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2008 Catastrophe Market Update: Insights on Natural Disasters and Reinsurance Trends

In the 2008 Catastrophe Market Update, we analyze significant natural and man-made disasters, highlighting the 20,000+ fatalities and $70 billion in losses from global catastrophes in 2007, alongside an estimated $20 billion loss from the China earthquake. The report discusses the softening casualty treaty reinsurance market due to five years of underwriting profits and identifies the increasing role of capital markets in providing catastrophe capacity. It emphasizes stable ratings and strong balance sheets across the reinsurance sector, while acknowledging ongoing challenges such as the subprime crisis and heightened catastrophe activity.

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2008 Catastrophe Market Update: Insights on Natural Disasters and Reinsurance Trends

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  1. 2008 Cat Market Update Ken Radigan (212) 266 – 5992 kenneth.radigan@aig.com Global Reinsurance Division

  2. 2008 Cat Market Update 2007 and 2008 Catastrophes Global Reinsurance Division

  3. Swiss Re: Natural catastrophes in 2007 • More than 20,000 fatalities • Losses of roughly $70bn (US$) • $28bn insured losses. • 142 natural catastrophes and 193 man-made disasters. Global Reinsurance Division

  4. Swiss Re: Natural catastrophes in 2007 Global Reinsurance Division

  5. PCS: Natural catastrophes in 2007 Global Reinsurance Division

  6. PCS: Natural catastrophes in 2008 Global Reinsurance Division

  7. 2008 Natural catastrophes • Myanmar Cyclone Nargis • China Earthquake AIR Worldwide estimates that total losses to insured and uninsured property from the M7.9 earthquake that struck near Chengdu, China will likely exceed $20 billion USD Global Reinsurance Division

  8. 2008 Cat Market Update 2008 Reinsurance Market Update Global Reinsurance Division

  9. Guy Carpenter: 2008 Reinsurance Market Review • Casualty treaty reinsurance market is softening in many areas. • Driven by 5 years of underwriting profits. • Difficult lines still subject to tough rating environment. Global Reinsurance Division

  10. Guy Carpenter: 2008 Reinsurance Market Review • Global Reinsurance capital increased to $129B in 2007. • 20.4% higher than end of 2005. • Retained earnings increased from $40.5B in 2005 to $59.3B in 2007. Global Reinsurance Division

  11. Guy Carpenter: 2008 Reinsurance Market Review • Stable Outlook from all rating agencies • Strong balance sheets with record profits in 2006 and 2007. • Threats: underwriting cycle, increase cat activity, subprime crisis Global Reinsurance Division

  12. Reinsurance Discussion 2008 Reinsurance Market Expectations Global Reinsurance Division

  13. AON: Reinsurance Market Update Sept 2007 Global Reinsurance Division

  14. AON: Reinsurance Market Update Sept 2007 Global Reinsurance Division

  15. Reinsurance Discussion Capital Markets Global Reinsurance Division

  16. Capital Markets (cat bonds and sidecars) • $7.2 billion issued in 2007, $6.2 billion issued in 2006. • Insulated from turmoil of broader credit markets. • Diversifying perils • Willing to support indemnity Global Reinsurance Division

  17. Capital Markets (cat bonds and sidecars) • How do they work? • Based on modeled statistics. • Investors assume risk and expect to make a profit. • ROL is multiple of estimated loss. • “Secured” reinsurance, ceded limit held in trust. • Example • $100M X $500M • Probability of attachment 1.0%. • Probability of exhaustion 0.75% • Expected loss 0.875M (LOL 0.875%) • Premium 5.0% + LIBOR, • ROL = 5.7 * LOL Global Reinsurance Division

  18. Capital Markets (cat bonds and sidecars) • Insurer Motivation • Access to additional capacity • Multiyear terms • “Secured” reinsurance • Ideal for short term, high cat exposures • Investor Motivation • High returns • Uncorrelated Exposure • “Modelable” Exposure, easy to analyze and compare statistics • Easy to monitor aggregate exposures Global Reinsurance Division

  19. Capital Markets (cat bonds and sidecars) • Higher Costs • Secured Program • No Leverage • No Reinstatements • Third Party Modeling • Structure Fees (SPV) • “Uncertainty” charge • Time commitments • Indemnity vs parametric vs PCS • Timing concerns with Indemnity Global Reinsurance Division

  20. Reinsurance Discussion Miscellaneous Topics Global Reinsurance Division

  21. Miscellaneous • Reinsurance spreads narrowing, worldwide credit spreads and equity spreads are widening. Insurers more likely to use reinsurance to finance risk. • Capital Markets are currently providing 10 to 25 percent of their catastrophe capacity. This is expected to expand. • Regulatory, rating agency, investor and management emphasis on ERM. Global Reinsurance Division

  22. Reference Sources: • Swiss Re: “Natural catastrophes and man-made disasters in 2007.” • Guy Carpenter: “2008 Reinsurance Market Review” • AON: “Reinsurance Now Materially Reducing Insurer Cost of Capital, Reinsurance Market Update, September 2007” • Deutsche Bank: “2007 Year-end Catastrophe Market Review” Global Reinsurance Division

  23. Reinsurance Discussion Open discussion Global Reinsurance Division

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