State of the Reinsurance Market

Gary BlumsohnArch Reinsurance Company

GBlumsohn@archreco.com

CAS Annual Meeting: BostonNovember 2002

Post-9/11 New Companies

• Allied World• Arch• Axis• DaVinci• Endurance• Goshawk• Montpelier• Olympus• Platinum

New Capital Raised

• Over $35 billion

• Both new and existing companies

Reductions in capital

• 9/11: $40B - $50B?

• Capacity exiting– Gerling– Overseas Partners– A&H markets for WC– Reliance, Legion & other fronts

• Stock market losses

• Reserve strengthening

More Reductions in Capital?

• Further reserve deficiencies?– Morgan Stanley: $120B (12/31/01)

• $55B asbestos• $65B 1992-2001 AYs• Mostly commercial lines

– WCIRB: $12.6B deficiency in CA WC

110.

5

105.

0 113.

6

119.

2

104.

8

100.

8

100.

5

114.

3

106.

5

117.

4

108.

8 115.

8

106.

9

108.

5

106.

5

105.

8

101.

6

105.

6

107.

7

110.

0

115.

7

105.

0

126.

5

162.

5

90

100

110

120

130

140

150

160

170

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*

Reinsurance All Lines Combined Ratio

Combined Ratio: Reinsurance vs. P/C Industry

*First Quarter 2002 figures.

Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

2001: Accident Year versus Calendar Year Net L&LAE Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

EmployersRe

General Re NationalIndemnity

Transatlantic Everest Re Odyssey Re Converium Swiss ReAmerica

American Re

Calendar Year 2001

Accident Year 2001

Average calendar year ratio 15 points worse than accident year.

Source: RAA

Asbestos

23.9

31.9

16.1

33.1

40.0

65.0

$0

$10

$20

$30

$40

$50

$60

$70

1996 2001

($ B

illi

ons)

Incurred Losses to Date Unfunded Future Liabilities Ultimate Costs

Source: A.M. Best, Insurance Information Institute.

In Sum….

An industry in turmoil

But, more favorably…

• Rates up virtually across the board– Compounding of higher primary and

higher reinsurance rates– Large differences by line

Emerging Trouble?

• What are loss trends?– D&O– Med Mal

• Re-emergence of inflation?

• Low interest rates

Inflation and Medical Inflation

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Inflation

Medical Inflation

Medical inflation up each year since 1997

Real Interest Rates

-5%

-3%

-1%

1%

3%

5%

7%

9%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Real interest rate after CPI

Real interest rate aftermedical CPI

Real returns after CPI now 0.8% - long-term average = 2.2%

Real returns after medical CPI now negative for first time in nearly a decade

Thought Experiment

• WTC + Asbestos = $110 billion

• Let’s guess that today, half would find its way to domestic reinsurers = $55 billion.

• Gross WP for US Reinsurers in 2002 ≈ $40 - $50 billion

Thought Experiment (cont.)

If average profit margin = x,

how many years to earn back losses?

“Unexpected” Losses

• Asbestos & WTC were “unexpected”

– Any reason to think the frequency of “unexpected” losses will diminish?

– Expect the unexpected!

The Blame Game

1988

Where was George?

2002

Where were the Actuaries???

More Blame

• More actuaries in reinsurance in 1990’s than ever before.– Correlation isn’t causation, but…

• Did we get too tied up worrying about risk loads, DFA, variability, correlations, and other cool stuff?

“Skurnick’s Theorem”

It’s the mean, stupid!