Slide 1

Report
DIRECTIONS IN
REINSURANCE
COOKSON WALKER CONSULTING
P&C CRYSTAL BALL 2008
Gordon Crutcher
Aon Re Canada
January 25, 2008
1
CURRENT DIRECTIONS
OF
P & C REINSURANCE
2007 REVIEW - 2008 PREVIEW
GORDON CRUTCHER,
Aon Re Canada
2
2
THE
REINSURANCE
MARKET
IS
GLOBAL
3
3
REINSURANCE MARKET
The
reinsurance
market is complex
and inter-related.
One
reinsurer can
rarely respond to all
of a client’s needs.
4
REINSURANCE MARKET
Insurers
usually prefer
to have several
reinsurers on their
treaties.
Better security; more
flexibility.
5
REINSURANCE 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)
6
REINSURANCE MARKET
Estimated Global
Reinsurance:
 Shareholders’
Funds:
$483 billion
 Net Reinsurance
Premiums Written:
$168 billion
S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)
7
REINSURANCE 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)
S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)
8
REINSURANCE MARKET
Estimated Global
Reinsurance Capacity:
$2 billion
any one program
9
REINSURANCE 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.
10
REINSURANCE MARKET
•
Canada does NOT have
a single independent
domestic reinsurance
company.
•
All independent
reinsurers operating
here are foreign-owned.
11 11
COMPARISON OF GROSS
CEDED REINSURANCE
PREMIUMS
200
150
100
Canada
50
0
World
Asia
Canada
U.S.
Latin America
Europe
Africa & Mid-East
12
COMPARISON OF CEDED
REINSURANCE PREMIUMS
• Information source for Gross Reinsurance
Premiums ceded by Region:
International Association of
Insurance Supervisors –
“Global Reinsurance Market
Report 2007”
Published December 12, 2007
13
Thus events
elsewhere
in the world
can impact
Canadian reinsurance rates
and conditions – as well as
the security ratings of
reinsurers doing business in
Canada.
14
14
THE CHANGING FACE OF
REINSURANCE
• 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.
15
THE CHANGING FACE
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
16
THE CHANGING FACE
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
17
THE CHANGING FACE
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
18
REINSURANCE MARKET
Remember this slide?
Estimated Global
Reinsurance Capacity:
$2 billion
any one program
19
S&P’s outlook for the
GLOBAL reinsurance
sector remains stable.
However,
2008 could be a
watershed for the
reinsurance industry.
Standard & Poor’s: Global Reinsurance Highlights, September 2007
20
20
REINSURERS’
COMBINED RATIOS
• Canadian Reinsurers
•
•
•
•
•
2003:
2004:
2005:
2006:
2007 (@ Q3):
- as per MSA Research
95%
93%
105%
87%
86%
• U.S. Reinsurers – as per R.A.A.
•
•
•
•
•
2003:
2004:
2005:
2006:
2007 (@ Q3)
101%
106%
129%
95%
94%
21
COMBINED LOSS &
EXPENSE RATIOS OF
CANADIAN REINSURERS
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
1991
1993
1995
1997
1999
2001
2003
2005
Source: Annual Statistical Issues of Canadian Underwriter Magazine
and MSA Research for Q3 2007
Q3
2007
22
Reinsurers
Combined Ratio Comparison
150%
Global
140%
Canadian
US
130%
120%
110%
100%
90%
80%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Est.
Sources: RRA and RRC and various publications,
23
Proprietary & Confidential
23
TOTAL REINSURANCE CEDED
(Domestic & Foreign Companies)
Billions
$9
$8
$7
$6
$5
$4
1999 2000 2001 2002 2003 2004 2005 2006
Source:
OSFI Financial Data
Q3
07
24
TOTAL REINSURANCE
WRITTEN
(By Canadian Licensed Reinsurers)
Billions
$3
$2
$1
$0
1999 2000 2001 2002 2003 2004 2005 2006
Source:
MSA Research
Q3
07
25
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.
26
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.
27
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.
28
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.
29
CEDED REINSURANCE PREMIUMS
AS % OF TOTAL INS. PREMIUMS
Total Insurance Premiums
Reinsurance Ceded
Billions
$
35
30
25
20
15
10
5
27%
30%
31%
30%
24%
24%
26%
2005
2006
26%
0
2000
2001
2002
2003
2004
Source: OSFI @ Q4 each year – but Q3 for 2007
Q3
2007
30
RELATIVE EMPLOYMENT
OF REINSURANCE BY
CANADIAN INSURERS
Ratios of “Reinsurance Ceded” to “Direct Premiums Written”
•
•
•
•
•
•
•
•
•
•
State Farm Auto:
Allstate Insurance Co. of Canada:
Wawanesa Mutual Insurance:
Dominion of Canada General:
Chubb Insurance Co. of Canada:
Aviva Insurance Co. of Canada:
Economical Mutual Insurance:
Royal & SunAlliance Canada:
ING Insurance Co. of Canada:
Commonwealth Insurance Company:
Source: OSFI Data as of Q4 2006
0%
0%
2%
4%
14%
17%
26%
28%
40%
76%
31
REINSURANCE CEDED
TO PREMIUMS WRITTEN
80%
70%
60%
50%
40%
30%
20%
10%
0%
S.F.
Allst
WAW DOC
CHU
AVI
Source: OSFI @ Q4 2006
ECO
ING
COM
32
CAUTION
• Reinsurance premiums can
be ceded:
- to EXTERNAL reinsurers,
- or INTERNALLY for
“group” protections.
33
IT’S GETTING
LONELY OUT THERE!
•Fewer licensed reinsurers.
• Only 19 active,
independent markets
left in Canada.
•Used to be 41 in 1991.
34
34
ACTIVE
FEDERALLY – LICENCED
INDEPENDENT REINSURERS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Ace
Aspen Re
Berkley
CCR
Everest Re
Folksamerica
General Re
Hannover Re
Lloyd’s
Mapfre Re
Munich Re
Odyssey Re
Paris Re
Partner Re
SCOR Re
Swiss Re
Toa Re
Transatlantic Re
XL Re
NEW IN 2007:
- None
LOST IN 2007:
- None
Note: The FMRP is not an independent reinsurer.
35
REVIEW OF 2007
“The absence of large
catastrophe losses was
a key factor in the
softening of reinsurance
markets.”
Guy Carpenter: Global Reinsurance Review – January 2008
36
36
37
GLOBAL CAT LOSS TREND
BEEN STEADILY RISING
38
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 Sigma
39
39
U.S. Insured Catastrophe Losses*
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
95
96
97
98
99
00
01
02
$100.0
$4.7
$5.5
$16.9
$9.2
$61.9
$4.7
91
92
93
94
$5.9
$7.5
$2.7
$20
89
90
$40
$26.5
$60
$22.9
$80
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.
$12.9
$27.5
$120
$100
$100 Billion
CAT year is
coming soon
$ Billions
07**
20??
03
04
05
06
$0
*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.
40
Source: Property Claims Service/ISO; Insurance Information Institute
CAT EXPOSURE IN
NORTH AMERICA IS
ABSOLUTELY ENORMOUS
(Originals of this map can be ordered from Risk Management Solutions)
41
WHAT WILL IT
TAKE TO TURN
THE MARKET?
42
42
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
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.
44
CANADIAN CAT
LOSSES IN 2007
45
REVIEW OF 2007
CANADIAN CAT LOSSES
• “The West had too much weather.”
- Severe summer weather warnings;
- Tornados;
INSURED
- Intense rainfalls;
LOSSES
OVER $200
- Wind storms;
MILLION
- Hail storms;
- Crop losses.
46
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.
47
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.)
48
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.
49
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.
50
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
51
Catastrophe Rates and Exposures
Canadian Catastrophe Rate Changes
2001 WTC
90%
70%
1991
Calgary
Hailstorm
1992
Andrew
50%
1998
Ice storm
2005 KRW
30%
10%
-10%
-30%
2005 Ontario August
Rain Storms
-50%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total
Sources: Swiss Re 1990 –2003, Aon Re Canada 2004 - 2008
52
Proprietary & Confidential
ST
1 ,
THE JANUARY
2008 CANADIAN
REINSURANCE
RENEWAL
SEASON
53
53
CANADIAN REINSURANCE
MARKET – 2008 RENEWALS
“AN OLDFASHIONED
SOFT
MARKET”
Benfield : Global Reinsurance Market Review – January 2008
54
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
55
CANADIAN REINSURANCE
MARKET – 2008 RENEWALS
• “The industry is showing signs of
reverting to its historic pattern of
feast or famine.”
– Willis Re
56
INSURERS’ CONCERNS
WHEN BUYING
REINSURANCE
Cost
2. Security/Ratings
3. Coverage and Conditions
1.
Benfield Report: “Global Reinsurance Market
Review – January 2008”
57
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
58
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)
59
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)
60
CANADIAN REINSURANCE
MARKET – 2008 RENEWALS
• Estimates for the reduction
in total premiums ceded to
licensed professional
reinsurers in Canada
for 2008, (including
Lloyd’s), range from
$200 to $300 million !!!!
(As per interviews with various reinsurers)
61
When the tide
goes out . . .
6262
. . ALL
BOATS
DROP
TO
THE
SAME
LEVEL
63
AVERAGE TREATY RATE
CHANGES IN CANADA
50
40
30
% 20
10
0
-10
Cat
2002
2003
Auto
2004
2005
Source: Various Reinsurers
GL
2006
2007
2008
64
AUTO
REMAINS
THE MOST
CHALLENGING
CLASS FOR
REINSURERS
65 65
95% OF ALL THE CLAIMS
THAT REINSURERS SEE
ARE AUTO
.
Source: Interview with major Canadian reinsurance CEO
66
66
TRUCK BURNING AFTER
MULTI-VEHICHLE ACCIDENT
ON HIGHWAY 401
67
67
WHILE UNUSUAL FOR
PROPERTY, A $2 - $3
MILLION AUTO LOSS
IS COMMON
Source: Interview
with a Canadian
reinsurance CEO
68
68
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.
69
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.
70
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.
71
CHARACTERISTICS OF
TODAY’S REINSURERS
• Require considerable
underwriting information.
• Pricing is heavily
influenced by risk
modeling.
72
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.
73
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.
74
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.
75
“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
76
7777
If you would like to receive
a copy of this presentation
by e-mail, please request
one from Gordon Crutcher
at:
[email protected]
78

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