A Reinsurance Perspective
Ty Birkett – Willis Re Australia
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!
Interesting Times ….
Depends on Your Perspective
• Technical Considerations
• Demand for Reinsurance
• Supply of Reinsurance
• Near Future
• Implications for Insurers
Today
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
Technical Considerations
Demand↑
Reinsurance
Cost
Reinsurance
Capacity
Demand Curve
2008 → 2009
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↑
Demand↑
Sources of Capital
EQUITY
DEBT
REINSURANCE
TOUGH TO SOURCE
EXPENSIVE
RELATIVELY CHEAP
EASY TO SECURE
BUT VOLATILE
Demand↑- non-GFC Impacts Australian Market Catastrophe Losses (1989 - present) > $300m (2007 Values)
New
castle E
Q (
12/8
9)
East
Coast
Sto
rms (
2/9
0) Sydney H
ail
(3/9
0)
Sydney S
torm
(1/9
1)
Sydney H
ail
(2/9
2)
Sydney H
ail
(4/9
9)
Canberr
a B
ushfire
(1/0
3)
Cyclo
ne L
arr
y (
3/0
6) H
unte
r R
egio
n S
torm
s (
6/0
7)
Sydney H
ail
(12/0
7)
Mackay S
torm
s (
2/0
8)
Brisbane S
torm
s (
11/0
8)
Vic
toria B
ushfire
s (
2/0
9)
$0 m
$500 m
$1,000 m
$1,500 m
$2,000 m
$2,500 m
$3,000 m
$3,500 m
$4,000 m
$4,500 m
$5,000 m
Supply↓
Reinsurance
Cost
Reinsurance
Capacity
Supply Curve
2009 ← 2008
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!
Standard & Poor Ratings
Supply↓- Quality AAA AA+ AA AA- A+ A
M unich Re
Swiss Re
General Re
ERC
Chubb
Allianz
Hannover Re
XL Re
PartnerRe
AXA Re
Transatlantic Re
SCOR
Gerling Global Re
Everest Re
W.R. Berkley
Lloyd's o f London
Converium (Swtz)
Axis Re
Odyssey Re
CNA
Paris Re
Endurance
M ontpelier
ACE Tempest
IPC
Trenwick
Renaissance Re
PXRE Re
A- BBB+ BBB BBB- Below
X
X
XX
X
XX
X
X
Black lines denote movement between 9/11 and Sept 03
X
X
Standard & Poor Ratings
Supply↓- Quality AAA AA+ AA AA- A+ A
M unich Re
Swiss Re
General Re
ERC
Chubb
Allianz
Hannover Re
XL Re
PartnerRe
AXA Re
Transatlantic Re
SCOR
Gerling Global Re
Everest Re
W.R. Berkley
Lloyd's o f London
Converium (Swtz)
Axis Re
Odyssey Re
CNA
Paris Re
Endurance
M ontpelier
ACE Tempest
IPC
Trenwick
Renaissance Re
PXRE Re
A- BBB+ BBB BBB- Below
X
X
XX
X
XX
X
X
Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05
X
X
Standard & Poor Ratings
Supply↓- Quality AAA AA+ AA AA- A+ A
M unich Re
Swiss Re
General Re
ERC
Chubb
Allianz
Hannover Re
XL Re
PartnerRe
AXA Re
Transatlantic Re
SCOR
Gerling Global Re
Everest Re
W.R. Berkley
Lloyd's o f London
Converium (Swtz)
Axis Re
Odyssey Re
CNA
Paris Re
Endurance
M ontpelier
ACE Tempest
IPC
Trenwick
Renaissance Re
PXRE Re
A- BBB+ BBB BBB- Below
X
X
XX
X
XX
X
X
Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05Green lines denote movement post-Katrina to March 09
X
X
Supply↓Reduction in Alternate Sources
• Role of Investment Banking
• Withdrawal of Hedge Fund capacity
• “Capital Reload” occurred in mid-90s, 2001 and 2005. 2008/09 ?
0
2
4
6
8
10
12
14
97 98 99 00 01 02 03 04 05 06 07 08 09
US
D 'b
n
Issued Outstanding
Value of Catastrophe Bond Capacity
Sponsor
(usually the insured)InvestorsSPV
Cover
Funds from sale of notesPremium
Balance on Maturity
LIBOR + Premium
Investment Income
LIBOR
Pro
ceeds
Inte
rest (L
IBO
R)
Unused c
olla
tera
l paid
back a
t M
atu
rity
Collateral Trust Swap CounterpartyTotal Return Swap
Sponsor
(usually the insured)Investors
Sponsor
(usually the insured)InvestorsSPV
Cover
Funds from sale of notes
SPV
Cover
Funds from sale of notes
Cover
Funds from sale of notesPremium
Balance on Maturity
LIBOR + Premium
Premium
Balance on Maturity
LIBOR + Premium
Investment Income
LIBOR
Investment Income
LIBOR
Pro
ceeds
Inte
rest (L
IBO
R)
Unused c
olla
tera
l paid
back a
t M
atu
rity
Collateral Trust
Pro
ceeds
Inte
rest (L
IBO
R)
Unused c
olla
tera
l paid
back a
t M
atu
rity
Collateral Trust Swap CounterpartyTotal Return Swap
Swap CounterpartyTotal Return Swap
Supply↓1996 American Re (USA)
1999 New Re (Swiss)2000 CNA Life Re (USA)
1996 M & G Re (UK)1997 Union Re (Swiss)1997 Unione Italiana (Italy)1999 Underwriters Re (USA)
Munich Re Group
(Germany)
20062008
GE Insurance Solutions (USA)Barclays Life (UK)
1988 Nordisk Re (Norway)1995 Frankona Re (Germany)1995 Aachen Re (Germany)1996 First & Excess Re (USA)
Employers Re Group
(member of GE Cap)
1998 Eagle Star Re (UK)1998 Kemper Re (Belgium)
GECapital
(USA)
2006
2008 Midland Company (USA)
201 Bavarian Re (Germany)
1997 Reale Riassicurazioni S.p.A
2008 Sterling Life Insurance (USA)2007 Bell & Clements (USA)2007 MSP Underwriting Ltd (UK)
2009 Hartford Steam Boiler (USA)
Swiss Re Group
(Switzerland)
GE Insurance Solutions
(USA)
Supply↓
2000 Partner Re Life (USA)2001 SOREMA (France)
SCOR Group(France)
2007 Converium (Swiss)
1997 SAFR (France)1998 Winterthur Re (Swiss)
1998 Mid Ocean Re (Bermuda)1999 NAC Re (UK)2000 CGNU (US Surety Only)
Partner Re
Group (Bermuda)
XL Group(Bermuda)
1996 Tempest Re (Bermuda)1998 CAT Re (Bermuda)1998 Cat Limited (Bermuda)1998 Cigna (USA)1999 Capital Re Corp. (USA)
Ace Group (Bermuda)
2008Combined InsuranceCompany of America (USA)
2006 Revios (Germany)
2003 Le Mans Re (France)
Supply↓- non-GFC
Source: Swiss Re Sigma 2/09 – most costly insurance losses 1970-2008
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
Supply and Demand
Reinsurance
Cost
Reinsurance
Capacity
Supply Curve
2009 ← 2008Demand Curve
2008 → 2009
2008
2009
20082009
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