Cost of Reinsurance

1. Nevada Captive Insurance Association 8th Annual Captive Conference Cost of Reinsurance

2. Cost of Reinsurance • The cost of reinsurance is not nearly as great as the cost of not having it when disaster strikes • Like the cost of umbrellas, it is valued less when it’s calm and more when it storms..….How’s the weather?

3. Role of the Intermediary Too Expensive! Too Cheap! Reinsurer Insurance Company

4. Defining Cost

5. Cost of Reinsurance • Reinsurance price drivers • YOUR cost of reinsurance

6. Supply Factors

7. Supply Factors • High reinsurer capital

8. Supply: Change in Reinsurer Capital(USD Billions) -4% 18% -17% 18% Reinsurers worldwide had $480 billion in capital available at the end of June 2012, up 5 percent from the end of 2011

9. Lloyds Capacity Market Capacity at 1/1 – GBP Billions

10. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses

11. Economic Loss From Catastrophes

12. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities

13. Reinsurer Profitability 2nd Q 2012 – Combined ratio of US reinsurers in the aggregate was 91.5% yielding over $3.7 Billion of Net Income

14. Investor Confidence

15. Global Reinsurance - Return on Equity

16. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities • Growing investor interest in catastrophe bonds or similar collateralized facilities

17. Outstanding Catastrophe Bonds Growing utilization by larger insurer and Acceptance by capital markets as a viable asset class

18. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities • Growing investor interest in catastrophe bonds or similar collateralized facilities • Continued favorable casualty reserve development

19. P/C Reserve Development Sources: Barclay’s Capital; A.M. Best.

20. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities • Growing investor interest in catastrophe bonds or similar collateralized facilities • Continued favorable casualty reserve development • Increasing size of U.S. states‘ wind pools

21. Residual Market Exposure to Loss ($Billion) 1600% Growth in 22 Years Source: Insurance Information Institute

22. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities Growing investor interest in catastrophe bonds or similar collateralized facilities • Continued favorable casualty reserve development • Increasing size of U.S. states‘ wind pools • Declining Florida homeowners insurance market

23. Florida Homeowners Direct Written Premium by Type of Insurer

24. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities Growing investor interest in catastrophe bonds or similar collateralized facilities • Continued favorable casualty reserve development • Increasing size of U.S. states‘ wind pools • Declining Florida homeowners insurance market • Heavily reinsured losses in New Zealand and Australia

25. Catastrophe Losses Roughly $48 Billion Of Loss

26. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities Growing investor interest in catastrophe bonds or similar collateralized facilities • Continued favorable casualty reserve development • Increasing size of U.S. states‘ wind pools • Declining Florida homeowners insurance market • Heavily reinsured losses in New Zealand and Australia • Uncertainty related to new Cat Models

27. Changes is Cat Modeling • RMS Released RMS v11 in February 2011 • Increased calculated PMLs substantially • changes to their 1% probable maximum loss (PML) estimates ranging from –4% to 279% • Average annual loss (AAL) estimate changes from –4% to 260%. • Results varied based on geography and exposure type

28. Supply Factors • High reinsurer capital • Heavy hurricane/typhoon season insured losses • Unattractive investment opportunities Growing investor interest in catastrophe bonds or similar collateralized facilities • Continued favorable casualty reserve development • Increasing size of U.S. states‘ wind pools • Declining Florida homeowners insurance market • Heavily reinsured losses in New Zealand and Australia • Uncertainty related to new Cat Models • Sovereign Debt Related Issues

29. Sovereign Debt • The default of Spain and Italy could trigger the break-up of the Euro • Defaults on sovereign debt issued by Portugal, Ireland and Greece could prompt write-downs of around EUR 25bn, or 4% of European insurers' capital • Similar defaults of Spanish and Italian sovereign debt would be much worse (EUR 143bn, or 24% of capital)

30. Effect of supply Factors

31. Property Catastrophe CapacitySize of largest reinsurance placement ($Billion)

32. Demand Factors

33. Demand Factors • Strong insurer capital

34. Insurance Industry Policyholder Surplus ($ Billions) Sources: ISO, A.M .Best.

35. Demand Factors • Strong insurer capital • Pricing uncertainty

36. Primary Pricing Trend

37. Weighted Average After-Tax Return on Equity

38. P/C Insurance Industry Combined Ratio Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (

39. US P&C Industry Operating Result(to 9 months 2012)

40. Demand Factors • Strong insurer capital • Pricing uncertainty • Sluggish insurance demand growth in difficult economic environment

41. US Real GDP Growth Real GDP Growth (%) Source: US Department of Commerce, Blue Economic Indicators 6/11; Insurance Information Institute.

42. Global NonlifePremium Growth: 1980-2009 Source: Swiss Re, sigma, No. 2/2010. 42 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

43. Declining Leverage Ratios - Little need for Surplus Relief Reinsurance The premium-to-surplus ratio hit a record low at just 0.76:1 in 2010. Sources: Insurance Information Institute calculations from A.M. Best data.

44. Demand: Ceded to Gross written Premium Insurers are retaining more and buying less reinsurance

45. Demand Factors • Strong insurer capital • Pricing uncertainty • Sluggish demand growth for insurance in difficult economic environment • Continued favorable development on casualty insurance

46. P/C Reserve Development Sources: Barclay’s Capital; A.M. Best.

47. Demand Factors • Strong insurer capital • Pricing uncertainty • Sluggish demand growth for insurance in difficult economic environment • Continued favorable development on casualty insurance • Very competitive insurance landscape in nearly all markets

48. Change in Commercial Rate Renewalsby Account Size Market has Been Soft for 7 years and Remains Soft as Capital Hits Record Levels Percentage Change (%) Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

49. Cumulative Qtrly. Commercial Rate Changes 1999:Q4 = 100 Pricing today is where is was in Q3:2000 (pre-9/11) Downward pricing pressure is most pronounced for larger risks Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

50. Average Commercial Rate Change - All Lines (Percent) Source: Council of Insurance Agents & Brokers; Insurance Information Institute