W

GenevaDecember, 2007

World Meteorological Organization Catastrophe Reinsurance

and Cat Bonds

2 W

Catastrophe Risk

From Session 2 Panel Discussion:

• Catastrophe Risk: same event affects multiple insureds• Catastrophe Risk is a unique class of risk• Reinsurers provide coverage to insurance companies for

exposure to catastrophe risk

3 W

Exposure to Catastrophe Loss

Measuring Exposure to the Insurer

• Inventory risks – Location– Construction– Occupancy– Protection– Policy Coverage

• Create electronically held data base• Quality control of data inventory• Aggregate risks by exposure and geography• Model impact of catastrophe events on portfolio of

properties

4 W

Modeling Catastrophe Risk

Fundamentals of Catastrophe Modeling

Hypothetical Physical Calculation of Calculation of Event Characteristics Impact of Events Value of Damage

Set of Events on Inventory to Inventory

Event set based on Wind speed, air Geography, Assessment of historical data and pressure, storm topography, financial valueclimatological path, etc. characteristics of damage due toresearch of individual storm

properties at risk(damage curve)

Modeling Process

Catastrophe Modeling is the stochastic simulation of hypothetical events and their affect on an inventory of insured risks.

5 W

Modeling Catastrophe Risk

Source: NOAA/NHC

6 W

Modeling Catastrophe Risk

Source: NOAA/NHC

7 W

Modeling Catastrophe Risk

Hypothetical Example Output

Hypothetical Portfolio:• Location: State on the US

Gulf of Mexico• Portfolio: 14,915 properties

OccurrenceExceedance Losses Probability US$ 1,000

0.01% $445,4360.02% $375,4860.05% $281,1810.10% $213,1290.20% $158,7030.40% $118,9300.50% $108,2651.00% $79,3722.00% $55,0914.00% $34,456

10.00% $12,21620.00% $1,772

Sample Residential Portfolio

8 W

Catastrophe Risk Program

Considerations

1. The buyer is expected to retain risk (retention, deductible):

• smaller events• a minimum amount of loss on larger events• function of price of reinsurance, cost of capital and

capital strength

2. Protection to .4% probability of exceedance.

9 W

Catastrophe Risk Program

Hypothetical Program Structure

$117.1 million xs $1.8 million, structured as follows:

LayerExpected EL Standard

Layer Limit Attachm Exit Attachm Loss Rate Deviation1 $26,700,000 xs $1,800,000 5.00% 20.00% $2,743,000 10.27% $7,494,0002 $26,600,000 xs $28,500,000 2.00% 5.00% $871,000 3.27% $4,426,0003 $31,000,000 xs $55,100,000 0.84% 2.00% $412,000 1.33% $3,313,0004 $32,800,000 xs $86,100,000 0.40% 0.84% $192,000 0.59% $2,354,000total $117,100,000 $1,800,000 $4,218,000

Probability

10 W

Catastrophe Risk Program

Outline Sample Agreement

Reinsured: Hypothetical Insurance CompanyCoverage: Property losses arising from a single Event.Type: Indemnity Excess of LossPeriod: 12 months 1 January 200Q – 31 December 200QLayer: Layer IVLimit: Up to US$32,800,000 UNL excess of US$86,100,000

UNL.Premium: US$xx,xxx,xxxOther Conditions: Definition of Event

Definition of UNLExclusionsetc.

11 W

Capital Markets View

Hypothetical Program – Layer 4 Cat Bond

Reinsurance Agreement Bond Issuance

Insurance Claims Bond ProceedsCompany

(Buyer/ Premium Interest and PrincipalSponsor)

Withdrawl to pay claims Deposit

Probability of a loss of $118.9m = 0.40%Probatility of full default of SPV = 0.40% - i.e. full lossof $32.8m

Reinsurance Private

Collateral

Capital

$32.8mTrust

Entity(SPV) Investor

12 W

Capital Markets View

Capital Markets convert physical catastrophe risk into financial risk of default: insurance linked investment risk.

If reinsurance market premium for risk equals or exceeds capital markets charge for default risk the catastrophe-insurance-linked security will attract investor interest.

Complicating factors:– Value added of capital markets

• Credit strength (collateral)• Risk transfer trigger

– Diversification value of insurance-linked risk• ILS not tied up with sub-prime crisis

13 W

Capital Markets View

Insured

Insured Insurance Reinsurer Retro-Company cessionaire

Insured

Insured

Insured

Insured Insurance Reinsurer Retro-Company cessionaire

Insured

Insured

Capital Markets Investors

Insurance Markets

Transfer of Catastrophe Risk

14 W

Cat Bonds

Dislocation in reinsurance market post 2004 and 2005 storms created conditions for increased investment in insurance-linked securities.

Cat bonds (ILS-investments) are now generally accepted asset class, managed as risk portfolios rather than as arbitrage opportunities.

Cat bonds bring outside capital to support insurance risk.

P&C SECURITISATIONSISSUANCE VOLUME AND OUTSTANDINGS

(as at 25 October 2007 )

01,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,0009,000,000

10,000,00011,000,00012,000,00013,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007YTD

USD

'000

Issued Outstanding

Source: Willis Capital Markets

15 W

Cat Bonds

Characteristics of Cat Bonds

Trigger Mechanisms

• Indemnity• Modeled Loss• Index Based

- Loss Indices (e.g. PCS, Swiss Re Sigma)- Parametric (e.g. Saffir-Simpson Scale, wind

speed)

All triggers based on modeling.

16 W

Cat Bonds

Parametric Triggers and Financing Public Relief

Parametric Triggers can be utilized flexibly• Pay on the event• Can be utilized in non-insurance and insurance

formats• Create opportunity for financing in the wake of

catastrophe event• Investor markets accept parametric triggers

• underlying data sufficiently robust• accurate, reliable and prompt reporting• recognized index

• Critical Issue: establishing in advance the financial support required in wake of event

17 W

Meteorological Services and Cat Risk

Importance of Meteorological Data

• Public Safety• Warnings• Prediction• Financing of Public Relief

• Commercial• Modeling of storms and storm damage• Capital adequacy of financial institutions

• Climatology of Extreme Events• Long term improvement of international data base• Short term issues:

• attenuation of storms after landfall• storm behavior at sea• storm related flood risk

18 W

Disclaimer

•Willis Structured Financial Solutions Limited ("WSFSL") is an investment business authorized and regulated by the UK Financial Services Authority.   Willis Securities, Inc. ("WSI"), is a licensed broker dealer authorized and regulated by the NASD and is a member of SIPC. Willis Capital Markets ("WCM") is a trading name of  WSFSL and WSI. Reinsurance products are placed through Willis Re Inc. in the United States and through Willis Limited in the UK. Willis Re, Willis Limited, WSFSL and WSI are Willis Group companies.  •These materials have been prepared by WCM for the WCM client or potential client to whom such materials are addressed in connection with an actual or potential mandate or engagement and may not be used or relied upon for any other purpose. These materials are based upon information provided by or on behalf of the company and other potential transaction participants from public sources or other sources.. WCM assumes no responsibility for independent investigation or verification of such information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance prepared by or reviewed with the company management or obtained from public sources, WCM has assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of company management (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. This communication was designed for use by the WCM client or potential client and is being furnished and should be considered only in connection with other information, oral or written, being provided by WCM in connection herewith. The information contained herein is not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. Nothing in this communication constitutes an offer or solicitation to sell or purchase any securities and is not a commitment by WCM (or any affiliate) to provide or arrange any financing for any transaction or to purchase any security in connection therewith. WCM assumes no obligation to update or otherwise revise these materials. This communication has not been prepared with a view towards public disclosure under any securities laws and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without the prior written consent of WCM. Information contained within this communication may not reflect information known to other employees in any other business areas of Willis Group and its affiliates.