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W Geneva December, 2007 World Meteorological Organization Catastrophe Reinsurance and Cat Bonds
W 2 Catastrophe Risk From Session 2 Panel Discussion: Catastrophe Risk: same event affects multiple insureds Catastrophe Risk is a unique class of risk Reinsurers provide coverage to insurance companies for exposure to catastrophe risk
W 3 Exposure to Catastrophe Loss Measuring Exposure to the Insurer Inventory risks –Location –Construction –Occupancy –Protection –Policy Coverage Create electronically held data base Quality control of data inventory Aggregate risks by exposure and geography Model impact of catastrophe events on portfolio of properties
W 4 Modeling Catastrophe Risk Fundamentals of Catastrophe Modeling Catastrophe Modeling is the stochastic simulation of hypothetical events and their affect on an inventory of insured risks.
W 5 Modeling Catastrophe Risk Source: NOAA/NHC
W 6 Modeling Catastrophe Risk Source: NOAA/NHC
W 7 Modeling Catastrophe Risk Hypothetical Example Output Hypothetical Portfolio: Location: State on the US Gulf of Mexico Portfolio: 14,915 properties
W 8 Catastrophe Risk Program Considerations 1.The buyer is expected to retain risk (retention, deductible): smaller events a minimum amount of loss on larger events function of price of reinsurance, cost of capital and capital strength 2.Protection to.4% probability of exceedance.
W 9 Catastrophe Risk Program Hypothetical Program Structure $117.1 million xs $1.8 million, structured as follows :
W 10 Catastrophe Risk Program Outline Sample Agreement Reinsured:Hypothetical Insurance Company Coverage:Property losses arising from a single Event. Type:Indemnity Excess of Loss Period:12 months 1 January 200Q – 31 December 200Q Layer:Layer IV Limit:Up to US$32,800,000 UNL excess of US$86,100,000 UNL. Premium:US$xx,xxx,xxx Other Conditions: Definition of Event Definition of UNL Exclusions etc.
W 11 Capital Markets View Hypothetical Program – Layer 4 Cat Bond
W 12 Capital Markets View Capital Markets convert physical catastrophe risk into financial risk of default: insurance linked investment risk. If reinsurance market premium for risk equals or exceeds capital markets charge for default risk the catastrophe- insurance-linked security will attract investor interest. Complicating factors: –Value added of capital markets Credit strength (collateral) Risk transfer trigger –Diversification value of insurance-linked risk ILS not tied up with sub-prime crisis
W 13 Capital Markets View Transfer of Catastrophe Risk
W 14 Cat Bonds Dislocation in reinsurance market post 2004 and 2005 storms created conditions for increased investment in insurance-linked securities. Cat bonds (ILS-investments) are now generally accepted asset class, managed as risk portfolios rather than as arbitrage opportunities. Cat bonds bring outside capital to support insurance risk. Source: Willis Capital Markets
W 15 Cat Bonds Characteristics of Cat Bonds Trigger Mechanisms Indemnity Modeled Loss Index Based - Loss Indices (e.g. PCS, Swiss Re Sigma) - Parametric (e.g. Saffir-Simpson Scale, wind speed) All triggers based on modeling.
W 16 Cat Bonds Parametric Triggers and Financing Public Relief Parametric Triggers can be utilized flexibly Pay on the event Can be utilized in non-insurance and insurance formats Create opportunity for financing in the wake of catastrophe event Investor markets accept parametric triggers underlying data sufficiently robust accurate, reliable and prompt reporting recognized index Critical Issue: establishing in advance the financial support required in wake of event
W 17 Meteorological Services and Cat Risk Importance of Meteorological Data Public Safety Warnings Prediction Financing of Public Relief Commercial Modeling of storms and storm damage Capital adequacy of financial institutions Climatology of Extreme Events Long term improvement of international data base Short term issues: attenuation of storms after landfall storm behavior at sea storm related flood risk
W 18 Disclaimer Willis Structured Financial Solutions Limited ("WSFSL") is an investment business authorized and regulated by the UK Financial Services Authority. Willis Securities, Inc. ("WSI"), is a licensed broker dealer authorized and regulated by the NASD and is a member of SIPC. Willis Capital Markets ("WCM") is a trading name of WSFSL and WSI. Reinsurance products are placed through Willis Re Inc. in the United States and through Willis Limited in the UK. Willis Re, Willis Limited, WSFSL and WSI are Willis Group companies. These materials have been prepared by WCM for the WCM client or potential client to whom such materials are addressed in connection with an actual or potential mandate or engagement and may not be used or relied upon for any other purpose. These materials are based upon information provided by or on behalf of the company and other potential transaction participants from public sources or other sources.. WCM assumes no responsibility for independent investigation or verification of such information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance prepared by or reviewed with the company management or obtained from public sources, WCM has assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of company management (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. This communication was designed for use by the WCM client or potential client and is being furnished and should be considered only in connection with other information, oral or written, being provided by WCM in connection herewith. The information contained herein is not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. Nothing in this communication constitutes an offer or solicitation to sell or purchase any securities and is not a commitment by WCM (or any affiliate) to provide or arrange any financing for any transaction or to purchase any security in connection therewith. WCM assumes no obligation to update or otherwise revise these materials. This communication has not been prepared with a view towards public disclosure under any securities laws and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without the prior written consent of WCM. Information contained within this communication may not reflect information known to other employees in any other business areas of Willis Group and its affiliates.
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