ICAR
2014
Guy Hudson
Partner JLT RE
+44 7767 880691
guy.hudson@jltre.com
AGENDA
 Recent European Floods
 What should Insurers think about these floods?

Reinsurance capital – The supply-driven inflow

The paradox of lower pricing amid heightening risk

So what might happen with Reinsurance rates for European flood exposed
catastrophe programs?
 Claims handling in light of increased losses
ICAR 2014
2
RECENT EUROPEAN FLOOD LOSSES
ROMANIA
 27th of July and 1st of August:
 99 homes were destroyed, 1,163 damaged and another 2,377 flooded.
 2,475 wells have been plugged, 13 bridges were destroyed, 83 partially
damaged, 60 culverts destroyed and 23 346 hectares of land were flooded.
PAID
 Insured losses to residential buildings, as at 5th August
- 22 claims advised to PAID until yesterday
- 116.622 lei (approx. 26.000 euro) related loss reserve
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RECENT EUROPEAN FLOOD & HAIL LOSSES 2014
Total damage
Insured part
$890m
Floods in Germany
Floods in Serbia
€1.7bn
€3bn ($4.08bn)
Floods in Bosnia
Hail in Sofia,
Bulgaria (9th July)
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‘Insured losses were small’
€1.3bn
BGN 100M (Bulgarian press) = €51m
4
WHAT DOES IT MEAN TO INSURERS?
 Demonstrates very low insurance penetration in many countries of Central and
South east Europe
 Losses often from unpredictable Flash floods not Riverine Floods
 Lack of third party proprietary models for flood in the region
 Models are no good for flash floods
 Evidence of Increasing exposure?
 Evidence of Increasing hazard?
 Is the portfolio of risks geo-coded? Quality of Information?
 Is the Insurer adequately reinsured?
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REINSURANCE
CAPACITY FOR FLOOD
THE EXTRAODINARY INCREASE IN
REINSURANCE SECTOR CAPITAL
THE LARGEST REINSURANCE SECTOR
CAPITAL STRUCTURE SHIFT IN
MEMORY?
JLT RE GLOBAL RE MARKET COMPOSITE CAPITAL*
The Upward March of Reinsurance Capital Increased Each Year Except 2008 (Financial Crisis)
500
450
Capital (USD Billions)
400
486
2013
2014 Q1
431
350
300
471
386
2010
2011
337
323
250
378
274
200
150
100
50
2007
2008
2009
2012
Note: Capital levels represent composite total adjusted shareholders’ funds. This is different from dedicated reinsurance capital and
different still from reinsurance capacity. Excludes capital markets, catastrophe funds and internal reinsurance capital.
*Represents a JLT Re proprietary list of leading global reinsurers.
Sources: SNL Financial, JLT Re.
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EVOLUTION OF THIRD PARTY CAPITAL: A BRIEF HISTORY
‘NON TRADITIONAL’ % OF PROPERTY-CAT LIMIT SINCE 2000
16%
14%
12%
10%
8%
6%
4%
2%
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0%
Source: JLT Towers Re
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PUTTING IT IN PERSPECTIVE
PENSION FUNDS VS INSURANCE VS REINSURANCE VS RETRO
Pension Fund Capital Under
Management
$30 trillion
Global reinsurance
market dedicated sector
capital ca. $300 billion
Global retrocession
capital <$30 billion
Global insurance sector
capital (including life)
$2.5 - $3 trillion
Source: JP Morgan, JLT Re estimates
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HOW MUCH CAPITAL COULD REALLY COME IN?
$30 TRILLION? $900 BILLION? $675? $300?
Pension Fund Capital Under
Management
$30 trillion
Global reinsurance
market dedicated sector
capital ca. $300 billion
Global retrocession
capital <$30 billion
$300 billion ($30
trillion x .1 x .1)?
Global insurance sector
capital (including life)
$2.5 - $3 trillion
Source: JP Morgan, JLT Towers Re estimates
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AND WHAT DO RATING AGENCIES THINK OF ALL THIS?
DON’T BE FOOLED BY THE STERILE LANGUAGE!
 Despite being well capitalized the P&C (Re) Insurance Industry faces ongoing
pressure, particularly in the commercial lines sector
 Record low investment returns continue to weigh on earnings
 Alternative capacity starting to creep into casualty lines of business
 Underwriting accuracy/discipline becoming even more important (cycle management)
Rating Outlooks by Agency
ICAR 2014
Sector
S&P
A.M. Best
Moody’s
Fitch
U.S. Personal Lines
Stable
Stable
Stable
Stable
U.S. Commercial Lines
Negative
Negative
Stable
Stable
Global Reinsurance
Negative
Stable
Negative
Negative
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LOSS TRENDS AND LOWER
REINSURANCE PRICING – A PARADOX
OF SORTS?
ARE PRICES DECREASING JUST AS
RISK IS INCREASING? IT WOULDN’T BE
THE FIRST TIME
HOW HAS THE REINSURANCE INDUSTRY FARED?
UNDERWRITING GAINS EVERY YEAR EXCEPT 2011
JLT Re Global RE Market Index*: Combined Ratio Trends
100
2014Q1
51
2013
52
1
32
3
49
2012
54
2010
55
2009
55
-
20
Loss Ratio
86
26
30
8
4
CAT Ratio
93
29
8
40
110
30
2
52
2007
86
29
59
2008
84
31
8
2011
Combined Ratio
86
27
94
28
60
84
80
100
120
Expense Ratio
*Represents a JLT Towers Re proprietary list of leading global
reinsurers. Sources: SNL Financial, JLT Towers Re
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DON’T BE FOOLED BY 2013
PROPERTY-CAT LOSSES ARE NOT DECREASING
Next time?
KRW
Tohoku,
Thailand,
Christchurch
Potential to affect capital
Potential to affect earnings
Sector natural catastrophe
loss range
Deepwater
oil rig,
Washington
hanger
collapse
Sandy
Cyber
Sector specialty loss range
Air
France
447
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INSURED CATASTROPHE LOSSES 1980 - 2010$20.7 BN ANNUAL
AVGE – GEOGRAPHIC DISTRIBUTION
18.7%
64.0%
9.5%
1.1%
3.5%
3.4%
Insured cat losses are traditionally determined by North American hurricane losses
Source: Swiss Re
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INSURED CATASTROPHE LOSSES 2011
>$125 BN – GEOGRAPHIC DISTRIBUTION
3.8%
35.1%
43.4%
0.3%
0.5%
•
2011: earthquake losses were the highest ever
•
2011: flood losses were the highest ever
•
2011: Other weather-related natural catastrophes were the 3rd
highest ever (after 2005 and 2004)
16.9%
Shift in perils and regions
Source: Swiss Re
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REINSURANCE RENEWAL PRICING
RECENT LOW LOSSES + EXCESS
SUPPLY = NEAR UNIVERSALLY LOWER
PRICING
RECENT RENEWALS SUMMARY
 The major driver for 2013 was lack of catastrophes coupled with continued favorable
loss reserve development from prior accident years
 Four issues are now placing pressure on traditional reinsurers
 Alternative capacity (capital market transactions, alternative/hedge fund backed Re)
 Continued low interest rate environment
 Primaries holding more retention
 Favorable reserve development has to come to an end at some point
 Potential reinsurer reactions
 Additional M&A pressure?
 Formation of alternative side car type vehicles to compete (e.g., Watford Re - PaCRe)
 Use of the alternative market to reinsurers’ advantage for example, lowering PML’s by buying
retro in the alternative markets
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SO WHAT MIGHT HAPPEN TO REINSURANCE RATES
FOR THE REGION?
Increase loss activity in 2014
Lack of Historical statistics
Lack of Geo-coding or partial Geo-Coding
Increasing Exposures
Increasing Hazards
Lack of Independent Cat Models
Some losses Flash Floods not Riverine
Pressures
Upwards
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Pressures
Downwards
Increased Capital
Effect of Alternative Capacity
Need for diversification
Income requirements
Single territory covers
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CLAIMS HANDLING AFTER MAJOR EVENT
CHRISTCHURCH EQ 2010 2011
 Lodgement and recording of claims - worked well at CHCH - contracted to firm operating from a broad
(Australia) , and untouched by the disaster
 Give claimants information about progress. Very bad, with both EQC and companies. EQC processes
not at all transparent - see Ombudsman's report with link on page
http://www.ombudsman.parliament.nz/resources-and-publications/latest-reports
 Claim settlement hindered at first by lack of clarity as to boundaries between EQC and companies
covers
 Claim adjustment made hard by multiple events
 The decisions of EQC and companies not clear throughout as to what sort of claims would be settled in
cash and which repaired
 Technical skills such as builders in short supply
 Shortage of skilled adjusters a problem. Shortage of qualified engineers - structural and geotech
 Companies were reluctant to put enough resources in from abroad to expedite adjustment
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THANK YOU