Growth Agenda for the Insurance Industry

1. Growth Agenda for the Insurance Industry A Capital Markets Perspective René Cotting, PhD Financial Institutions Solutions Group - Insurance International Insurance Society Berlin, July 8-11, 2007

2. Growth Agenda for the Insurance Industry • A Capital Markets’ Perspective: • Markets – size, growth and interaction • Innovations – recent & pending • Requirements – to facilitate growth • Conclusions

3. 1. Insurance & Capital Markets – Areas of Interaction Risk-Capital Map • How can the Capital Markets support • Your Business? • Capital: Accelerate the B/S Flexible Capital Structures RBC: Associates Risk with Capital and hence Cost Applies to Economic, Regulatory and Signal Capital • Risk Transfer / Risk Management • Insurance Linked Securities (Cat Bonds) • Senior Debt • Subordinated Debt • Equity risk CFO • Derivatives • Equity, Rates, FX, Commod., Inflation, Weather,… • R/I: • XL / SL • QS /Sidecars • Credit Lines • Contingent Capital Capital Off-B/S Paid-Up risk RM Risk Transferred Retained Adapted from P. Shimpi, Integrating Corporate Risk Management

4. 1. Global Capital Markets – Size (matters…..) Total Global Capital Markets Outstanding Estimate2: Equity $ 75’000 bn Fixed Income $ 75’000 bn Total $ 150’000 bn (100%) Total FI27,700 Source: SIFMA 1: only liquid investable assets, as of March 2006 2: Extrapolation based on U.S. gross-up factors

5. Global Insurance Premiums1 non-life $ 1’619 bn Life $ 1’707 bn Total $ 3’311 bn Global Catastrophe Market2 Premium $12.9 bn Limit $143 bn (0.1%) Capital Increase (following KRW) Existing Companies $ 5.3 bn Start-Ups $ 1.9 bn Alternative Capacity2,3,4 ILS $ 28.0 bn of which cat. $ 10.3 bn ILW $ 6.5 bn Side Cars $ 5.1 bn Private Placements ??? Total Alternative Insurance Capacity ≥$ 40 bn (0.027%) 1. Insurance Market Size 1: OECD markets 2004, source: OECD 2: 1/2007 figures, source: Guy Carpenter 3: source: Swiss Re sigma 4: source: LaneFinancial Alternative Cat Capacity accounts for >15% of Global Catastrophe Limits

6. Life Risks securitized to date XXX/AXXX regulatory reserves Catastrophic Mortality Embedded Value P&C Risks securitized to date Natural Catastrophe Big Four: US HU, US EQ, EU WS, JP EQ JP TY, Med EQ, TW EQ, Aus CY/EQ, Mex EQ, UK river flood, … Credit (Trade, R/I Recoverables) Liability Motor Longevity conspicuously absent Insurance Linked Securities (ILS) 20061 has been a banner year 60% of ILS is life related Still only 0.03% of Global FI Markets 1. Growth of Alternative Insurance Capacity CAGR: 42% Source: Swiss Re sigma Updated with company disclosures for full 2006 1: trend continued in 1H07

7. 1. Impact on Reinsurance Market - Cycle is flattening • Rate Impact per Dollar Loss1 decreased significantly: Andrew 92: 2.4% / $bn WTC 01: 1.2% / $bn KRW 05: 0.7% / $bn • Speed of Capital is increasing • Cycle Amplitude is flattening • Post-Loss Recuperation is no longer a viable strategy 1: indexed, not trended 2: Source: Swiss Re Sigma 2/07(liability and NFIP flood losses excluded) 3: Source: Lane Financial LLC Trade Notes April 2007 (with data from Paragon) The eight largest global catastrophe insured losses 1970-2006, indexed, not trended2 Rita Wilma Katrina 10 13 Loss Sidecars Charley Ivan Andrew ILS WTC Northridge Start-Ups 45 9 Recapitalization 23 21 19 14 55% / 23bn = 2.4% / $bn 1.2% / $bn 0.7% / $bn Reinsurance Rate Changes3 YoY Index Change (detrended) +55% +45% YoY Index Change +25% 1985 1990 1995 2000 2005 1Q07

8. Credit Default Swaps (CDS) CDS = “credit insurance” today the global CDS market exceeds the cash market Mortgage Backed Securities (MBS) Allowed banks to sell down risks previously held on B/S (de-risk & accelerate B/S) Facilitated by Government Agencies Acceptance criteria Standardization Creation of secondary market Guarantee timely payment to investors CAGR: 7% CAGR: 81% CAGR: 9% CAGR: 25% Source: Mellon / BBA 1. Capital Market Comparables Global CDS Market (Notional Amounts) (U.S. only) Source: SIFMA

9. Total PE capital raised: $ 800 bn of which by top-50 PE firms: $ 551 bn Cumulative buying power1: $ 4’000 bn Global IPOs: $ 2’322 bn Top-5 PE firms Capital Raised The Carlyle Group $ 32.5 bn Kohlberg Kravis Roberts $ 31.1 bn Goldman Sachs Principal Investment Area $ 31.0 bn The Blackstone Group2 $ 28.4 bn TPG (Texas Pacific Group) $ 23.5 bn Top-50 PE firms by Location Insurance Post KRW Sidecars raised $ 5.1 bn capital; $ 3.6 bn of which equity Corresponds to 0.45% of average annual PE buying power High Sidecar activity in 2006 abated in 2007 1. Private Equity Markets source: Dealogic / Private Equity International All data for the period 1.1.2002 – 18.4.2007 1: assumes 5-times leverage multiple 2: IPO on June 22, 2007

10. A standard catastrophe bond gives investors and rating agencies no early default warning (digital credit cliff) Cat bond rating ceiling of A and strong pricing compared to CDO/ABS market Applying CDO technology to a basket of natural catastrophe perils1 Decouples security rating from individual layer risk profile Results in gradual rating migration rather than digital default As a result, the Senior Tranche of Fremantle achieved AAA/Aa1 rating Event 9 Event 8 Event 7 Event 6 Event 5 Event 4 Event 3 Event 2 Event 1 2. Examples of Recent Innovations A: Elimination of Credit Cliff in Catastrophe Bonds Senior (Class A) AAA/Aa12 Mezzanine (Class B)BBB+/A3 Junior (Class C) BB-/Ba2 1: Bay Haven, Fremantle, Gamut Re 2: Fitch/Moody’s rating $33.375m Each Event

11. NAV GMDB (ratchet) Account Value GMAB Death Pay-off Surrender Pay-off Maturity Pay-off Maturity 2. Examples of (not so) recent Innovations • B: Dynamic Hedging of Secondary Guarantees • Guaranteed Minimum Benefits (GMB) are value added guarantees embedded into U.S. style savings products such as Variable Annuities • A Guaranteed Minimum Death Benefit (GMDB) for example represents a mortality  investment hybrid risk with sensitivity to • Equity (delta, gamma, vega) • Interest rates (rho) • Realised mortality • Persistency / policyholder behaviour • Dynamic hedging of complex guarantees with liquid, traded instruments (i.e. swaps, futures, options) • Requires periodic / frequent hedge adjustment • Net Market Risk Minimized • Hedging Activity prompted by introduction of new regulation (C-3 Phase II Market Risk Requirement Nov. 2005) Investment risks Insurance risks GMDB: Guaranteed Minimum Death Benefit GMAB: Guaranteed Minimum Accumulation Benefit

12. C: Regulatory Reserve Financing (i.e. XXX / AXXX reserves) Move from pure credit support (i.e. standard 5-7y LoCs) to mortality linked credit structures as alternative to securitizations Resulting credit risk is conditional upon underperformance of underlying block (double trigger) Allows to secure capital support for much longer tenors (e.g. 30y) for a similar pricing as 7y LoCs Requires insurance (mortality / persistency) as well as credit expertise D: Longevity(pending) Not much securitization activity to date Attempt to create liquid swap market Difference in expectation between buyer and seller – in particular on tenor Negative accounting arbitrage for corporate sponsors Current FTSE 100 pension deficit at Dec.06 is £38bn from £75bn at Dec.051 ? Mortality Rates qx (U.K. Males) 2. Examples of recent & pending Innovations 1: source: Deloitte, FTSE 100 went up +12% during 2006

13. 3. Requirements for Capital Markets Solutions Growth • Risk Standardization (I) – Documentation • Insurance policy / reinsurance treaty vs. ISDA Master & Schedule • Lack of standardization introduces basis risk • Risk Standardization (II) – Natural Catastrophe Indices • Indices create liquidity & reduce transaction costs • PCS-style market loss reporting for non-U.S. perils • Longevity Indices (relevant and independent) • Market Consistent Valuation of Risks & Reserves • Reduces arbitrage / creates level playing field • Facilitates economically motivated hedging decisions • Insurance Rates remain at technical levels • Capital is not locked into insurance sector • Will be reallocated quickly, if return expectations no longer meet expectations

14. 3. Requirements Growth (cont.) • Further educate & develop investor base • Reach for investors beyond cat. / hedge fund world • CDO / ABS investors • Institutional investors • Continuous flow of new issues • Allowing investors to build portfolio • Economy of scales

15. 4. Conclusions • Capital Markets Solutions are well established by now • But more work needs to be done • Self-enforcing process (supply, liquidity, demand, granularity of hedging indices) • We are only at the beginning • Basis Risk as an Opportunity for Risk Aggregators • Wholesale risk transfer to capital markets based on parametric / industry triggers • Basis risk fully priced in and retained where expertise is highest • Likely to become a lesser issue as markets mature • Longevity market expected to explode • Global Correlation of Mortality Improvement greatly reduces Diversification Benefits • Size of Exposure: $ 19’000 bn of global pension assets1(13%) • Set-up of dedicated pension / closed block buy-out firms 1: OECD, FIAP, IFSL estimates, Dec. 2004

16. 4. Conclusions (cont.) • Paradigm Change • From Claims experience driven capital level and variable rates (recuperation) • To Pro- and retroactively managed capital level and stable rates • …And ultimately to A Fee-based rather than Risk-based Insurance Business Model Based on Sourcing, Characterizing, Packaging and Selling of Insurance Risks With the majority of the Risks transferred to investors Similar to how banks manage loans, mortgages and credit card debt