1. 1 COOKSON WALKER CONSULTING P&C CRYSTAL BALL 2008 Gordon Crutcher Aon Re Canada January 25, 2008 DIRECTIONS IN REINSURANCE

2. 2 CURRENT DIRECTIONS OF P & C REINSURANCE 2007 REVIEW - 2008 PREVIEW 2007 REVIEW - 2008 PREVIEW GORDON CRUTCHER, Aon Re Canada 2

3. 3 THE REINSURANCE MARKET IS GLOBAL 3

4. 4 REINSURANCE MARKET The reinsurance market is complex and inter-related. One reinsurer can rarely respond to all of a client’s needs. The reinsurance market is complex and inter-related. One reinsurer can rarely respond to all of a client’s needs.

5. 5 REINSURANCE MARKET Insurers usually prefer to have several reinsurers on their treaties. Better security; more flexibility. Insurers usually prefer to have several reinsurers on their treaties. Better security; more flexibility.

6. 6 REINSURANCE MARKET In compiling its 2007 edition of Global Reinsurance Highlights, Standard & Poor’s Ratings Services collected data on approximately 250 reinsurance organizations from over 50 countries. (Life + P&C)

7. 7 REINSURANCE MARKET Estimated Global Reinsurance : Shareholders’ Funds: $483 billion Net Reinsurance Premiums Written: $168 billion Estimated Global Reinsurance : Shareholders’ Funds: $483 billion Net Reinsurance Premiums Written: $168 billion S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)

8. 8 REINSURANCE MARKET Estimated Market Share of the top five World-Wide Reinsurance Groups: 47% (up from 40% in 2005) (Munich Re, Swiss Re, Lloyd’s, Hannover Re, & Berkshire Hathaway Re) Estimated Market Share of the top five World-Wide Reinsurance Groups: 47% (up from 40% in 2005) (Munich Re, Swiss Re, Lloyd’s, Hannover Re, & Berkshire Hathaway Re) S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)

9. 9 REINSURANCE MARKET Estimated Global Reinsurance Capacity: $2 billion any one program

10. 10 REINSURANCE MARKET Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks. Diversification helps make underwriting results more predictable, less volatile – and more profitable. Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks. Diversification helps make underwriting results more predictable, less volatile – and more profitable.

11. 11 REINSURANCE MARKET Canada does NOT have a single independent domestic reinsurance company. All independent reinsurers operating here are foreign-owned. 11

12. 12 COMPARISON OF GROSS CEDED REINSURANCE PREMIUMS Canada

13. 13 COMPARISON OF CEDED REINSURANCE PREMIUMS Information source for Gross Reinsurance Premiums ceded by Region: International Association of Insurance Supervisors – “Global Reinsurance Market Report 2007” Published December 12, 2007

14. 14 Thus events elsewhere in the world can impact Canadian reinsurance rates and conditions – as well as the security ratings of reinsurers doing business in Canada. 14

15. 15 THE CHANGING FACE OF REINSURANCE With the retro market in decline, there has been an amazing increase in the securitization of risks during last few years. Capital Market instruments include: - Catastrophe Bonds; - Catastrophe Loans; - Sidecars; - Industry Loss Warranties; - Insurance Linked Securities.

16. 16 THE CHANGING FACE OF REINSURANCE These types of solutions now account for 30% – 40% of the retro market; And between 5% – 10% of the reinsurance market. According to Goldman Sachs’ Financing Group

17. 17 THE CHANGING FACE OF REINSURANCE “It’s evident that the steady convergence of the capital markets with the insurance sector is irreversible.” Source: Jardine Lloyd Thompson – When two worlds converge...; May 2007

18. 18 THE CHANGING FACE OF REINSURANCE “The landmark issuance by State Farm of a $1.2 billion multi peril catastrophe bond, the largest ever issuance of its type, is an example of what we believe is an emerging trend.” Standard & Poor’s: Global Reinsurance Highlights, September 2007

19. 19 REINSURANCE MARKET Remember this slide? Estimated Global Reinsurance Capacity: $2 billion any one program Remember this slide? Estimated Global Reinsurance Capacity: $2 billion any one program

20. 20 S&P’s outlook for the GLOBAL reinsurance sector remains stable. However, 2008 could be a watershed for the reinsurance industry. 20 Standard & Poor’s: Global Reinsurance Highlights, September 2007

21. 21 REINSURERS’ COMBINED RATIOS Canadian Reinsurers - as per MSA Research 2003: 95% 2004: 93% 2005:105% 2006: 87% 2007 (@ Q3): 86% U.S. Reinsurers – as per R.A.A. 2003:101% 2004: 106% 2005:129% 2006: 95% 2007 (@ Q3) 94%

22. 22 COMBINED LOSS & EXPENSE RATIOS OF CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2007

23. Proprietary & Confidential 23 Reinsurers Combined Ratio Comparison Sources: RRA and RRC and various publications, 23

24. 24 TOTAL REINSURANCE CEDED (Domestic & Foreign Companies) Source: OSFI Financial Data

25. 25 TOTAL REINSURANCE WRITTEN (By Canadian Licensed Reinsurers) Source: MSA Research

26. 26 LESS BUSINESS AVAILABLE FOR REINSURERS Insurer retentions continue to increase. Significant decline in use of Proportional reinsurance. Mergers and acquisitions of insurers. The reinsurance “pie” in Canada is definitely shrinking.

27. 27 LESS BUSINESS AVAILABLE FOR REINSURERS Insurance company mergers and acquisitions are NOT good news for reinsurers. e.g. neither Allianz Canada, nor Citadel Canada, nor CNS buys an independent treaty program any more. SUPPLY of reinsurance has increased but the DEMAND has been declining.

28. 28 IMPACT OF BILL C-37 ON CANADIAN REINSURERS? Bill C-37 will amend Part XIII of the Insurance Companies Act, (ICA). Becomes effective January 1 2009. Among other provisions, could eliminate need for a foreign reinsurer to maintain a Canadian branch.

29. 29 IMPACT OF BILL C-37 ON CANADIAN REINSURERS? “Will this eventually result in an exodus of foreign reinsurers from Canadian soil?” Read the article by J. Brian Reeve, Partner, Cassels Brock & Blackwell LLP in the November 2007 issue of Canadian Underwriter.

30. 30 CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS 24%30%31%30%27% Source: OSFI @ Q4 each year – but Q3 for 2007 24%26% Billions $

31. 31 RELATIVE EMPLOYMENT OF REINSURANCE BY CANADIAN INSURERS Ratios of “Reinsurance Ceded” to “Direct Premiums Written” State Farm Auto: 0% Allstate Insurance Co. of Canada: 0% Wawanesa Mutual Insurance: 2% Dominion of Canada General: 4% Chubb Insurance Co. of Canada: 14% Aviva Insurance Co. of Canada: 17% Economical Mutual Insurance: 26% Royal & SunAlliance Canada:28% ING Insurance Co. of Canada:40% Commonwealth Insurance Company: 76% Source: OSFI Data as of Q4 2006

32. 32 REINSURANCE CEDED TO PREMIUMS WRITTEN Source: OSFI @ Q4 2006

33. 33 CAUTION Reinsurance premiums can be ceded: - to EXTERNAL reinsurers, - or INTERNALLY for “group” protections.

34. 34 IT’S GETTING LONELY OUT THERE! Fewer licensed reinsurers. Only 19 active, independent markets left in Canada. Used to be 41 in 1991. 34

35. 35 ACTIVE FEDERALLY – LICENCED INDEPENDENT REINSURERS 1.Ace 2.Aspen Re 3.Berkley 4.CCR 5.Everest Re 6.Folksamerica 7.General Re 8.Hannover Re 9.Lloyd’s 10.Mapfre Re 11.Munich Re 12.Odyssey Re 13.Paris Re 14.Partner Re 15.SCOR Re 16.Swiss Re 17.Toa Re 18.Transatlantic Re 19.XL Re NEW IN 2007: - None LOST IN 2007 : - None Note: The FMRP is not an independent reinsurer.

36. 36 REVIEW OF 2007 36 “The absence of large catastrophe losses was a key factor in the softening of reinsurance markets.” Guy Carpenter: Global Reinsurance Review – January 2008

37. 37

38. GLOBAL CAT LOSS TREND BEEN STEADILY RISING 38

39. 39 GLOBAL CAT LOSSES Natural and man-made catastrophes produced insured losses of some US $25 billion in 2007. In comparison, such insured cat losses in 2005 exceeded US $112 billion. (4.5 times higher!) Source: Swiss Re Sigma 39

40. U.S. Insured Catastrophe Losses* *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute $ Billions 2006 & 2007 were a welcome respite. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon 40

41. 41 CAT EXPOSURE IN NORTH AMERICA IS ABSOLUTELY ENORMOUS (Originals of this map can be ordered from Risk Management Solutions)

42. 42 WHAT WILL IT TAKE TO TURN THE MARKET? 42

43. WHAT WILL IT TAKE TO TURN THE MARKET? Probably a ceded loss of US $15 to $25 billion is required to change the direction of the market. Aon Re Canada – Reinsurance Market Conditions – January 2008 43

44. 44 WHAT WILL HAPPEN IN 2008? Predicted to be an active hurricane season. Unlikely to have a benign hurricane season two years in a row. And an earthquake can happen at any time.

45. 45 CANADIAN CAT LOSSES IN 2007

46. 46 REVIEW OF 2007 CANADIAN CAT LOSSES “The West had too much weather.” - Severe summer weather warnings; - Tornados; - Intense rainfalls; - Wind storms; - Hail storms; - Crop losses. INSURED LOSSES OVER $200 MILLION

47. 47 REVIEW OF 2007 CANADIAN CAT LOSSES Elie, Manitoba – June 22, 2007 - Canada’s first documented F5 intensity tornado with winds above 420 km/h. - An F5 is the highest rating on the internationally recognized Fujita tornado damage scale.

48. 48 REVIEW OF 2007 CANADIAN CAT LOSSES A number of significant flood events in B.C., last spring. The worst flooding ever in the Prairies. Up to 50 cm of snow in Vancouver Island in December. Extreme heat and humidity in Alberta, Saskatchewan and Manitoba in July. (The 2 nd hottest July on record in Calgary.)

49. 49 REVIEW OF 2007 CANADIAN CAT LOSSES August 9 th – Dauphin, Manitoba. A spectacular hail storm triggered some 13,000 claims for MPI. Estimated loss of $53 million. One of the single largest catastrophic events in MPI’s history.

50. 50 REVIEW OF 2007 CANADIAN CAT LOSSES Reinsurers will bear only a small proportion of the 2007 Canadian Cat losses. Most of these losses will be absorbed instead by insurers. The insurers’ share of the losses typically fall within their Cat deductibles.

51. 51 REVIEW OF 2007 CANADIAN CAT LOSSES Water-related issues are a Property insurer’s biggest problem, and one that will continue to grow. Storms and flooding are costing the industry record amounts. Source: Kathy Bardswick, CEO, Co-Operators Group – BestWeek,October 1, 2007

52. Proprietary & Confidential 52 Catastrophe Rates and Exposures Canadian Catastrophe Rate Changes Sources: Swiss Re 1990 –2003, Aon Re Canada 2004 - 2008 1991 Calgary Hailstorm 1998 Ice storm 2001 WTC 2005 KRW 1992 Andrew 2005 Ontario August Rain Storms

53. 53 THE JANUARY 1 ST, 2008 CANADIAN REINSURANCE RENEWAL SEASON 53

54. CANADIAN REINSURANCE MARKET – 2008 RENEWALS 54 “AN OLD- FASHIONED SOFT MARKET” Benfield : Global Reinsurance Market Review – January 2008

55. 55 CANADIAN REINSURANCE MARKET – 2008 RENEWALS “Lackluster January renewals” – A.M. Best “Current soft cycle could be a lengthy one” – Aon Re Canada “A buyer’s market” – Guy Carpenter “Late and low” – Benfield

56. 56 CANADIAN REINSURANCE MARKET – 2008 RENEWALS “The industry is showing signs of reverting to its historic pattern of feast or famine.” – Willis Re

57. 57 INSURERS’ CONCERNS WHEN BUYING REINSURANCE 1. Cost 2. Security/Ratings 3. Coverage and Conditions Benfield Report: “Global Reinsurance Market Review – January 2008”

58. 58 INSURERS’ CONCERNS Insurers no longer consider relationships a key factor when buying reinsurance. It is price; then reinsurers’ security, Followed by terms & conditions. Benfield: Global Reinsurance Market Review – January 2008

59. 59 CANADIAN REINSURANCE MARKET – 2008 RENEWALS Capacity outstripped demand. One of the latest renewal seasons ever. No technical issues to deal with. Pricing under competitive pressures for all lines. (As per interviews with various reinsurers)

60. 60 CANADIAN REINSURANCE MARKET – 2008 RENEWALS Canadian Cat rates-on-line down 5% - 10% from expiring ROL’s. Property “Per Risk” rates down 5% - 10%. Little change in proportional commissions. Casualty rate changes were “choppy, but rates seemed to have weakened overall”. (As per interviews with various reinsurers)

61. 61 CANADIAN REINSURANCE MARKET – 2008 RENEWALS Estimates for the reduction in total premiums ceded to licensed professional reinsurers in Canada for 2008, (including Lloyd’s), range from $200 to $300 million !!!! (As per interviews with various reinsurers)

62. 62 When the tide goes out... 62

63. 63.. ALL BOATS DROP TO THE SAME LEVEL (Old maxim) 63

64. 64 AVERAGE TREATY RATE CHANGES IN CANADA Source: Various Reinsurers

65. 65 AUTO REMAINS THE MOST CHALLENGING CLASS FOR REINSURERS 65

66. 66. 95% OF ALL THE CLAIMS THAT REINSURERS SEE ARE AUTO Source: Interview with major Canadian reinsurance CEO 66

67. 67 TRUCK BURNING AFTER MULTI-VEHICHLE ACCIDENT ON HIGHWAY 401 67

68. 68 WHILE UNUSUAL FOR PROPERTY, A $2 - $3 MILLION AUTO LOSS IS COMMON Source: Interview with a Canadian reinsurance CEO 68

69. 69 CHARACTERISTICS OF TODAY’S INSURERS They are retaining a lot more risk. Common to see $2 to $10 million retentions – and higher!. They don’t buy as much reinsurance. Sophisticated analytical tools help to increase insurers’ comfort level in retaining higher levels of risk.

70. 70 CHARACTERISTICS OF TODAY’S INSURERS Consider collection of accurate data for reinsurers is essential. A costly and complex exercise, lasting several months. If not accurate, can result in company paying thousands of $ more in reinsurance premiums. Source: Interview with Canadian reinsurance buyer.

71. 71 CHARACTERISTICS OF TODAY’S REINSURERS Also retaining more risk. Getting larger. Top 20 markets write 80% of business. Retro market capacity is very limited and expensive. Disciplined underwriting. Focused on bottom-line results.

72. 72 CHARACTERISTICS OF TODAY’S REINSURERS Require considerable underwriting information. Pricing is heavily influenced by risk modeling.

73. 73 CHARACTERISTICS OF TODAY’S REINSURERS The level of sophistication and capability among local reinsurers has increased dramatically over the last 2 years. Little need for them to rely upon actuaries and models at Head Office. Source: Interview with major Canadian reinsurance buyer.

74. 74 CHARACTERISTICS OF TODAY’S REINSURERS Their expenses and costs of doing business are increasing. Reinsurers fully aware the world-wide demand for their product is declining. Some are diversifying into insurance.

75. 75 WHAT DOES 2008 HOLD FOR REINSURERS? Local reinsurers typically expect market will remain soft in 2008. When losses increase, or less new capital becomes available to reinsurers, this will increase rates.   Large losses  destruction of capital  replenishment of capital  unavoidable rate increases.

76. 76 “The wind hasn’t stopped blowing and the earth hasn’t stopped shaking.” Martin Sullivan, CEO of AIG at 2007 P/C Ins. Joint Industry Forum

77. 77

78. 78 If you would like to receive a copy of this presentation by e-mail, please request one from Gordon Crutcher at: Gordon@Crutcher.ca