Transcript Canadian Institute of Actuaries Annual Meeting

CANADIAN
INSTITUTE
OF
ACTUARIES
ANNUAL MEETING
St. John’s, June 28-29, 2005
Gordon Crutcher – Sutton Reinsurance
1
CURRENT DIRECTIONS
OF
P & C REINSURANCE
2004 REVIEW
–
PREVIEW
OF 2005 & BEYOND
2
EXECUTIVE SUMMARY
THE
CURRENT
REINSURANCE
MARKET
3
CURRENT REINSURANCE
MARKET



2004 was a profitable year for most
reinsurers, despite an unprecedented
frequency of natural disasters.
Underwriting profits were earned in
2003 and 2004.
Continuing good results are
expected for 2005.
4
CURRENT
REINSURANCE MARKET
Balance sheets have been
strengthened again.
 Treaties generally adequately
priced.
 Capacity is adequate for most
lines.

5
CURRENT
REINSURANCE MARKET



Market has definitely started to
soften (as it has for insurance).
Investment gains are rising
(although still 20% below peak in
1998).
Not the bull market of the ’90’s
but a global economic recovery
appears underway.
6
CURRENT
REINSURANCE MARKET





However, a falling combined ratio
can be a reinsurer’s worst enemy.
. . . Times are good.
. . . Losses are down.
. . . If we soften prices, we gain
more market share.
Right?
Source: BestWeek – January 24, 2005
7
SURPRISES AHEAD ?
8
JUST STARTING THE
RIDE DOWN?
9
HOW SERIOUS ARE
REINSURERS ABOUT
MAINTAINING
PRICING DISCIPLINE
IN 2005?
10
THIS SERIOUS?
11
INTERESTING OBSERVATION
“The underwriting cycle is back with a
vengeance and will have no mercy this
time around. Pricing, reserving and
underwriting blunders will prove far more
lethal, far more quickly in today's
lethargic investment environment,
especially if potential investors flee
following the recent spate of insurance
industry scandals.”
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist, Insurance
Information Institute (www.iii.org)
12
ANOTHER INTERESTING
OBSERVATION
P/C Insurance Will Always Be An
Impossible Business:
 “Impossible
to use past information
to determine prices today for a
product sold tomorrow for claims
that may arise in the distant future
AND expect to be right.”
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief
Economist, Insurance Information Institute (www.iii.org)
13
2004 – A BRIEF REVIEW
 Once again, it was an
“interesting time” for insurers,
reinsurers and brokers.
 Challenges came from:
- Nature
- Economy
- Public
- Regulators
- Ourselves
14
REINSURERS’
COMBINED RATIOS

Canadian Reinsurers
2000:
 2001:
 2002:
 2003:
 2004:


113%
119%
110%
96%
92%
U.S. Reinsurers
2000:
 2001:
 2002:
 2003:
 2004

114%
143%
121%
101%
105%
15
COMBINED LOSS & EXPENSE
RATIOS OF CANADIAN
REINSURERS
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
1990
1992
1994
1996
1998
2000
2002
2004
Source: Annual Statistical Issues of Canadian Underwriter Magazine
16
NET PREMIUMS WRITTEN
BY CANADIAN REINSURERS
Billions
$3
$2
$2
$1
$1
$0
1990
1992
1994
1996
1998
2000
2002
Source: Annual Statistical Issues of Canadian Underwriter Magazine
2004
17
TOTAL CANADIAN
REINSURANCE ASSUMED
Billions
$6
$5
$4
$3
2000
2001
2002
2003
Source: Canadian Insurance 2005 Statistical Issue
2004
18
LESS BUSINESS FOR
REINSURERS TO WRITE
Reinsurance “pie” continues to
shrink in Canada.
 Insurer retentions continuing to
increase.
 One major insurer significantly
increased its retention for 2004.
 Another has done so for 2005.

19
LESS BUSINESS FOR
REINSURERS TO WRITE
Insurance Company mergers and
acquisitions are not good news for
reinsurers.
 Allianz Canada no longer buys an
independent treaty program.
 Supply of reinsurance has
increased but demand is flat
– or declining.

20
CEDED REINSURANCE PREMIUMS
AS % OF TOTAL INS. PREMIUMS
Total Insurance Premiums
Reinsurance Ceded
30
25
20
15
10
5
27%
30%
31%
30%
24%
0
2000
2001
2002
2003
Source: OSFI @ Q4 each year
2004
21
RELATIVE IMPORTANCE OF
REINSURANCE TO CANADIAN
INSURERS
Ratios of “Reinsurance Ceded” to “Net Premiums Written”









Wawanesa Mutual Insurance:
Dominion of Canada General:
Co-operators General
Aviva Insurance Co. of Canada:
ING Insurance Co. of Canada:
Economical Mutual
Zurich Insurance Company:
R & SA Insurance Co. of Canada:
Commonwealth Insurance Company:
2%
3%
6%
18%
23%
26%
33%
37%
65%
22
Source: http://www.osfi-bsif.gc.ca/ Data as of Q4 2004
REINSURANCE CEDED
TO PREMIUMS WRITTEN
70%
60%
Source: OSFI @ Q4 2004
50%
40%
30%
20%
10%
0%
WAW DOC
COOP
AVI
ING
ECO ZUR
RSA COM
23
IT’S GETTING LONELY
OUT THERE!
•
Fewer licensed reinsurers
• Now only 19 active markets
in Canada

Used to be 41
in 1991
24
ACTIVE
FEDERALLY – LICENCED
INDEPENDENT REINSURERS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Aspen Re
AXA Re
CCR
Endurance Re
Everest Re
Folksamerica
GE/ERC
General Re
Hannover Re
Lloyd’s
Mapfre Re
Munich Re
Odyssey Re
Partner Re
SCOR Re
Swiss Re
Toa Re
Transatlantic Re
XL Re
NEW IN 2004:
- Endurance Re
- Mapfre Re
LOST IN 2004:
-
Converium Re
25
CANADIAN
CATASTROPHES
• July 2, 3, 7, 11: Rain, hail and flooding
in Edmonton:
($170 million)
• July 15 - 20: Rainstorms and flooding
in Peterborough: ($90 million)
• September 8: Rainstorm and flooding
in Kingston/Ottawa & Niagara:
($60 million)
• Wildfires in B.C.:
($50 million)
26
CATS ELSEWHERE
WERE THE PROBLEM

INSURED LOSSES HIT NEW
RECORD LEVELS IN 2004!
 $42
billion! 300 Cats
$18.5 billion in 2003.
 $37 billion in 2001. (Remember
September 11?)

27
WORLD – WIDE CAT
LOSSES IN 2004




4 hurricanes in Florida within 6
weeks.
(>$22 billion total loss)
(Hurricane Andrew was $20.3 B in
1992)
10 typhoons in Japan (>$6 billion)
Asian earthquake & tsunami
(>$5 billion and >295,000 deaths)
28
EXCEPTIONAL CAT
LOSSES IN 2004

The exceptional world-wide
Catastrophe loss experience in
2004 no doubt dampened
increasing competitive
pressures on rates.
29
DECEMBER
TH
26
- What A Disastrous Date!
In 2004: Asian earthquake &
tsunami:
>295,000 killed
 In 2003: Earthquake in Iran:
>41,000 killed
 In 1999: Winter storm Lothar
in Europe:
$6.5 billion

30
CAT LOSS TREND IS
STEADILY RISING
Source: Swiss Re Sigma
31
CAT LOSS TREND IS
DISTURBING
32
INSURED LOSSES BY
CATEGORY IN 2004
33
CAT EXPOSURE IN NORTH
AMERICA IS ENORMOUS
(Originals of this map can be ordered from Risk Management Solutions)
34
ANOTHER
CATASTROPHE?

Elliot Spitzer

Permanent significant
impact on market
practices, broker
revenues and
disclosure.
35
SPITZER

. . . To say nothing what he has done to
Marsh McLennan’s share price !
36
SPITZER’S IMPACT
ON REINSURANCE



Modest impact generally on
reinsurance industry.
Could see changes in broker
structure and distribution.
Finite reinsurance under
intense scrutiny – but it’s a
very small line in Canada.
37
CANADIAN REINSURANCE
MARKET – 2005 RENEWALS

Reinsurance renewal pricing for Jan 1,
2005 in Canada was firmer and less
competitive than
originally
expected.
38
CANADIAN REINSURANCE
MARKET – 2005 RENEWALS



Pricing continues to be based on
modeling results → less volatility.
Final underwriting decision on many
treaties made in London, Europe,
Bermuda, or the U.S.
No significant changes in treaty
terms and conditions.
39
INSURERS’
CONCERNS
WHEN BUYING REINSURANCE
Price
2. Terms and conditions
3. Security
1.
40
INSURERS’ CONCERNS

Insurers no longer consider
relationships an important
factor when buying reinsurance.

It’s price, terms and conditions.

Followed by reinsurer security.
41
CANADIAN REINSURANCE
MARKET – 2005 RENEWALS




Canadian Cat rates decreased slightly
(10% - 15%).
As did Property “Per Risk” covers.
Little change in proportional
commissions.
Casualty rates generally held firm,
except for lower layers where rates
increased.
42
AVERAGE TREATY RATE
CHANGES IN CANADA
50
40
30
% 20
10
0
-10
Cat
Auto
2002
2003
GL
2004
Source: Swiss Re Canada
Est. for 2005
2005
43
AUTO IS NOT A POPULAR
LINE WITH REINSURERS
44
REINSURERS CONTINUE TO
SEE LARGE AUTO CLAIMS
45
CANADIAN REINSURANCE
MARKET – 2005 RENEWALS

While public is not reporting small
collision & comprehensive losses to
private insurers (frequency is down)
– “fear induced frequency
suppression” –
reinsurers are seeing higher
severity for A.B. & liability losses.
46
CANADIAN REINSURANCE
MARKET – 2005 RENEWALS





HIGHER SEVERITY
e.g. Laura Browne claim (1997)
$13 million settlement in 2004.
Passenger in a leased car.
$3 M from State Farm; $10 M from
AIG.
Vicarious liability involved.
47
CHARACTERISTICS OF
TODAY’S INSURERS




They are retaining a lot more risk.
Common to see $2 to $10 million
retentions.
They don’t buy as much reinsurance.
Sophisticated analytical tools help to
increase insurers’ comfort level in
retaining higher levels of risk.
48
CHARACTERISTICS OF
TODAY’S INSURERS


They are very price conscious.
The security rating of their reinsurers is
important - but the predominant issue
is price!
49
CHARACTERISTICS OF
TODAY’S REINSURERS




Also retaining more risk. Getting
larger.
Top 10 markets write 80% of
business.
Retro market capacity is still limited
and expensive.
Disciplined underwriting (so far).
Focused on bottom-line results.
50
CHARACTERISTICS OF
TODAY’S REINSURERS
Require considerably more
underwriting information.
 Pricing is directly tied to risk
modeling.
 Little room for rate negotiation.

51
WHAT DOES 2005 HOLD?

The biggest risk is the most predictable:
- the cyclical nature of the market!

Periods of strong profitability have
historically been followed by cyclical
downswings in pricing.

Continuing aggressive weather patterns:
- frequency and severity of Cats.
52
WHAT DOES 2005 HOLD?

Profitability should continue but rate
of growth in profits will be lower.

Premium growth is faltering. Real
premium growth in 2005 will be
near zero.
Source: Best Week of June 20, 2005
53
WHAT DOES 2005 HOLD?



Big changes are happening in global
reinsurance industry, most coming
from Europe.
Fundamental shifts (or updates) in
strategy.
EC allowing European reinsurers
more business mobility with less
expense and better use of capital.
Source: Best Week of June 20, 2005
54
WHAT DOES 2005 HOLD?



Business mix changing. Reinsurers
seeking more life business to offset
impact of the P&C cycle.
Focus on emerging markets in Asia
and Pacific Region.
Some major reinsurers retreating from
U.S. market for better prospects in
Europe.
Source: Best Week of June 20, 2005
55
WHAT DOES 2005 HOLD?





Additional adjustments for reserve
deficiencies.
Likely other mergers or withdrawals.
Subtle shifts in strategy expected.
Volatile investment environment.
Another major terrorism loss?
56
TERRORISM

Authorities in the U.S. have
envisaged a scenario, (involving
conventional explosives), where a
terrorism loss could exceed $25
billion.

A loss on this scale would
severely test the market’s ability
to respond.
57
TERRORISM
Uncertain if the world’s largest
reinsurance program – TRIA –
will be extended beyond Dec. 31,
2005.
 Without TRIA, market capacity for
U.S. terrorism reinsurance likely
only about $750 million.

58
59

If you would like to receive a copy of this
presentation by e-mail, please request
one from Gordon Crutcher at:
[email protected]
60