Non-Life Securitisation
CAE Conference – May 2008
Graham Fulcher
Chief Actuary
ACE European Group
Chairman
Securitisation of Non-Life Insurance
Working Party
GIRO 2008
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Agenda
 Basic Concept
 Supply and Demand Arguments
 Deals to Date
Volumes cf insurance cycle
 Past, present and future
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The Concept
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Securitisation
 Pooling, repackaging and often commoditisation of the cash-
flows associated with financial assets (or less commonly
liabilities) into marketable securities, so that the investors in
these securities assume the benefits of the cash-flows
 Most commonly loans
-
mortgage backed securities
credit cards
car loans
student loans
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Asset Backed Securitisation - Examples
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Catastrophe Bond – Basic Concept
Interest
Capital at
maturity
Premium
Special
Purpose
Vehicle
Reinsurer
Insurer
Claims
Traditional Reinsurance
w/o credit risk
Investor
Initial
investment
Traditional Bond
Claim = Default
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Supply and Demand Argument
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Original Supply Side Argument
$50-100Bn
$20Tn
$200Bn
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Original Supply Side Argument
Source: weather.unisys.com: Hurricane #6 1926
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Original Supply Side Argument
Source: www.hurricanecity.com
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Original Supply Side Argument
Ocean Drive, Miami 1924-6
Source: http://www.miamibeachfl.gov
Ocean Drive, Miami 2006
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Original Supply Side Argument
Estimated original economic loss
$105M
Price inflation
2.9% p.a.
X 9.29
Growth in real wealth per household
1.7% p.a.
X 3.71
Growth in exposed housing units
4.7% p.a.
X 38.51
Estimated 2005 Economic Loss
$139.5Bn
Crude Estimated 2005 Insured Loss
$70Bn
Source: Pielke et al – Normalised Hurricane Damage in US
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Supply side Argument - Developments
 Catastrophe model recalibration
 Rating downgrades
 Increasing credit risk concentration
 Climate Change
Source: ClearTheAir.org following Emanuel (2005)
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Original Demand Side Argument
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Demand side Argument - Developments
 Sub-Prime bought zero-beta firmly into focus
 Spreads on catastrophe bonds tightened 2007 credit crunch at
the same times as corporate bond spreads increased hugely
 Assisted by two-years of low catastrophe activity leading to
reinsurance market softening
 Reaction of investors to a loss has not been tested
 Sub-prime losses also raised questions about securitisation
e.g. use of “black-box” models postulating 1 in 100 year events
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Comparison to Other Forms of Securitisation
Reduce
regulatory or
economic
capital
Realisation of
cash-flow
including
intangibles
XXX (US)
AXXX (US)
Embedded value
securitisation
Transfer of
extreme
uncorrelated
risk
Catastrophe
bonds
Extreme
mortality bonds
Longevity bonds
Mortgage
backed
securitisation
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Market Developments
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Insurance Linked Securitisation over time
8,000
30
7,000
25
20
5,000
4,000
15
3,000
Number issued
Risk Capital ($Bn)
6,000
10
2,000
5
1,000
0
0
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
Year
Source: Guy Carpenter
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Insurance Linked Securitisation over time
8,000
200
160
6,000
Risk Capital ($Bn)
140
5,000
120
4,000
100
80
3,000
60
2,000
40
1,000
Average rate on line US Cat (1997 = 100)
180
7,000
20
0
0
'97
'98
'99
'00
'01
'02
Year
Source: Guy Carpenter
'03
'04
'05
'06
'07
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Global issuance of Asset-Backed Securities
Source: Bank Of England April 2008 Financial Stability Report (data Dealogic)
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Catastrophe Bond Share of Market
US Only Property Limits $81Bn
Traditional
Reinsurance (82%)
Industry Loss
Warranties (12%)
Catastrophe Bonds
(6%)
Source: Guy Carpenter as of 31.12.07
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Past, Present and Future
PAST
PRESENT
FUTURE
Traditional Approach
Existing Developments
Possible future developments
- Sponsors of ILS
- Catastrophe Perils and Territories Covered
- Type of (non-life) insurance risk or asset securitised
Investors in ILS
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Sponsors
PAST
PRESENT
FUTURE
Insurers
Theme Parks
Charities
Reinsurers
Power company
Airlines
Governmental pools
Industry Captive
International Group
Railway company
Lloyd’s market
Energy company
Governments
Hedge Funds
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Catastrophe Perils and Territories Covered
PAST
PRESENT
FUTURE
East Coast Windstorm
European Hail
BRIC territories
California Quake
New Madrid Quake
Terrorism
Pacific Northwest Quake
Tsunami
Japanese Quake
Mediterranean Quake
Volcanic losses
European Windstorm
Hawaii Wind
Japanese Typhoon
Puerto Rico Windstorm
Mexican Earthquake
Australian Typhoon
Australian Quake
Taiwan Earthquake
US Tornado and Hail
UK River Flood
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Insurance Risks or Assets securitised
PAST
PRESENT
FUTURE
Catastrophes
Excess general liability
Casualty run-off
Motor
Goodwill
Reinsurance receivables
Travel/A&H/Household
Capacity constrained
lines (e.g. construction)
Volatile lines
(e.g. Aviation/D&O)
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Investors - 1999
Insurer
Reinsurer
Money manager
Bank
Hedge Fund
Dedicated Fund
Source: Swiss Re
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Investors - 2007
Insurer
Reinsurer
Money manager
Bank
Hedge Fund
Dedicated Fund
Source: Swiss Re
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Non-Life Securitisation
CAE Conference – May 2008
Graham Fulcher
Chief Actuary
ACE European Group
ACE EUROPEAN GROUP