Sustainability –Insurance Challenges and...
Transcript of Sustainability –Insurance Challenges and...
Sustainability – Insurance Challenges
and Opportunities
Neil Sprackling
Director
Swiss Re
(Sydney)
Slide 2
Agenda
� The changing risk landscape
� Environmental sustainability
� Case studies
� Insurance and weather/renewable energy
Slide 3
Sustainability
Most widely accepted definition:
“meeting the needs of the present without
compromising the ability of future generations
to meet their own needs”
Source: World Commission on Environment and Development (the Brundtland
Commission).
Slide 4
Risks have become
increasingly inter-dependent
GHG emissions
Climate Change
Storms
Flood DroughtSea level Ecosystems
Food security
Health effects
Migration
GHG regulation
ConflictInvestments
Energy security
Slide 5
Risks have become
increasingly more severe
Ocean Drive, FL, 1926
Ocean Drive, FL, 2000
0
10
20
30
40
50
60
70
80
90
100
110
1970 1975 1980 1985 1990 1995 2000 2005
Insured losses, USD billions
earthquake losses
weather-related losses
Insured worldwide cat losses > 40m (property/business interruption) at 2007 price levels in USDbn
Source: Swiss Re Economic Research & Consulting
1992:
Hurricane Andrew,
USD 23bn
1999:
Storms Lothar/Martin,
USD 10bn
2004:
Hurricanes Charley,
Frances, Ivan, Jeanne,
USD 32bn
2005:
Hurricanes Katrina,
Rita, Wilma,
USD 90bn
Clear upward trend!
� increased insurance penetration
� more values
� more values in high-risk areas
� higher vulnerability
� climate change (storm, flood)
Slide 6
The increasing use of risk transfer
instruments in the private sector
Growth of ILS outstanding, life and non-life
securities 1997 – 2007, in USD bn
0
10
20
30
40
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
46% CAGR over 10-years
9.5% CAGR over 13-years
0
20
40
60
80
100
120
140
160
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
at historical exchange rates at today's exchange rates
Growth of traditional catastrophe reinsurance
1994 – 2007, 15 prime markets, in CHF bn
Source: Swiss Re Source: Swiss Re Capital Markets
9.5% CAGR over 13-years
� Protection against tail risk using both traditional insurance and capital market instruments.
Slide 7
Gap between economic and
insured losses is widening
0
50
100
150
200
250
1970 1975 1980 1985 1990 1995 2000 2005
Total economic losses (estimate)
Insured losses
Natural catastrophe losses 1970-2007, in USD billion
� In 2007, natural
catastrophes and
man-made disasters
claimed more than
21 000 human lives
worldwide and
caused total losses
of approximately
USD 70bn
� Only a fraction of
total losses is
covered by
insurance (USD
27.6bn in 2007)
Source: Swiss Re Economic Research & Consulting
Slide 8
For many large loss potentials
the un-insured portion is significant
40-60%0.5%15200windstorm Germany
10-30%0.7%15200windstorm France
30-50%2.7%201000earthquake in SydneyAustralia
30-50%14.4%201000earthquakeIsrael
30-50%1.6%20500earthquake in BCCanada
10-30%1.3%30200windstorm UK
80-90%25.9%501000earthquakePortugal
80-90%5.9%50500earthquakeMexico
70-80%12.6%50500earthquakeTurkey
70-80%2.7%50500earthquakeItaly
60-80%1.1%50200typhoonJapan
40-60%2.3%300200hurricaneUS
80-90%2.3%300200California earthquake US
90-95%11.5%500200earthquakeJapan
of which,
not insured
Economic loss
in % of GDP
Economic loss
in USDbn
Return period
in years, approx.
Reference eventCountry
Source: Swiss Re sigma No. 2/2007
Slide 9
The precautionary principle
Why does Switzerland
have an army?
Applying the precautionary principle is best practice:
Experiences from the past:
asbestosis
unsuccessful
mad-cow disease
successful
Why do we purchase
property insurance?
Slide 10
Case study Mexico: Funding for
immediate relief efforts after earthquake
Solution features
� Insured peril: Earthquake
� Payments to be used for immediate emergency relief after earthquake
� Aggregate insurance limit: USD 450 million
– USD 290 million: Parametric reinsurance coverage
– USD 160 million: Parametric cat bond
� Trigger type: Index, physical trigger (quake magnitude)
� Time horizon: May 2006 – May 2009
� 1st cat bond issued in Latin America
Involved parties
� Insured: Fund for Natural Disasters (FONDEN) of Mexico
� Reinsurer and arranger of cat bond Swiss Re
Slide 11
Case study:
Flood risk securitization in Great Britain
Features
� Structure and placement of USD 150 million of securities
covering catastrophic flood events in Great Britain and
earthquakes in Canada and the United States
� First transaction that transfers flood risks to the capital
markets
� Creation of a parametric index based on flood depths
Involved parties
� Swiss Re structured and placed the securitization for
Allianz Global Corporate & Specialty AG and acted as the
sole bookrunner
� Risk Management Solutions (RMS) as risk modeller
Slide 12
Case study Canada:
Wildfire suppression cost cover
Solution features
� Innovative coverage of wildfire suppression costs
� The loss is calculated by multiplying the area burnt in
hectares with CAD 300 per hectare
� Annual cover of CAD 100m above CAD 100m retention
� The client provides the reinsurer with monthly reporting of
the suppression costs, number of wildfires, and area burnt
Involved parties
� Forest Protection Division of Alberta, Canada
� Swiss Re as the lead reinsurer
Slide 13
The increasing use of risk transfer
instruments in the private sector
9.5% CAGR over 13-years
Growth of weather derivative market 2000-2007, total notional values of contracts (CME*, OTC**) , USD bn
Source: PwC
� Protection against earnings volatility.
4.3 4.2 4.7
9.7
45.2
19.2
2.5
0.0
10.0
20.0
30.0
40.0
50.0
2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 47%
14%
9%6% 6%
18%
* Chicago Mercantile Exchange, ** Over-The-Counter
Energy
Agriculture
Retail
Construction
Transportation
Other
Slide 14
Case study Mexico:
Weather insurance for the government
Solution features
� Small cattle ranchers rely mainly on natural pastureland to feed their animals
� Climatic events such as droughts reduces available biomass, an essential component to
maintain animal’s weight and health
� This very innovative solution provides economic relief to supplement purchase of additional feed
to maintain animal’s minimum weight
� Available biomass is measured by a Vegetation Index
Involved parties
� Insured: Secretariat of agriculture (SAGARPA)
� Local reinsurer: Agroasemex, a Mexican, state-owned reinsurance company
� International reinsurers: Swiss Re and others
Slide 15
Solution features
� Weather derivative contracts covering drought-related food shortages in three Millennium Villages
clusters situated in Sauri (Kenya), Tiby (Mali), and Koraro (Ethiopia)
Involved parties
� Swiss Re partnered with Millennium Promise and the International Research Institute for Climate and
Society (part of The Earth Institute at Columbia University)
Case study Africa:
Drought protection for villages via NGO
� Under the agreement Swiss Re provided up to USD 2m of
financial protection in the case of extreme drought through
Millennium Promise Alliance (NGO)
� Financial instruments use a combined precipitation and
vegetation density index
Business Insurance, September 10, 2007
Slide 16
Parametric Insurance Solutions
VOLUME 3907, JUNE 08 2007
Macquarie arm secures a drought first
MACQUARIE ALTERNATIVE Assets Management Limited (MAAML) has become the first managed investment scheme to incorporate
drought insurance protection for investors.
And it has gone big - with the security of Swiss Re as insurer. MAAML has arranged the drought insurance cover for investors in the
Macquarie Almond Investment 2007.
Anthony Abraham, director and head of retail agribusiness, Investment Banking Group, said MAAML had secured the policy to provide
protection for its investors.
“This is the first time a management investment scheme (MIS) has incorporated drought insurance protection for its investors.”
The drought insurance followed MAAML’s constant endeavor to enhance its services.
The insurance policy is based on the level of rainfall at agreed locations within the catchment areas that provide inflows to the Murray
River.
The policy provides cover in the event that the total rainfall between now and February 2008 is below a pre-agreed level resulting in trees to
be planted this year become unavailable in the first year after planting.
In such circumstance, the policy should cover most of the cost of replanting trees, and to provide investors with a payment for the estimated
loss of one year of income.
This was given that there would be at least an extra year before the trees reached commercial production.
Mr Abraham said the protection came at no extra cost to its investors.
He added that MAAML was committed to delivering agribusiness investments that sought to maximise the return potential and reduce the
downside risk.
Slide 17
Insurance & Renewable Energy
� Non-traditional risk transfer solutions, structured to the specific
needs of the project and clients:
� ELPRO for the Power Generation sector
Electricity price protection not linked to any material loss or
damage
� PRAECIPIO concept for Windfarms
Comprehensive Predictive Maintenance and Risk Transfer
Package, cradle to grave solution
� Renewable Energy
Insurance cover for all kinds on renewable energy sources
- Clean Coal Technologies and Carbon Capture & Storage
- Geothermal: Exploration & Generation
- Solar and Wind: Weather and Price Protections
Slide 18
Carbon Capture & Storage
� For insurance purposes main issues are:
– Gradual or abrupt leakage of CO2
– Definition of damage or harm
– Robust regulatory framework required around
– issue of permanence
– long term liability
� Who should ultimately bear the risks and liability?
– Operator / Owner
– Original polluter
– Government
Slide 19
The Australian Challenge
Source: Garnaut Report
Slide 20
Four strategic priorities
1. Understand the risk & adapt pricing models and risk
mitigation strategies accordingly
2. Leverage the opportunities by developing products &
services for mitigation and adaptation
3. Influence the business environment by raising awareness
at industry & governmental level
4. Address own environmental footprint
Swiss Re’s approach
Slide 21
� Global initiative for all Swiss Re Group employees
� Swiss Re supports a maximum of 50% of any investment
� An employee can claim up to CHF 5’000, or equivalent
over the five-year lifetime of the programme.
� Eligible investments in Australia are
– Hybrid/LPG car purchase (or LPG conversion)
– Rainwater tanks
– Solar panels
– Paid days leave for work with recognised
environment charities
COYou2 Reduce & Gain Programme
Slide 22
Summary
� be aware of increasing inter-dependent nature of risks
� be aware of global solutions
� seize the opportunities
� consider local relevance
� meet current needs….
� but not at the expense of future generations.
Sustainability – Insurance Challenges
and Opportunities
Neil Sprackling
Director
Swiss Re
(Sydney)
This presentation has been prepared for the Finity Niche Insurer Conference held on 5 November 2008. Finity Consulting Pty Limited (ABN 89 111 470 270) wishes it to be understood that opinions put forward herein are not necessarily those of Finity and Finity is not responsible for those opinions. The information presented at the conference was of a general nature and a reader of this presentation must seek their own independent advice before using it for any purpose.