Transcript Slide 1
Overview of global trends in reinsurance
(International reinsurance point of view)
Thomas Hess
Group Chief Economist
Head of Economic Research &
Consulting, Swiss Re
14th African Reinsurance Forum
Tunis, 20 October 2008
Key resinsurance questions to be
adressed
14th African Reinsurance
Forum, Tunis, 20 Oct. 2008
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The economic situation and the banking crisis
Where do we stand in reinsurance?
Demand/ supply situation
Is reinsurance still safe?
Prospects for reinsurance
Current situation in global
financial markets
14th African Reinsurance
Forum, Tunis, 20 Oct. 2008
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Interbank markets dried up; large parts of financial markets face liquidity
issues. There is high uncertainty about extent and duration of the crisis.
IMF sees half of subprime related losses (estimated at USD 1’405 bn)
borne by banks, the other half absorbed by hedge funds, pension funds
and insurers.
Additonal losses arise from the default of financials (Lehman,
Washington Mutual, AIG).
The effects of the real economy are now becoming visible. US and
Europe face recessions.
The economic slowdown will have further negative consequences for
credit and stock markets.
The bank recapitalisation plans and other measures announced recently
should avert a complete financial meltdown, but outlook is still grim.
The indirect impact of the credit
crisis on insurers
14th African Reinsurance
Forum, Tunis, 20 Oct. 2008
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Lower investment income due to weak equity markets, rising
credit spreads and defaults on corporate bonds
Slower premium growth in P&C due to growth slowdown but
problems with investments speed up hardening of insurance
prices
Individual US life insurers investment losses required them to
raise capital from financial markets
Lower demand for index-linked products (life insurers)
Rise in inflation may lead to higher claims inflation (long-tail
casualty)
Higher costs of capital: both equity and credit have become
more expensive
Insurance business is fundamentally
different from banking
Assets
Fixed-income
securities
Liabilities
Unearned
premiums
Insurance business is funded primarily by premiums
received for providing insurance protection
both premium flow and pay-outs are reasonably
predictable
Pay-outs are triggered by hazardous events,
and not by policyholders’ will
there can be no ‘run’ on an insurance company
Insurance hazards are typically uncorrelated
the failure of one insurer does not necessarily
predict failures of other companies*
Premiums received for providing insurance are
invested in diversified classes with currency and cash
flow matching
Insurers invest assets mostly to maturity and
therefore immunise against short-term value
fluctuation
Unpaid claims
Equity securities
Alternative
invest.
Other liabilities
Cash and other
assets
Equity
* see G30 and FSF studies
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Forum, Tunis, 20 Oct. 2008
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Where do we stand in reinsurance?
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Forum, Tunis, 20 Oct. 2008
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The reinsurance price cycle turned in 2004, we are now
reaching the bottom
Higher combined ratios, and less positve run-off of prior
years cause lower underwriting results
Selective upward trends from low price levels in aviation,
motor insurance, D&O already visible
Losses on the investment side put additonal pressure on
profitability
How are catastrophe losses
developing
Large insurance losses 2008 (> USD 1bn)
Date
Insured loss
Event
Feb 08
1.0
Tornadoes, winter storms, floods (United States)
Feb 08
1.5
Winter storm Emma (Central & Eastern Europe)
May 08
1.0
Sichuan Earthquake (China)
May 08
1.2
Tornadoes (United States)
Aug 08
2.5-4.0
Sep 08
8-10
Hurricane Gustav
Hurricane Ike
Source: Swiss Re Economic Research & Consulting
14th African Reinsurance
Forum, Tunis, 20 Oct. 2008
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Insured losses up to 1 September 2008 increased by more than
25% relative to the same period in 2007
2008 figures confirm long-term trend towards higher nat cat
claims
Demand/ supply situation is
favouring higher reisurance rates
Demand
- Insurers combined ratio increases
- Insurers lose 5-20% of equity capital
- Higher cost of capital
Insurers will retain less and reinsure more
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Forum, Tunis, 20 Oct. 2008
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Supply
- Reinsurers combined ratios increase
- Reinsurers lose on investments
- Higher cost of capital
- Less alternative capacity available (securitisation, side
cars, reinsurance start ups)
Reinsurers will provide more capacity only at
higher price
Stable ratings for reinsurers with
few exceptions
S&P
Moody’s
A.M. Best
ACE
A+/ stable
Aa3/ stable
A+/ stable
Berkshire Hathaway
AAA/ stable
Aaa
A++/ stable
Everest Re
AA-/ stable
Aa3/ stable
A+/ stable
Hannover Re
AA-/ stable
*
A/ stable
Munich Re
AA-/ stable
Aa3/ stable
A+/ stable
A-/ stable
Not rated
A-/ stable
Partner Re
AA-/ stable
Aa3/ stable
A+/ stable
Renaissance Re
AA-/ stable
A2
A+/ stable
RGA
AA-/ stable
A1
A+/ stable
A-/ stable
A3 / stable
A- / stable
AA-/ Watch Neg
Aa3/ stable
A/ negative
XL Re
A+/ stable
A1/ stable
A/ stable
Swiss Re
AA-/ stable
Aa2/ stable
A+/ stable
Financial Strength Rating/ Outlook
Paris Re
SCOR
Transatlantic Re
Source: Swiss Re Economic Research & Consulting
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Forum, Tunis, 20 Oct. 2008
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Solvency ratios expected to decline
as capital growth slows down
Capital and solvency of the P&C industry, 1999-2011
USD index, 1999 = 100.
%
200
120
150
90
new scenarios
100
60
50
30
0
0
99
00
01
02
03
04
Primary insurers' capital
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Forum, Tunis, 20 Oct. 2008
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Source: Swiss Re Economic Research & Consulting
05
06
07
08
Primaries' solvency [RHS]
09
10
11
Worldwide P&C growth
P&C insurance and reinsurance real premium growth in %, 1991–2011.
12
The cycle may
turn earlier and
more forcelully!
10
8
6
4
2
0
-2
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
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Forum, Tunis, 20 Oct. 2008
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Source: Swiss Re Economic Research & Consulting
Profitability prospect non-life
insurance
Profitability of 6 major primary markets, 1999-2011*,
as a % of net premium earned
2008 and 2009
investment results
and overall profits
results will be worse!
30
Reinsurance
looks similar
but is more
cyclical
20
10
0
-10
-20
-30
99
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Forum, Tunis, 20 Oct. 2008
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00
01
02
03
Underwriting result
Operating result
04
05
06
07
08
09
Investment result
ROE after tax
Source: Swiss Re Economic Research & Consulting
10
11