International Catastrophe Reserving

Paul Gates, Platinum Underwriters

Casualty Loss Seminar, September 11 2006

International Cat ReservingInternational Cat Reserving – a live experience!

Catastrophe Reserving in Europe

• Legislative background

• The changing environment

• Practical issues– Assessing catastrophic loss potential– “Live” catastrophe reserving– “Large” versus “small” catastrophes

Legislative Background - Europe

• A quick tour– United Kingdom– Germany– Switzerland– Australia (?!)

• Pre-funding and post-funding

Catastrophe Reserving in the UK

Catastrophe Reserving in the UK

• Regulated by FSA (Financial Services Authority)– Tax position supervised by Inland Revenue

• Equalisation Reserves pre-event

• Post-event – demonstration of reserve requirement (tax allowance)

Catastrophe Reserving in the UK

• Equalisation Reserve Calculation– Transfers In & Out

• Transfers In– Percentage of Net Premiums in Financial Year– Transfers & Reserve based on “Business Groups”

• Transfers Out– “Abnormal Loss”– Transfer Limited by Business Group Maxima

Equalisation Reserves in the UK

“Abnormal loss” refers to losses in excess of above percentages,expressed as percentage of net written / earned premiumsBusiness Group maximum expressed as percentage of average netwritten in previous 5 years

Business GroupTransfer in

%"Normal Loss" %

Business Group Maximum

Property 3.0% 72.5% 20.0%Business Interruption 3.0% 72.5% 20.0%Marine & Aviation 6.0% 95.0% 40.0%Nuclear 75.0% 25.0% 600.0%Non-proportional treaty 11.0% 100.0% 75.0%

Example of UK Equalisation Reserving

YearNon-prop Premium

Marine Premium Transfer In

Abnormal Loss 1

Abnormal Loss 2

Maximum Recovery -

Bus Group 1

Maximum Recovery -

Bus Group 2Actual

Fund1998 5,000 1,000 610 5,000 950 3,750 400 6101999 6,000 750 705 6,000 713 4,125 350 1,3152000 5,500 500 635 5,500 475 4,125 300 1,9502001 5,000 500 580 5,000 475 4,031 275 2,5302002 5,000 600 586 5,000 570 3,975 268 3,1162003 7,500 1,000 885 7,500 950 4,350 290 4,0012004 9,000 1,250 1,065 9,000 1,188 4,800 320 5,0662005 10,000 1,500 1,190 10,000 1,425 5,475 355 5,8302006 10,000 1,750 1,205 10,000 1,663 6,225 393 6,618

GOLDIE RE - UK EQUALISATION RESERVES

Catastrophe Reserving in the UK

• Post-event Reserving– Projection of ultimates– Identifying claimant / potential cedants– Run-off term– Uncertainty v best estimate– IBNER

• “Unknown” Catastrophe

Catastrophe Reserving in Germany

• Regulated by BAFin (Bundesanstaltfür Finanzdienstleistungsaufsicht)

• Significant Equalisation Reserves– Prescribed by formula

– Applied to transfers in & out

– Related to the standard deviation in last 15 years

– “To disappear eventually”

Equalisation Reserves in Germany• Based on net premiums• Per line of business• Compare loss ratio for year with average• Prerequisites for establishing reserve

– Average net premium large enough (>Eur125,000)– Standard deviation of loss ratios >=5%– Combined ratio >100% at least once in 15 years

• Limitation for reserve– Equals (usually) current net premium * standard deviation *

4.5– 3.5% of limit transferred to the reserve pa

Catastrophe Reserving in Switzerland

• Regulated by FOPI – Federal Office of Private Insurance (also known as BPV/OFAP/UFAP)

• Equalisation reserves still being utilised significantly?– “Swiss Re….expects its losses reserves related to Hurricane Ivan

and Typhoon Songda to be approximately USD300m before tax….in addition to estimated claims of USD 290m before tax for Hurricanes Charley & Frances…Swiss Re may use some of its claims equalisation reserves to absorb part of the financial impact of these events”(Swiss Re news release 24 Sept 2004)

– “Swiss Re…will use equalisation reserves to mitigate part of the claims caused by this year’s extraordinary hurricane season” (Swiss Re news release 2 November 2005)

Catastrophe Reserving in Switzerland• Equalisation Reserves

– Give details of determination in business plan

– Must maintain this methodolodgy– No explicit mention in Swiss Insurance

Regulation Act (no guidelines)– Exception for credit insurance– To be eliminated?

Catastrophe Reserving in Australia

• Regulated by APRA

• Best estimate reserving– According to actuarial calculation

• No equalisation reserves– No tax allowance

Evolution of Catastrophe Reserving• Harmonisation of financial regimes (Europe)• International Financial Reporting Accounting

Standards– Demise of equalisation reserves?

• The debate continues

– Listed companies– Consolidated accounts v local reporting

• Link to solvency requirements– Solvency II progressing (risk based assessment in Europe)– Catastrophic loss key driver of (in)solvency– Role of actuaries

Catastrophe Reserving in Practice

• Goldie Re (UK)

• Assessing loss potential pre-event– Link to solvency calculations

• “Live Cat” reserving

• Reserving at year-end– Large versus small events

Catastrophe Reserving in Practice

• Assessing Loss Potential (PML)– Key zones– Exposing cedants– Using pricing information

• Losses per event, per cedant• Layers, shares, exchange rates, reinstatement terms• Also allow for outwards reinsurance• Focus on key return periods

• Forms basis of catastrophic loss element of ICA model – solvency purposes

PML Example

Renewal Date: 01/01/2005 01/01/2005 01/01/2005 01/01/2005 Policy Number: L0000118800 L0000118900 L0000119000 L0000024600

Goldie Re Share: 7.5% 10.0% 5.0% 5.0%Currency: EUR EUR USD GBP

Exchange Rate: 1.2548 1.2548 1.000 1.8412Goldie Re Limit

Limit: 20,000,000 25,000,000 30,000,000 27,500,000 9,050,850xs

Retention: 15,000,000 35,000,000 30,000,000 27,500,000

Event No Cedant 1, Layer 1 Cedant 1, Layer 2 Cedant 2, Layer 1 Cedant 3, Layer 1 Goldie Re Loss

52511 741,615 0 30,000,000 27,500,000 4,101,44346309 20,000,000 25,000,000 30,000,000 27,500,000 9,050,85050026 0 0 27,982,772 27,500,000 3,930,78949810 0 0 13,215,543 284,874 687,003

Policy Information

Event Loss Information

GOLDIE RE "PML CALCULATIONS"

PML Example Goldie Re PMLs

0

20

40

60

80

100

120

140

160

180

0 200 400 600 800 1,000

Return period (yrs)

Lo

ss (

MM

) Japan WS

Aus EQ

Euro WS

Japan EQ

Live Cat Reserving• Need for more timely information

– Shareholders/investors– Management

• Less developed process outside USA– No equivalent of NHC– More reliant on cat modelling firms (RMS/EQE/AIR)– Liaise with brokers and cedants

• Use PML calculations as basis– Link to matching event IDs, issued by modelling cos

Live Cat Reserving – Example

• Windstorm Erwin– 7th to 9th January 2005– Affected Northern UK, Northern Germany,

Denmark and Sweden– A year’s worth of Sweden’s forestry output felled!– Information hard to obtain

• Broker reports• News websites

– Approximately USD 1.75bn of insured loss

Live Cat Reserving – Example

• Windstorm Erwin– Range of reserve estimates $350,000 to $25,000,000– September 2006 -100% settled, final loss of $2m

How year-end reserving might run• Large Catastrophes

– Define threshold– Specific projections– Allowance for deterioration

• New cedant notifications• Market developments

– Reporting tail quite swift

• Small catastrophes– Loss ratio for overall portfolio– Reporting slower

Thank you for your attention

Hurricane Fabian, 2003

pgates@platinumre.com