Aon Boardroom Series

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Aon Boardroom Series
Lambros Lambrou National Manager Market
Services

• Selling risk the role of insurance in capital
  management

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Setting the scene for this evening

• From buying insurance to selling risk
• The insurance industrys opportunity to innovate
• The concept of insurability
• Alternative Risk Transfer Just how alternative
  is it?
• Risk transfer innovations in weather related
  solutions
• Trends in marketing risks to insurance capital
  markets
• Use of technology

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From buying insurance to selling risk
Product Push
Client Differentiation
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Risk Financing Framework From the CFOs
Perspective
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The risk landscape What role can insurance play?
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Changes over time in key risk concerns
Aon Australias 2005/06 Risk Management Total
Cost Of Insurable Risk Survey Results
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Insurer Choice Factors
Aon Australias 2005/06 Risk Management Total
Cost Of Insurable Risk Survey Results
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The opportunity to innovate
The insurance industry faces single digit growth
opportunities if it fails to challenge current
insurable risk boundaries
Global premium growth 1980-2004
                                                  
                                                  
                                                  
                                                  
                               
Source - Swiss Re
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The concept of insurability

• Not every risk can be insured at all times
• The concept underlying this observation is called
  insurability
• The essence of this concept is risks that are
  insurable are measurable, bounded and well
  behaved!
• Premium rates must be acceptable to both insurers
  and insureds
• Insurers face 2 types of insurability challenges
  
• Making new risks insurable
• Understanding how changes in the environment
  surrounding risks that are already covered affect
  these risks

Swiss Re Sigma No.4/2005
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Alternative Risk Transfer Just how alternative
is it?

• People generally refer to Alternative Risk
  Transfer as a new way of financing existing
  definitions of insurable risk
• True forms of new insurable risk products appear
  at this stage to be focussing on weather related
  issues (core risk for reinsurers)
• ART developments for broader insurable risk is
  still reasonably underdeveloped
• The opportunity to attract capital markets to
  invest in non-correlating insurable risks is
  enormous large scale securitization would make
  coverage for hard to insure risks more available
  and affordable

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The weather market

• There is an increasing awareness of the huge
  impact of weather on the global industry
• There has been tremendous growth in the trading
  of weather risk contracts
• The investment community has also helped drive
  major growth in the over-the-counter (OTC) market
  
• This year has seen increased participation from
  financial institutions such as banks and hedge
  funds, who see weather derivatives as a vibrant
  new marketplace in which to operate
• Demand in the Asia Pacific region grew 25

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Catastrophe bonds the Katrina, Rita Wilma
experience

• The catastrophe bond market has not emerged from
  Hurricane Katrina unscathed
• Observers say a 190-million indemnity based cat
  bond, issued by a special-purpose vehicle, in
  August on behalf of Swiss Re was triggered
• If the bond's entire principal is required to pay
  Katrina losses, it will be the first cat bond
  issue to totally call in investors' funds, say
  investors
• The bond, which was sold in a private placement,
  was intended to provide protection in the event
  that ultimate net losses from U.S. hurricane and
  earthquake claims were more than 1 billion

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Tokyo Gas

• Tokyo Gas Co., Japan's biggest natural gas
  distributor, had a 15 percent gain in
  third-quarter 04 profit because it sold shares in
  other companies and used weather derivatives to
  hedge against warmer-than-usual temperatures
• Tokyo Gas secured 1.3 billion yen from weather
  derivative contracts signed with Tokyo Electric
  Power Co. and other utilities as warmer weather
  trimmed household gas demand by 2.6 percent in
  the three months
• The average temperature in the Tokyo region for
  the three months was 14.3 degrees Celsius (57.7
  degrees Fahrenheit), compared with 13.8 degrees
  Celsius in the same period in 2003, according to
  figures Bloomberg News calculated with monthly
  data from the company

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Sompo Insures for Spring Cherry Season Rain

• Sompo Japan's product to pay policyholders such
  as restaurants and hotels for each day to a
  maximum of 10 days that rainfall is more than 10
  millimeters above a predetermined amount in the
  period from March 19 to April 10
• Sales of Sompo Japan's weather insurance products
  that started in 1999 have been rising as more
  abnormal weather has been recorded and the
  products have become more widely known
• The insurer also covers businesses against losses
  caused by long periods of rainfall in autumn and
  low spring temperatures

Source - Nikkei
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Emerging risks - Bird Flu

• Catastrophe bonds could absorb bird flu risk but
  perhaps only for life risk
• Bird flu continues rapidly to infect the world's
  media, if not yet its population, spawning
  feverish headlines about the human and monetary
  costs of a potential pandemic
• But signs of the seriousness of the threat are
  evident in capital markets, where there is
  growing interest in the potential for reinsurers
  to pass on to investors in the form of
  so-called catastrophe bonds the costs
  associated with a sudden rise in deaths

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Involvement in selling risks
Aon Australias 2005/06 Risk Management Total
Cost of Insurable Risk Survey Results
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Innovative use of technology

• Differentiation helps to sell risk
• Information is king
• Gives Risk Management process transparency among
  risk stakeholders
• Gives underwriters confidence knowing data is
  accurate,up to date and accessible anytime e.g
• Exposure details
• Values and declarations
• Loss statistics
• On-line claim reporting
• Surveys and inspection reports
• Helps to transforms speculation into
  calculation of risk
• Enables global markets to access regardless of
  time zone or location

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