1. Role of the Reinsurance Industry in the Management of Catastrophe Related Risks Dr. Anselm Smolka Geo Risks Research Munich Reinsurance Company Global Conference on Insurance and Reinsurance for Natural Catastrophe Risk, Dec 8-9, 2005, Istanbul, Turkey

2. 2 2005 160 bn US$ 0 20 40 60 80 100 120 19501955196019651970197519801985199019952000 US$ bn. >178 bn US$ Economic losses (2004 values) Insured losses (2004 values) Trend of economic losses Trend of insured losses © 2005 MRNatCatSERVICE, Geo Risks Research, Munich Re Great Natural Disasters 1950 – 2005 Economic and insured losses

3. 3 - Risk identification - Risk evaluation - Risk control - Risk financing The trend to growing catastrophe losses requires a holistic risk management encompassing: Growing losses The reinsurance sector has built up a unique experience in catastrophe related losses and risk management, and therefore has to play a role in each of these fields

4. 4 Risk identification The MR NatCatSERVICE © output - examples

5. 5 Risk identification The MR World Map

6. 6 Vulnerability function Munich Re's loss experience Set of scenarios Statistics Expected loss or loss occurrence probability Risk curve Individual exposure Scientific input Hazard information Value distribution Risk evaluation The risk model MRHazard Risk = Hazard × Vulnerability × Values

7. 7 Reinsurance – at the cutting edge of recent knowledge Risk evaluation Climate change – introducing activity cycles into pricing 0 5 10 15 20 25 1850187519001925195019752000 Hurricane and Tropical Storm Hurricane Hurricane (SS3,4,5) 2,6/year * 1,5/ year * 3,8/ year * Warm phase Cold phase Warm phase Warm phase Cold phase 1,2/ year * 1,5/ year * Low probability extreme events – a concern for insurance?

8. 8 Westward migration of earthquakes along the NAF in the 20th century Turk/US Study on earthquake probability Istanbul sponsored by Swissre Risk evaluation

9. 9 Risk control The role of reinsurance  Adequate pricing  Substantial deductibles, based on the respective exposure  Accumulation control  Improved claims settlement  Tax reductions on reserves  Liability limits  Exclusion of certain hazards or highly exposed areas  Loss prevention Reinsurance is in itself a means of risk of control, and reinsurers give guidance in respect of the following risk control measures:

10. 10 A holistic risk management requires sharing the risk between Insured Insurer State Reinsurer Capital market Risk control and risk financing The principle of risk partnership

11. 11 -Capacity for rare, large-scale catastrophic losses through global balance of risks. Single objects (industrial plants). Accumulation losses (natural disasters) -Education and knowledge transfer -Technical support and innovation in insurance solutions for catastrophe risks, drawing on the unique experience regarding catastrophe losses -Maximizing the role of the private sector in catastrophe insurance Risk Partnership The role of reinsurance The role is different in different parts of the world – it is inversely proportional to a market‘s development

12. 12 Capital markets vs. reinsurance procon Cat bonds- no default risk- complexity (# partners) - immediate payout- transaction cost (stable prices)- restricted regional scope - continuity to be tested Reinsurance- universal scope- default risk - only 2 parties - market cycles => simple contracts => low price - continuity Risk Partnership Capital market – additional rather than alternative capacity

13. 13 Risk Partnership -Land use regulations and building codes -Ensure that regulations are observed -Measures to protect the infrastructure (e.g. dams/dykes, water-retaining basins) -Favourable tax treatment of natural perils reserves The state’s tasks

14. Role of the Reinsurance Industry in the Management of Catastrophe Related Risks Dr. Anselm Smolka, Munich Re Thank you for your attention!