International Catastrophe Reserving

1. International Catastrophe Reserving Paul Gates, Platinum Underwriters Casualty Loss Seminar, September 11 2006

2. International Cat Reserving International Cat Reserving – a live experience!

3. Catastrophe Reserving in Europe • Legislative background • The changing environment • Practical issues • Assessing catastrophic loss potential • “Live” catastrophe reserving • “Large” versus “small” catastrophes

4. Legislative Background - Europe • A quick tour • United Kingdom • Germany • Switzerland • Australia (?!) • Pre-funding and post-funding

5. Catastrophe Reserving in the UK

6. Catastrophe Reserving in the UK • Regulated by FSA (Financial Services Authority) • Tax position supervised by Inland Revenue • Equalisation Reserves pre-event • Post-event – demonstration of reserve requirement (tax allowance)

7. Catastrophe Reserving in the UK • Equalisation Reserve Calculation • Transfers In & Out • Transfers In • Percentage of Net Premiums in Financial Year • Transfers & Reserve based on “Business Groups” • Transfers Out • “Abnormal Loss” • Transfer Limited by Business Group Maxima

8. Equalisation Reserves in the UK “Abnormal loss” refers to losses in excess of above percentages, expressed as percentage of net written / earned premiums Business Group maximum expressed as percentage of average net written in previous 5 years

9. Example of UK Equalisation Reserving

10. Catastrophe Reserving in the UK • Post-event Reserving • Projection of ultimates • Identifying claimant / potential cedants • Run-off term • Uncertainty v best estimate • IBNER • “Unknown” Catastrophe

11. Catastrophe Reserving in Germany • Regulated by BAFin (Bundesanstaltfür Finanzdienstleistungsaufsicht) • Significant Equalisation Reserves • Prescribed by formula • Applied to transfers in & out • Related to the standard deviation in last 15 years • “To disappear eventually”

12. Equalisation Reserves in Germany • Based on net premiums • Per line of business • Compare loss ratio for year with average • Prerequisites for establishing reserve • Average net premium large enough (>Eur125,000) • Standard deviation of loss ratios >=5% • Combined ratio >100% at least once in 15 years • Limitation for reserve • Equals (usually) current net premium * standard deviation * 4.5 • 3.5% of limit transferred to the reserve pa

13. Catastrophe Reserving in Switzerland • Regulated by FOPI – Federal Office of Private Insurance (also known as BPV/OFAP/UFAP) • Equalisation reserves still being utilised significantly? • “Swiss Re….expects its losses reserves related to Hurricane Ivan and Typhoon Songda to be approximately USD300m before tax….in addition to estimated claims of USD 290m before tax for Hurricanes Charley & Frances…Swiss Re may use some of its claims equalisation reserves to absorb part of the financial impact of these events”(Swiss Re news release 24 Sept 2004) • “Swiss Re…will use equalisation reserves to mitigate part of the claims caused by this year’s extraordinary hurricane season” (Swiss Re news release 2 November 2005)

14. Catastrophe Reserving in Switzerland • Equalisation Reserves • Give details of determination in business plan • Must maintain this methodolodgy • No explicit mention in Swiss Insurance Regulation Act (no guidelines) • Exception for credit insurance • To be eliminated?

15. Catastrophe Reserving in Australia • Regulated by APRA • Best estimate reserving • According to actuarial calculation • No equalisation reserves • No tax allowance

16. Evolution of Catastrophe Reserving • Harmonisation of financial regimes (Europe) • International Financial Reporting Accounting Standards • Demise of equalisation reserves? • The debate continues • Listed companies • Consolidated accounts v local reporting • Link to solvency requirements • Solvency II progressing (risk based assessment in Europe) • Catastrophic loss key driver of (in)solvency • Role of actuaries

17. Catastrophe Reserving in Practice • Goldie Re (UK) • Assessing loss potential pre-event • Link to solvency calculations • “Live Cat” reserving • Reserving at year-end • Large versus small events

18. Catastrophe Reserving in Practice • Assessing Loss Potential (PML) • Key zones • Exposing cedants • Using pricing information • Losses per event, per cedant • Layers, shares, exchange rates, reinstatement terms • Also allow for outwards reinsurance • Focus on key return periods • Forms basis of catastrophic loss element of ICA model – solvency purposes

19. PML Example

20. PML Example

21. Live Cat Reserving • Need for more timely information • Shareholders/investors • Management • Less developed process outside USA • No equivalent of NHC • More reliant on cat modelling firms (RMS/EQE/AIR) • Liaise with brokers and cedants • Use PML calculations as basis • Link to matching event IDs, issued by modelling cos

22. Live Cat Reserving – Example • Windstorm Erwin • 7th to 9th January 2005 • Affected Northern UK, Northern Germany, Denmark and Sweden • A year’s worth of Sweden’s forestry output felled! • Information hard to obtain • Broker reports • News websites • Approximately USD 1.75bn of insured loss

23. Live Cat Reserving – Example • Windstorm Erwin • Range of reserve estimates $350,000 to $25,000,000 • September 2006 -100% settled, final loss of $2m

24. How year-end reserving might run • Large Catastrophes • Define threshold • Specific projections • Allowance for deterioration • New cedant notifications • Market developments • Reporting tail quite swift • Small catastrophes • Loss ratio for overall portfolio • Reporting slower

25. Thank you for your attention Hurricane Fabian, 2003 pgates@platinumre.com