Reinsurers a changing role or back to basics

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Reinsurers a changing role or back to basics ?
Grant Robson President and CEO Berkley Re
Australia AILA Annual Conference Hamilton Island
19th September 2008
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What really is the role of the Insurance and
Reinsurance industry ?
I think sometimes we all do forget
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The critics definition
The premiums of the many to pay
the expenses of the few !
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Of course, thats NONSENSE !!
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The reality is
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We protect people, property reputations
Reinsurance 170 Billion marketplace
Insurance 1.66 Trillion global marketplace
USD
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Our previous Governments view
Insurance provides the vital market function of
allocating and pricing of risk. This is an
essential element of a high performing economy.
Without a reliable mechanism for pooling and
transferring risk, much economic development
would not take place. Hon. Peter Costello,
12th August 2004 Australian Federal
Treasurer March 1996 December 2007
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Cumulative Incurred Losses, 2000-2007
US PC Market
US2.2 Trillion paid in claims to tens of
millions of people and businesses since 2000
USD Billions
Losses occurring within a fixed period whether
or not adjusted or paid during the same period,
on a direct basis before reinsurance. Sources
NAIC Annual Statement Database, via Highline
Data, LLC, ISO. Insurance Info. Institute
http//www.iii.org/economics/toc/
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Underwriting Gains (Losses) 1975-2008F
Insurers earned a record underwriting profit of
31.7 billion in 2006, the largest ever but only
the second since 1978. Cumulative underwriting
deficit from 1975 through 2007 is 422 billion.
US BN
Source A.M. Best, Insurance Information
Institute (US PC market)
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Reinsurance - some basics

• Allows insurers to truly spread and transfer
  risk
• Reduces volatility in underwriting results
• Provides a major capital management tool
• Supplies capital relief and flexible financing
  often seen
• or referred to as soft capital
• Allows insurers to accept more business and
  therefore grow
• with the same amount of capital
• Allows primary insurers to spread their
  overheads with larger
• premium writings
• Support for new or risky products entry into
  new markets

No other readily available financial instrument
meets these needs
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Reinsurance makes insurance more stable and
attractive
Reinsurance allows insurers to manage their risks
and capital in the most
efficient and effective way
Schematic courtesy of Swiss Re
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Share of Losses Paid by Reinsurers, by Disaster
Reinsurance is playing an increasingly important
role in the financing of mega-CATs Reins. Costs
are skyrocketing
Excludes losses paid by the Florida Hurricane
Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane
Andrew. FHCF payments to insurers are estimated
at 3.85 billion for 2004 and 4.5 billion for
2005. Sources Wharton Risk Center, Disaster
Insurance Project Insurance Information
Institute.
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Catastrophes increase in volatility/loss
Data indicates both average annual loss and
volatility are consistently increasing

• Chart plots decadal annual average losses
  against standard deviation for
• successive 5 year intervals starting at 1973
  and ending in 2007.

Source Benfield Research
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Our place in the world Insurance scene
Non-Life Market Size
Reinsurance Market Size Estimates
Only
Estimates only
USD
Bn
Bn
1.5
1.2
Bn
Bn
Australia is 4th largest in Asia Pacific behind
Japan, Korea and China
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The Australian Reinsurance marketplace

• Currently there are only 7 active, licensed
  players Lloyds syndicates
• All are either branches or subsidiaries of large
  global groups
• Market size estimated at A2,500,000,000
• Of the 7 groups, 3 are USA based and 4 are
  European based
• The top 2 write 50 of the market
• All of the top 5 reinsurers in the world are
  represented here
• Australian reinsurers no longer exist
  (outside of some captives)

Market has consolidated dramatically over the
past 15 years
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Recent local marketplace changes

• Cologne Re
• American Re
• 1996 MG Re
• 1999 New Cap Re
• FAI Re
• 2000 Copenhagen Re
• REAC
• 2001 Zurich Re
• 2002 Kemper Re
• 2002 GIO Re
• QBE Re
• 2002 Gerling Re
• 2002 St Paul Re
• 2002 Alea Group
• 2003 Danish Re
• 2004 XL Re
• NRG Victory Re
• 2006 GE Employers Re

• - purchased by General Re
• - purchased by Munich Re
• - purchased by Swiss Re
• - license revoked
• - license revoked
• - placed into run-off
• - placed into run- off
• - placed into run-off
• - purchased by Employers Re
• - placed into run-off
• - ceases Australian treaty ops
• - withdraws from Australia
• - withdraws from Australia
• - withdraws from Australia
• - withdraws from Australia
• - withdraws from Australia
• - authority revoked
• - purchased by Swiss Re

18 players disappear over the recent 13 year
period
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The Reinsurers role in Australia

• PROPERTY
• Australian property insurers are very large
  purchasers of Natural
• Catastrophe reinsurance due to Australias
  inherent Nat Cat risks
• The larger programs are protected by reinsurers
  in layers, some from
• around A200m in attachment, up to around A 5
  Billion for single event
• exposures
• CASUALTY
• Most casualty programs also have extensive
  reinsurance support.
• Large casualty programs of A10,000,000 to
  A100,0000,000 will
• have 100 reinsurance protection in layers
  over the insurers
• net line.
• Unlimited layers are still being placed into
  the reinsurance market
• for CTP and workers compensation (in some
  states)

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Time Magazine March 1986
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Is this a future Time Magazine edition ?
Australia,
Reinsurance
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The Reinsurers role, critical or redundant ?

• Simply put
• Without the current level of reinsurance support,
  direct
• companies could easily fail in the event of a
  large loss or
• a series of losses.
• So without reinsurance they have three choices -
• Share their risks with their competitors
• Reduce dramatically their portfolios, exposures
  and capacities
• Raise more capital

Reinsurance remains the simplest, most cost
effective financial instrument
to spread an insurers risk
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Update on a past item
Emerging Risks
Creative Solutions
Commodity

• Asbestos
• Ultimate losses 50 Billion
• Caused 57 companies to go bankrupt

• Infectious
• Disease
• Avian Flu

CyberRisk
Genetic Testing
Silica
Terrorism
Global Warming
Electromagnetic Fields
I N D U S T R Y I M P A C T
Mad Cow Benzene
Runaway tort costs
Obesity
Workplace Violence
Mold
Genetically Modified Food
Medical Inflation

• DO
• Enron
• Andersen
• Wall Street
• Sub Prime

Cell Phones (Accidents, Illness)
Secondhand smoke
CCA Lumber
Nanotechnology
Growing Cost of Compliance
Lead Paint Manufacturers
Privacy
Economy Class Syndrome
Suntan beds
Alcohol/Firearms
Business Interruption
Casino Gambling
Underwriting Opportunity Curve
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US tort system costs, 1950-2009E
After a period of rapid escalation, tort system
costs as a of GDP are now falling
Source Tillinghast-Towers Perrin, 2007 Update on
U.S. Tort Costs as of GDP
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Emerging Risks the London view
As identified by leading London underwriters
(June 2008)

• Growth of Compensation Culture
• The Credit Crisis
• Political Risk
• Pandemic
• Cyber Risk
• Mass Litigation
• Exposure Data Quality
• Retaining Young Talent
• Climate Change
• Inflation

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Emerging Risks Cyber Risk

• Cyber Risk
• Between January 2005 and May 2008 there were an
  estimated 227 million records compromised
• largest being HM Customs with 25 million
  records stolen.
• Visa, MasterCard and Amex account for another 40
  million breaches
• An incredible 78 of IT professionals in the US
  claim that their companies have suffered,
  unreported, inside related data breaches

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Credit crisis Sub Prime (USD Billions)

• Investment income / derivative write downs
  Insurance sector
• AIG
• Swiss Re
• XL Re
• Directors and Officers / Professional Indemnity
  losses (estimates)
• DO
• P/I

10 - 15 bn 2 - 3 bn 1 - 2 bn 3 - 5 bn
2 - 3 bn

• Other financial sector write downs
• Citigroup
• UBS
• Merrill Lynch
• HSBC
• IKB Deutsche
• Morgan Stanley

43 bn 38 bn
37 bn 20 bn
16 bn 12 bn

Losses are estimates only as at May 2008
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Credit crisis Sub Prime class actions
USA
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Sub prime what the numbers mean
Estimated total sub prime losses are around USD
1 Trillion USD
1,000,000,000,000.00 Fanny Mae and Freddie Mac
hold loans of USD 5.2 Trillion
USD 5,200,000,000,000.00
SO If you were to hand
out US 1.00 bills to people standing in a line
it would take 52,500 years to pay out 1
Trillion dollars and 275,000 years to
pay out 5.2 Trillion dollars

The line of people would go to the Sun and
back 3.5 times
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The future for Reinsurers Reinsurance

• The landscape is continually changing and
  evolving , with -
• emerging risks
• technological advances
• climate change issues
• capital delivery methodology
• increased complexity of program structures
• hybrid alternative risk transfer mechanisms
• regulatory environment and tort reforms
• increased use of capital markets

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Capital markets - Cat Bond activity
Huge growth in recent activity post Hurricanes
Use of capital markets for risk transfer is an
increasing trend
Source Benfield Research
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What does the future hold ?

• From Chinese and Babylonian traders in the 2nd
  and 3rd millennia BC
• To the traders of Greece, Rome and then Genoa in
  the 14th century
• To a certain tea house established in London
  by Edward Lloyd
• in 1680 and now up to the present day

The fundamentals of risk transfer and why it
occurs, has not really changed in 3,000
years
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Reinsurance - the basics the reality

• Allows insurers to truly spread and transfer
  risk
• Reduces volatility in underwriting results
• Provides a major capital management tool
• Supplies capital relief and flexible financing
  often seen
• or referred to as soft capital
• Allows insurers to accept more business and
  therefore grow
• with the same amount of capital
• Allows primary insurers to spread their
  overheads with larger
• premium writings\
• Support for new or risky products or entry into
  new markets

No other readily available financial instrument
meets these needs
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So, we will STILL protect people, property
reputations
Reinsurance 170 Billion marketplace
Insurance 1.66 Trillion global marketplace
USD
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Berkley Re Australia
Always do right, this will gratify some and
astonish the rest.
- Mark Twain