Actuarial role/ contributions/ challenges in Reinsurance Jyoti Majumdar, 19 May, 4th Seminar on Current Issues in General Insurance

Agenda The big problem One of the solutions Expanding the horizon Q&A

What is the ‘big’ problem? Insured vs uninsured losses 1970–2016 in USD billion, at 2016 prices Increasing values Concentration in exposed areas Insurance penetration Changing hazard climate variability climate change

Regional overview Source: Cat Perils and Swiss Re Institute.

Risk Assessment: Risk premium for natural perils? Natural Catastrophes… Are rare Are random Affect vast areas – thousands up to millions of risks affected at the same time; heavy accumulation No sufficient loss experience! Need for scientific risk assessment

Nat Cat risk assessment: Natural (Cat) Perils vs. other Perils Fire Natural perils Risk size Frequency Loss potential Risk assessment single building high low-moderate experience large portfolio low moderate-very high scientific/exposure based

Driving a car by looking (mainly) in the rear mirror Exposure rating vs. Experience rating Main differences of the two rating methods Characteristics Experience Exposure Is the actual exposure considered? Are specific risk characteristics considered? Do we consider the loss history Are we applying market assumptions? Are changes in the portfolio considered?

Assisted driving ???

Definitions of Catastrophe Model/Modelling A Cat Model determines the potential loss to a client’s exposure from natural perils like - wind, earthquake, flooding [Aon Benfield] Catastrophe modeling is the process of using computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic event such as a hurricane or earthquake [Wiki/Swiss Re] A cat model is a computerized system that generates a robust set of simulated events and estimates the magnitude, intensity, and location of the event to determine the amount of damage and calculate the insured loss as a result of a catastrophic event such as a hurricane or an earthquake [Lloyd's Market Association]

Catastrophe covers are large and complex Data is the key Catastrophe models Catastrophe covers are large and complex Data is the key Multidisciplinary approach is required All models are wrong, some of them are useful

Four Elements to Model Losses – Four Box Principle Hazard Vulnerability Value distribution Coverage conditions How often? How strong? How well built and protected? What is covered? Where? How? Four box model – simplified 1. What’s the chance of an earthquake occurring? 2. What’s the chance that it does damage? 3. What’s the chance that it affects me? 4. How much will it cost me?

Four Box Principle: A multidisciplinary approach Where and how often and with what intensity do events occur. Natural sciences Example Hurricane “Charley” Aug 2004 Natural Hazard Extent of damage to exposed values at a given event intensity. Civil and structural engineering Vulnerability Location of Insured objects and how high is their value. Geoinformatics Distribution of property values What proportion of loss is insured Mathematics, Statistics Limit Deductible Insurance conditions

Expanding the horizon Insurance Linked Securities (ILS)

Insurance Linked Securities (ILS) Since its inception in 1996, the market for insurance-linked securities (ILS) as witnessed robust growth worldwide. Re/insurers, governments and corporations continue to access capital market solutions to finance growth, manage capital and transfer risk related to extreme events. Swiss Re is a pioneer in the development of transparent and tradable insurance-linked securities.

What are Insurance Linked Securities (ILS)? Natural catastrophe bonds (cat bonds) and other types of ILS are issued in order to provide re-/insurance protection to insurers, reinsurers, governments, and corporations Cat bonds allow companies to obtain reinsurance protection from a new pool of capital separate from traditional reinsurers Money managers, hedge funds, and pension funds represent a new pool of capital for insurers and reinsurers to gain protection from Investor capital provides collateralized cover Investor capital sits in a segregated collateral account, meaning that if an event occurs, dedicated funds are available to make a payment This virtually eliminates the credit risk inherent in traditional re-/insurance

Why do sponsors consider cat bonds? Concern about counterparty credit risk in case of a large event Shortage/pricing of available traditional capacity e.g. companies with large reinsurance programs, peak perils Diversifying sources of capacity Reducing dependency on one just one market Structural features that the traditional markets have difficulty providing in size at the right price Aggregate, second event, drop down, etc. Multi-year pricing stability (3 – 5 year term is typical for cat bonds)

Cat bond: triggers

Legal notice ©2017 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.