinsurer Assets Assets Assets SEK304 billion Examples: €189 billion (€45 billion) $12.2 billion lver on e se ur n 12 ll on or e er es 201 1 ssuan e e s en er uda ed s d ar e anded 0 ll on annover s annover e ess on e anded around 2 Location Location Location n ener vers erun s esells a en esells a s un e Zeist, Stockholm, United States, Alternative den e II d u s n 70 ll on The Netherlands Sweden Bermuda and London Capital Invested in Invested in Invested in Arrangements ILS since: 2006 ILS since: 2008 ILS since: 1998
Collateralized Re | Size as of 2017: $54 Billion a n l en eal are and so al as u l u a s all n ernal ea e al s n n a as ro e and ea er A treaty whereby a nontraditional reinsurer places in escrow the or se or ens on und o ana e s d re I nves en s nsuran e l n ed se ur es I and entire amount of coverage, invested safely in e.g. treasury securities. re nsuran e l n ed asse s under a es s e o $ nves en rou e ernal ana ers 100 a u red ar el or ora on a les e la v a er uda en ered n o a 10 ear s a a al The firm will be a unit of major global o er s loo nd ar a l n ansas nder e on ra e nd ar nsuran e and e nsuran e o an a l ll re e ve ed annual a en s n l eu o e loa n ener r e over a 10 ear er Pension funds are new areas of Alternative capital arrangements which play Merger and acquisition between a great role in enhancing the protection gap position. To date, the protection insurance-linked securities experts gap remains very large, and the global pension gap is set to increase from about and insurance/reinsurance companies $70 trillion today to roughly $400 trillion by 2025. opening doors for exchanging experienced and talented management Insurance - Linked Securities (ILS) | Size as of 2017: $25 Billion team with Insurtech, fronting and Protection through bonds, whereby the investor will provide collateral that insurance-linked securities capabilities will be tapped if the reinsurance is triggered. The most commonly known types are called Cat Bonds (part of Property line.) to enhance and strengthen the breadth and depth of offerings to policyholders, producers and investors.
Source: Aon Benfield Reinsurance Market Outlook Report, Jan 2018
06 07 Market Hurdles The limited availability of data leads to:
Difficulties in understanding the risks
Trust Re Makes it hard to model and price ILS
Experts’ An imbalance between demand and supply of ILS
Viewpoints It exacerbates the impact of information asymmetries between managers and investors
Increases the potential for mispricing risk.
Expert Viewpoint New Areas of Development Following the HIM losses of 2017, many observers expected the ILS market to shrink or retrench somewhat. New Areas of Development This has not happened; in fact, it has continued to expand. It therefore appears that the ILS market will continue As ILS expands in deal size and volume, the number and types of market to grow at a higher rate than conventional reinsurance for the foreseeable future. However, the various ILS As ILS expands in deal size and volume, the number and types of market structures require a significant amount of risk assessment and modeling which may not be available for many participants also changed. With more market maturity, new entrants have lines of business or territories for some time (if ever). Therefore, for many markets and /or lines of business, emerged. On the buy-side, pension funds and other institutional investors ILS will not be a viable option. In such cases, more traditional reinsurance structures will continue to play emerged. On the buy-side, pension funds and other institutional investors the key role. have become more active participants. On the sell-side, new types of sponsors such as sovereign sponsors, are issuing ILS to support the risk- ILS began with Catastrophe Bonds back in the 1990s. We have already seen the securitization concept sponsors such as sovereign sponsors, are issuing ILS to support the risk- move into the Life sector, which makes sense given the high level of actuarial information and statistical capital value chain by supporting the reinsurance capacity and improving modeling available. This will no doubt continue to expand. It is also very likely that ILS will develop in new / ecosystem’s efficiencies. Hedge funds were key investors in ILS previously, additional geographic areas, as the historical exposure and claims information becomes more extensive and ecosystem’s efficiencies. Hedge funds were key investors in ILS previously, comprehensive. but now the pension funds have increased their participation in the market. Some prominent examples are large Nordic and Dutch pensions funds, It does not seem that there will be any real substitute for ILS for the foreseeable future. However, some Some prominent examples are large Nordic and Dutch pensions funds, companies’ reinsurance programs are already split between traditional placements and ILS. It is probable e.g. the Swedish buffer fund AP3 and the Dutch giant PGGM, with smaller that we will see some reinsurance programs become more of a “blend” of the two. ones entering the market later, particularly in Switzerland. Arthur Underwood Operations Projects Manager
Prepared by Planning and Performance Management Department
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