Guy HudsonPartner JLT RE+44 7767 880691guy.hudson@jltre.com

ICAR2014

ICAR 2014 2

AGENDA

Recent European Floods

What should Insurers think about these floods?

Reinsurance capital – The supply-driven inflow

The paradox of lower pricing amid heightening risk

So what might happen with Reinsurance rates for European flood exposed

catastrophe programs?

Claims handling in light of increased losses

ICAR 2014 3

ROMANIA

27th of July and 1st of August:

99 homes were destroyed, 1,163 damaged and another 2,377 flooded.

2,475 wells have been plugged, 13 bridges were destroyed, 83 partially

damaged, 60 culverts destroyed and 23 346 hectares of land were flooded.  PAID

Insured losses to residential buildings, as at 5th August  

- 22 claims advised to PAID until yesterday

- 116.622 lei (approx. 26.000 euro) related loss reserve

RECENT EUROPEAN FLOOD LOSSES

ICAR 2014 4

RECENT EUROPEAN FLOOD & HAIL LOSSES 2014

 Total damage Insured part

Floods in Germany 

$890m

Floods in Serbia  

€1.7bn 

€3bn ($4.08bn)

 

‘Insured losses were small’

Floods in Bosnia €1.3bn

Hail in Sofia, Bulgaria (9th July)

 

 

BGN 100M (Bulgarian press) = €51m

ICAR 2014 5

Demonstrates very low insurance penetration in many countries of Central and

South east Europe

Losses often from unpredictable Flash floods not Riverine Floods

Lack of third party proprietary models for flood in the region

Models are no good for flash floods

Evidence of Increasing exposure?

Evidence of Increasing hazard?

Is the portfolio of risks geo-coded? Quality of Information?

Is the Insurer adequately reinsured?

WHAT DOES IT MEAN TO INSURERS?

REINSURANCE CAPACITY FOR FLOOD

THE EXTRAODINARY INCREASE IN REINSURANCE SECTOR CAPITAL

THE LARGEST REINSURANCE SECTOR CAPITAL STRUCTURE SHIFT IN MEMORY?

ICAR 2014

JLT RE GLOBAL RE MARKET COMPOSITE CAPITAL*

8

The Upward March of Reinsurance Capital Increased Each Year Except 2008 (Financial Crisis)

2007 2008 2009 2010 2011 2012 2013 2014 Q1 -

50

100

150

200

250

300

350

400

450

500

323

274

337

378 386

431 471

486

Capi

tal (

USD

Bill

ions

)

Note: Capital levels represent composite total adjusted shareholders’ funds. This is different from dedicated reinsurance capital and different still from reinsurance capacity. Excludes capital markets, catastrophe funds and internal reinsurance capital.*Represents a JLT Re proprietary list of leading global reinsurers.Sources: SNL Financial, JLT Re.

ICAR 2014 9

EVOLUTION OF THIRD PARTY CAPITAL: A BRIEF HISTORY

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

0%

2%

4%

6%

8%

10%

12%

14%

16%

Source: JLT Towers Re

‘NON TRADITIONAL’ % OF PROPERTY-CAT LIMIT SINCE 2000

ICAR 2014

PENSION FUNDS VS INSURANCE VS REINSURANCE VS RETROPUTTING IT IN PERSPECTIVE

10

Pension Fund Capital Under Management$30 trillion

Global reinsurance market dedicated sector capital ca. $300 billion

Global retrocession capital <$30 billion

Global insurance sector capital (including life) $2.5 - $3 trillion

Source: JP Morgan, JLT Re estimates

ICAR 2014 11

$30 TRILLION? $900 BILLION? $675? $300?HOW MUCH CAPITAL COULD REALLY COME IN?

Pension Fund Capital Under Management$30 trillion

Global reinsurance market dedicated sector capital ca. $300 billion

Global retrocession capital <$30 billion

Global insurance sector capital (including life) $2.5 - $3 trillion$300 billion ($30

trillion x .1 x .1)?

Source: JP Morgan, JLT Towers Re estimates

ICAR 2014 12

DON’T BE FOOLED BY THE STERILE LANGUAGE!AND WHAT DO RATING AGENCIES THINK OF ALL THIS?

Despite being well capitalized the P&C (Re) Insurance Industry faces ongoing

pressure, particularly in the commercial lines sector

Record low investment returns continue to weigh on earnings

Alternative capacity starting to creep into casualty lines of business

Underwriting accuracy/discipline becoming even more important (cycle management)

Sector S&P A.M. Best Moody’s Fitch

U.S. Personal Lines Stable Stable Stable Stable

U.S. Commercial Lines Negative Negative Stable Stable

Global Reinsurance Negative Stable Negative Negative

Rating Outlooks by Agency

LOSS TRENDS AND LOWER REINSURANCE PRICING – A PARADOX OF SORTS?

ARE PRICES DECREASING JUST AS RISK IS INCREASING? IT WOULDN’T BE THE FIRST TIME

ICAR 2014 14

UNDERWRITING GAINS EVERY YEAR EXCEPT 2011HOW HAS THE REINSURANCE INDUSTRY FARED?

JLT Re Global RE Market Index*: Combined Ratio Trends

2007

2008

2009

2010

2011

2012

2013

2014Q1

- 20 40 60 80 100 120

52

59

55

55

54

49

52

51

4

8

2

8

26

8

3

1

28

27

29

30

30

29

31

32

Loss Ratio CAT Ratio Expense Ratio

Combined Ratio

84

86

86

110

93

86

94

84

*Represents a JLT Towers Re proprietary list of leading global reinsurers. Sources: SNL Financial, JLT Towers Re

100

ICAR 2014 15

PROPERTY-CAT LOSSES ARE NOT DECREASINGDON’T BE FOOLED BY 2013

Deepwater oil rig,

Washington hanger collapse

Air France

447

KRWTohoku,

Thailand, Christchurch

Sandy

Potential to affect capital

Potential to affect earnings

Cyber

Sector specialty loss range

Sector natural catastrophe loss range

Next time?

ICAR 2014 16

INSURED CATASTROPHE LOSSES 1980 - 2010$20.7 BN ANNUAL AVGE – GEOGRAPHIC DISTRIBUTION

Insured cat losses are traditionally determined by North American hurricane lossesSource: Swiss Re

ICAR 2014 17

INSURED CATASTROPHE LOSSES 2011>$125 BN – GEOGRAPHIC DISTRIBUTION

Shift in perils and regionsSource: Swiss Re

• 2011: earthquake losses were the highest ever

• 2011: flood losses were the highest ever

• 2011: Other weather-related natural catastrophes were the 3rd highest ever (after 2005 and 2004)

REINSURANCE RENEWAL PRICING

RECENT LOW LOSSES + EXCESS SUPPLY = NEAR UNIVERSALLY LOWER PRICING

ICAR 2014 19

The major driver for 2013 was lack of catastrophes coupled with continued favorable loss reserve development from prior accident years

Four issues are now placing pressure on traditional reinsurers

Alternative capacity (capital market transactions, alternative/hedge fund backed Re)

Continued low interest rate environment

Primaries holding more retention

Favorable reserve development has to come to an end at some point

Potential reinsurer reactions

Additional M&A pressure?

Formation of alternative side car type vehicles to compete (e.g., Watford Re - PaCRe)

Use of the alternative market to reinsurers’ advantage for example, lowering PML’s by buying

retro in the alternative markets

RECENT RENEWALS SUMMARY

ICAR 2014 20

SO WHAT MIGHT HAPPEN TO REINSURANCE RATES FOR THE REGION?

Increase loss activity in 2014Lack of Historical statisticsLack of Geo-coding or partial Geo-CodingIncreasing ExposuresIncreasing HazardsLack of Independent Cat ModelsSome losses Flash Floods not Riverine

Increased CapitalEffect of Alternative CapacityNeed for diversificationIncome requirementsSingle territory covers

Pressures Downwards

Pressures Upwards

ICAR 2014 21

Lodgement and recording of claims - worked well at CHCH - contracted to firm operating from a broad (Australia) , and untouched by the disaster

Give claimants information about progress. Very bad, with both EQC and companies. EQC processes not at all transparent - see Ombudsman's report with link on page http://www.ombudsman.parliament.nz/resources-and-publications/latest-reports

Claim settlement hindered at first by lack of clarity as to boundaries between EQC and companies covers

Claim adjustment made hard by multiple events

The decisions of EQC and companies not clear throughout as to what sort of claims would be settled in cash and which repaired

Technical skills such as builders in short supply

Shortage of skilled adjusters a problem. Shortage of qualified engineers - structural and geotech

Companies were reluctant to put enough resources in from abroad to expedite adjustment

CHRISTCHURCH EQ 2010 2011CLAIMS HANDLING AFTER MAJOR EVENT

THANK YOU