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2006 General Meeting

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Canadian Institute of Actuaries L Institut canadien des actuaires Life Insurance Securitization Francois Dagneau Aon Re Canada 2006 General Meeting – PowerPoint PPT presentation

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Title: 2006 General Meeting


1
Canadian Institute of Actuaries
LInstitut canadien des actuaires
Life Insurance Securitization Francois
Dagneau Aon Re Canada
  • 2006 General Meeting
  • Assemblée générale 2006
  • Chicago, Illinois

2
Plan of the Presentation
  • 1- Insurance Securitization
  • 2- Integration within a Reinsurance framework
  • 3- A critical view of Securitization

3
1 Insurance Securitization
  • 1.1 Market Situation
  • 1.2 Capacity

4
1.1 Market Situation
  • The cat bond market is a relatively young fixed
    income market with inception dating back only 11
    years.
  • New issuance of cat bonds over the past six years
    has averaged about 1.4 billion per year. Sharp
    increase in 2006.
  • Frictional costs decline.
  • Visibility is very high due to current capacity
    issues.

5
1.1 Market Situation
  • The market continues to evolve
  • Shelf transactions
  • Second event bonds
  • Life Mortality bonds (Vitas)
  • Embedded value bonds, reserve funding bonds, etc.
  • Indemnity versus Index-based
  • Investorss comfort with indemnity reduced
    following Katrina

6
1.2 Capacity
  • Capital market capacity for property risk
    continues to grow.
  • Cat bond fund managers are increasing size of
    funds under management allocated to Cat bonds.
  • Cat bonds are a source of clean insurance
    industry risk to hedge funds.

7
1.2 Capacity
Capacity Issued 2000-2005
8
2 Integration within the Reinsurance Framework
  • 2.1 Important comments
  • 2.2 Perils to Life Portfolio
  • 2.3 Coverage through Securitization

9
2.1 Important Comments
  • Securitization of reinsurance is not best for all
    clients
  • Reinsurance brokers analyze the various
    alternatives and select the one better suited for
    the client
  • Better indicated when
  • Low return period loss activity
  • Tight capacity
  • Large size (fixed costs remains very high)
  • External modeling is available
  • Security is a big concern
  • Result USA, Europe, Japan dominate the market
    with retro covers being very common.

10
2.1 Important Comments
  • Some insurers will buy both Cat bonds and
    traditional reinsurance
  • Important to align the covers to one another
    easier with indemnity based.
  • Quota-share is sometimes the cheapest form of
    coverage.
  • As long as exclusions, limitations and solvency
    are not a worry.
  • If so, then back to gross exposure at some point
    along the curve.

11
2.2 Perils to Life Portfolio
  • Pandemic
  • Natural catastrophe
  • Terrorism
  • War
  • Industrial accident
  • Wind
  • Earthquake

12
2.3 Coverage through Securitization
  • Adverse mortality stop loss calculated over a
    2-year period is an excellent form of coverage
    for a life insurer
  • All perils
  • Multi-waves scenario is covered
  • Multi-year is better
  • Proximate cause of death can be an issue with
    per event covers.

13
2.3 Coverage through Securitization
  • However, mortality might not be it
  • Medical expenses
  • Income replacement benefits
  • Equity market, Operational risks, etc.
  • Abnormal mortality only coversmortality!
  • Can buy more to compensate but

14
3 Critical View of Cat Securitization
15
3 Critical View of Cat Securitization
  • Non-Mortality Exposure
  • Basis risk (less for individual life business)
  • Costs
  • Peril-specific, not all risks

16
3 Critical View of Cat Securitization
  • Spread is NOT independent of the reinsurance
    market
  • Less flexible (think Scottish Re)
  • Very high attachment points
  • D is 103 WTC, B is 206 WTC
  • 1918 only hits tranche D

17
In Summary
  • Securitization is a tool with growing importance
    in your risk management tool box.
  • It is not all bad security, multi-year
    capacityfixed pricing, looks good, etc.

18
  • THANK YOU
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