10/03/2016
Alternative Sources of Capital
Daniela Collis and Sie Liang Lau SCOR Global P&C Asia Pacific
Asia Conference 3rd – 4th March 2016, Kuala Lumpur
Friday, 4 March 2016
Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 2
1 10/03/2016
Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 3
Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88 Introduction: Why reinsurance?
Gold R217 G171 B22 Reinsurance (or retrocession) is an effective way of optimising capital relief and forms part of Mid blue R64 G150 B184 (re)insurer’s strategy
Light grey R220 G221 B217 The key reasons to buy reinsurance (or retrocession) are: Secondary colour palette Dark grey R63 G69 B72 • to satisfy Regulator Pea green (such as C-ROSS), Capital efficiency (as an R121 G163 B42 and 1 alternative to capital) Forest green • to expand efficiently Cost R0 G132 B82
Bottle green R17 G179 B162 • smooth peaks and Profitability and Cyan volatility, and Profitability R0 G156 B200 2 portfolio management • control portfolio Capital and Light blue Portfolio R124 G179 B225 Efficiencies Cost efficiencies/ Manageme Violet 3 Arbitrage nt R128 G118 B207
Purple R143 G70 B147 Market intelligence/ Market Fuscia 4 R233 G69 B140 reinsurer’s expertise Intelligence
Red R200 G30 B69
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Introduction: R17 G52 B88
Gold R217 G171 B22 What is a typical insurer or reinsurer’s Mid blue R64 G150 B184 approach to reinsurance/retrocession? Light grey R220 G221 B217 Typically one would buy protection… Secondary colour palette Dark grey R63 G69 B72 in many different types such as: …across many different classes: Pea green Traditional cat and risk XL Property R121 G163 B42 Aggregate XL Facultative Forest green R0 G132 B82 Quota share Engineering Bottle green R17 G179 B162 Catastrophe bonds Marine
Cyan Parametric deals such as CWIL (county Motor R0 G156 B200 weighted indexed loss) Decennial Light blue Contingent capital R124 G179 B225 Aviation and Space
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia The aim is to diversify its dependence in any one market and its panel of partners is diversified R233 G69 B140 for this reason Red R200 G30 B69
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Colour palette for PowerPoint presentations Primary colour palette Introduction: What has been happening Dark blue R17 G52 B88 these last few years? Gold R217 G171 B22 Interest rates close to historic lows, pressure Bilateral education between reinsurance and Mid blue on investors capital market, increasing convergence R64 G150 B184 Long-term (10-year) govt bond yield in advanced markets (1) New technology improves management of capital Light grey and reduces asymmetry of information R220 G221 B217
Secondary colour palette Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green Big Data & Satellite loss Cat R0 G132 B82 High assessment modelling granularity Bottle green R17 G179 B162
Cyan R0 G156 B200 Alternative capital has been growing rapidly ILS outstanding capacity (in USD billions) (2) Light blue Alternative capital: approx. USD 68bn of R124 G179 B225 capacity, while 10 years ago it was < Violet USD 10bn R128 G118 B207 Purple But capacity ≠ premiums. Cat bonds R143 G70 B147 often correspond to high layers with low Fuscia rates on line (typically less than 10%) R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Sources: Bloomberg; Global Financial Analysis; 6 R238 G116 29 2) Sources: Aon Securities Inc
3 10/03/2016
Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 7
Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88 The reinsurance universe: Status Quo
Gold R217 G171 B22 Global non-life reinsurance premium in 2013 Global Reinsurance Premium: USD 190 bn Mid blue 2013 is about USD 190 bn, with about 10% R64 G150 B184 coming from catastrophe reinsurance (of Other, 4% Casualty XL, Light grey which about 50% emanating from the US) Property R220 G221 B217 9% Proportional, But the 10% does generate a large 44% Secondary colour palette part of the profit and over time it does Dark grey R63 G69 B72 drive earnings Casualty, 23% Pea green R121 G163 B42 Property XL, Forest green 20% R0 G132 B82
Bottle green Global Catastrophe reinsurance capacity is 2013 Global Catastrophe Capacity: USD 312 bn R17 G179 B162 about USD 312 bn as at end of 2013 Cyan R0 G156 B200 Alternative capacity is estimated to be around USD 45 bn at the same time, Light blue R124 G179 B225 which is about 15% of total Cat Capacity. Violet R128 G118 B207 Growth in the alternative capital Purple markets space likely to be USD 75 bn R143 G70 B147 by 2016. Expectations are that this Fuscia capacity will only plateau at around R233 G69 B140 USD 100 bn. Red R200 G30 B69
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Colour palette for PowerPoint presentations Primary colour palette The inflow of alternative capital: Dark blue R17 G52 B88 Rapid growth of catastrophe bonds, in particular for US perils Gold R217 G171 B22 Cat Bonds have been growing quickly, and majority covering US perils Mid blue R64 G150 B184 Outstanding capacity (in $ billions) (1)
Light grey US perils form the majority of the R220 G221 B217 covering
Secondary colour palette The demand of JP wind and Dark grey earthquake bonds has increased R63 G69 B72 significantly after the 2011 March Pea green R121 G163 B42 Tohoku EQ Forest green R0 G132 B82
Bottle green Cat bonds have a compelling track record for Growth has been fuelled by low interest rate R17 G179 B162 investors environment Cyan Cat bond returns vs. other asset classes (2) Cat bond spreads vs. risk-free rates (3) R0 G156 B200 1400 US Light blue Wind 1200 New R124 G179 B225 Issue 1000 Spread Violet s 800 R128 G118 B207 600 US 2Y Purple Govt R143 G70 B147 400 Note
Fuscia 200 R233 G69 B140 0 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Red R200 G30 B69
Orange Friday, 4 March 2016 1) Source: Aon Benfield 9 R238 G116 29 2) GC Analytic, Bloomberg 3) Source: Swiss Re capital Markets & Bloomberg. Spreads for US Wind new-issue cat bonds with 2% expected loss
Colour palette for PowerPoint presentations Primary colour palette The reinsurance universe and the inflow of Dark blue R17 G52 B88
Gold alternative capital R217 G171 B22 Different forms of Alternative Capital Mid blue R64 G150 B184 The reinsurance universe encompasses long term partners (the traditional reinsurers), as well as the Light grey shorter term partners in many forms such as collateralized reinsurers, Cat bond investors, permanent R220 G221 B217 sidecars, special vehicles for asset managers and periodic partners (the opportunistic sidecars which Secondary colour palette have recently re-emerged) Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green R0 G132 B82
Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 10 R238 G116 29
5 10/03/2016
Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 11
Colour palette for PowerPoint presentations Primary colour palette Dark blue What is catastrophe bond? R17 G52 B88
Gold R217 G171 B22 Catastrophe Bonds date back to the early 1990s following Hurricane Andrew and the Northridge Mid blue earthquake in Los Angeles and were developed to alleviate the extreme tail risk posed by a R64 G150 B184 major event. Light grey R220 G221 B217
Secondary colour palette Dark grey How it works Why it has become more popular R63 G69 B72 It is an insurance related debt-securities issued by Independent correlation to financial markets so Pea green an insurer or reinsurer (Sponsor) and are set up they provide excellent diversification R121 G163 B42 using special purpose vehicles (SPVs), which are Forest green typically rated by the rating agencies They allow access to reinsurance market R0 G132 B82 Multi-year coverage, mainly peaks but can cover Generally pitched ‘out-of-the-money’ say 1% Bottle green R17 G179 B162 non-peak spots. 99.9% catastrophe, tiny single risk expected loss (1:100 year return period), thus coverage (such as mortgage insurance risks, lottery offering cover with high capital intensive nature Cyan winning risk) R0 G156 B200 The coupon rate is attractive in a low-interest Light blue Loss probabilities are normally modelled by RMS’ environment. R124 G179 B225 RiskLink, EQECAT or AIR’s CATRADER Violet Investor proceeds invested in high-quality, liquid R128 G118 B207 The premise of a catastrophe bond is that if a pre- securities (such as Money Market Funds), held in determined type of event occurs, the bond defaults trust and which is available to the sponsor in the Purple R143 G70 B147 and investor cash is passed to the sponsor event of loss
Fuscia The fund is held within a trust, which generates R233 G69 B140 interests (coupon) to investors Red R200 G30 B69
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Catastrophe bond mechanics R17 G52 B88
Gold R217 G171 B22 An SPV allows investors to access the reinsurance market without the headache of barriers to Mid blue entry which are common-place R64 G150 B184 Light grey R220 G221 B217
Secondary colour palette Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green R0 G132 B82
Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
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Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88 Catastrophe bonds split by type of placement
Gold R217 G171 B22
Mid blue Indemnity is becoming more available, proving investors are now comfortable with this type of R64 G150 B184 product Light grey Increased pressure on reinsurers as indemnity used to be a monopolised product R220 G221 B217
Secondary colour palette Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green R0 G132 B82
Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Catastrophe bond recent losses R17 G52 B88
Gold R217 G171 B22 Mid blue R64 G150 B184 Cat Bond market has been tested by losses in recent years:
Light grey most of these losses are triggered by specific events linked, R220 G221 B217 some are due to the failure of the financial institution that served as the swap counterparty: Secondary colour palette Lehman failure in 2008 led losses of collateral funds protection about USD 116 mn on Dark grey R63 G69 B72 various bonds Pea green Losses are so far about 2% of total sum at risk (no more than 20% loss ratio) R121 G163 B42
Forest green R0 G132 B82 (1) Bottle green Catastrophe Bond Losses in recent years R17 G179 B162 Transaction Date of Issue Sponsor Size % of loss Reason Cyan (USD mn) R0 G156 B200 Kelvin Ltd Nov 1999 Koch Energy Trading 50 Complex Temperature Light blue R124 G179 B225 Avalon Re Jul 2005 Oil Casualty Insurance 405 9% of class C Explosions (casualty losses)
Violet Kamp Re 2005 Aug 2005 Zurich American 190 75% Hurricane R128 G118 B207 Four bonds 2008 Munich Re, Aspen, About About USD 116 mn Ineffective collateral protection on four Purple Catlin, Allstate $585M for various bonds with total limit of R143 G70 B147 transactions $585 million when Lehman collapses Muteki Ltd May 2008 Zenkyoren 300 100% JP Tokoru EQ Fuscia R233 G69 B140 Mariah Re (series 1) Nov 2010 American Family 100 100% Joplin, Mo. Tornado (2)
Red Mariah Re (series 2) Dec 2010 American Family 100 100% Joplin, Mo. Tornado (2) R200 G30 B69
Orange Friday, 4 March 2016 1) National Association of Insurance Commissioners, AM Best research 15 R238 G116 29 2) The Joplin Mo Tornado losses are in litigation.
Colour palette for PowerPoint presentations Primary colour palette Dark blue Why investors like Catastrophe bonds? R17 G52 B88
Gold R217 G171 B22 Cat bonds have a compelling track record for investors Mid blue R64 G150 B184 Historical Performance of ILS (1) Light grey Investors like Cat bonds: R220 G221 B217 Significant and long-lasting returns, Secondary colour palette even tested in last 10 years across a Dark grey series of major events R63 G69 B72 Independence with financial market Pea green R121 G163 B42 Diversification improving efficient Forest green frontier of an investment portfolio R0 G132 B82
Bottle green R17 G179 B162 Cat bonds provide independent correlation The diversification improves the efficient frontier
Cyan with financial market by adding Cat Bond to a portfolio R0 G156 B200 Cat Bond vs. Broad Bond vs. S&P 500 return index (2) Efficient frontier – impact of adding a Cat Bond Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Aon Benfield Securities 16 R238 G116 29 1) Aon Benfield Securities 2) Bloomberg Broad Bond Index – Barclays US Aggregate Bond Index 2) Bloomberg Broad Bond Index – Barclays US Aggregate Bond Index
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Beyond catastrophe bond? R17 G52 B88
Gold R217 G171 B22 Criteria for a successful Suitability of various area of insurance for ILS(1) Mid blue R64 G150 B184 placement in capital market:
Light grey Un-Correlation to financial R220 G221 B217 market risks. Secondary colour palette Big size. Dark grey R63 G69 B72 The risk must be Pea green (relatively) easily and R121 G163 B42 accurately modelled, i.e. Forest green information asymmetry R0 G132 B82 must be minimal. Bottle green R17 G179 B162 Business needs to be capital intensive Cyan R0 G156 B200 Examples Light blue R124 G179 B225 AXA’s transfer of motor Reserving risks Liability risk less likely to be securitised Violet risks to capital market R128 G118 B207 . Swiss Re (during crisis), . Correlation with macro risks such as
Purple . Put in place in 2005, the Catlin and RSA choosing inflation, GDP R143 G70 B147 debt is collateralized Capital market to protect . Longer duration Fuscia aggregate stop-loss against adverse loss R233 G69 B140 reinsurance contract. development . Limited third party model providers Red R200 G30 B69
Orange Friday, 4 March 2016 1) Redburn 17 R238 G116 29
Colour palette for PowerPoint presentations Primary colour palette Private sector Cat Bond innovation: Dark blue R17 G52 B88
Gold Property & Casualty R217 G171 B22 MetroCat Re (sponsor: First Mutual Transportation Assurance Co - FMTAC) Mid blue R64 G150 B184 . FMTAC is the captive insurer of NY Metropolitan Transport Authority Light grey . After NY subway flooding experience from Tropical Storm (“Hurricane”) Sandy 2012 R220 G221 B217 . Sponsored by First Mutual Transportation Assurance Co. to cover surge damage to NY subway Secondary colour palette & related infrastructure Dark grey R63 G69 B72 . Covers Storm Surge damage (only) from named US storms (tropical cyclones)
Pea green . First of its kind – and a way of writing only storm surge risk (not hurricane wind, flood) R121 G163 B42 . Obviously correlated with US east coast tropical cyclone activity hence not as useful a Forest green diversifier from the peak US peril (hurricane) as Life & Health Cat Bonds, for example R0 G132 B82 . 1st issue of USD 200 MN coverage Bottle green R17 G179 B162 . Triggered only once FMTAC’s existing underlying USD 600 MN Cat XL coverage is exhausted Cyan R0 G156 B200 Light blue VenTerra Re (sponsor: QBE’s Equator Re) R124 G179 B225 . Covers tsunami, flooding caused by dam or levee break; and volcanic activity Violet R128 G118 B207 . First time such perils have been explicitly included in the scope of a Cat Bond
Purple . Main perils covered by this bond are US EQ, Australian EQ & Cyclone – hence these are ones R143 G70 B147 to consider when assessing the overall diversification benefit, rather than the “extra” perils Fuscia above R233 G69 B140 . Sponsored by QBE’s captive reinsurer Equator Re – USD 250 MN of coverage Red R200 G30 B69
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Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 19
Colour palette for PowerPoint presentations Primary colour palette Dark blue What is sidecar? R17 G52 B88 Gold R217 G171 B22
Mid blue A sidecar is a special purpose reinsurance vehicle (SPRV) usually formed by a reinsurer to R64 G150 B184 provide additional capacity for specific perils within a defined geographical scope Light grey The sponsor (buyer) acts as manager for the sidecar in return for management/performance R220 G221 B217 fees Secondary colour palette Capacity is provided by investors in the sidecar, generally from the capital markets Dark grey R63 G69 B72 SPRVs have a limited life of around 24 months but can be renewed Pea green R121 G163 B42
Forest green R0 G132 B82 cash Bottle green premiums Defined Risks / Peak Special Purpose R17 G179 B162 Investors in Sidecar Peril Reinsurer (Sidecar) Cyan Quota share dept R0 G156 B200 Light blue R124 G179 B225 Primary motivation to set up a sidecar is to increase Reinsurer Violet market share in target markets without the sponsor R128 G118 B207 having to increase its own balance sheet Purple R143 G70 B147 Opportunistic sidecars typically attract private equity
Fuscia and hedge fund investors, whilst strategic sidecars R233 G69 B140 attract more longer-term capital in the form of ILS Red fund managers R200 G30 B69
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Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88 Evolution of the side cars in the capital markets
Gold R217 G171 B22
Mid blue R64 G150 B184 Sidecar evolution is more cyclical/opportunistic than catastrophe bonds (post KRW1 and Light grey Tohoku) R220 G221 B217
Secondary colour palette Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green R0 G132 B82
Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) KRW: 2005 Hurricanes Katrina Rita and Wilma 21 R238 G116 29
Colour palette for PowerPoint presentations Primary colour palette Dark blue Sidecar evolution 1999 to 2013 R17 G52 B88
Gold R217 G171 B22 Sixty-six sidecars have been launched since Mid blue R64 G150 B184 1999, majority of them targeting cat-exposed portfolios, while some targeting specialized Light grey R220 G221 B217 classes such as marine, energy and aviation
Secondary colour palette Dark grey They do not write longer tail risk such as R63 G69 B72 casualty or life Pea green R121 G163 B42 Forest green Capacity of ‘live’ sidecars totals around R0 G132 B82 $2½B, not large enough to singularly Bottle green R17 G179 B162 alter the reinsurance pricing landscape
Cyan Form of Sidecar R0 G156 B200 (1) Light blue R124 G179 B225 9% Portfolio Securitisation Violet R128 G118 B207 Third Party Captial 35% Management Purple 56% R143 G70 B147 Hybrid
Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Portfolio securitisation: Quota-Share arrangement of the reinsurer’s portfolio for a given line of business and/or region/peril, with significant 22 R238 G116 29 retention taken by the sponsor takes significant retention; Third Party Capital management: Purpose-built vehicle with collateralized capacity. Sponsor provides underwriting expertise and franchise value; Hybrid: mix of two above
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Sidecars: investor appeal? R17 G52 B88
Gold R217 G171 B22
Mid blue Advantages R64 G150 B184 • Immediate access to “payback” pricing Light grey R220 G221 B217 • Avoids cost/complications of creating start-up infrastructure Secondary colour palette Dark grey • Exploit experienced management/underwriting team and franchise R63 G69 B72
Pea green • Clean exit (in theory) R121 G163 B42 Forest green R0 G132 B82 Disadvantages Bottle green R17 G179 B162 • Giving pen to third-party management (with costs attached) Cyan R0 G156 B200 • Possibility of adverse selection/moral hazard Light blue R124 G179 B225 • Exit route could be complicated by losses
Violet R128 G118 B207 • Inherent volatility (sufficiently capitalised?) Purple • No multiple gain from possible IPO (model of Class of 1993/2001 R143 G70 B147
Fuscia and probably 2005 start-ups (Bermuda classes – private equity) R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 23 R238 G116 29
Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 24
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Emerging Asia Insured Cat losses still remaining low R17 G52 B88
Gold R217 G171 B22 So far, most insured cat losses coming from developed markets Mid blue R64 G150 B184 Insured Cat losses & Annual Averages by Region (1) Cat bond capacity correlated to Insured Cat losses. Light grey US, EU and JP contribute most insured Cat Loss in R220 G221 B217 latest 10 years: Secondary colour palette Developed economy Dark grey R63 G69 B72 Higher insurance penetration Pea green Advanced financial market R121 G163 B42
Forest green Emerging Asia is however heavily exposed to R0 G132 B82 Nat Cat risks.
Bottle green R17 G179 B162 Insurance ( penetration in emerging markets is The elasticity of insurance growth is
Cyan still low significantly above 1 in emerging markets R0 G156 B200 World output, 20122) 2012 World Insurance penetration (premiums as of % of GDP)4) Light blue insurance premiums3) R124 G179 B225 16% Violet R128 G118 B207 50% 50% Purple 84% R143 G70 B147
Fuscia Emerging and developing R233 G69 B140 Advanced economies economies Red R200 G30 B69
1) Aon Benfield Analytics Orange Friday, 4 March 2016 2) IMF world economic outlook April 2013 25 R238 G116 29 3) Sigma report, May 2011 4) Sigma from 5/2012 – Insuring ever-evolving commercial risk (note: Estimates for direct non-life premiums written in 2010 (excluding health).
Colour palette for PowerPoint presentations Primary colour palette Dark blue Japan is the largest market for R17 G52 B88
Gold Catastrophe Bond in Asia Pacific R217 G171 B22 (1) Mid blue List of Catastrophe Bond covering JP perils since 2005 R64 G150 B184 Issuance Year Security Name Sponsor Size (USD M) Regional Peril Spread Expected Loss Trigger Light grey 2006 Fhu-jin Ltd Tokio Marine & Fire 200 JP Typhoon 5.20% ??? parametric R220 G221 B217 2007 Midori Ltd East Japan Railway Co 260 JP Earthquake 4.00% ??? parametric Secondary colour palette 2008 Muteki Ltd Zenkyoren 300 JP Earthquake 4.40% 0.80% parametric 2011 Kizuna Re Ltd Tokio Marine 160 JP Typhoon 5.50% ??? indemnity Dark grey R63 G69 B72 2012 Kibou Ltd Series 2012 Zenkyoren 300 JP Earthquake 5.10% 0.80% parametric 2012 Akibare II Ltd Series 2012 Mitsui Sumitomo 130 JP Typhoon 3.75% 1.10% modelled loss Pea green R121 G163 B42 2013 Nakama Re Ltd Zenkyoren 300 JP Earthquake 2.75% 0.90% indemnity 2014 Kizuna Re II Ltd 2014 - 1A Tokio Marine 200 JP Earthquake 2.25% 0.21% indemnity Forest green R0 G132 B82 2014 Kizuna Re II Ltd 2014 - 1B Tokio Marine 45 JP Earthquake 2.50% 0.57% indemnity 2014 Nakama Re Ltd 2014 1 - 1 Zenkyoren 150 JP Earthquake 2.25% 0.75% indemnity Bottle green 2014 Nakama Re Ltd 2014 1 - 2 Zenkyoren 150 JP Earthquake 2.50% 0.75% indemnity R17 G179 B162 2014 Aozora Re Ltd Sompo Japan Nipponkoa 100 JP Typhoon 2.00% 0.52% indemnity Cyan R0 G156 B200 So far there is none for Malaysia, as is not considered a key cat peril prone region Light blue R124 G179 B225 and the reinsurance rates remain too attractively low for many loss relatively low years. Violet R128 G118 B207 In July 2015, China Re has sponsored Panda Re covering China Earthquake Purple excluding Hong Kong and Macao, on indemnity trigger basis, providing further R143 G70 B147 diversification option for investor even though spread is relatively low. Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Artemis and Swiss Re capital Markets 26 R238 G116 29
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Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88 Challenges in developing Cat Bonds for Asia
Gold R217 G171 B22 Poor Cat model quality & exposure data (ex. Japan) make it often difficult to reliably Mid blue R64 G150 B184 estimate burn statistics (probability of attachment, exhaustion and expected loss)
Light grey required for credibility / investor buy-in R220 G221 B217
Secondary colour palette Cat Bond trigger types likely to be limited – even given current sponsor leverage Dark grey R63 G69 B72 with investors Pea green Indemnity triggers only for developed Asian markets – Taiwan, Korea, Japan – but R121 G163 B42 even then investors do not like open-ended tie-up of capital in the event of a Forest green R0 G132 B82 loss Bottle green Industry loss index – cannot use as no reputable independent industry R17 G179 B162 organization (equivalent to PCS or PERILS) in any Asian territory Cyan R0 G156 B200 This leaves only Pure Parametric, Parametric Index or Modelled Loss triggers Light blue These are not heavily in sponsors’ interest due to basis risk – although this could R124 G179 B225 be offset using a transformer to provide basis risk cover Violet R128 G118 B207 Purple Lack of Cat XL reinstatements R143 G70 B147 Asian reinsureds are accustomed to being able to access Cat XL reinstatements – Fuscia R233 G69 B140 not available in Cat Bonds – unless a transformer is involved Red R200 G30 B69
Orange Friday, 4 March 2016 27 R238 G116 29
Colour palette for PowerPoint presentations Primary colour palette Future diversifying coverages anticipated Dark blue R17 G52 B88 on the market Gold R217 G171 B22 New Cat coverages for Japan Mid blue R64 G150 B184 . After USD 500-600 mil market insured winter storm loss in early 2014
Light grey . A wider set of perils may include: winter storm / TY flooding / non-TY flooding R220 G221 B217 . All likely to have parametric triggers Secondary colour palette . Contingent on adequate CAT modelling for these perils becoming available Dark grey . May be issued by major Japanese insurers and/ or their reinsurers R63 G69 B72 st Pea green . Need to eliminate possibility of prediction of 1 season payout by sponsor – since Cat models not yet R121 G163 B42 able to reflect meteorological activity forecasts Forest green R0 G132 B82 Gap-financing Capacity for Rapidly developing Asian Insurance Peak Zones (ex. Japan) Bottle green R17 G179 B162 . Traditional RI capacity has expanded by 28% since 2007 – question is whether in future this pace will be rapid enough to keep pace with rapidly developing peak zones of China (and India) Cyan R0 G156 B200 . Capacity shortfalls may result – could be filled with alternative risk transfer solutions, including Cat
Light blue Bonds R124 G179 B225 . Likely to be sponsored by Transformers rather than directly by cedants themselves Violet R128 G118 B207 . Obvious initial peak zones in China potentially include Purple R143 G70 B147 . Beijing-Hebei-Tianjin Fuscia . Shanghai + defined adjacent areas of Zhejiang/ Jiangsu R233 G69 B140 . Pearl River delta (Guangdong) Red R200 G30 B69 . These 3 areas currently generate ~60% of China’s GDP
Orange Friday, 4 March 2016 28 R238 G116 29
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Colour palette for PowerPoint presentations Primary colour palette Example: Dark blue R17 G52 B88 Pearl river delta (Guangdong, China) Gold R217 G171 B22 4th largest economy in Asia, after Japan, Korea and Mid blue India, ahead of Taiwan (excluding CHINA) R64 G150 B184 Light grey World’s most densely populated delta, >7,500 R220 G221 B217 people/km2 (Syvitski & Saito, 2007)
Secondary colour palette Covers <1% of China’s land area but contributes up to Dark grey 20% of its GDP (up from 9% in 2000) R63 G69 B72
Pea green R121 G163 B42 Called the “world’s factory” by some economic commentators (Yeung, 2010) Forest green R0 G132 B82 (Ex-SAR) Population 48 MN in 2009, projected to reach 65 Bottle green MN by 2020 Economic concentration in the Pearl River delta – based on R17 G179 B162 . Compare with night-time luminosity. Source: http://ngdc.noaa.gov/eog/ Cyan . Taiwan 23 MN (2012) R0 G156 B200 Historic record from AD 700-1883 shows 161 typhoons . South Korea 50 MN (2012) with damage – 4 were the most disastrous (Huang & Light blue Yim, 2007) R124 G179 B225 Total population (including 2 SARs) may reach 120 MN byChristchurch . AD – 957 - 5 counties flooded 2050 (UN-HABITAT, 2008) – although some are sceptical Violet European 2 of this projection . AD 1245 – 9 counties flooded, >17000 km R128 G118 B207 settlement began inundated by seawater with death toll c. 10,000 Purple 1853 . AD 1862 – 11 counties flooded, 25000 km2 area, R143 G70 B147 Will there always be sufficient capacity in the traditional global reinsurance market for all of China’s 80000 dead. Fuscia three main economic peak zones as they develop . AD 1874 – 10 counties flooded, 20000 km2, R233 G69 B140 towards 2050?1 10000 dead, sea-level rise of 5m Red R200 G30 B69
Orange Friday, 4 March 2016 1) The traditional reinsurance market will grow to accommodate increased insured risk – question is 29 R238 G116 29 whether this growth will match that allocated to new global peak zones? (incl. China and India).
Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 30
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Alternative capital puts pressure on R17 G52 B88
Gold reinsurance pricing R217 G171 B22
Mid blue With the increasing search for yield, the inflows into ILS have been accepting lower yields R64 G150 B184
Light grey Cat Bond Pricing since 2001 R220 G221 B217 Normalized spreads for each bond
Secondary colour palette issued. It is clear the spread for business written in 2013 is lower than Dark grey R63 G69 B72 previous years: falling from c700-
Pea green 1350bp to level below 600bp as at R121 G163 B42 June 2014. Forest green R0 G132 B82
Bottle green R17 G179 B162 CAT bonds are competing directly with traditional reinsurance, on product and now on price Cyan R0 G156 B200 Global Reinsurance – Cat ROL index Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 31 R238 G116 29
Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88 The soft market puts pressure on reserving
Gold R217 G171 B22 Soft pricing puts pressure on reserves to meet targets Mid blue Combined Ratio (1) R64 G150 B184
Light grey R220 G221 B217
Secondary colour palette Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green R0 G132 B82
Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue R124 G179 B225 Despite continuing soft pricing combined ratios are still below 100%, with continued favourable loss development
Violet Willis Re estimated that the aggregate RoE at half-year 2015 was improved by approximately 2.8 percentage points through R128 G118 B207 contribution from releases from prior year reserves (2.5 percentage points at half-year 2014) The ability to compensate lower pricing through continued reserve release diminishes through an extended soft cycle as reinsurers Purple must begin to recognize the price reduction through higher loss ratios on the most recent years, with increased pressure on reserve R143 G70 B147 strengthening for the longer tail lines Fuscia Early adequate reserving is key to ensure sustainable results and to avoid negative reserve run-off in the future R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Willis Re – Reinsurance market Report, September 2015 32 R238 G116 29
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Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88 The reserving cycle
Gold R217 G171 B22 Reserve Development by statement year (in billions) (1) Mid blue R64 G150 B184
Light grey R220 G221 B217
Secondary colour palette Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green R0 G132 B82
Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue The key risk on reserving of a soft market are the potential for under-reserving on current and future years, as companies do not allow R124 G179 B225 for: Violet • Weaker pricing R128 G118 B207 • Broader terms and conditions – changes in limits and retention, fewer exclusions, inclusion of additional coverage Purple • Inflation risk R143 G70 B147 During a soft market IEULRs based on historical ratios can grossly underestimate reserve needs Fuscia Need to be aware of the existence of a reserving cycle, not the same but linked to the underwriting cycle R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Milliman – Actuaries and Reserve Adequacy, March/April 2014 33 R238 G116 29
Colour palette for PowerPoint presentations Primary colour palette Dark blue Will falling pricing continue for ever? R17 G52 B88
Gold R217 G171 B22 Growth has been fuelled by low interest Alternative capital is complementary to Mid blue R64 G150 B184 rate environment the offer from well-prepared Reinsurers
Light grey 1) R220 G221 B217 Cat bond spreads vs. risk-free rates
Secondary colour palette 1400 Alternative Well-prepared reinsurers Dark grey 1200 Capital R63 G69 B72 1000 Low Cost Model Competitive pricing AND Pea green value added services for R121 G163 B42 800 US Wind New Collateralized Issue Spreads cedants (knowledge 600 Capital Forest green US 2Y Govt sharing, etc.) R0 G132 B82 400 Note Efficient use of capital 200 Bottle green (diversification) whilst low R17 G179 B162 0 counterparty risk Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Indemnity covers are the Cyan R0 G156 B200 Tightening ILS spreads may put pressure rule, not the exception: no on future returns basis risk Light blue Reinstatements / Long-term R124 G179 B225 Tapering in the US and higher interest partnerships Violet rates should reduce ILS attractiveness R128 G118 B207 Cat model risk is greatest threat to long-
Purple term success of alternative capital (ex. R143 G70 B147 Thai Flood, 9/11 attack etc) Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Source: Swiss Re capital Markets & Bloomberg. Spreads for US Wind new-issue cat 34 R238 G116 29 bonds with 2% expected loss
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Potential future Cat Bond volatility R17 G52 B88
Gold R217 G171 B22 CAT Bond market as a whole is yet to be tested by “the big one” 1 Mid blue . AIR Worldwide recently estimated that at the ~50 year return period, about 20% of R64 G150 B184 outstanding CAT Bond market principal would be lost from US hurricane landfalls in Light grey Florida or North Carolina * R220 G221 B217 . This figure rises to 38% of outstanding Cat Bond market principal at the 250 year Secondary colour palette return period, this time triggered by a New York landfall Dark grey R63 G69 B72 Historical Cat Bond secondary market volatility Pea green R121 G163 B42
Forest green R0 G132 B82 10 years from Jan 2002 to Jan 2012, as measured by the Swiss Re Cat Bond Bottle green Global Index. Source: Swiss Re Cat Bond R17 G179 B162 Indices, Year in Review 2012. Cyan R0 G156 B200 Nat Cat events produced Light blue R124 G179 B225 greater volatility than the 2008 Global Financial Crisis Violet R128 G118 B207 Low correlation with major Purple R143 G70 B147 episodes of conventional financial market trauma Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) Source: http://www.air-worldwide.com/Publications/AIR-Currents/2013/Uncovering-Florida-Hurricane-Risk-with-the- 35 R238 G116 29 Catastrophe-Bond-Database/
Colour palette for PowerPoint presentations Primary colour palette Dark blue SCOR Perspective: Properly viewed, R17 G52 B88
Gold “alternative capital” is an opportunity R217 G171 B22
Mid blue SCOR is positioned to benefit from the convergence of insurance and capital markets R64 G150 B184
Light grey SCOR minimizes the cost of its SCOR benefits from its R220 G221 B217 SCOR increases its client capital shield thanks to expertise to open ILS funds to Secondary colour palette offering alternative solutions 3rd parties Dark grey R63 G69 B72
Pea green R121 G163 B42 Atlas series of ILS protecting Over the Optimal Dynamics SCOR’s ILS team manages 4 the Group against natural plan, SGPC intends to help funds Forest green catastrophes clients to access capital R0 G132 B82 market capacity through ILS Bottle green Each fund targets a specific
R17 G179 B162 Recent issuance of extreme risk/return profile Cyan mortality risk transfer Atropos GFS Map R0 G156 B200 contract Atropos Atropos Catbond Trust Catbond Light blue SELECT SCOR ILS
R124 G179 B225 This will provide fee income, Contingent capital and allow SGPC to better launch 31-Aug-11 19-Jul-13 12-Jul-13 01-Jan-14 Violet leverage existing AuM1) 187 24 41.5 40 R128 G118 B207 target relationship 6-8% 4-5% 4-5% 10-12% Purple return R143 G70 B147 2013 perf 8.75% 2.84%* 3.48%* n/a
* fund open for 45% of 2013 Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 1) As of 31 December 2013, in USD 36 R238 G116 29
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Colour palette for PowerPoint presentations Primary colour palette Perspectives and incentives: sponsor Dark blue R17 G52 B88 versus investors Gold R217 G171 B22 Advantages Disadvantages (Currently low) pricing - capital influx and low No reinstatements (unless transformer is Mid blue conventional investment returns have driven the involved) R64 G150 B184 price of both CAT Bonds and traditional reinsurance Light grey to historic lows R220 G221 B217 Can fit comfortably within an existing CAT XL Basis risk exists for all triggers (unless a Secondary colour palette reinsurance program transformer is involved) – although significantly less for Indemnity triggers Dark grey R63 G69 B72 More efficient access to capital than untimely liquidation and repatriation of overseas investments Long term corporate relationship with Pea green R121 G163 B42 Sponsor at a time of need – e.g. after 2011 Tohoku EQ and investors not very important (although tsunami in Japan important with transformer) Forest green R0 G132 B82 Reduced capital charges in internal Capital Model Bottle green reflecting both immediate capital access via R17 G179 B162 collateralization (“cash in bank” versus a promise of Cyan indemnification) R0 G156 B200 Greater bargaining power arising from investor oversubscription -> now easier to sponsor Light blue R124 G179 B225 indemnity CAT bonds Diversifying asset class compared with Oversubscription reduces spread over Violet conventional investment types (equities, fixed benchmark, EL multiple and bargaining R128 G118 B207 income) (and hence markets are less susceptible to power on types of trigger Purple systemic failure) R143 G70 B147 Investors Relatively high yields (historic) compared with Potentially delayed return of capital; Fuscia current conventional risk-free fixed income universe litigation may result whenever a partial or R233 G69 B140 total loss to a CAT bond
Red Low volatility (historic) Market has yet to be tested by "the big R200 G30 B69 one"
Orange Friday, 4 March 2016 37 R238 G116 29
Colour palette for PowerPoint presentations Primary colour palette Dark blue Perspectives and incentives: traditional R17 G52 B88
Gold reinsurance versus securitisations R217 G171 B22
Mid blue Advantages Disadvantages R64 G150 B184 Very responsive – deals can be agreed swiftly Credit risk of reinsurance failure
Light grey with a longer term client retention drive R220 G221 B217 (relationship emphasis) Indemnity based – avoids basis risk and has a High frictional costs – brokerage etc Secondary colour palette proven track record in indemnity-based covers Dark grey Broad range of coverage available – a Volatility in pricing and capacity R63 G69 B72 Traditional diversified book, covering all lines of business, Pea green Reinsurance regions & perils and an ability to cover long-tail R121 G163 B42 business and natural events with long Forest green development pattern R0 G132 B82 Dependent on cycle but pricing can be more Disputes – emergence of “can pay, won’t Bottle green competitive than capital markets – open to pay” culture? R17 G179 B162 multi-year covers and reinstatements, flexibility with terms and conditions (inc cyber/terror Cyan R0 G156 B200 covers in nat cat treaties) No credit risk – fully collateralised security Slow development time – bespoke Light blue transactions typically take months to R124 G179 B225 construct Violet Greater stability in pricing – lower, more stable Basis risk from parametric and index R128 G118 B207 prices triggers Purple Securitisations R143 G70 B147 Avoids reinsurance disputes Capacity still restricted for cat risk (US Property Cat) & retrocession Fuscia Potential for far greater capacity Secondary market needed to increase R233 G69 B140 liquidity/reduce costs etc Red High frictional costs – advisory fees etc R200 G30 B69
Orange Friday, 4 March 2016 38 R238 G116 29
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Alternative Sources of Capital
1 Introduction
2 The reinsurance universe and the influx of alternative capital
3 Catastrophe bonds bonds
4 Sidecars
5 Development in Asia Pacific
6 Impact on the reinsurance market
7 Conclusion
Friday, 4 March 2016 39
Colour palette for PowerPoint presentations Primary colour palette Dark blue Concluding remarks R17 G52 B88
Gold R217 G171 B22 It is expected that a flurry of new companies or funds will enter the ILS market in the next six months, Mid blue further intensifying the competitive pressures that have led to a series of warnings from rating agencies R64 G150 B184 and analysts about the near-term prospects of the reinsurance sector as a whole. Light grey R220 G221 B217 The full potential of ILS has not yet been tapped, with alternative capacity now set to move into wider Secondary colour palette geographic zones and extend its reach into a broader set of exposures such as flood, terrorism or Dark grey pandemic risk. In APAC, except for Japan and China, it is still largely muted (probably due to modelling R63 G69 B72 risk (lack of and low quality of data) and low appetite (from large institutional investors)). Pea green R121 G163 B42 One of the challenges for traditional reinsurers is high distribution costs, which is not sustainable in the Forest green long term. Just as a lot of corporations will decide it is cheaper to miss out brokers and insurers by R0 G132 B82 transferring risk directly into the capital markets, many cedants will opt to bypass reinsurers or brokers Bottle green in the same way. R17 G179 B162
Cyan R0 G156 B200 The relevance of the reinsurance sector is increasingly under threat and is in need to adapt business models to defend their competitive positions in the market and generate earnings that can meet cost of Light blue R124 G179 B225 capital without taking excessive risk.
Violet S&P has recently outlined the six dominant reinsurance business models of the future: Superior Scale; R128 G118 B207 Nimble Innovators; Lloyd’s; Float Accumulators; Risk Transformers; & Go Direct.
Purple R143 G70 B147 It is expected that more medium-sized reinsurers (40% of the market) especially those regionally Fuscia operated (such as some in APAC) are at risk of cost cutting and consolidation amid the challenges R233 G69 B140 posed by the influx of ILS capital, low investment returns and soft market conditions. Red R200 G30 B69
Orange Friday, 4 March 2016 40 R238 G116 29
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Colour palette for PowerPoint presentations Primary colour palette Dark blue R17 G52 B88
Gold R217 G171 B22 Thank you for your attention! Mid blue R64 G150 B184
Light grey R220 G221 B217
Secondary colour palette Dark grey R63 G69 B72
Pea green R121 G163 B42
Forest green R0 G132 B82
Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 41 R238 G116 29
Colour palette for PowerPoint presentations Primary colour palette Dark blue Disclaimer R17 G52 B88
Gold R217 G171 B22 Any views and opinions expressed in this presentation or any material distributed in Mid blue R64 G150 B184 conjunction with it solely reflect the views of the author and nothing herein is intended to, or
Light grey should be deemed, to reflect the views or opinions of the employer of the presenter. R220 G221 B217 Secondary colour palette The information, statements, opinions, documents or any other material which is made Dark grey R63 G69 B72 available to you during this presentation are without any warranty, express or implied,
Pea green including, but not limited to, warranties of correctness, of completeness, of fitness for any R121 G163 B42 particular purpose. Forest green R0 G132 B82 Bottle green R17 G179 B162
Cyan R0 G156 B200
Light blue R124 G179 B225
Violet R128 G118 B207
Purple R143 G70 B147
Fuscia R233 G69 B140
Red R200 G30 B69
Orange Friday, 4 March 2016 42 R238 G116 29
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Colour palette for PowerPoint presentations Primary colour palette Dark blue Definitions R17 G52 B88
Gold R217 G171 B22 ASoC segment Products High level definition Mid blue • Provide insurance to non-insurance related parents and other group companies R64 G150 B184 Captives • Long been used by prominent companies with c.5k now in existence Light grey • Collective pool of assets from multiple insurers to provide coverage for high risk exposures R220 G221 B217 Pools ‘Self’ risk • Claims are paid from this pool instead of being funded by individual insurer assets management Secondary colour palette • Owner-controlled insurance companies authorized by the Federal Liability Risk Retention Act of 1986 solutions Risk Retention Groups • Similar to Captives as they provide members with opportunities to control their own programmes Dark grey R63 G69 B72 • Risks are managed by setting aside company assets to pay for future losses Self-Insurance • Typically suited to risks where insurance is uneconomical i.e. highly predictable, low severity losses Pea green R121 G163 B42 • Guarantees owner of leased property a value at a specified future date Residual Value • Covers the difference between the realised value of property and the policy specified value Forest green • Non-Traditional (re)insurance solutions for Captive entities e.g. Agg Stop Loss, Capped Quota Share R0 G132 B82 Structured Captive RI • Risk is transferred outside the corporate group Bottle green • Provides cover for the specific risks that participants in M&A deals are exposed to e.g. tax covenants R17 G179 B162 Transaction Liability • An insurance solution used to facilitate the closing of a deal which otherwise might collapse Cyan Adverse Developement • ADC: Reinsurance coverage that protects the cedant from a deterioration of its loss reserves Cover/ Loss Portfolio R0 G156 B200 • LPT: Loss obligations that are already incurred and will ultimately be paid are ceded to a reinsurer Transfer Structured Light blue • Designed to limit (re)insurer losses across the entire book to a specified amount R124 G179 B225 (Re)insurance Aggregate Stop Loss solutions • Typically high expected loss, hard to find and seldom unlimited Violet • Quota share reinsurance coverage up to a specified premium volume Capped Quota Share R128 G118 B207 • Enables cedants to retain more upside potential of the book through exposure to higher layers
• Multi-year deals where a limited amount of risk is transferred through profit share mechanisms Purple Finite Risks R143 G70 B147 • Historically open to controversy due to inherently complex nature and favourable accounting treatment • Multi-Line: Coverage provided over multiple LoBs to reduce volatility and improve transaction efficiency Fuscia Multi-Line / Multi-Year • Multi-Year: Coverage provided over multiple years to lock-in prices and improve transaction efficiency R233 G69 B140 • An insurance policy that only pays out if more than one trigger occurs Multi-Trigger Red • Designed to respond to both physical hazard-type events and financial indexes R200 G30 B69
Orange Friday, 4 March 2016 Source: Aon, International Risk Management Institute, Investopedia, The Actuarial Professions’ Glossaries, 43 R238 G116 29 The Law Dictionary, Guy Carpenter – Glossary of Reinsurance Terms, Artemis
Colour palette for PowerPoint presentations Primary colour palette Dark blue Definitions R17 G52 B88
Gold R217 G171 B22 ASoC segment Products High level definition Mid blue R64 G150 B184 • Collateralised reinsurance refers to a reinsurance contract backed by assets that are fully pledged to Collateralised RI the cedant in the event of a trigger Light grey • Collateral is provided by third-party investors in the form of liquid, low risk securities e.g. Treasuries R220 G221 B217 Hybrid • Coverage based on total losses to an industry rather than individual company or insurer losses Secondary colour palette reinsurance Industry Loss Warranties • Specified limit denotes the amount of compensation received if the industry loss warranty is triggered Dark grey products R63 G69 B72 • Quota Share contracts between (re)insurers and investors covering a book of business Sidecars Pea green • Collateral is provided by third-party investors through a special purpose vehicle R121 G163 B42
Forest green • A collateralised loan, through an SPV, from a third-party investor to an insurance company sponsor Cat Bonds R0 G132 B82 • If a pre-defined Cat loss occurs, the obligation to pay interest/principal is either deferred or forgiven
Bottle green • Derivative contract providing insurers a means to transfer Cat risks to third-party investors R17 G179 B162 Cat Options / Futures • Settlements are based on specified Cat indexes Cyan R0 G156 B200 • Two parties, an insurer and an investor, exchange streams of periodic payments Cat Swaps Light blue • Insurer payments are based on investor securities and investor payments are based on Cat losses R124 G179 B225 Securitised solutions • Debt securities which are converted to equity if insurance and/or financial triggers are met Violet Contingent Capital R128 G118 B207 • Recent innovations include solvency triggers to carry high risk-adjusted weighting under Solvency II
Purple • Effectively an insurance product that protects against the non-payment of bond coupon payments R143 G70 B147 Credit Default Swaps • A buyer of a CDS might be speculating on the possibility that the third party will indeed default Fuscia R233 G69 B140 • Instrument used by companies to hedge against the risk of weather-related losses Weather Derivatives • In contrast to traditional insurance products, these cover high-probability events e.g. a dry summer Red R200 G30 B69
Orange Friday, 4 March 2016 Source: Aon, International Risk Management Institute, Investopedia, The Actuarial Professions’ Glossaries, 44 R238 G116 29 The Law Dictionary, Guy Carpenter – Glossary of Reinsurance Terms, Artemis
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