Current State of the Market - icmif

MORO 2012
Current state of the reinsurance market
Paddy Jago
May 2012

The current state of the reinsurance
market
• External factors
• Where are we in the market cycle?
• What this means for Mutuals
• Addressing these issues
2

MORO 2012
Current state of the reinsurance market
External factors

External factors
Economic crisis &
Sovereign Debt
Regulatory
Change
Reinsurance
Market
Catastrophe
Losses
Catastrophe model
change
4

Economic Crisis & Sovereign Debt
• Economic Crisis
– Asset impairment
– Investment difficulties
– … but no evidence that traditional re/insurance holds systemic risks
• Impact of the Eurozone Debt Crisis on Insurer Solvency?
– Implicit and explicit threats to insurer security
– Issues if one or more sovereigns exiting the Euro
– But … the sector has proven itself resilient
• Insurers are different from Banks
– Insurers are significant investors in Eurozone sovereign / financial sector
debt;
– However, exposure differs from banks in many key respects
5

Catastrophic losses
- Events of 2011
Source: MR NatCatSERVICE
6

Catastrophic losses
- Most Costly World Insurance Losses, 1970-2011
50
45
Source; Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
40
Insured Loss (USDm)
35
30
25
20
15
10
5
0
Hurricane Hugo
(1989)
Winter Storm Daria
(1991)
Chile Quake (2010)
Hurricane Ivan
(2004)
Typhoon Mirielle
(1991)
Charley (2004)
Thailand Floods
(2011)
Wilma (2005)
New Zealand
Quake (2011)
Hurricane Ike
(2008)
Northridge EQ
(1994)
Spring Tornadoes/
Storms (2011)
WTC Terror Attack
(2001)
Hurricane Andrew
(1992)
Japan Quake,
Tsunami (2011)
Hurricane Katrina
(2005)
1970 - 2010 2011
7

Catastrophic losses
- 1988 to 2011
140,000
Source; Swiss Re Economic Research & Consulting
120,000
100,000
Insured Loss (USDm)
80,000
60,000
40,000
20,000
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Weather-related Earthquake/tsunami Man-made disasters
8

Catastrophic losses
Event Loss (USD) Issue
Australia Floods
3 bn
Little modelling or exposure
monitoring
Japan EQ & Tsunami 35 bn Only partially modelled
US Tornadoes 19 bn Extreme frequency
New Zealand EQ 20 bn Significant modelling issues
• 2011; the highest loss year on record
for economic losses
– USD 380bn in economic losses
globally
– USD 270bn in 2005 previous
highest
• USD 105 bn in insured losses globally
– 2 nd only to 2005 (inflation
adjusted)
– > 5x 30 year average of USD
19bn
Hurricane Irene 4 bn Extreme flooding
Thailand
12 bn
Little modelling or exposure
monitoring
9

Catastrophic losses
- What have we learned?
• Insured losses still a small percentage of economic loss
– An long-term theme that commercial insurers struggle to address
– Opportunity for the cooperative movement
• The “tail is always bigger than we think
• It’s easy to understate “time element” losses
– Denial of access
– Business Interruption
– Contingent Business Interruption
• A global contagion?
Sendai Airport, source; National Geographic
• Catastrophe models have under-performed
– Coverage
– Secondary and contributing perils
Source; NOAA
10

Model change
• Catastrophe models change frequently
– New science, new loss experience
– RMS v11 Europe Windstorm
• Hazard increases
• Explicit clustering
– RMS v11 US Hurricane
• Medium Term Rates
• Storm surge
• In-land filling
• 2011 saw an unprecedented level of change
– Especially in Europe & USA
– Around 250 new or upgrades from a total of 450 territory peril
combinations
• Model change affects
– Underwriting & business planning
– Portfolio management
– Reinsurance purchasing
– Capital management
– Regulatory
v10
v11
11

Regulatory Change
• Regulatory change is everywhere
– But felt most acutely as a result of SII
• Regulation is becoming global
– A spreading of good and bad regulatory ideas?
• Will this result in
increased understanding of risk?
A clean-up of poorly capitalised companies?
best practice and better understanding of cat
models?
• But at what cost?
Increased consumer costs
Increased reinsurance costs
Enormous regulatory burden
12

ICMIF Solvency II Solutions
One Day Seminar
• WHEN: May 24, 2012
• WHERE: Willis Re, The Willis Building, 51 Lime Street, London,
EC3M 7DQ, UK
• HOSTED BY: ICMIF Supporting Members
• REGISTER NOW: http://www.icmif.org/solvency2012
– Managing Insurance Risk for Profit
– Being Ahead of the Curve in Asset Management
– Optimising Internal Risk Management Practices beyond
Solvency II Compliance Requirements
– Rating Agency and Political Perspectives on Transparency
and Reporting
• Speakers
– Jonathan Evans, MP - key note speaker
– A.M. Best Europe, INVESCO, PartnerRe, Risk Dynamics &
Willis Re
13

MORO 2012
Where are we in the market cycle?

Where are we in the market cycle?
- Selected recent renewals
Territory
Loss free
excess of loss
Loss affected
excess of loss
Comments
Australasia +15 to +35% +40% to +75%
Australasia (inc. NZ) - +80 to +150%
Significant losses
China 0% to +15% - EQ exposure driving pricing
Europe +1% to +4% -
France 0% to +3% -
Broadly loss free, other than Nordic
Nordic +5% to +10% +25% to +50%
Japan +20% to +30% +30% to +50% In addition to prior year increases
Taiwan > +30% - Concern over EQ and CBI
US Nationwide +2.5% to +10% - Losses and model change
15

Where are we in the market cycle?
• Where are we in the market cycle
– AM Best “Critically, the market seems poised for a
turn” January 2012
– Hardening in response to major losses
– … but only spotty increases in loss free territories
• Reinsurers under pressure
– USD 50 bn of losses to the reinsurance sector in 2
years
– Manageable from a capital perspective
– Market’s capital remains strong for 2012
• Not a “proper” hard market
– No dislocation
– Capacity remains available
– Little in the way of capital impairment
Estimated Market Capitalisation
500 bn
450 bn
400 bn
350 bn
• Are we entering an era of “Micro-cycles”?
300 bn
– Dependant on line of business
– Dependant on geography
– Not necessarily industry-wide
250 bn
2007 2007-
2008
2008-
2009
2009-
2010
2010-
2011
2011
16

Reinsurance market cycles
Loss of capital
Rates Rise
Greater
profitability
New capital
attracted
Pricing
decreases
Catastrophes
Reserve erosion
Underwriting losses
Asset impairment
Traditional market cycles
• Reactive to major market events
• High barriers to entry
• Multi-year cycles
17

Reinsurance market cycles
Rates Rise
Rates Rise
New capital attracted
Greater
profitability
Market flattens
New capital
attracted
Pricing
decreases
Pricing
decreases
Is there still a macro cycle?
• Reduced barriers to entry
• New products and investment strategies
• New capital anticipates market hardening
• Continued over-capitalisation
18

MORO 2012
Current state of the reinsurance market
What this means for Mutuals

Universal qualities of mutuals
Focus and homogeneity
• Homogeneity
• Focus on one market segment
• No incentive to move in and out
of product lines
• Highly motivated to remain
relevant to membership
• Explains extraordinary focus on
product and service when
compared to for profit market
Focus
20

Universal qualities of mutuals
Commitment to Policyholders
• Unrivalled product and customer
support
• Long term perspective
• Maintain availability of
appropriate limits
• Realistic pricing – often in the
face of bitter commercial market
competition
• Dividends when results exceed
expectations
Focus
Commitment
21

Universal qualities of mutuals
Consistent value over time
• Maintaining coverage and limits
at lowest sustainable price
• Reduced loss costs through
cutting edge loss prevention
• Reduce claims costs with
specialist expertise
• For profit markets have moved in
and out at whim
Focus
Commitment
Consistency
22

Universal qualities of mutuals
Unrivalled service
• Tailored products, adapted as
needed
• Intimate knowledge of, and direct
communication with members
• The “for profit” market serves
multiple constituencies and
cannot match service level
Focus
Service
Commitment
Consistency
23

Challenges faced by mutuals
Relentless
competition
Smaller size
Outside
Insurance
market
mainstream
Concentration
of risk
Stakeholder
balance
24

What this means for Mutuals
Relentless competition Reinsurance shouldn’t restrict the coverage you give
Outside Insurance market mainstream Reinsurance relationships should inform, not be transactional
Equity between different stakeholders Consistent approach to underwriting
Working with one affinity group Risk concentration need reinsurance to manage peaks
Smaller Size Capital is precious
Mutuals need preferred treatment when accessing
Reinsurance capital
25

MORO 2012
Current state of the reinsurance market
Addressing these issues

Addressing these issues
• Diversification
• Mutual reinsurers
• Multi Year reinsurance
• Pooling Risk
27

Diversification
• We have chosen this week to launch a new report;
Diversification challenges and opportunities for Mutuals
• Key lessons; pursue diversification only where
– It is in line with the long-term aims of the
organisation
– Stands a reasonable chance of being profitable
– Does not come at the expense of a loss of focus
on other aspects of business
28

Mutual reinsurers
• Like minded partners
– Significant financial strength already
within the movement
– Starting on the same page
– A long history of service
– No need to explain who you are
29

Multi Year reinsurance
Year 1 of 3
Year 2 of 3 Year 3 of 3
Open market reinsurance Open market reinsurance Open market reinsurance
Multi-year
(1 of 3)
Single
Year
Multi-year
(2 of 3)
Multi-year
(1 of 3)
Single
Year
Multi-year
(3 of 3)
Multi-year
(2 of 3)
Multi-year
(1 of 3)
Retention Retention Retention
30

Pooling Risk
• Good examples already available
– Latin American Reinsurance Group
– Fire Facultative Facility
10.00%
Potential Cost Savings
• Shared XL purchase
– A High Layer Catastrophe Excess of
Loss
– Joint purchase by 3 – 6 ICMIF members
– Derive cost savings from
Layer Rate on Line
8.00%
6.00%
4.00%
2.10%
2.25%
1.75%
3.13%
• Capital efficiencies from reduction in
“redundant” top layer limits
• Diversification within layer
2.00%
3.00%
6.00%
• Bulk purchasing power
0.00%
• An ICMIF Reinsurer or SPV?
Company A
Company B
Company C
Company D
Potential Savings
Shared Layer
31

Conclusion
• The needs of a Mutual insurance company (including reinsurance)
• The current state of the reinsurance market
• The challenges faced by both
• Working together to build reinsurance solutions
A mutual understanding = a mutual future
32

MORO 2012
Current state of the reinsurance market