Overview of global trends in reinsurance International reinsurance point of view

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Overview of global trends in reinsurance(Internat
ional reinsurance point of view)
Thomas HessGroup Chief EconomistHead of
Economic Research Consulting, Swiss Re 14th
African Reinsurance Forum Tunis, 20 October 2008

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Key resinsurance questions to be adressed

• The economic situation and the banking crisis
• Where do we stand in reinsurance?
• Demand/ supply situation
• Is reinsurance still safe?
• Prospects for reinsurance

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Current situation in global financial markets

• Interbank markets dried up large parts of
  financial markets face liquidity issues. There is
  high uncertainty about extent and duration of the
  crisis.
• IMF sees half of subprime related losses
  (estimated at USD 1405 bn) borne by banks, the
  other half absorbed by hedge funds, pension funds
  and insurers.
• Additonal losses arise from the default of
  financials (Lehman, Washington Mutual, AIG).
• The effects of the real economy are now becoming
  visible. US and Europe face recessions.
• The economic slowdown will have further negative
  consequences for credit and stock markets.
• The bank recapitalisation plans and other
  measures announced recently should avert a
  complete financial meltdown, but outlook is still
  grim.

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The indirect impact of the credit crisis on
insurers

• Lower investment income due to weak equity
  markets, rising credit spreads and defaults on
  corporate bonds
• Slower premium growth in PC due to growth
  slowdown but problems with investments speed up
  hardening of insurance prices
• Individual US life insurers investment losses
  required them to raise capital from financial
  markets
• Lower demand for index-linked products (life
  insurers)
• Rise in inflation may lead to higher claims
  inflation (long-tail casualty)
• Higher costs of capital both equity and credit
  have become more expensive

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Insurance business is fundamentally different
from banking

• Insurance business is funded primarily by
  premiums received for providing insurance
  protection? both premium flow and pay-outs are
  reasonably predictable
• Pay-outs are triggered by hazardous events, and
  not by policyholders will ? there can be no
  run on an insurance company
• Insurance hazards are typically uncorrelated?
  the failure of one insurer does not necessarily
  predict failures of other companies

• Premiums received for providing insurance are
  invested in diversified classes with currency and
  cash flow matching? Insurers invest assets
  mostly to maturity and therefore immunise
  against short-term value fluctuation

see G30 and FSF studies
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Where do we stand in reinsurance?

• The reinsurance price cycle turned in 2004, we
  are now reaching the bottom
• Higher combined ratios, and less positve run-off
  of prior years cause lower underwriting results
• Selective upward trends from low price levels in
  aviation, motor insurance, DO already visible
• Losses on the investment side put additonal
  pressure on profitability

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How are catastrophe losses developing
Large insurance losses 2008 (gt USD 1bn)
Source Swiss Re Economic Research Consulting
? Insured losses up to 1 September 2008 increased
by more than 25 relative to the same period in
2007 ? 2008 figures confirm long-term trend
towards higher nat cat claims
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Demand/ supply situation is favouring higher
reisurance rates

• Demand- Insurers combined ratio increases-
  Insurers lose 5-20 of equity capital- Higher
  cost of capital
• Supply- Reinsurers combined ratios increase-
  Reinsurers lose on investments- Higher cost of
  capital- Less alternative capacity available
  (securitisation, side cars, reinsurance start
  ups)

Insurers will retain less and reinsure more
Reinsurers will provide more capacity only at
higher price
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Stable ratings for reinsurers with few exceptions
Source Swiss Re Economic Research Consulting
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Solvency ratios expected to decline as capital
growth slows down
Capital and solvency of the PC industry,
1999-2011USD index, 1999 100.

new scenarios
Source Swiss Re Economic Research Consulting
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Worldwide PC growth
The cycle may turn earlier and more forcelully!
Source Swiss Re Economic Research Consulting
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Profitability prospect non-life insurance
2008 and 2009investment resultsand overall
profitsresults will be worse!
Reinsurancelooks similar but is more cyclical
Source Swiss Re Economic Research Consulting