Recent Trends in Catastrophe Risk Pricing. 2 How do reinsurers price Catastrophe Risk ? Trends in...

Recent Trends in Catastrophe Risk PricingRecent Trends in Catastrophe Risk Pricing

Recent Trends in Catastrophe Risk Pricing2

Recent Trends in Catastrophe Risk Pricing

How do reinsurers price Catastrophe Risk ?

Trends in Catastrophe pricing in 2005

How has the market reacted to the Catastrophe losses of 2005 ?

Outlook for the global catastrophe market in 2006

Impact on the Catastrophe Bond Market


How do reinsurers price Catastrophe Risk Emerging Territories

Territories such as China, India and Eastern Europe are good examples of emerging territories from the perspective of catastrophe reinsurers

Although in many cases they are in development stage, there is often a shortage of credible catastrophe models that can be used for pricing in emerging territories

Reinsurers, therefore, generally rely on;

Information on aggregate values by zone at most detailed level available

Historical losses

A large amount of extrapolation and guesswork

This omits capacity from some more technical reinsurers and often leads to significant price corrections after a loss


How do reinsurers price Catastrophe Risk Developed Territories

The US,UK and Japan are good examples of Developed markets from a catastrophe reinsurance perspective

Catastrophe models have been the key underwriting tool for most reinsurers in these territories. The widespread use of RMS,AIR,EQE often leads to a narrow band of quotes from reinsurers.

Pricing is based on annual expected loss plus loading for volatility, un-modeled perils, expenses and profit

There is an increasing use of portfolio optimisation models by reinsurers giving them the ability to charge higher loadings in territories where they have heavy concentrations of exposure and lower loadings where they are light on exposures


How do reinsurers price Catastrophe Risk Global split of Catastrophe Premium


How do reinsurers price Catastrophe Risk Why is writing business in emerging territories attractive to reinsurers?

There are only a few regions where the peak amount of traditional reinsurance may be too concentrated for the reinsurance market

Throughout most of the world the opportunity to diversify is attractive and cost-effective to resinsurers and cedants alike


How do reinsurers price Catastrophe Risk Diversification Effect

In this example, a CAT reinsurer can meet its target return of 16% by charging less than 16% in each region due to favorable diversification effects (global spread)

Overall ROE 16%

UK 6%

Europe 8%

Japan EQ 2%-8%

Japan Typhoon 4%

Other Regions 6%

Florida 12%

CA EQ 11%

Other US 9%

Trends in Catastrophe Pricing 2005Trends in Catastrophe Pricing 2005


Trends in Catastrophe Pricing in 2005 Situation prior to September 2005

Continued moderate softening in Global Catastrophe Rates but more disciplined than the soft market of the 1990’s due to:

4 large Hurricanes in the US,10 typhoons in Japan and Indian Ocean Tsunami in 2004, Hurricane Erwin in early 2005

Marketplace becoming more technical in pricing techniques

Investment returns still relatively low

The market for Retrocession support remained disciplined

The new entrants to the market had promised investors not to chase prices down

More significant reductions in non-peak territories


Trends in Catastrophe Pricing in 2005 Pricing Index for Catastrophe Reinsurance business

Overall, Property Rates continued to decrease in 2005 except on the most severely loss affected business

*1990 = 100. Index constructed by Guy Carpenter & Company, Inc.


Risk Adjusted ROL Change by Territory

Trends in Catastrophe Pricing in 2005

How has the Reinsurance Catastrophe Market changed following the 2005 losses

How has the Reinsurance Catastrophe Market changed following the 2005 losses

Capital entering and exiting the market Issues with Catastrophe Models Reaction from rating agencies


How has the Reinsurance Catastrophe Market changed following the 2005 losses The Ten most Costly Natural Catastrophe Losses in history ($ US)

2005 Hurricane Katrina US Est $40 - $60bn

1992 Hurricane Andrew US Caribbean $21.5bn

1994 Northridge Earthquake US $17bn

2005 Hurricane Wilma US $8bn - $12bn (Est)

2004 Hurricane Ivan US Caribbean $11bn

2004 Hurricane Charley US Caribbean $8bn

1991 Typhoon Mireille Japan $7.8bn

1990 Winterstorm Daria France, UK et al $6.6bn

1999 Winterstorm Lothar France, Switz et al $6.5bn

1989 Hurricane Hugo US, PR, et al $6.4bn

Plus Hurricane Erwin, Swiss Floods, Mumbai Floods, Hurricane Rita!


How has the Reinsurance Catastrophe Market changed following the 2005 losses Capital in and out

2004 was the costliest year on record for global catastrophic losses

2005 will eclipse 2004 with industry losses nearing $100bn at the top end of estimates

The Reinsurance market could pick up an estimated $40bn of loss from catastrophic events in 2005

Est $10bn new capacity is entering the market supporting existing insurers/reinsurers and creating new companies. Most new start up companies are based in Bermuda

Hedge Funds in particular have shown an appetite for writing Catastrophe Reinsurance business


How has the Reinsurance Catastrophe Market changed following the 2005 losses Catastrophe Models 2005 hurricanes highlighted the

following issues: Demand surge is not included in models

for most countries Models in US that do include it

performed poorly Storm surge is not included in most models

Frequency as a result of increased sea temperature

Non modelled perils Flood

Effects of increased urbanization

Adequacy of river defences


How has the Reinsurance Catastrophe Market changed following the 2005 losses Rating Agencies

A.M Best stated last week that ‘Man made and natural catastrophes are the most significant threat to the financial strength and credit quality of the property and casualty market’

Rating Agencies have downgraded many insurers and reinsurers since Sept 05. Monoline catastrophe writers are looking to diversify

Capital requirements for writing Catastrophe business are increasing as assumptions over frequency and severity are revised upwards

Capital requirements for Catastrophe reinsurers increasing to gain/maintain ‘A’ rating


Reinsurers will have to take their medicine from the rating agencies

Outlook for the global catastrophe market in 2006Outlook for the global catastrophe market in 2006

Difference between 2006 and market WTC Summary of factors What should we expect for 2006


Outlook for the global catastrophe market in 2006 Difference between this market and post WTC

WTC hit at bottom of cycle

WTC hit insurance rates first

Reinsurance market rode on the back of increasing insurance rates

Post WTC rates increased across all lines globally

WTC was more of a risk loss than a cat loss to the reinsurance market

WTC


Outlook for the global catastrophe market in 2006 Summary of the Factors in Play

Factors Pushing Rates Up

Cat losses (Primarily US but also WW – eg Erwin,

India, Switzerland)

Destruction of capital

Uncertainty over models

Rating Agency actions

Retro market

Factors Mitigating Rate Increases

New capital entering market

Many reinsurers’ capital positions remain strong

Many loss free territories

Existing price levels

Need for mono-line reinsurers to diversify their books both in terms of territory and

line of business


Outlook for the global catastrophe market in 2006 What should we expect?

Significant increases for loss affected territories, especially in the US and for clients with Gulf of Mexico exposure

Mild increases (5 – 15%) in other peak zones eg European Wind and Japan for loss free programmes

Neutral to small (0 – 10%) increases for non-peak areas including emerging territories for loss free territories

Large capacity programmes that need significant support from the international market will pay more than smaller programmes

Top layers paying minimum capacity premiums may see the largest % increases as capital charges are increased

Impact on the Catastrophe Bond MarketImpact on the Catastrophe Bond Market


Impact on the Catastrophe Bond Market

First loss to a Cat Bond as a result of Katrina

Investor appetite does not appear to have been negatively impacted

Increased interest from clients, especially in peak zones due to;

Increasing traditional prices in peak zones

Clients concerns over credit risk

Stability of cover over multi year period

Recent Trends in Catastrophe Risk Pricing. 2 How do reinsurers price Catastrophe Risk ? Trends in...

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