cookson walker consulting p&c crystal ball 2008
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DIRECTIONS IN REINSURANCE. COOKSON WALKER CONSULTING P&C CRYSTAL BALL 2008. Gordon Crutcher Aon Re Canada January 25, 2008. CURRENT DIRECTIONS OF. P & C REINSURANCE 2007 REVIEW - 2008 PREVIEW. GORDON CRUTCHER, Aon Re Canada. 2. THE REINSURANCE MARKET IS GLOBAL. 3. - PowerPoint PPT PresentationTRANSCRIPT
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COOKSON WALKER CONSULTING
P&C CRYSTAL BALL 2008
Gordon Crutcher
Aon Re Canada
January 25, 2008
DIRECTIONS IN REINSURANCE
2
CURRENT DIRECTIONSCURRENT DIRECTIONS OF OF
P & C REINSURANCEP & C REINSURANCE
2007 REVIEW - 2008 PREVIEW2007 REVIEW - 2008 PREVIEW
GORDON CRUTCHER, Aon Re Canada 2
3
THEREINSURANCE
MARKET IS
GLOBAL3
4
REINSURANCE MARKETREINSURANCE 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
REINSURANCE MARKETREINSURANCE 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
REINSURANCE MARKETREINSURANCE 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)
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
REINSURANCE MARKETREINSURANCE 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
REINSURANCE MARKETREINSURANCE 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)
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REINSURANCE MARKETREINSURANCE MARKET
Estimated Global Reinsurance Capacity:
$2 billion
any one program
Estimated Global Reinsurance Capacity:
$2 billion
any one program
10
REINSURANCE MARKETREINSURANCE 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
REINSURANCE MARKETREINSURANCE MARKET
• Canada does NOT have a single independent domestic reinsurance company.
• All independent reinsurers operating here are foreign-owned. 11
12
COMPARISON OF GROSS COMPARISON OF GROSS CEDED REINSURANCE CEDED REINSURANCE
PREMIUMSPREMIUMS
0
50
100
150
200
World U.S. Europe
Asia Latin America Africa & Mid-East
Canada
Canada
13
COMPARISON OF CEDED COMPARISON OF CEDED REINSURANCE PREMIUMSREINSURANCE 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
Thus eventsThus eventselsewhereelsewherein the worldin the worldcan impactcan impactCanadian reinsurance Canadian reinsurance ratesrates and and conditionsconditions – as well as – as well as the the security ratingssecurity ratings of of reinsurers doing business in reinsurers doing business in Canada.Canada.
14
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THE CHANGING FACE OF THE CHANGING FACE OF REINSURANCEREINSURANCE
• 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
THE CHANGING FACETHE CHANGING FACE OF REINSURANCE 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
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THE CHANGING FACETHE CHANGING FACE OF REINSURANCE 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
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THE CHANGING FACETHE CHANGING FACE OF REINSURANCE 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
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REINSURANCE MARKETREINSURANCE 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
S&P’s outlook for the S&P’s outlook for the GLOBAL reinsurance GLOBAL reinsurance sector remains stable.sector remains stable.
However, However, 2008 could be a2008 could be a
watershed for the watershed for the reinsurance industry.reinsurance industry.
20Standard & Poor’s: Global Reinsurance Highlights, September 2007
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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%
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COMBINED LOSS & EXPENSE RATIOS OF CANADIAN
REINSURERS
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1991 1993 1995 1997 1999 2001 2003 2005 Q32007
Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2007
Proprietary & Confidential
2323
Reinsurers Combined Ratio Comparison
Sources: RRA and RRC and various publications,
80%
90%
100%
110%
120%
130%
140%
150%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Est.
Global
Canadian
US
23
24
TOTAL REINSURANCE CEDED (Domestic & Foreign Companies)
$4
$5
$6
$7
$8
$9
Billions
1999 2000 2001 2002 2003 2004 2005 2006 Q307
Source: OSFI Financial Data
25
TOTAL REINSURANCE WRITTEN (By Canadian Licensed Reinsurers)
$0
$1
$2
$3
Billions
1999 2000 2001 2002 2003 2004 2005 2006 Q307
Source: MSA Research
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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
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
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.
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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.
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CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS
0
5
10
15
20
25
30
35
2000 2001 2002 2003 2004 2005 2006 Q32007
Total Insurance Premiums Reinsurance Ceded
24%30%31%30%27%
Source: OSFI @ Q4 each year – but Q3 for 2007
24% 26% 26%
Billions $
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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
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REINSURANCE CEDED TO PREMIUMS WRITTEN
0%
10%
20%
30%
40%
50%
60%
70%
80%
S.F. Allst WAW DOC CHU AVI ECO ING COM
Source: OSFI @ Q4 2006
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CAUTION
• Reinsurance premiums can be ceded:
- to EXTERNAL reinsurers,
- or INTERNALLY for “group” protections.
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
ACTIVE FEDERALLY – LICENCED
INDEPENDENT REINSURERS
1. Ace2. Aspen Re3. Berkley 4. CCR5. Everest Re6. Folksamerica7. General Re8. Hannover Re9. Lloyd’s10. Mapfre Re11. Munich Re12. Odyssey Re13. Paris Re14. Partner Re15. SCOR Re16. Swiss Re 17. Toa Re18. Transatlantic Re19. XL Re
NEW IN 2007:- None
LOST IN 2007:- None
Note: The FMRP is not an independent reinsurer.
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REVIEW OF 2007
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““The absence of large The absence of large catastrophe losses wascatastrophe losses wasa key factor in the a key factor in the softening of reinsurance softening of reinsurance markets.”markets.”
Guy Carpenter: Global Reinsurance Review – January 2008
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GLOBAL CAT LOSS TREND BEEN STEADILY RISING
38
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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 Sigma39
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$4.7
$100
.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07**
20??
*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
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CAT EXPOSURE IN NORTH AMERICA IS ABSOLUTELY
ENORMOUS
(Originals of this map can be ordered from Risk Management Solutions)
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WHAT WILL IT TAKE TO TURN THE MARKET?
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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
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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
CANADIAN CAT CANADIAN CAT LOSSES IN 2007LOSSES IN 2007
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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
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
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 2nd hottest July on record in Calgary.)
49
REVIEW OF 2007 CANADIAN CAT LOSSES
• August 9th – 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
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
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
Proprietary & Confidential
5252
-50%
-30%
-10%
10%
30%
50%
70%
90%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total
Catastrophe Rates and ExposuresCanadian 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
THE JANUARY 1ST, 2008 CANADIAN REINSURANCE
RENEWAL SEASON
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CANADIAN REINSURANCE MARKET – 2008 RENEWALS
54
“AN OLD-FASHIONED
SOFT MARKET”
Benfield : Global Reinsurance Market Review – January 2008
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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
CANADIAN REINSURANCE MARKET – 2008 RENEWALS
• “The industry is showing signs of reverting to its historic pattern of feast or famine.”
– Willis Re
57
INSURERS’ CONCERNSWHEN BUYING REINSURANCE
1. Cost
2. Security/Ratings
3. Coverage and Conditions
Benfield Report: “Global Reinsurance Market Review – January 2008”
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
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
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
CANADIAN REINSURANCE MARKET – 2008 RENEWALS
• Estimates for the reductionin total premiums ceded tolicensed professional reinsurers in Canadafor 2008, (includingLloyd’s), range from $200 to $300 million !!!!
(As per interviews with various reinsurers)
62
When the tide goes out . . .
62
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. . ALLBOATSDROP
TOTHE
SAMELEVEL
64
AVERAGE TREATY RATE CHANGES IN CANADA
-10
0
10
20
30
40
50
%
Cat Auto GL
2002 2003 2004 2005 2006 2007 2008
Source: Various Reinsurers
65
AUTO REMAINS THE MOST
CHALLENGING CLASS FOR REINSURERS
65
66
.
95% OF ALL THE CLAIMS 95% OF ALL THE CLAIMS THAT REINSURERS SEE THAT REINSURERS SEE
ARE AUTOARE AUTO
Source: Interview with major Canadian reinsurance CEO 66
67
TRUCK BURNING AFTER MULTI-VEHICHLE ACCIDENT ON
HIGHWAY 401 67
68
WHILE UNUSUAL FOR PROPERTY, A $2 - $3 MILLION AUTO LOSS
IS COMMON
Source: Interview with a Canadian
reinsurance CEO 68
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
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
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
CHARACTERISTICS OF TODAY’S REINSURERS
• Require considerable underwriting information.
• Pricing is heavily influenced by risk modeling.
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
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
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
“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
7777
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