Presentation to: WRMA Conference June 3, 2008 Hurricane Panel Industry Loss Warranties (ILWs)

1. Presentation to: WRMA Conference June 3, 2008 Hurricane Panel Industry Loss Warranties (ILWs) Mariagiovanna Guatteri, PhD Swiss Re ILS Trading

2. Buyers of Protection • Typical buyers include: Insurers and reinsurers • Purpose: To hedge portions of their risk or to balance their portfolios ILWs: What are they? • ILWs are reinsurance contracts whose payouts are linked to a predetermined trigger of estimated industry losses. • Three general forms of ILWs/Swaps include: Reinsurance, Customized Swap, Standardized Swaps (SNaCSTM) (Seeking Protection) (Taking Risk) Risk Seller Buyer Protection Sellers of Protection • Typical sellers include: Insurers, reinsurers, hedge funds and money managers • Purpose: To take on more risk or to diversify their portfolios

3. Derivative vs. Reinsurance

4. Features of ILW and Cat Derivative Contracts • ILWs can be used to hedge cat bond portfolio exposure. For example, a position in a cat bond with an industry-based trigger can be hedged by buying protection through an ILW defined with the same or similar trigger.

5. European Market Loss Index Background Index governance structure and methodology • Swiss Re has been within an industry working group to develop a European Industry Loss Index • The Group consists of Swiss Re, AXA, Zurich, Allianz and Munich Re. The working group expects further support prior to implementation Objectives • Create an independent entity to collect a pre-event exposure portfolio and post event loss calculation; initial focus of the index is on European wind and expand to other perils over time • Pre-event exposure portfolio will be of significant value to the industry in terms of pricing, risk management, benchmarking and improving risk modellers industry models • Post-event industry loss index to support the development of risk trading solutions (e.g., ILWs)

6. 15-NOV-07 PCS Estimate 3bn 15-JAN-08 PCS Estimate 3.8bn 20-FEB-08 PCS Estimate 5bn 28-APR-08 PCS Estimate 4.9bn 30-APR-08 Termination – No Payment 15-OCT-07 Event 31-JAN-07 1st Extended Termination Date 31-MAR-08 3rd Extended Termination Date 30-APR-08 4th Extended Termination Date 29-FEB-08 2nd Extended Termination Date Start Date 31-DEC-07 Risk Period End Date Final Extended Termination Date Contract Timeline: Event Example 1 US Wind 20bn Contract - Extended until the Extension Threshold is no longer met.

7. Advantages and Disadvantages to ILWs Advantages Disadvantages • Provides an alternative form of natural catastrophe and insurance risk in the capital markets • They are not correlated to financial markets • Effective means of hedging and diversification of portfolio risks • Attractive risk-adjusted returns with different underlying risks from other fixed income instruments like corporate bonds and asset-backed securities • Several risks embedded in ILW instruments – some such risks include: • trigger risk • pricing and liquidity risk • development period risk • counterparty credit risk • basis risk • Price differentials possible between cat bond and corresponding ILW depending on capacity, size and market inefficiencies

8. Standardization: Documentation and Products PROS CONS • Improved Transparency • Improved Credit/Counterparty exposure management. • Standardized and understood terms. • No additional terms negotiation • Reduces legal cost and legal risk • Easier back office processing • Reduces basis risk, development mismatch, pricing and liquidity risk • Improved liquidity • Easy to use electronic platforms • Cross Exchange and Product trading strategies possible. ISDA Standardized Documentation SNaCSTM Several Futures products • Improved Transparency • Less arbitrage-type profits • Standard contracts may not exactly meet needs of counterparties • Limited trigger development may hinder creativity

9. Exchange-Traded Futures Contracts

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