1. Recent Trends in Catastrophe Risk Pricing

2. 2  How do reinsurers price Catastrophe Risk ?  Trends in Catastrophe pricing in 2005  How has the market reacted to the Catastrophe losses of 2005 ?  Outlook for the global catastrophe market in 2006  Impact on the Catastrophe Bond Market

3. 3 Recent Trends in Catastrophe Risk Pricing How do reinsurers price Catastrophe Risk Emerging Territories  Territories such as China, India and Eastern Europe are good examples of emerging territories from the perspective of catastrophe reinsurers  Although in many cases they are in development stage, there is often a shortage of credible catastrophe models that can be used for pricing in emerging territories  Reinsurers, therefore, generally rely on;  Information on aggregate values by zone at most detailed level available  Historical losses  A large amount of extrapolation and guesswork  This omits capacity from some more technical reinsurers and often leads to significant price corrections after a loss

4. 4 Recent Trends in Catastrophe Risk Pricing How do reinsurers price Catastrophe Risk Developed Territories  The US,UK and Japan are good examples of Developed markets from a catastrophe reinsurance perspective  Catastrophe models have been the key underwriting tool for most reinsurers in these territories. The widespread use of RMS,AIR,EQE often leads to a narrow band of quotes from reinsurers.  Pricing is based on annual expected loss plus loading for volatility, un-modeled perils, expenses and profit  There is an increasing use of portfolio optimisation models by reinsurers giving them the ability to charge higher loadings in territories where they have heavy concentrations of exposure and lower loadings where they are light on exposures

5. 5 Recent Trends in Catastrophe Risk Pricing How do reinsurers price Catastrophe Risk Global split of Catastrophe Premium

6. 6 Recent Trends in Catastrophe Risk Pricing How do reinsurers price Catastrophe Risk Why is writing business in emerging territories attractive to reinsurers?  There are only a few regions where the peak amount of traditional reinsurance may be too concentrated for the reinsurance market  Throughout most of the world the opportunity to diversify is attractive and cost-effective to resinsurers and cedants alike

7. 7 Recent Trends in Catastrophe Risk Pricing How do reinsurers price Catastrophe Risk Diversification Effect  In this example, a CAT reinsurer can meet its target return of 16% by charging less than 16% in each region due to favorable diversification effects (global spread) Overall ROE16% UK6% Europe8% Japan EQ2%-8% Japan Typhoon4% Other Regions6% Florida12% CA EQ11% Other US9%

8. Trends in Catastrophe Pricing 2005

9. 9 Recent Trends in Catastrophe Risk Pricing Trends in Catastrophe Pricing in 2005 Situation prior to September 2005  Continued moderate softening in Global Catastrophe Rates but more disciplined than the soft market of the 1990’s due to:  4 large Hurricanes in the US,10 typhoons in Japan and Indian Ocean Tsunami in 2004, Hurricane Erwin in early 2005  Marketplace becoming more technical in pricing techniques  Investment returns still relatively low  The market for Retrocession support remained disciplined  The new entrants to the market had promised investors not to chase prices down  More significant reductions in non-peak territories

10. 10 Recent Trends in Catastrophe Risk Pricing Trends in Catastrophe Pricing in 2005 Pricing Index for Catastrophe Reinsurance business  Overall, Property Rates continued to decrease in 2005 except on the most severely loss affected business *1990 = 100. Index constructed by Guy Carpenter & Company, Inc.

11. 11 Recent Trends in Catastrophe Risk Pricing Risk Adjusted ROL Change by Territory Trends in Catastrophe Pricing in 2005

12. How has the Reinsurance Catastrophe Market changed following the 2005 losses  Capital entering and exiting the market  Issues with Catastrophe Models  Reaction from rating agencies

13. 13 Recent Trends in Catastrophe Risk Pricing How has the Reinsurance Catastrophe Market changed following the 2005 losses The Ten most Costly Natural Catastrophe Losses in history ($ US) 2005Hurricane Katrina US Est $40 - $60bn 1992Hurricane Andrew US Caribbean $21.5bn 1994 Northridge Earthquake US $17bn 2005Hurricane Wilma US $8bn - $12bn (Est) 2004Hurricane Ivan US Caribbean $11bn 2004Hurricane Charley US Caribbean $8bn 1991Typhoon Mireille Japan $7.8bn 1990Winterstorm Daria France, UK et al $6.6bn 1999Winterstorm Lothar France, Switz et al $6.5bn 1989Hurricane Hugo US, PR, et al $6.4bn Plus Hurricane Erwin, Swiss Floods, Mumbai Floods, Hurricane Rita!

14. 14 Recent Trends in Catastrophe Risk Pricing How has the Reinsurance Catastrophe Market changed following the 2005 losses Capital in and out  2004 was the costliest year on record for global catastrophic losses  2005 will eclipse 2004 with industry losses nearing $100bn at the top end of estimates  The Reinsurance market could pick up an estimated $40bn of loss from catastrophic events in 2005  Est $10bn new capacity is entering the market supporting existing insurers/reinsurers and creating new companies. Most new start up companies are based in Bermuda  Hedge Funds in particular have shown an appetite for writing Catastrophe Reinsurance business

15. 15 Recent Trends in Catastrophe Risk Pricing How has the Reinsurance Catastrophe Market changed following the 2005 losses Catastrophe Models  2005 hurricanes highlighted the following issues:  Demand surge is not included in models for most countries  Models in US that do include it performed poorly  Storm surge is not included in most models  Frequency as a result of increased sea temperature  Non modelled perils  Flood  Effects of increased urbanization  Adequacy of river defences

16. 16 Recent Trends in Catastrophe Risk Pricing How has the Reinsurance Catastrophe Market changed following the 2005 losses Rating Agencies  A.M Best stated last week that ‘Man made and natural catastrophes are the most significant threat to the financial strength and credit quality of the property and casualty market’  Rating Agencies have downgraded many insurers and reinsurers since Sept 05. Monoline catastrophe writers are looking to diversify  Capital requirements for writing Catastrophe business are increasing as assumptions over frequency and severity are revised upwards  Capital requirements for Catastrophe reinsurers increasing to gain/maintain ‘A’ rating

17. 17 Recent Trends in Catastrophe Risk Pricing Reinsurers will have to take their medicine from the rating agencies

18. Outlook for the global catastrophe market in 2006  Difference between 2006 and market WTC  Summary of factors  What should we expect for 2006

19. 19 Recent Trends in Catastrophe Risk Pricing Outlook for the global catastrophe market in 2006 Difference between this market and post WTC  WTC hit at bottom of cycle  WTC hit insurance rates first  Reinsurance market rode on the back of increasing insurance rates  Post WTC rates increased across all lines globally  WTC was more of a risk loss than a cat loss to the reinsurance market WTC

20. 20 Recent Trends in Catastrophe Risk Pricing Outlook for the global catastrophe market in 2006 Summary of the Factors in Play Factors Pushing Rates Up Cat losses (Primarily US but also WW – eg Erwin, India, Switzerland) Destruction of capital Uncertainty over models Rating Agency actions Retro market Factors Mitigating Rate Increases New capital entering market Many reinsurers’ capital positions remain strong Many loss free territories Existing price levels Need for mono-line reinsurers to diversify their books both in terms of territory and line of business

21. 21 Recent Trends in Catastrophe Risk Pricing Outlook for the global catastrophe market in 2006 What should we expect?  Significant increases for loss affected territories, especially in the US and for clients with Gulf of Mexico exposure  Mild increases (5 – 15%) in other peak zones eg European Wind and Japan for loss free programmes  Neutral to small (0 – 10%) increases for non-peak areas including emerging territories for loss free territories  Large capacity programmes that need significant support from the international market will pay more than smaller programmes  Top layers paying minimum capacity premiums may see the largest % increases as capital charges are increased

22. Impact on the Catastrophe Bond Market

23. 23 Recent Trends in Catastrophe Risk Pricing Impact on the Catastrophe Bond Market  First loss to a Cat Bond as a result of Katrina  Investor appetite does not appear to have been negatively impacted  Increased interest from clients, especially in peak zones due to;  Increasing traditional prices in peak zones  Clients concerns over credit risk  Stability of cover over multi year period