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Property Catastrophe – The Cedant’s Viewpoint Personal Lines Perspective

Property Catastrophe – The Cedant’s Viewpoint Personal Lines Perspective. CAS Limited Attendance Reinsurance Seminar on Catastrophes September 18, 2006 Charles Parsons Senior Actuary, Allstate Insurance Company. Agenda. Allstate 2005 vs. 2006 Risk Transfer Strategy What Changed?

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Property Catastrophe – The Cedant’s Viewpoint Personal Lines Perspective

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  1. Property Catastrophe – The Cedant’s Viewpoint Personal Lines Perspective CAS Limited Attendance Reinsurance Seminar on Catastrophes September 18, 2006 Charles Parsons Senior Actuary, Allstate Insurance Company

  2. Agenda • Allstate 2005 vs. 2006 Risk Transfer Strategy • What Changed? • Catastrophe Management Strategies for Personal Lines

  3. Allstate’s Reinsurance Strategy Has Evolved 2005 Reinsurance Program 2006 Reinsurance Program AK AK NH NH ME ME WA WA VT VT ND ND MT MT MN MN RI RI MA MA WI WI OR OR NY NY ID ID SD SD CT CT MI MI WY WY NJ NJ PA PA IA IA DE DE OH OH CA CA NE NE IN IN NV NV IL IL WV WV VA VA UT CO UT CO MD MD KS KS KY KY MO MO DC DC NC NC TN TN OK OK AZ AZ SC SC HI HI AR AR NM NM MS MS GA GA AL AL TX LA LA TX FL FL No Reinsurance Annual Aggregate cover only Separate state contracts Separate state contracts underlie Annual Aggregate cover South-East contract underlies Annual Aggregate cover Separate contract not included in Annual Aggregate cover

  4. Growing Reliance on Risk Transfer What Changed? • Exposure is increasing in risk prone areas • Climatological influences - frequency and severity of storms • Rating agency models • Need for quick action

  5. +20.6 +36.3 +34.5 +32.4 Exposure Is Increasing in Risk Prone Areas Percent Change in U.S. Population: 1990 - 2004 Cumulative Home Price Changes Since January 2000 by Region +33% +45% +74% +31% +68% +104% +37% +57% +25% +27%

  6. 1975-1989 Storm Tracks

  7. KATRINA 2005 LILI 2002 1990-2005 Storm Tracks

  8. Hurricanes Are Becoming More Severe Lower Pressure = Increased Intensity Katrina Wilma Isabel Rita Ivan

  9. Climatological Influences • Atlantic Multidecadal Oscillation (AMO) • Increased Atlantic sea surface temperature • El-Nino Southern Oscillation (ENSO) • Increased vertical wind shear which tends to decrease hurricane intensity • Quasi-Biennial Oscillation (QBR) • Upper atmosphere winds • North Atlantic Oscillation (NOA) • Bermuda High – If Atlantic pressure system is at lower latitudes storms will steer toward US • Global Warming • Other

  10. Rating Agencies • Rating agencies have increased their capital requirements to maintain the same rating A.M. Best 2005 introduced a new cat risk stress test 2006 toughened the stress test S&P Introduced a 1 in 250 annual aggregate PML in capital adequacy Model Moody’s Introduced a risk adjusted capital model

  11. Personal Lines Reactions • Earthquake: • Allstate has taken action to remove optional earthquake in most markets • Safeco and The Hartford have taken actions to limit Earthquake exposure • State Farm Insurance publicly considers options • New York: • Allstate, MetLife Auto & Home Group, Nationwide, Atlantic Mutual and Andover have all taken action to restrict new business and reduce exposure in certain coastal areas • Florida: • Allstate has arranged for a program under which 215,000 homeowner policies may potentially be offered coverage through an alternative carrier, at the carrier’s discretion. Additionally, Allstate will non-renew all Manufactured Home policies. • Facility (Citizens) is the largest property insurer in the state with over 1.2 million policyholders. • FHCF $1.1B in debt; has issued $1.5 billion in bonds, to be financed by 1% assessment on all P&C premiums, beginning 1/1/07

  12. Setting a Catastrophe Management Strategy Allstate’s catastrophe risk management strategy is intended to provide our shareholders an acceptable return on the risks assumed in our property business and to reduce variability of earnings, while providing protection to our customers. Source: 8/18/2006 press release

  13. Potential Considerations for a Catastrophe Management Strategy • Risk Tolerance • Rating Agency Requirements • Impairment/Solvency • Return on Capital • Efficiency & Stability of Strategy • Volatility of Returns

  14. Executing a Catastrophe Management Strategy • Underwriting • Legislative: Public-Private Partnership • Risk Transfer

  15. Executing a Catastrophe Management StrategyUnderwriting • Appropriate Rate Level • Rate Segmentation • New Business Limitations • Property Inspections (New and Renewal) • Mitigation Device Requirements • Residual Markets • Expanded Markets • Coverage Changes • Non-Renewals

  16. Executing a Catastrophe Management StrategyLegislative: Public-Private Partnership ProtectingAmerica.org: A comprehensive integrated solution to strengthen the Public-Private Partnership • Build stronger financial protection for consumers • Integrated state and national financial backstop • Improve prevention and mitigation programs • Strengthening first responders and developing new processes to stage and deploy essential relief materials • Improve consumer education and consumer protections to make sure people are better prepared for catastrophes before they strike and to protection them from predators afterwards • Create a rigorous process of continuous improvement

  17. Executing a Catastrophe Management StrategyRisk Transfer Reinsurance and Capital Markets • Fills immediate need • Capacity and stability • Credit security • Ability to reflect cost in pricing

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