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

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

3. 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

4. Regional overview
Source: Cat Perils and Swiss Re Institute.

5. 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

6. 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

7. 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?

8. Assisted driving ???

9. 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]

10. 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

11. 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?

12. 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

13. Expanding the horizon
Insurance Linked Securities (ILS)

14. 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.

15. 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

16. 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)

17. Cat bond: triggers

19. Legal notice
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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.