Rendez-Vous de Septembre 2012Rendez-Vous de Septembre 2012

THE WORLD REINSURANCE INDUSTRY IN THE PAST

TWELVE MONTHS

Press Conference

Tuesday 11 September 2012

2

The world reinsurance market in 2011

World insurance market € 3,300 billion

World reinsurance market~ € 160 billion

Source: Sigma (Swiss Re); IAIS Global Reinsurance Report

Non life73%

Life*27%

4.8%

The direct insurance market is up by 2.7% compared to 2010.

The reinsurance market has risen in particular thanks to some “financial quota shares”, and to rate rises for certain types of natural catastrophe cover

* Including savings

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The 10 leading reinsurers in 2011

Net premiums as % Net premiums in billions of Euro

Non Life Life *reinsurance segment only

Source: SCOR based on annual reports, except China Re amb

4

Concentration in the market continues.The top 5 reinsurers represented about 17% of the market in 1980.They account for about 44% of the market in 2011.The top 10 reinsureurs represent about 59% of the market in 2011.

Source : SCOR

The top 5

The top 10

Breakdown of the Reinsurance market

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Mergers and acquisitions

1994 2000 2006 2008 2010 2012

1999 2005 2007 2009 2011

Summary of the main operations carried out since 1994 (1)

Source: SCOR

Key: Purchasertarget

Folksamerica ReRisk Capital Re

SCORPartnerRe LifeSorema

Swiss ReLincoln ReUnderwriters Re

BerkshireGeneral ReCologne ReEmployers ReFrankona ReAachener ReEagle Star ReFairfaxCTRHannover ReSkandia ReMunich ReAmerican RePartnerReSAFRWinterthur ReSCORAllstate ReSwiss ReM&G ReLife ReXLNac Re

Globale Management GmbHGerling Global Re

VHVGerling Life Re

XL CapitalLe Mans Re

Argonaut GroupPX Re

Ariel ReAtrium

Paris ReAXA Re

SCORReviosConverium

Swiss ReGE Insurance Solutions

Hannover ReScottish Re ING portfolio

Pacific LifeScottish Re*

Partner ReParis Re

RGAReliaStar

SCORPrévoyance Re XL Re Life America

ValidusIPC

White MountainsSirius

Alterra**MaxHarbor Point

SCORTransamerica Re

QBESecura

Pacific LifeManulife***

* International segment (business in Europe & Asia)

** New name of the group after merger

*** Life retrocession portfolio

(1) Reinsurance only, i.e. excluding the acquisition of insurance business (e.g. HSB by Munich Re)

AlleghanyTransatlantic

Goldman SachsAriel Re

Validus ReFlagstone Re

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Group Home of parent company

1 Aon Benfield USA1,461

2 Guy Carpenter USA 1,041

3 Willis Re UK 763

Total for 3 leading brokers ~ 3,267

Reinsurance brokers

Source: brokerage companies

Gross brokerage business in millions of USD

The turnover of these 3 brokers is up compared to 2011 (+ 6.4%)

The next 5 brokers taken together have a turnover lower than that of n° 3 on its own

August 2012August 2001 August 2006

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Since the events of September 11 2001 and the financial crisis ratings have fallen sharply, no reinsurer is now in the AAA category. In 2012 most reinsurers have a AA- or A+ rating and no reinsurer is rated less than A-.

Source: S&P

Changes in the ratings of the 25 largest reinsurers

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Profitability in decline in 2011 (particularly on account of the very large number of Natural Disasters)

Source: S&P Global Reinsurance Highlights and estimates for 2011

Changes in combined ratios in non-life reinsurance

*

* Estimated

2011*

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Changes in equity capital of the leading reinsurers

In 2009 reinsurers regained the equity lost (20 %) in 2008 and the market capitalization of reinsurance companies had returned to the levels of the end of 2007

A small part of the gain achieved in 2010 was absorbed by the natural disasters of 2011 but at end March 2012 the level of capitalization had returned to the 2010 peak and continued to improve in Q2 of 2012

0

100

200

300

400

500

2007 2008 2009 2010 2011 March 2012

Capital of Reinsurersin billions of USD

Source: The Aon Benfield Aggregate

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Worldwide Natural Catastrophe ClaimsThe 5 most significant insured events in 2011

Source: Munich Re Topics Geo

Date Event

Estimated cost USD Million

February Earthquake (New Zealand) 16,000 13,000

March Earthquake, Tsunami (Japan) 210,000 40,000

April Storm, Floods (USA) 15,000 7,300

September Hurricane Irene (USA, Caribbean) 15,000 7,000

Autumn Floods (Thailand) 40,000 10,000

Economic Insured

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Worldwide Natural Catastrophe Claims in 2011

In terms of the number of events (820) 2011 remains in line with the average for the last 10 years

In terms of victims (27,000), 2011 fortunately remains well below the average for the last 30 years

But in terms of costs, 2011 has set new recordseconomic cost $ 380 billioninsured cost $ 105 billion

Earthquakes represent almost half (47% or $ 50 billion) of the total cost of natural catastrophe claims in 2011; this is well above the average for the last 30 years which is only 10%.

The cost of storms, on the other hand, remains well below average (37% compared with an average of 76%)

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Worldwide Natural Catastrophe Claims since 1990: cumulative annual cost

Source: Sigma

Andrew Northridge Charley IvanFrancesJeanne

LotharMartin

Daria

(In millions of USD, cost indexed to 2011)

Kobé KatrinaRitaWilma

KyrillInond. UK

IkeGustavEmma

KlausChiliN.ZealandFloods Australia

N.Zealand JapanFloods Thailand

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Natural Events since 01.01.2012

The level of claims in the first half of 2012 has been well below average The economic cost amounts to $ 26bn compared with an average of $ 76bn

over the last 10 years, with insurance claims of $ 12bn compared with an average of $ 19bn over the last 10 years

Only 2 events have an insured cost in excess of $ 1bn

Tornados USA (March) 42.4

Tornados USA (April) 21

Munich Re press release

In billions of USD

Economic cost Insured cost

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Major risks claims experience in 2011 (> USD 200 Million)

January Horizon Oil Sands (Explosion)

February Rio Tinto (Mines)

February Gryphon (offshore)

May / June BNSF* (Floods)

June Vale Inco (Explosion)

July Vassilikos (Explosion)

August Satellite Express AM 4 (Space)

October Black & Veatch Construction (boiler)

October Freeport McMoran (strike)

490

306

800

271

230

389

271

304

225

Millions of USD

*Burlington Northern & Santa Fe Railway

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Major risks claims experience (> USD 200 Million):2012 starts badly compared to 2011

January Costa Concordia (marine)

January KS Endeavour Rig (offshore)

January Schlecker (credit)

March Evonik (fire)

April Spirit Aero System (Cat US 72)

May Bangkok Synthetics (Explosion)

1,000

275

350

270

700

215

Estimate in millions of USD

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Securitization

0,6 0,8 1,0 1,1 1,01,2

1,71,1

2,0

4,7

7,0

2,7

3,4

4,64,1

3,4

0

1

2

3

4

5

6

7

97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 H12012

Source: GC Securities: “Capital Market”

USD billion

Number of transactions 5 8 10 9 7 7 7

By June 30 the sums issued had already reached the figure for the whole of 2009

6 10 2720 13 18 24 18 15

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Securitization (continued)

Cat Bond issues amounted to 4.1 billion dollars in 2011, slightly below the level of 2010. Following the earthquakes in the first quarter, the level of issues was particularly low in the 2nd quarter but picked up again in the 2nd half of the year

The quality and diversification of assets deposited as guarantee have significantly improved, thus ensuring greater transparency and security

One 300-million-dollar cat bond is a total loss for the investors since it is affected by the earthquake in Japan.

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Securitization (continued)

Institutional investors, who were originally not greatly attracted to Cat Bonds(5 % of total take-up in 2009), represented almost a quarter of all subscriptions in 2011

At the same time new investors are appearing, attracted by the high yield of this type of investment: in particular pension funds, which consider that the advantage of diversification can offset the risk

Solvency II also encourages the issue of Cat Bonds as ceding companies seek more capacity, additional to or in replacement of the capacity offered by the traditional reinsurance market

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Securitization (continued)

Securitization continues to be focused mainly on the “Storm” risk in the USA. But several Cat Bonds also cover “Storm” risks in Europe and “Earthquakes” in Japan. In addition some Cat Bonds cover excess death rates

During the renewals in July 2012 some players stressed the fact that Cat Bonds had slowed the rise in rates for catastrophe reinsurance.

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How Reinsurance is evolving

The events of 2011 have had a strong impact on reinsurers, but only in terms of results. The lost capital has been recovered in 2012 and share buy-backs have resumed.

Contrary to what happened after previous major events (Andrew, WTC, Katrina, etc.), one year later no new traditional reinsurance company has been created; new capital has been invested using alternative routes

For the moment reinsurers have succeeded in managing the crisis without any need for recapitalization or State aid

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How Reinsurance is evolving (continued)

On account of their budget deficits some governments might be tempted to increase taxation, which would obviously handicap reinsurers established in the countries concerned

Financial earning are affected by the drop in interest rates and the instability of the financial markets. Since government bonds now offer poorer security and lower yields than before, investors are looking for alternatives so as to maintain quality and income.

In a context where earnings from investments are low, any increase in inflation would have a negative impact on reserves. On the other hand, a sharp increase in interest rates would have an impact on equity capital

Some headline topics

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I - Natural Catastrophes

II - Terrorism in Europe

III - Direct and contingent business interruption (CBI)

IV - Reinsurance and Solvency II

V - New world regulations(challenges for leading insurance and reinsurance groups)

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Natural Catastrophes

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In July 1982 France adopted a specific insurance scheme to face up to the occurrence of natural events of abnormal intensity that were considered to be impossible to pool, and were therefore non-insurable (floods, earthquakes, drought, etc.).

– The list of risks covered by this scheme is non-exhaustive

– The guarantee is obligatory and is included in the motor/property and casualty policies of individuals and companies.

– The premium rate is uniform whatever the type of risk and the degree of exposure to natural events. It is fixed by the government as a percentage of the general insurance premium

– Obligatory insurance = obligation to offer reinsurance. CCR (the state reinsurance agency) offers proportional reinsurance and stop loss policies.

The Cat Nat scheme in France

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The aim of the bill tabled on July 13, 2012 is to overcome the main weaknesses identified in the current system: its imprecise legal framework and the inadequacy of mechanisms to encourage prevention

The main proposals in the reform are to:

– Draw up a list of natural phenomena that are eligible under the scheme

– Determine the parameters for evaluation of the abnormal intensity of the natural phenomena that are eligible

– Modulate the Cat-Nat premium for companies and local authorities of a certain size, according to their exposure to risk and the preventive measures taken

– Systematically require a soil survey report before building on clay soils

– Limit drought compensation for buildings over ten years old

– Exclude from Cat-Nat coverage all zones classified as “unsuitable for building” by a PPRN (Natural Risks Prevention Plan)

Reform of the scheme for indemnification of natural catastrophes in France

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The insurers’ point of view:

– Extend public guarantees to cover supplier default

– Limit flexibility of tariffs to major risks

The reinsurers’ point of view :

– Cover as many natural risks as possible, including those considered to be extremely rare

– Extend flexibility of tariffs to most professional risks (Industrial risks of SMEs, local authorities, etc.) to further encourage prevention

– Clearly identify for policyholders the areas not covered by the state guarantee (infra cat nat -< below cat nat declaration threshold - and supra cat nat: guarantees not taken into account by cat nat)

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Reform of the scheme for indemnification of natural catastrophes in France

In most European countries, floods and earthquakes are covered in the same way as other natural events (storms, etc.)

Only France and Spain have set up public reinsurance schemes to cover risks linked to natural events. In Spain these risks, with the exception of drought, are ceded to the “Consorcio”

Other countries, such as Switzerland and Norway, have opted for market solutions (pools)

Italy is considering setting up a system of protection after the earthquake in Emilia-Romagna

Studies have been launched in Europe at the initiative of the Barnier Commission to compare cover and bring about convergence of the various schemes with more prevention and uniform best practices

Natural events in Europe

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Terrorism in Europe

Market insurance solutions in Europe in the face of the terrorist

risk

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Europe

A situation of contrasts in Europe. Market solutions are the most frequent:Recent

– Most were created after September 2001, except for Spain (1941) and the UK (1993)

– No market solutions exist in southern Europe apart from Spain (Greece, Italy, Portugal), in central Europe (Hungary, Poland) and in northern Europe apart from Denmark (Finland, Norway, Sweden)

Facultative

– Only France (for major risks) and Spain make cession to a pool obligatoryCapping of guarantees

– Only France, Spain and the UK offer unlimited pools guaranteed by the State. The other countries offer capped guarantees (max € 10bn in Germany) that are sometimes very low (€ 200 million in Austria)

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Market solutions are the most frequent:Limited to:

– Damage to property• Only Belgium and the Netherlands take into account the possible involvement of

both Life and Non-Life branches. But these solutions are capped (€ 1bn each of which € 300 million for the Belgian state and € 50 million for the Dutch state)

• The other European solutions focus exclusively on non-life coverage

– Sometimes only business/industrial risks are covered: this is the case in Germany, the UK and Switzerland which have no pools for personal risks

Exclusion of NBCR coverage, including the nuclear risk– Despite the enormous potential for economic and human losses, in particular in

nuclear scenarios, the latter are rarely covered and often specifically excluded from European market solutions

– Only the British, Belgian, Spanish, French and Dutch markets and pools cover the risk of nuclear terrorism (NBCR coverage exists only in France)

Europe (continued)

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Renewal of GAREAT 2013 Major Risks:

– Maintenance of the current level of retention (400 million euros)

– Increase of the State threshold by 15% from 2000 to 2300 million euros and of the reinsurance capacity by 19% from 1600 to 1900 million euros

– 5 year guarantee

Small/Medium risks:

– State threshold indexed, minimum 20 million euros per company

– Collective guarantee possible for GAREAT and groupings of companies

– 5 year guarantee

France

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The insurers’ point of view:

– Maintenance of the current solution

– Inclusion of coverage against default by suppliers

– State intervention at a reasonable level

The reinsurers’ point of view:

– Branch dedicated to terrorism

– Contractual insurance premiums

– Overall coverage, with all players, including the public sector, aligned with guarantees offered by the market (Tangible/Intangible, Direct/Indirect, Life/Non-Life)

– NBCR protection guaranteed by governments with complementary backing from Europe

France (continued)

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Direct / contingent business interruption (defaulting clients / suppliers)

in Non-Life insurance / reinsurance

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35

World Catastrophes 2011- Earthquake in Japan - Floods in Thailand

→ Growing awareness of the importance of Business Interruption / Supplier Default claims in Industrial Risks > property damage claims

Complexity of chains of production / out-sourcing circuits

Difficulty of understanding / evaluating exposure

Difficulty of estimating cumulative effects and modelling risks

Claims not yet quantified

Curent issues in Industrial Risks

Object of the guarantee: cover the financial losses due to interruption of business following an incident (fire, natural event, etc.)

Guarantee essential to ensure business continuity

Non-obligatory guarantee dependant on subscription to a Property Damage policy (2009-France: 62% of companies with Property Damage insurance also purchased the BI cover)

In the context of a Property Damage policy, the guarantee remains valid, whether the claim is due to a natural event or one of human origin

The major problem encountered by players in the market (insurers / reinsurers): difficulty of estimating cumulative effects due to the specific nature of the guarantee which makes risks difficult to model

Direct business interruption

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Often referred to as supplier / client default coverage, this comprises 3 types of guarantee:– supplier / client default – Default by energy / telecom suppliers – Impossibility of access

Non-obligatory coverage provided as an extension to direct business interruption insurance

Coverage not provided by CCR under Catnat law 82 or as State guarantee over and above GAREAT

The major problem encountered by players in the market: assessment of cumulative impacts

Contingent Business Interruption (CBI)

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To better understand this type of risk, more precise information is required

• An evaluation of business interruption commitments in fine detail (by type of risk, by CRESTA zone and for each capital band)

• Details on the level of claims (direct damage / Business Interruption) whether due to fire or natural events

• A clearer view of all the chains of production and out-sourcing

Recommendations by the profession

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Transposition of Solvency II in France and the Reinsurance industry

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1) Maintain the current regulatory distinction between insurance and reinsurance activities, and thus between insurance and reinsurance companies, in view of the differences between the two professions.

2) Clearly state various points concerning reinsurance as the system applicable to guarantees of claims against reinsurers and retrocessionnaires and to transfers of reinsurance portfolios.

3) In granting powers to national supervisory authorities, keep in view the aim of the directive, which is to unify rules applicable to identical professions

4) Recognize in full the role of reinsurance in the calculation of the SCR of the (retro)ceding companies

Key points in transposition

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Reinsurance and insurance are two quite separate activities:

– Reinsurance takes place on a “B to B” basis

– Reinsurance is essentially an international business

The spirit of the Reinsurance directive, compatible with that of the Solvency II directive, must therefore be maintained. In particular:

– No extension to reinsurance of measures concerning the protection of clients

– It is essential to prevent any distortion of competition in the EEZ and to avoid subjecting national reinsurance companies to new constraints that do not derive directly from European texts: e.g. concerning investment, it is important not to go beyond the “prudent person principle”

Distinction between insurance and reinsurance

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Guarantee of claims against reinsurers and retrocessionnaires:

- A single secure market, taking into account the specific features of the reinsurance business

- Collateralization requirement limited to the reinsurance of small risks (mass risks, treaties) and to reinsurers from outside the EEZ, which are not members of a Group and are established in a country considered as non-equivalent

Guarantee of claims

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Clarification and flexibility in the procedure for transfers of reinsurance portfolios so as to avoid distortions of competition: The insurers’ preferences:

– Double authorization, by the supervisory bodies of the cessionnaire and the ceding reinsurer

– Transfers enforceable against ceding companies except where a contrary agreements exists between ceding company and reinsurer

The reinsurers’ point of view (by application of the European Directive):

– Optional prior authorization procedure, mainly with the aim of fixing a definite date for the transfer through its publication in the OJ

– A certificate from the supervisory body of the cessionnaire represents authorization

– Transfers enforceable as of right against ceding companies after publication in the OJ

Transfers of reinsurance portfolios

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Reporting: limitation of specific national statements and no overlap with the quantitative statements required at European level

EIOPA recommendations: the French ACP should be able to accept the EIOPA recommendation with which it wishes to comply, but with no addition, modification or adaptation

Audit of prudential balance sheet: since the Solvency II balance sheet is drawn up solely for prudential reasons, no obligatory external audit

Distortions of competition

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Recognition of the effective risk transfer function of reinsurance (finite reinsurance)

Recognition of XS reinsurance (in various forms, including multi-risk, multi-annual, aggregate, stop-loss, etc.) in the Cat. module

Role of reinsurance in the SCR

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New world regulations

Challenges for leading insurance and reinsurance groups

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The International Association of Insurance Supervisors (IAIS) has been working since the financial crisis and the collapse of AIG in 2009 on the definition of systemic risk in insurance, in collaboration with the FSB (Financial Stability Board)

G20 drive for global financial stability, with measures for worldwide banks and insurance companies, identification of global systemically important banks (list of 28 GSIBs in 2012)

Discussions currently under way between regulators and the industry (in particular Association de Genève, INIA and Insurance Europe)

Definition of methodology to identify potentially systemic insurers/reinsurers by the end of 2012: the industry would prefer an approach based solely on risk-bearing business

List of global systemically important insurers (GSII) in 2013, then transposition to the level of national systemically important insurers (under way in the US market)

Systemic risk

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Following the financial crisis the International Association of Insurance Supervisors (IAIS) has been working since 2010 to strengthen the control of multinational groups

A joint transnational supervisory structure (ComFrame) has been set up, with the aim of harmonizing methods and facilitating cross-border supervision through identical methods of group-wide supervision and winding-up of companies

Discussions currently under way between regulators and the industry (in particular INIA, Insurance Europe and North American associations)

Definition of methodology for uniform world-wide supervision in 2013: the industry would prefer an approach that does not add another layer of regulation but that complements existing regulatory systems (Solvency 2 in Europe)

List of groups involved in 2013 then subsequent extension to medium-sized groups of insurers and reinsurers

ComFrame

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