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1. 2 CURRENT DIRECTIONS OF P & C REINSURANCE 2005 REVIEW - 2006 PREVIEW 2005 REVIEW - 2006 PREVIEW GORDON CRUTCHER, Sutton Reinsurance.

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Presentation on theme: "1. 2 CURRENT DIRECTIONS OF P & C REINSURANCE 2005 REVIEW - 2006 PREVIEW 2005 REVIEW - 2006 PREVIEW GORDON CRUTCHER, Sutton Reinsurance."— Presentation transcript:

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2 2 CURRENT DIRECTIONS OF P & C REINSURANCE 2005 REVIEW - 2006 PREVIEW 2005 REVIEW - 2006 PREVIEW GORDON CRUTCHER, Sutton Reinsurance

3 3 THE REINSURANCE MARKET IS GLOBAL 3

4 4 REINSURANCE MARKET The reinsurance market is complex and inter-related. One reinsurer can rarely respond to all of a client’s needs. The reinsurance market is complex and inter-related. One reinsurer can rarely respond to all of a client’s needs.

5 5 REINSURANCE MARKET Insurers usually prefer to have several reinsurers on their treaties. Better security; more flexibility. Insurers usually prefer to have several reinsurers on their treaties. Better security; more flexibility.

6 6 REINSURANCE MARKET In compiling its 2005 edition of Global Reinsurance Highlights, Standard & Poor’s Ratings Services collected data on approximately 220 reinsurance organizations from 48 countries. (Life + P&C)

7 7 REINSURANCE MARKET Estimated Global Reinsurance (in 2004) : Capital + Shareholders’ Funds: $377 billion Net Reinsurance Premiums Written: $167 billion Estimated Global Reinsurance (in 2004) : Capital + Shareholders’ Funds: $377 billion Net Reinsurance Premiums Written: $167 billion S&P: Global Reinsurance Highlights, Sept. 2005 (P&C + Life)

8 8 REINSURANCE MARKET Estimated Net Reinsurance Premiums Written by the top 35 world-wide reinsurance groups: $146 Billion (87%) Estimated Net Reinsurance Premiums Written by the top 35 world-wide reinsurance groups: $146 Billion (87%) A.M. Best: Review/Preview – January 2006 (P&C + Life)

9 9 REINSURANCE MARKET Estimated Global Reinsurance Capacity: $2 billion any one program Estimated Global Reinsurance Capacity: $2 billion any one program

10 10 REINSURANCE MARKET Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks. Diversification helps make underwriting results more predictable – and more profitable. Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks. Diversification helps make underwriting results more predictable – and more profitable.

11 11 REINSURANCE MARKET Canada does NOT have a single independent domestic reinsurance company. All reinsurers operating here are ultimately foreign-owned. 11

12 12 COMPARISON OF ASSUMED REINSURANCE PREMIUMS

13 13 COMPARISON OF ASSUMED REINSURANCE PREMIUMS Source for Gross Reinsurance Premiums ceded by Region: International Association of Insurance Supervisors – “Global Reinsurance Market Report 2004” Published December 2005

14 14 Thus events elsewhere in the world can impact Canadian reinsurance rates and conditions – as well as the security ratings of reinsurers doing business in Canada. 14

15 15 CURRENT REINSURANCE MARKET With a few exceptions, the reinsurance sector’s capital adequacy generally held up in the face of record losses in 2005. The global reinsurance sector lost as much as $20 billion of equity in 2005, as a result of record Cat losses. - Fitch Ratings Special Report: Dec. 7, 2005

16 16 CURRENT REINSURANCE MARKET This equates to 5% - 6% of the global reinsurance industry’s year- end 2004 surplus. (Significant but manageable.) Expect more than $16 billion of new capital to find its way in the reinsurance sector by April 2006. Also expect rates to stay firm. - Fitch Ratings Special Report: Dec. 7, 2005

17 17 NEW CAPITAL and the “Class of 2005” Some $20 billion of new capital has already been injected into the insurance and reinsurance industry after the 2005 U.S. hurricanes. 80% went to Bermuda. $8 - $12 billion going into 12 new start-up reinsurers. S&P: “Global Reinsurance 2006 Outlook”, Dec. 2005

18 18 ANNOUNCED INSURER CAPITAL RAISING* ($ Millions, as of December 1, 2005) *Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute. As of Dec. 1st, 19 insurers announced plans to raise $9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65 billion more for a total of $18.65 billion. Likely at least $20B raised eventually.

19 19 S&P lowered its outlook for the GLOBAL reinsurance sector from stable to negative on Sept. 28, 2005. Outlook remains negative. S&P downgraded five reinsurance groups in November and December. 19

20 20 S & P’s CONCERNS: Strains on reinsurers’ capital caused by largest Cat loss year in history. Higher than expected volatility. Will the industry price risk exposures appropriately and manage its risk aggregation? Potential for adverse reserve development from 2005 Cats. S&P: “Global Reinsurance 2006 Outlook”, Dec. 2005

21 21 REINSURERS’ COMBINED RATIOS Canadian Reinsurers 2001:119% 2002:110% 2003: 96% 2004: 92% 2005 (@ Q3): * 107% U.S. Reinsurers 2001:143% 2002:121% 2003:101% 2004 105% 2005 (@ Q3)124% (* MSA Research)

22 22 COMBINED LOSS & EXPENSE RATIOS OF CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2005

23 23 NET PREMIUMS WRITTEN BY CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2005

24 24 TOTAL REINSURANCE CEDED (Domestic & Foreign Companies) Source: OSFI Financial Data

25 25 LESS BUSINESS AVAILABLE FOR REINSURERS Insurer retentions continuing to gradually increase. Mergers and acquisitions. Reinsurance “pie” in Canada is shrinking.

26 26 LESS BUSINESS AVAILABLE FOR REINSURERS Insurance company mergers and acquisitions are NOT good news for reinsurers. e.g. Allianz Canada no longer buys an independent treaty program. Neither will Citadel next year. SUPPLY of reinsurance has increased but the DEMAND has been declining.

27 27 CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS 24%30% 31%30%27% Source: OSFI @ Q4 each year – but Q3 for 2005 24%

28 28 RELATIVE IMPORTANCE OF REINSURANCE TO CANADIAN INSURERS Ratios of “Reinsurance Ceded” to “Net Premiums Written” Wawanesa Mutual Insurance: 2% Dominion of Canada General: 4% Aviva Insurance Co. of Canada: 17% Economical Mutual 28% Zurich Insurance Company: 28% R & SA Insurance Co. of Canada: 33% ING Insurance Co. of Canada: 45% Commonwealth Insurance Company: 79% Source: OSFI Data as of Q3 2005

29 29 QUESTION ? If an insurer’s reinsurance premiums are only 2% - 20% of its total original premium income, what impact would a 10% increase in reinsurance costs have on the premiums that insurer charges the public?

30 30 REINSURANCE CEDED TO PREMIUMS WRITTEN Source: OSFI @ Q3 2005

31 31 IT’S GETTING LONELY OUT THERE! Fewer licensed reinsurers. If Swiss Re buys ERC, will be only 18 active markets left in Canada. Used to be 41 in 1991. 31

32 32 ACTIVE FEDERALLY – LICENCED INDEPENDENT REINSURERS 1.Aspen Re 2.AXA Re 3.CCR 4.Endurance Re 5.Everest Re 6.Folksamerica 7.GE/ERC 8.General Re 9.Hannover Re 10.Lloyd’s 11.Mapfre Re 12.Munich Re 13.Odyssey Re 14.Partner Re 15.SCOR Re 16.Swiss Re 17.Toa Re 18.Transatlantic Re 19.XL Re NEW IN 2005: - None LOST IN 2006: - GE/ERC ?

33 33 UNLIKELY THAT MORE M&A ACTIVTY JUST AHEAD FOR REINSURERS Fitch does not view GE’s sale of E.R.C. to Swiss Re as the beginning of a trend. GE had indicated for some time that its reinsurance operations were not a strategic fit with the rest of its operations. - Fitch Ratings Special Report: Dec. 7, 2005

34 34 REVIEW OF 2005 - THE BIG STORY WAS THE WEATHER 2005 was the year Mother Nature showed it was mad at the world. Relentless, unstoppable weather extremes wreaked havoc around the world. The driest year in decades across the Amazon rainforest. 34

35 35 REVIEW OF 2005 - THE BIG STORY WAS THE WEATHER A record drought in south-eastern Australia; Weather striking Europe with a biblical vengeance (flooding, searing heat, wildfires); Weather striking Europe with a biblical vengeance (flooding, searing heat, wildfires); Weeks of torrential rains and floods in south China. Weeks of torrential rains and floods in south China. 35

36 36 REVIEW OF 2005 - THE BIG STORY WAS THE WEATHER More than 112,000 people died around the world from natural and man-made catastrophes. Total financial losses of some US $225 billion. Total financial losses of some US $225 billion. Estimated US $80 - $100 billion of these losses (36%) were insured. Estimated US $80 - $100 billion of these losses (36%) were insured. Source: Swiss Re Sigma 36

37 37 REVIEW OF 2005 - THE BIG STORY WAS THE WEATHER It was the “worst-ever” Atlantic hurricane season. Unprecedented. The most active – and destructive. The most active – and destructive. 27 named tropical storms (average: 10) 27 named tropical storms (average: 10) 13 of these became hurricanes (ave: 6) 13 of these became hurricanes (ave: 6) 7 of the hurricanes were major (ave: 2) 7 of the hurricanes were major (ave: 2) 37

38 38 REVIEW OF 2005 - THE BIG STORY WAS THE WEATHER One hurricane in particular, Katrina, pounded Florida, the Gulf Coast, and the City of New Orleans.One hurricane in particular, Katrina, pounded Florida, the Gulf Coast, and the City of New Orleans. The worst natural disaster in American history.The worst natural disaster in American history. Then came Rita... and Wilma... and Alpha... and Zeta.Then came Rita... and Wilma... and Alpha... and Zeta. 38

39 39 WEATHER EXTREMES – MORE TO COME ? There is increasing evidence Katrina and Rita were not freak events. The noticeable increase in storm activity in recent years is part of an emerging trend over the past 25 years of: - greater frequency of storms; and - increasing destructive capacity. Nature magazine: August 2005, quoting Kerry Emanuel of the Massachusetts Institute of Technology

40 40 REVIEW OF 2005 LOSSES - IN NORTH AMERICA A year of record losses.A year of record losses. Earliest start of hurricane season in 45 years.Earliest start of hurricane season in 45 years. First time in 89 years that two major hurricanes occurred before August 1st.First time in 89 years that two major hurricanes occurred before August 1st. The last hurricane in 2005 formed on December 30th.The last hurricane in 2005 formed on December 30th. 40

41 41 KATRINA The largest insured loss in history. Estimated loss: $40 - $60 billion. 1.6 million claims. Some 10,000 adjusters at work. Mississippi lawsuit to recover flood claims from insurance policies.

42 42 MAJOR 2005 HURRICANES August 28: Hurricane Katrina (Cat 3) Sept 24: Hurricane Rita (Cat 5) Oct 24: Hurricane Wilma (Cat 3) Total deaths (U.S.): 1,777 confirmed These hurricanes alone may cost the insurance industry as much as $90 billion. Global reinsurers will absorb a substantial portion of this amount. S&P: “Global Reinsurance 2006 Outlook”, Dec. 2005

43 43 IMPACT ON LOUISIANA ALONE “It would take all the Homeowners insurance premiums paid in Louisiana over the past 25 years to cover the total Homeowners claims resulting from the 2005 hurricanes in the state.” - Insurance Information Institute

44 44 U.S. INSURED CATASTROPHE LOSSES *Includes $53.7 billion per ISO/PCS plus $4B offshore energy losses from Hurricanes Katrina & Rita. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute $ Billions 2005 will be by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon

45 45 CAT MODELS SHOWN NOT PERFECT AFTER ALL 2005 hurricanes turned an intense spotlight on exposure management - and on Cat models. 45

46 46 INSURERS RELIED ON MODELS WHICH INDICATED THE PROBABILITY OF A KATRINA EVENT WAS ONE IN 500 YEARS = 0.20% Which insurer or reinsurer do you think incurred the largest loss from Katrina?... And also from Rita?

47 47 IMPACT ON ALLSTATE Allstate’s net loss from Katrina: $3.68 billion. (Rita was $850 M. ) Effective June 1, 2006, Allstate is buying additional Catastrophe reinsurance for 95% of $2 billion excess of $2 billion of aggregate losses.

48 48 CATASTROPHE MODELS ARE BEING RECALIBRATED Models built partly on science; And partly on historical data; And partly on historical data; And partly on professional judgement.And partly on professional judgement. They weren’t programmed for a Katrina.They weren’t programmed for a Katrina. 48

49 49 SOURCE OF FUNDS FOR 2005 HURRICANE LOSSES How was the insurance industry able to absorb the 2005 Catastrophe losses?How was the insurance industry able to absorb the 2005 Catastrophe losses? High profitability of insurance industry during Q1 and Q2 of 2005; Record policyholder surpluses; Investment income and new capital; Significant risk transfer to reinsurers.

50 50 SOURCE OF FUNDS FOR 2005 HURRICANE LOSSES Reinsurers are expected to absorb at least 50% of the 2005 hurricane losses – & possibly as much as 60%.

51 51 SOURCE OF FUNDS FOR 2005 HURRICANE LOSSES The financial performance of the U.S. P & C insurance industry during the first six months of 2005 was nothing short of spectacular. The average return on surplus was 15.3% It appeared the industry was heading for its highest level of profitability since 1987.

52 52 SOURCE OF FUNDS FOR 2005 HURRICANE LOSSES Net profits of $31 billion at Q2 2005 Which included $25 billion of investment income – up 25% over 2004 Policyholder surplus reached a record $412.5 billion by Q2 2005.

53 53 SOURCE OF FUNDS FOR 2005 HURRICANE LOSSES The Catastrophes of 2005 were an “earnings” event – not a “capital” event. The losses were basically paid out of 2005 earnings, rather than the industry’s capital base.

54 54 LET’S NOT FORGET CANADIAN CAT LOSSES IN 2005

55 55 2005 began with an immense insurance loss in Fort McMurray, Alberta – Suncor Energy. A $1 billion loss. 55

56 56

57 57 REVIEW OF 2005 LOSSES - IN CANADA Then during 2005 Canadian P & C insurers (and reinsurers) made disaster payments exceeding ANOTHER $1 billion. Major catastrophe losses included: - Southern Ontario wind and rain storm on August 19 th : $500 million

58 58 REVIEW OF 2005 LOSSES - IN CANADA - Alberta floods in June: $275 million - Summer floods in Manitoba - Quebec rainstorms:$57 million - Summer rainstorms in Saskatchewan (flooding) - Spring flooding and winter snowstorms in Atlantic Canada - Jane Voll, Chief Economist, IBC

59 59 August 19, 2005 GTA rainstorm: 103 millimetres of rain = 4.1 inches (One month of average rainfall) July 2004 Peterborough rainstorm: July 2004 Peterborough rainstorm: 150 millimetres of rain = 5.9 inches Oct 1954 Hurricane Hazel Oct 1954 Hurricane Hazel 53 millimetres of rain = 2.1 inches RAINFALL PER HOUR 59

60 60 GLOBAL CAT LOSS TREND BEEN STEADILY RISING Source: Swiss Re Sigma

61 61 GLOBAL CAT LOSS TREND Insured Natural Cat Loss Development Source: Swiss Re Sigma

62 62 CAT EXPOSURE IN NORTH AMERICA IS ABSOLUTELY ENORMOUS (Originals of this map can be ordered from Risk Management Solutions)

63 63 CANADIAN REINSURANCE MARKET – 2006 RENEWALS Reinsurance renewal pricing for treaties renewing on January 1st increased – but much less than originally expected.

64 64 EVERYONE WAS HAPPY! 64

65 65 CANADIAN REINSURANCE MARKET – 2006 RENEWALS It was a late but “civilized” renewal season. Increased retentions were common. Several insurers absorbed their lower layers (i.e. they disappeared from the reinsurance market).

66 66 CANADIAN REINSURANCE MARKET – 2006 RENEWALS Pricing continued to be based on modeling results → less volatility and variance in rates. Final underwriting decision on many treaties made in London, Europe, Bermuda, or the U.S. Final underwriting decision on many treaties made in London, Europe, Bermuda, or the U.S. No significant changes in treaty conditions for 2006. No significant changes in treaty conditions for 2006. 66

67 67 INSURERS’ CONCERNS WHEN BUYING REINSURANCE 1. Price 2. Terms and conditions 3. Security Benfield Report: “Reinsurance Market and Renewals Review – January 2006”

68 68 INSURERS’ CONCERNS Insurers no longer consider relationships a key factor when buying reinsurance. It’s price, terms and conditions. Followed by reinsurer security.

69 69 CANADIAN REINSURANCE MARKET – 2006 RENEWALS Canadian Cat rates increased 5% - 20%. Property “Per Risk” covers: 5% - 10%. Little change in proportional commissions. Casualty rates generally held firm, except for lower layers, where rates increased about 2% - 10%.

70 70 AVERAGE TREATY RATE CHANGES IN CANADA Source: Various Reinsurers

71 71 AUTO IS NOT A POPULAR LINE WITH REINSURERS

72 72 REINSURERS CONTINUE TO SEE LARGE AUTO CLAIMS.

73 73 AND SOME FUNNY ONES... At least it wasn’t far to go to the graveyard. 73

74 74 DRINKING? NOT ME! 74

75 75 CANADIAN REINSURANCE MARKET – 2006 RENEWALS While public is not reporting small collision & comprehensive losses to private insurers (frequency is down) – “fear induced frequency suppression” – reinsurers are seeing higher severity for A.B. and liability losses.

76 76 CANADIAN REINSURANCE MARKET – 2006 RENEWALS HIGHER SEVERITY e.g. Laura Browne claim (1997) $13 million settlement in 2005. Passenger in a leased car. $3 M from State Farm; $10 M from AIG. Vicarious liability involved.

77 77 CHARACTERISTICS OF TODAY’S INSURERS They are retaining a lot more risk. Common to see $2 to $10 million retentions. They don’t buy as much reinsurance. Sophisticated analytical tools help to increase insurers’ comfort level in retaining higher levels of risk.

78 78 CHARACTERISTICS OF TODAY’S REINSURERS Also retaining more risk. Getting larger. Top 20 markets write 80% of business. Retro market capacity is very limited and expensive. Disciplined underwriting. Focused on bottom-line results.

79 79 CHARACTERISTICS OF TODAY’S REINSURERS Require considerably more underwriting information. Pricing is still heavily influenced by risk modeling. Little room for rate negotiation.

80 80 CHARACTERISTICS OF TODAY’S REINSURERS Their expenses and costs of doing business are increasing. Retrocessional costs up 50% - 100% for 2006. Reinsurers fully aware the world-wide demand for their product is currently declining. Some are diversifying.

81 81 CHARACTERISTICS OF TODAY’S REINSURERS As cedents merge, or increase their retentions and/or move from Quota Share/Surplus treaties to Excess of Loss covers, this reduces the amount of premium in the reinsurance marketplace.

82 82 WHAT DOES 2006 HOLD FOR REINSURERS? The biggest risk is the most predictable: - competition and the cyclical nature of the market! The new reinsurers in Bermuda (“Class of 2005”) have yet to make their influence felt on the market. (The key word is “YET”.) Will aggressive weather patterns continue: - i.e. Cat frequency and severity?

83 83 WHAT DOES 2006 HOLD FOR REINSURERS? Expect reinsurance rates to remain firm in 2006 – and likely increase further. When less new capital becomes available to reinsurers, this will increase rates.   Large losses  destruction of capital  replenishment of capital  unavoidable rate increases.

84 84 WHAT DOES 2006 HOLD FOR INSURANCE INDUSTRY? Profitability should be good – unless catastrophe activity sets new records. Investment income will decrease. R.O.E. will be less than 10%. Don’t expect many M & A’s. (One big one?) Bigger companies expected to grow their market share organically – not by acquisition. Source: I.I.I. – January 10, 2006

85 85 TIME TO RE-EVALUATE THIS DIVERSIFICATION STRATEGY? WHOOPS! One year ago A.M. Best reported: “The business mix is changing. Reinsurers are seeking more life business to offset the impact of the P&C cycle.” Source: Best Week of June 20, 2005

86 86 BACK TO THE DRAWING BOARD? In January, 2006, A.M. Best noted: “The I.I.I. envisions global life insurance losses of as much as $133 billion from a avian flu pandemic.” Source: Best Week of January 23, 2006

87 87 “Financially weak life insurance companies wouldn’t survive a severe avian flu outbreak.” “... the life business suddenly seems a lot less secure.” Source: Best Week of January 23, 2006

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90 90 If you would like to receive a copy of this presentation by e-mail, please request one from Gordon Crutcher at: gcrutcher@SuttonReinsurance.com


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