International Catastrophe Reserving Paul Gates, Platinum Underwriters Casualty Loss Seminar, September

International Cat Reserving International Cat Reserving – a live experience!

Catastrophe Reserving in Europe Legislative background The changing environment Practical issues –Assessing catastrophic loss potential –“Live” catastrophe reserving –“Large” versus “small” catastrophes

Legislative Background - Europe A quick tour –United Kingdom –Germany –Switzerland –Australia (?!) Pre-funding and post-funding

Catastrophe Reserving in the UK

Regulated by FSA (Financial Services Authority) –Tax position supervised by Inland Revenue Equalisation Reserves pre-event Post-event – demonstration of reserve requirement (tax allowance)

Catastrophe Reserving in the UK Equalisation Reserve Calculation –Transfers In & Out Transfers In –Percentage of Net Premiums in Financial Year –Transfers & Reserve based on “Business Groups” Transfers Out –“Abnormal Loss” –Transfer Limited by Business Group Maxima

Equalisation Reserves in the UK “Abnormal loss” refers to losses in excess of above percentages, expressed as percentage of net written / earned premiums Business Group maximum expressed as percentage of average net written in previous 5 years

Example of UK Equalisation Reserving

Catastrophe Reserving in the UK Post-event Reserving –Projection of ultimates –Identifying claimant / potential cedants –Run-off term –Uncertainty v best estimate –IBNER “Unknown” Catastrophe

Catastrophe Reserving in Germany Regulated by BAFin (Bundesanstalt für Finanzdienstleistungsaufsicht) Significant Equalisation Reserves –Prescribed by formula –Applied to transfers in & out –Related to the standard deviation in last 15 years –“To disappear eventually ”

Equalisation Reserves in Germany Based on net premiums Per line of business Compare loss ratio for year with average Prerequisites for establishing reserve –Average net premium large enough (>Eur125,000) –Standard deviation of loss ratios >=5% –Combined ratio >100% at least once in 15 years Limitation for reserve –Equals (usually) current net premium * standard deviation * 4.5 –3.5% of limit transferred to the reserve pa

Catastrophe Reserving in Switzerland Regulated by FOPI – Federal Office of Private Insurance (also known as BPV/OFAP/UFAP) Equalisation reserves still being utilised significantly? –“Swiss Re….expects its losses reserves related to Hurricane Ivan and Typhoon Songda to be approximately USD300m before tax….in addition to estimated claims of USD 290m before tax for Hurricanes Charley & Frances…Swiss Re may use some of its claims equalisation reserves to absorb part of the financial impact of these events”(Swiss Re news release 24 Sept 2004) –“Swiss Re…will use equalisation reserves to mitigate part of the claims caused by this year’s extraordinary hurricane season” (Swiss Re news release 2 November 2005)

Catastrophe Reserving in Switzerland Equalisation Reserves –Give details of determination in business plan –Must maintain this methodolodgy –No explicit mention in Swiss Insurance Regulation Act (no guidelines) –Exception for credit insurance –To be eliminated?

Catastrophe Reserving in Australia Regulated by APRA Best estimate reserving –According to actuarial calculation No equalisation reserves –No tax allowance

Evolution of Catastrophe Reserving Harmonisation of financial regimes (Europe) International Financial Reporting Accounting Standards –Demise of equalisation reserves? The debate continues –Listed companies –Consolidated accounts v local reporting Link to solvency requirements –Solvency II progressing (risk based assessment in Europe) –Catastrophic loss key driver of (in)solvency –Role of actuaries

Catastrophe Reserving in Practice Goldie Re (UK) Assessing loss potential pre-event –Link to solvency calculations “Live Cat” reserving Reserving at year-end –Large versus small events

Catastrophe Reserving in Practice Assessing Loss Potential (PML) –Key zones –Exposing cedants –Using pricing information Losses per event, per cedant Layers, shares, exchange rates, reinstatement terms Also allow for outwards reinsurance Focus on key return periods Forms basis of catastrophic loss element of ICA model – solvency purposes

PML Example

Live Cat Reserving Need for more timely information –Shareholders/investors –Management Less developed process outside USA –No equivalent of NHC –More reliant on cat modelling firms (RMS/EQE/AIR) –Liaise with brokers and cedants Use PML calculations as basis –Link to matching event IDs, issued by modelling cos

Live Cat Reserving – Example Windstorm Erwin –7 th to 9 th January 2005 –Affected Northern UK, Northern Germany, Denmark and Sweden –A year’s worth of Sweden’s forestry output felled! –Information hard to obtain Broker reports News websites –Approximately USD 1.75bn of insured loss

Live Cat Reserving – Example Windstorm Erwin –Range of reserve estimates $350,000 to $25,000,000 –September % settled, final loss of $2m

How year-end reserving might run Large Catastrophes –Define threshold –Specific projections –Allowance for deterioration New cedant notifications Market developments –Reporting tail quite swift Small catastrophes –Loss ratio for overall portfolio –Reporting slower

Thank you for your attention Hurricane Fabian, 2003