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Swiss Re Media Briefing

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Presentation on theme: "Swiss Re Media Briefing"— Presentation transcript:

1 Swiss Re Media Briefing
John Coomber, Chief Executive Officer Thomas Hess, Head Economic Research & Consulting Monte Carlo, 13 September 2004

2 Agenda Welcome John Coomber
Reinsurance is back to profitability Thomas Hess Underwriting for profit John Coomber Media Briefing Monte Carlo 13 September 2004

3 Agenda Lessons from 2001-2003 Situation of the industry in 2004
Media Briefing Monte Carlo 13 September 2004

4 Lessons from The combination of the soft market and a stock market crash is a dangerous mix for reinsurers Liability insurance has to respect the borders of insurability and price for high loss inflation and the risks of legal change Reinsurance is an attractive product, insurers are willing to pay for Media Briefing Monte Carlo 13 September 2004

5 The soft cycle shows up in high reinsurance combined ratios*
Combined ratios peaked in 2001, since then they are on a steady decline to profitable underwriting results 80% 90% 100% 110% 120% 130% 140% 150% 90 92 94 96 98 00 02 04 Worldwide US [RAA] Media Briefing Monte Carlo 13 September 2004 * calendar year view Source: Swiss Re Economic Research & Consulting, Reinsurance Association of America (US)

6 2001-2003 was the worst period for US reinsurers since the liability crisis*
ROE of US reinsurers Media Briefing Monte Carlo 13 September 2004 * calendar year view Sources: A.M.Best, Swiss Re Economic Research & Consulting

7 Liability business has to price for loss inflation and nasty surprises
Canada [1] UK [1] Germany France Italy Japan Period Compound annual growth rate - Liability claims 10.6% 11.3% 8.8% 7.4% 9.4% 15.9% 13.8% - Nominal GDP 7.1% 7.3% 6.7% 5.2% 8.0% 11.6% 6.1% - Health expenditures 10.2% 8.7% n.a. 8.3% Elasticity [2] of liability claims versus 1.51 1.55 1.31 1.43 1.17 1.38 2.24 1.04 1.19 1.02 1.01 0.93 1.66 [1] net of reinsurance [2] The GDP elasticity of liability claims measures how many percent claims grow for each percent of GDP or health expenditure growth. Source: Swiss Re Economic Research and Consulting

8 Borders of insurability need to be respected
Exclusions of terror risk have been introduced (also very relevant for property) Unlimited liability in motor third party has been removed in many countries Shift to tighter conditions to limit the impacts of the risks of legal change in highly exposed buiness lines (product liability, D&O, E&O, and medical malpractice) Media Briefing Monte Carlo 13 September 2004

9 Reinsurance is back Reinsurance premiums grew by more than 60% in USD terms between 2000 and 2004 USD bn 160 140 120 100 80 60 40 20 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Media Briefing Monte Carlo 13 September 2004 Industrialised Markets Emerging Markets Source: Swiss Re Economic Research & Consulting

10 Strong demand for reinsurance in Emerging markets
Share of Emerging Markets will grow from 14% in 2003 to 20% by 2014. 51.9 bn USD (20%) 211 bn USD (80%) Media Briefing Monte Carlo 13 September 2004

11 Agenda Lessons from 2001-2003 Situation of the industry in 2004
Media Briefing Monte Carlo 13 September 2004

12 The situation of the industry in 2004
Reinsurance in a strongly improved state, but not all problems are solved Capital in the insurance and reinsurance industry is still tight, but starts growing again Reinsurance prices are attractive and will remain so Profitability is of high quality A better capitalisation and reserving of reinsurers together with higher interest rates will lead to improved investment results Media Briefing Monte Carlo 13 September 2004

13 Capacity in the Property & Casualty industry is still tight
Capital and solvency of the 6 major insurance markets USD bn 900 120% 750 100% 600 80% 450 60% 300 40% 150 20% 0% 98 99 00 01 02 03 04 Media Briefing Monte Carlo 13 September 2004 Capital Premiums Solvency [RHS] Source: Swiss Re Economic Research & Consulting

14 Prices are at attractive levels
Base 1996 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 1994 1996 1998 2000 2002 2004 Marine, Lloyds Non-Marine, Lloyds Media Briefing Monte Carlo 13 September 2004 Aviation, Lloyds Property Fac, Swiss Re Sources: Lloyds, Swiss Re

15 The quality of profits is now based on solid underwriting
Profitability of major reinsurers * -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 99 00 01 02 03 04** U/w result Investment result Operating margin in % NPE Media Briefing Monte Carlo 13 September 2004 *calendar year view, excluding Munich Re and Berkshire Hathaway, ** estimate Source: Swiss Re Economic Research & Consulting

16 Recovery of underwriting cash-flow in the US P&C industry
9/11 Source: Fox-Pitt, Kelton The significant increase in combined ratio is reflected by a strong decline of underwriting cash-flow. The underwriting cash-flow has even turned negative for the last couple of years. This has happened before only during the liability crisis and Hurricane Andrew. Economics of a property/casualty insurer rely on a positive cash-flow that can be invested and create investment returns to compensate for negative underwriting results. Loss reserves for old claims had to be released in increasingly significant amounts and reserves for new claims are set tighter. The decline of technical reserves has a severe negative impact on the float (which means Policyholder-financed funds available for investment). Liability crisis Andrew Media Briefing Monte Carlo 13 September 2004 Sources: Fox Pitt, Kelton, A.M.Best, Swiss Re Economic Research & Consulting

17 10-year government bond yields will rise from currently 4-4. 5% to 5
10-year government bond yields will rise from currently 4-4.5% to 5.5% in 2006 ALM is the instrument to deal with rising interest rates Higher interest rates will increase investment results 16 14 Forecast 12 10 8 6 4 2 1979 1982 1985 1988 1991 1994 1997 2000 2003 2005 Media Briefing Monte Carlo 13 September 2004 US Germany Source: Datastream Advance

18 Summary Liability business needs to respect borders of insurability and price for the high risks involved Today premiums reflect the exposures. Industry earns higher premiums for reduced risks Increasing interest rates and increase of reserves will trigger improved investment returns Focus in reinsurance has to remain on underwriting Media Briefing Monte Carlo 13 September 2004

19 Underwriting for profit Managing the cycle at its peak
John Coomber Chief Executive Officer

20 Agenda Risk is a growth business
Steering capacity to aim for attractive returns Summary Media Briefing Monte Carlo 13 September 2004

21 Risk is a growth business: Long-term growth assured
Growth of the property & casualty industry will continue to surpass global GDP growth 190 180 170 160 150 140 130 120 110 Forecast 100 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Media Briefing Monte Carlo 13 September 2004 1990 = 100 Direct premiums Free ceded premiums GDP Source: Swiss Re Economic Research & Consulting

22 Swiss Re can accelerate growth by effective cycle management and consolidation gains
illustrative Premium 12% growth 7% growth Industry growth % Market outperformance Transactions % Business extension Swiss Re 12% Time Media Briefing Monte Carlo 13 September 2004 P&C only P&C and L&H

23 Agenda Risk is a growth business
Steering capacity to aim for attractive returns Summary Media Briefing Monte Carlo 13 September 2004

24 Swiss Re directs capital to attractive non-life opportunities
Each line of business and geography show its own cycle and pattern Illustrative Nat cat Property Liability Special lines Industry sectors USA Europe Asia Time Technical profitability The US Nat Cat market tends to be more stable due to the higher capacity demand (for tropical cyclone North America and EQ California, in particular) as well as the fact that there is a higher consensus of all market participants about the correct level of the risk premium. Windstorm Europe shows a high price volatility, due to its relative smaller capacity demand and a wider range of views about the correct risk premium level. The Property (non-cat) market is down 10-15% in the US, particularly for big ticket transactions. In Asia and Europe, rates are stabilising. The rates in liability seem to move in longer cycles but with a tendency of the cycles to get shorter; compared with Property and particularly Nat Cat, liability rates increase with a certain time lag; rate increases for highly exposed liability business (Products Liability USA, D&O) are more pronounced, increases for less exposed business are less significant. Media Briefing Monte Carlo 13 September 2004

25 Capacity (re)allocation during the cycle Premiums earned by line of business
100% 8% 7% 4% 8% 8% 13% 17% 16% 15% 15% 80% 17% 18% 18% 22% 21% 60% 32% 25% 27% 20% 21% 40% 20% 33% 34% 34% 33% 34% 0% 2000 2001 2002 2003 1HY 2004 Media Briefing Monte Carlo 13 September 2004 Property Liability Motor Other Accident

26 Capacity (re)allocation during the cycle Premiums earned by division
100% 34% 80% 38% 38% 44% 42% 60% 40% 57% 49% 53% 45% 48% 20% 13% 9% 9% 11% 10% 0% Media Briefing Monte Carlo 13 September 2004 2000 2001 2002 2003 1 HY 2004 Asia Europe Americas

27 Control pricing over the cycle Premiums earned by type of business
100% 15% 19% 17% 17% 18% 80% 31% 28% 35% 36% 36% 60% 40% 53% 54% 48% 47% 46% 20% 0% 2000 2001 2002 2003 1HY 2004 Proportional Media Briefing Monte Carlo 13 September 2004 Non-Proportional Facultative Based on premiums in calendar years at historic exchange rates Traditional business only

28 Steer capacity where it generates attractive returns
Use steering tools to direct capital to attractive business sectors and clients Quarterly reinsurance survey Underwriting Steering Values Capacity steering for product prioritization Underwriting Tracking Tool Media Briefing Monte Carlo 13 September 2004

29 Reinsurance Survey: Clear understanding of market trends
Qualitative surveys on recent and expected developments in the re/insurance market Provides market intelligence as a basis for upcoming market opportunities Structured quarterly questionnaire collected from 250 client managers, underwriters to gather information regarding: Key reinsurance variables Lines of Business Key competitors In addition, more frequent qualitative market reports by market units Media Briefing Monte Carlo 13 September 2004

30 Underwriting Steering Values Definition of price targets
U/W Costs Production Costs Cycle Reference Premium Renewal Target Underwriting costs: Is the sum of present value of claims and expenses Production costs: Will produce minimum return on capital Cycle Reference Premium: Will produce the RoE target over the cycle Renewal Target Premium: Set to produce the economic profit margins planned for the next year Econ. Profit External Costs Capital Costs Note: All measures on expected cash flow, risk based capital requirements and risk free investment return Expected Claims Internal Costs

31 Underwriting tracking tool Basis for effective capital allocation
Data base capturing contract specific information from all clients Allows real time monitoring throughout the renewals driving transparency and discipline Quarterly validation of estimates against actual Provides information per contract or portfolio: Price adequacy Expected Combined Ratio Expected economic profit Media Briefing Monte Carlo 13 September 2004

32 Agenda Risk is a growth business
Steering capacity to aim for attractive returns Summary Media Briefing Monte Carlo 13 September 2004

33 Summary Cycle will be less pronounced: Low interest rate environment
Greater internal and external transparency Capital equilibrium Pricing levels today are very attractive Rates will continue above cycle reference levels at next renewal Media Briefing Monte Carlo 13 September 2004

34 Questions & Answers Media Briefing Monte Carlo 13 September 2004


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