A Reinsurance Perspective
Ty Birkett – Willis Re Australia 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…
Other Governments including China are also making unprecedented efforts to stimulate their economies
Source: Slide from someone’s presentation and I have not done the Maths! Depends on Your Perspective Today • Technical Considerations
• Demand for Reinsurance
• Supply of Reinsurance
• Near Future
• Implications for Insurers Technical Considerations Covered today in detail
BUT FOR 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 Demand↑
Demand Curve 2008 → 2009
Reinsurance Cost
Reinsurance Capacity 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 Demand↑ Sources of Capital
EQUITY TOUGH TO SOURCE
DEBT EXPENSIVE
RELATIVELY CHEAP REINSURANCE EASY TO SECURE BUT VOLATILE Demand↑- non-GFC Impacts
Australian Market Catastrophe Losses (1989 - present) > $300m (2007 Values)
$5,000 m
$4,500 m Newcastle EQNewcastle (12/89)
$4,000 m
$3,500 m Sydney (4/99) Hail
$3,000 m
$2,500 m
$2,000 m Hunter Region Storms (6/07) Region Hunter
$1,500 m Sydney (3/90) Hail Victoria Bushfires (2/09)
$1,000 m
Sydney Storm (1/91)
Cyclone Larry (3/06) Cyclone Larry
Canberra Bushfire (1/03) Canberra Sydney (2/92) Hail
$500 m Sydney (12/07) Hail
Mackay Storms (2/08)
East Coast Storms (2/90) Brisbane StormsBrisbane (11/08)
$0 m Supply↓
Supply Curve 2009 ← 2008
Reinsurance Cost
Reinsurance Capacity 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! Supply↓- Quality
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below
M unich Re
Swiss Re General Re X ERC
Chubb
Allianz
Hannover Re
XL Re
PartnerRe
AXA Re Transatlantic Re X SCOR
Gerling Global Re Everest Re X W.R. Berkley X Lloyd's of London
Converium (Swtz) Axis Re X Odyssey Re
CNA Paris Re X Endurance X M ontpelier X ACE Tempest IPC X Trenwick Renaissance Re X PXRE Re X Black lines denote movement between 9/11 and Sept 03 Standard & Poor Ratings Supply↓- Quality
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below
M unich Re
Swiss Re General Re X ERC
Chubb
Allianz
Hannover Re
XL Re
PartnerRe
AXA Re Transatlantic Re X SCOR
Gerling Global Re Everest Re X W.R. Berkley X Lloyd's of London
Converium (Swtz) Axis Re X Odyssey Re
CNA Paris Re X Endurance X M ontpelier X ACE Tempest IPC X Trenwick Renaissance Re X PXRE Re X Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05 Standard & Poor Ratings Supply↓- Quality
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below
M unich Re
Swiss Re General Re X ERC
Chubb
Allianz
Hannover Re
XL Re
PartnerRe
AXA Re Transatlantic Re X SCOR
Gerling Global Re Everest Re X W.R. Berkley X Lloyd's of London
Converium (Swtz) Axis Re X Odyssey Re
CNA Paris Re X Endurance X M ontpelier X ACE Tempest IPC X Trenwick Renaissance Re X PXRE Re X Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05 Standard & Poor Ratings Green lines denote movement post-Katrina to March 09 Supply↓ Reduction in Alternate Sources
LIBOR Value of Catastrophe Bond Capacity
Collateral Trust Swap Counterparty Total Return Swap 14 Investment Income 12
10
8
Proceeds Proceeds Proceeds
InterestInterestInterest(LIBOR) (LIBOR) (LIBOR)
USD 'bn USD
Unused collateral collateral collateral Unused Unused backbackback MaturityMaturityMaturity at at at paid paid paid 6 collateral Unused Premium Funds from sale of notes
4 Sponsor SPV Investors (usually the insured) Balance on Maturity 2 Cover LIBOR + Premium 0 97 98 99 00 01 02 03 04 05 06 07 08 09 Issued Outstanding • Role of Investment Banking • Withdrawal of Hedge Fund capacity • “Capital Reload” occurred in mid-90s, 2001 and 2005. 2008/09 ? Supply↓ 1996 American Re (USA) 1997 Reale Riassicurazioni S.p.A 1999 New Re (Swiss) Munich Re Group 2000 CNA Life Re (USA) 2007 MSP Underwriting Ltd (UK) (Germany) 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) Swiss Re Group 1999 Underwriters Re (USA) (Switzerland) 201 Bavarian Re (Germany) 2006 2006 GE Insurance Solutions (USA) 2008 Barclays Life (UK)
1988 Nordisk Re (Norway) Employers Re Group 1995 Frankona Re (Germany) 1995 Aachen Re (Germany) (member of GE Cap) 1996 First & Excess Re (USA) GE Insurance Solutions (USA) 1998 Eagle Star Re (UK) GECapital 1998 Kemper Re (Belgium) (USA) Supply↓
2000 Partner Re Life (USA) SCOR Group 2001 SOREMA (France) 2006 Revios (Germany) (France) 2007 Converium (Swiss)
1997 SAFR (France) Partner Re 1998 Winterthur Re (Swiss) Group (Bermuda)
1998 Mid Ocean Re (Bermuda) 1999 NAC Re (UK) XL Group 2000 CGNU (US Surety Only) (Bermuda) 2003 Le Mans Re (France)
1996 Tempest Re (Bermuda) 1998 CAT Re (Bermuda) 1998 Cat Limited (Bermuda) Ace Group 1998 Cigna (USA) (Bermuda) 1999 Capital Re Corp. (USA) Combined Insurance 2008 Company of America (USA) Supply↓- non-GFC
Source: Swiss Re Sigma 2/09 – most costly insurance losses 1970-2008 Supply BUT some positive signs:
• Improved results – underwriting and investment • Less required by some – e.g. Florida and Texas schemes • Signs of new capital • Insurance Linked Securities regaining some momentum • General reduction in EQ models • Non-peak versus Peak (US EQ+ WS, Jpn EQ, Eur WS) Supply and Demand
Demand Curve Supply Curve 2008 → 2009 2009 ← 2008
Reinsurance Cost
2009
2008
Reinsurance 2009 2008 Capacity Where to From Here?
• Market Hardening - GFC - Other factors - Territory specific • Market cycle impacted by regular “one off” events - LMX, WTC, KRW, GFC, etc. etc. • Flow of future capital key – traditional, alternative, self-generated • Reinsurance remains a resilient form of capital 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