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Non-Life Securitisation CAE Conference – May 2008

Non-Life Securitisation CAE Conference – May 2008. Graham Fulcher Chief Actuary ACE European Group Chairman Securitisation of Non-Life Insurance Working Party GIRO 2008. Agenda. Basic Concept Supply and Demand Arguments Deals to Date Volumes cf insurance cycle

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Non-Life Securitisation CAE Conference – May 2008

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  1. Non-Life SecuritisationCAE Conference – May 2008 Graham Fulcher Chief Actuary ACE European Group Chairman Securitisation of Non-Life Insurance Working Party GIRO 2008

  2. Agenda Basic Concept Supply and Demand Arguments Deals to DateVolumes cf insurance cycle Past, present and future

  3. The Concept

  4. 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

  5. Asset Backed Securitisation - Examples

  6. Catastrophe Bond – Basic Concept InterestCapital at maturity Premium Special Purpose Vehicle Reinsurer Insurer Investor Initial investment Claims Traditional Reinsurancew/o credit risk Traditional BondClaim = Default

  7. Supply and Demand Argument

  8. Original Supply Side Argument $50-100Bn $20Tn $200Bn

  9. Original Supply Side Argument Source: weather.unisys.com: Hurricane #6 1926

  10. Original Supply Side Argument Source: www.hurricanecity.com

  11. Original Supply Side Argument Ocean Drive, Miami 2006 Ocean Drive, Miami 1924-6 Source: http://www.miamibeachfl.gov

  12. 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

  13. Supply side Argument - Developments Catastrophe model recalibration Rating downgrades Increasing credit risk concentration Climate Change Source: ClearTheAir.org following Emanuel (2005)

  14. Original Demand Side Argument

  15. 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 securitisatione.g. use of “black-box” models postulating 1 in 100 year events

  16. Comparison to Other Forms of Securitisation Reduce regulatory or economic capital Realisation of cash-flow including intangibles Transfer of extreme uncorrelated risk XXX (US) AXXX (US) Catastrophe bonds Extreme mortality bonds Embedded value securitisation Longevity bonds Mortgage backed securitisation

  17. Market Developments

  18. Insurance Linked Securitisation over time Source: Guy Carpenter

  19. Insurance Linked Securitisation over time Source: Guy Carpenter

  20. Global issuance of Asset-Backed Securities Source: Bank Of England April 2008 Financial Stability Report (data Dealogic)

  21. Catastrophe Bond Share of Market Source: Guy Carpenter as of 31.12.07

  22. Past, Present and Future PAST Traditional ApproachPRESENT Existing DevelopmentsFUTURE Possible future developments - Sponsors of ILS- Catastrophe Perils and Territories Covered- Type of (non-life) insurance risk or asset securitised Investors in ILS

  23. Sponsors PAST Insurers Reinsurers Governmental pools PRESENT Theme Parks Power company Industry Captive Railway company Lloyd’s market Energy company Governments Hedge Funds FUTURE Charities Airlines International Group

  24. Catastrophe Perils and Territories Covered PAST East Coast Windstorm California Quake Japanese Quake European Windstorm Japanese Typhoon PRESENT European Hail New Madrid Quake Pacific Northwest Quake Mediterranean Quake • Hawaii Wind Puerto Rico Windstorm Mexican Earthquake Australian Typhoon Australian Quake Taiwan Earthquake US Tornado and Hail UK River Flood FUTURE BRIC territories Terrorism Tsunami Volcanic losses

  25. Insurance Risks or Assets securitised PAST Catastrophes PRESENT Excess general liability Motor Reinsurance receivables FUTURE Casualty run-off Goodwill Travel/A&H/Household Capacity constrained lines (e.g. construction) Volatile lines(e.g. Aviation/D&O)

  26. Investors - 1999 Source: Swiss Re

  27. Investors - 2007 Source: Swiss Re

  28. Non-Life SecuritisationCAE Conference – May 2008 Graham Fulcher Chief Actuary ACE European Group

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