CAGNY
Property Per Risk & Property Catastrophe
Market Overview
Agenda
• Property Per Risk Market
– 2002 renewals
• structure, price, terms and conditions
• Property Catastrophe Market
– 2002 renewals
• structure, price, terms and conditions
• Prospects
2
CAGNY
Property Per Risk Market
Property Per Risk Market
• 2002 Renewals - Impact of 9/11
– WTC concentrated in limited number of risks
• blown PMLs rather than accumulation of small losses
• disproportional loss to risk reinsurance treaties
– many risk programs experienced “blown occurrence caps”
• disproportional loss to risk reinsurers
– large risk syndication consisted of 25 markets + London
» significant lines from only 15 markets
– large cat syndication consisted of 50 markets + London
– majority of loss ceded to a small segment within
the property reinsurance market
4
Property Per Risk Market
• 2002 Renewals
– per risk sample
• 8 renewals (2001 to 2002)
– 4 > $100m in limit, 4 < $100m in limit
– 3 with WTC loss, 5 without WTC loss
– exposure types
» HPR, E&S, program, CMP
• beyond the market reaction to WTC, numerous
issues impacted the transactions within this peer
study
– a broader sample is required for definitive conclusions
5
Property Per Risk Market
• Structure
– changes
• retention
– 7 of 8 maintained 2001 retention
• limit
– 6 of 8 maintained 2001 limit
• small changes may be due to reinsurance market
forces
• significant changes may be related to cedant’s
underwriting criteria rather than reinsurance market
forces
6
Property Per Risk Market
• Price
– changes
• catastrophe loads
– unicede data included in underwriting information
• measuring volatility versus burning cost
– markets are beginning to measure program volatility when
pricing risk business
• higher roe targets
7
Property Per Risk Market
Price Changes
Company
A
B
C
D
E
F
G
H
Weighted Average
Premium to Limit Premium to Limit
2001
2002
3.21%
7.70%
17.92%
17.21%
29.90%
54.86%
15.91%
32.67%
24.10%
44.67%
29.89%
63.16%
21.00%
50.88%
33.23%
60.53%
20.11%
Premiums ceded, as a percentage
of limit, doubled
41.02%
Percent
Change
140.27%
-3.95%
83.50%
105.33%
85.34%
111.27%
142.27%
82.12%
103.98%
8
Property Per Risk Market
• Terms and Conditions
– changes
• loss caps
• terrorism exclusions
• other issues
9
Property Per Risk Market
Loss Caps
Company
A
B
C
D
E
F
G
H
Working Layer
Working Layer
Working Layer
Reinstatement
Occurrence Limit Maximum Loss Ratio
1 Free, 1@100%
2 Limits
862%
1@50%, 2@75%
1 Limit
365%
Free & Unlimited
3 Limits
NA
2 Free, 2@50%
3 Limits
113%
1 Free, 2@100%
3 Limits
152%
10 Free
3 Limits
314%
5 Free
3 Limits
300%
Free & Unlimited
3 Limits
NA
10
Property Per Risk Market
Terrorism Exclusions
Company
A
B
C
D
E
F
G
H
Terrorism Exclusion
Coverage Terms
Absolute
Absolute
Absolute
Coverage in Bottom Half of Program
< $50m TIV
Absolute
Absolute
Absolute
Coverage Through Program
< $50m TIV, Top Layer on Annual Aggregate Basis
11
Property Per Risk Market
• Other Issues
– risk definition
• location versus insured
– Cyber Risk
• follow fortunes, if managed on front end
– Toxic Mold - growing issue
12
Property Per Risk Market
• Observations - 2002 Renewals
– little perceived difference in cedants’ risk
management strategy
• no fundamental changes to limits and retentions
– price increases were significant
• prices doubled across the sample
– terms and conditions are “tight”
• limited downside with exclusions or caps for systemic
risk (e.g. terrorism and natural catastrophes)
13
CAGNY
Property Catastrophe Market
Property Catastrophe Market
• 2002 Renewals - Impact of 9/11
– loss primarily effected nationwide and super regional programs
• programs with commercial exposure
• programs with wider syndication
– regional personal lines portfolios tend to generate larger
authorizations than commercial portfolios
– with some exceptions, program losses were
partial
• loss to lower layers
– higher reinstatement premiums
– less cedant leverage
15
Property Catastrophe Market
• 2002 Renewals
– catastrophe sample
• 10 renewals (2001 to 2002)
–
–
–
–
–
5 > $400m in limit, 5 < $400m in limit
6 with WTC loss, 4 without WTC loss
41 layers in 2001, 42 layer in 2002
RMS output
exposure types
» personal and commercial
» nationwide, super-regional, single state
• many factors, other than WTC loss, contributed to
2002 transaction specifics
– a broader sample is required for definitive conclusions
16
Property Catastrophe Market
• Structure
– changes
• retention
– two of ten companies increased their retention
• limit
– six of ten companies increased their limits purchased
– 14% overall growth in limits purchased
• while retention increases were minimal, a majority of
companies in the peer study purchased more limit
– may be from exposure growth in hard primary market
– may be increased awareness of catastrophe liability
17
Property Catastrophe Market
Structure - Retention
Two of ten programs increased
their retention by 50%
150.00%
125.00%
100.00%
75.00%
50.00%
25.00%
0.00%
A
B
C
D
2001 Retention
E
F
G
H
I
J
2002 Retention
18
Property Catastrophe Market
Structure - Limit
Six of ten programs increased
their limit by between
7% and 75%
175.00%
150.00%
125.00%
100.00%
75.00%
50.00%
25.00%
0.00%
A
B
C
D
2001 Limit
E
F
G
H
I
J
2002 Limit
19
Property Catastrophe Market
• Price
– changes
• greater attention to miscellaneous loads
–
–
–
–
–
–
–
fire following for EQ events
storm surge
demand surge
loss adjustment expense (+3-5% for wind; +5-10% for EQ)
APD losses (+2% impact to industry loss in “Andrew”)
annual inflation adjustment to TIV
other wind
• cost of capital increase
– significant impact on lower layers
20
Property Catastrophe Market
Prices - 2001
CV Band
0% to 250%
250% to 500%
500% to 1000%
1000% +
Count
6
13
14
8
Average
Rate on Line
20.63%
12.25%
6.85%
3.19%
Average
Average
Layer CV Risk Charge
173.49%
10.72%
367.48%
15.05%
655.80%
31.90%
1707.57%
51.25%
Notes:
Layer CV is the standard deviation divided by expected loss.
Risk charge is the percent of standard deviation added to expected loss to determine the deposit premium.
21
Property Catastrophe Market
Prices - 2002
CV Band
0% to 250%
250% to 500%
500% to 1000%
1000% +
Layer
Count
5
11
19
7
Average
Rate on Line
28.80%
17.04%
9.17%
3.61%
Average
Average
Layer CV Risk Charge
203.00%
21.46%
377.49%
31.47%
699.35%
47.45%
2318.14%
48.54%
Notes:
Layer CV is the standard deviation divided by expected loss.
Risk charge is the percent of standard deviation added to expected loss to determine the deposit premium.
22
Property Catastrophe Market
Prices - 2001 Versus 2002 ROL
CV Band
0% to 250%
250% to 500%
500% to 1000%
1000% +
2001 Average 2002 Average Percent
Rate on Line
Rate on Line Change
20.63%
28.80%
39.62%
12.25%
17.04%
39.11%
6.85%
9.17%
33.92%
3.19%
3.61%
13.10%
Cedants paid between 30% and 40% more
for the lower and middle layers of their programs
23
Property Catastrophe Market
Prices - 2001 Versus 2002 Risk Charge
CV Band
0% to 250%
250% to 500%
500% to 1000%
1000% +
2001 Average 2002 Average Percent
Risk Charge
Risk Charge
Change
10.72%
21.46% 100.16%
15.05%
31.47% 109.13%
31.90%
47.45%
48.74%
51.25%
48.54%
-5.28%
Reinsurers doubled their risk charges
on the lower layers of the sample
24
Property Catastrophe Market
• Terms and Conditions
– changes
• terrorism
– excluded on commercial
– coverage available for non “NBC” events on personal lines
• Cyber Risk
– often excluded via “side letter”
• geographic specification
– unless incidental, difficult to get coverage for international
exposures within domestic treaty
• natural perils
– reinsurers backing off named peril restrictions
25
Property Catastrophe Market
• Observations - 2002 Renewals
– cedants are purchasing additional limit
• may be due to greater awareness of catastrophe risk
and model uncertainty
– sharp price increases within the lower and
middle layers of catastrophe programs
• miscellaneous loads
• perils not modeled
• deficits following WTC
– successful introduction of terrorism exclusion
26
CAGNY
Prospects
Prospects
• Property Per Risk Market
– price levels may be slow to decline
• despite some new capital, quoting market is limited
– requires both capacity and actuarial infrastructure
• evolving pricing techniques may push costs higher
– greater inclusion of catastrophe loads
– @risk simulations to measure volatility
• finite downside
– limited reinstatements on working layers
• underwriting for systemic risk
– exclusions, sub-limits and occurrence caps for industrywide losses
28
Prospects
• Property Catastrophe Market
– significant downward pricing pressure
• with new capacity, quoting market is vast
– Bermuda start-ups
– re-capitalization of existing reinsurers
– large, stand-alone lines from domestics
• evolving pricing techniques may push costs lower
– increasing use of capital allocation models
» generates credits for non-correlated exposures
• influence of retrocessional costs is declining
– pricing available from net line underwriters
29