SYMPOSIUM ON THE FUTURE OF CROP INSURANCE THE ROLE OF REINSURANCE

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1 SYMPOSIUM ON THE FUTURE OF CROP INSURANCE THE ROLE OF REINSURANCE

2 Reinsurance - Insurance for Insurance Companies Reinsurance follows the same concepts and principles as insurance 2

3 Gross vs Nett Portfolio 3

4 Let s recap: Why buy reinsurance? Provide catastrophe protection Stabilise loss experience Protection from the financial consequences of a single catastrophic event causing multiple losses Aids in financial planning, supports growth, encourages capital investment Provide surplus relief Provide for a means to meet policyholders surplus requirements imposed by regulators Increase large line capacity Ability of the insurer to provide larger limits of insurance for property loss exposures or higher limits of liability for liability loss exposures Facilitate withdrawal from a market segment Insurer may want to withdraw from a market segment that is unprofitable, undesirable, or does not fit into the strategic plan Provide underwriting guidance Reinsurers work with a wide variety of insurers and consequently accumulate a great deal of underwriting expertise 4

5 Worldwide The Top 10 Insured Losses Year Cost (2012 USD Values) Hurricane Katrina 2005 $76b Japan EQ/Tsunami 2011 $35b Hurricane Sandy USA 2012 $35b Hurricane Andrew 1992 $26b 9/ $24b Northridge Earthquake USA 1994 $21b Hurricane Ike 2008 $21b Hurricane Ivan 2004 $15b Thailand Floods 2011 $15b New Zealand Earthquakes 2011 $15b Source: Swiss Re sigma No. 2/2002 & 2/2003 (USD) 5

6 Australia The Top 10 Insured Losses Year Original Cost AUD 2011 Normalised Value AUD Sydney Hail Storm 1999 $1.7b $4.2b Cyclone Tracy 1974 $200m $4b Newcastle Earthquake 1989 $862m $3.2b Brisbane Flood (Wanda) 1974 $68m $2.6b Brisbane Hail Storm 1985 $180m $2b Newcastle Storms 2007 $1.48b $1.7b Ash Wednesday Bushfires (VIC&SA) 1983 $176m $1.7b Cyclone Leah (QLD/NT/WA) 1974 $30m $1.4b Sydney Hail Storm 1990 $319m $1.3b Victorian Bushfires 2009 $1.0b $1.3b Source: Insurance Council of Australia *1 More to add from last week 6

7 . even a Hailstorm in Brisbane on 27 th November

8 . even a Hailstorm in Brisbane on 27 th November

9 Diversification Of Risk Reinsurers spread risk across the Globe Windstorm Florida, Australia Flood Europe, Australia Earthquake Japan, California, New Zealand, Turkey Bushfire Australia Tsunami Pacific Rim..and crop insurance over Northern and Southern hemispheres 9

10 ..and further diversification Insurers spread risk across Australia Cyclone Darwin / North Queensland Bushfire NSW / Victoria / South Australia Hail Sydney 10

11 .. Diversification with regions and crop State to state eg Queensland vs New South Wales Crop Crop to Crop eg Broadacre vs say sugar in Nth Queensland The underwriter needs to identify non correlating exposures 11

12 The Global Reinsurance Market USA close to half of the global reinsurance premium Asia less than 10% but growing. Property reinsurance equates to about 40% globally Focus on underwriting due to poor investment returns Despite softening market, still strong results for reinsurers 12

13 The Top 10 Reinsurers Source: AM Best,

14 Capacity, capacity, everywhere capacity 14

15 The Global Reinsurance Market Supply of Reinsurance is increasing Worldwide Non-life Reinsurance Premium estimated at over $180 billion Worldwide Reinsurance Capital estimated at in excess of $500 billion Surge in ILS Insurance Linked Securities (around $50B currently) Investors searching for yield pension funds ILS market represents about 15% of the market globally Reinsurers appetite for forms of risk varies by Reinsurer Outlook bond yields to be low When will US cash rate increase? 15

16 Current Market Cat Bonds Collateralised Re Sidecars Approaching $60B at July 2014 Asset class legitimised Recent growth driven by long-term investors (mainly pension funds) Expected to support throughout the cycle Multiple channels Harder to define traditional vs nontraditional Larger funds developing infrastructure to become mainstream competitors

17 Investable Assets Closer to USD60B at July 2014 Traditional RI markets have USD520B in capital insurance USD2.2T 17

18 Reinsurance Hierarchy Direct Insurance insurance Insurer A Reinsurance Reinsurer A Reinsurer B Reinsurer C Reinsurer D Reinsurer E 18

19 Primary Methods of Crop Reinsurance Proportional Reinsurance Quota Share Excess of Loss Stop Loss 19

20 Proportional Reinsurance Features It is a pro rata sharing of liability and premium i.e. losses are met in the same proportion as the sum insured and premium is distributed between insurer and reinsurer eg 50% Quota Share Core principle An insurer is bound to cede, and a reinsurer is bound to accept, a proportional share of all insurance written by the insurance company under the terms of the agreement 20

21 Quota Share treaty Automatic reinsurance Retention set relative to capital base Features Considerations Fixed proportions before ceding Defined maximum limits Quarterly accounting Suitable for new companies, new classes of business and surplus relief 21

22 Quota Share treaty Simple to operate Enhances cash flow Establishes confidence Good variety of business Advantages Provides operating capacity Can provide catastrophe protection Guaranteed protection Potential access to profitable business? Beneficial for new companies capital relief relating to solvency considerations Disadvantages Inflexible: Fixed retention (no choice) High level of premium ceded May not need reinsurance of smaller risks Retained risk balanced? Potential limited catastrophe protection 22

23 Stop Loss Reinsurance Based on loss ratio not individual claims - also known as excess of loss ratio Stop loss It operates on the same basis as an excess of loss treaty, but instead of monetary amounts the limits are expressed as percentages (loss ratios) 23

24 Stop Loss Excess of Loss Features Stop loss / Aggregate excess of loss protects against an unforeseen rise in claims frequency which might produce an underwriting loss for an insurer during any one period Cover Covering losses which exceed a pre-determined percentage / amount of the reinsured s premium income (retention), up to another pre-determined percentage / amount (limit) 24

25 Characteristics To pay up to the amount in excess of 90% loss ratio up to 130% loss ratio Example To pay the aggregate of compensation claims paid in excess of the equivalent of 130% of the gross premium income to the reinsured up to the equivalent of a further 90% of gross premium income to the reinsured Co-reinsurance Generally reinsurers force the reinsured to take a 5-10% share in the contract ( Skin in the Game ) 25

26 Stop Loss Treaty: Illustration 230% Size of loss Loss paid by ceding company Loss recovered from excess of loss reinsurance Stop Loss treaty 90% of 100% excess of 130% 130% Retained Loss Recovered Loss 26

27 Summary Stop Loss Reinsurance Issues Protection against adverse trends Moral issue - guarantee a profit? Do I need to underwrite prudently? Will reinsured be involved in the loss? Uses Protect against general deterioration in results Limits aggregate losses Individual losses difficult to determine Relieve loss situation not guarantee profit 27

28 Which Reinsurance to choose? Nature of portfolio? Core considerations Automatic protection? Potential Claims >> Nature of losses? Large single claims? Accumulations? Frequency Specific sums insured? General liability? Capital Management Solvency margin Effect on retained income Need to control losses Impact on business strategy Exchanging / expanding business Administration costs / ease of operation 28

29 Summary Proportional reinsurance Sharing original risk Non-proportional reinsurance Reinsuring the loss 29

30 The Market Cycle 30

31 Reinsurance Features & History Reinsurance cannot improve and under-performing gross portfolio over the long term When designing reinsurance the gross portfolio needs to be fully understood Your Gross Loss Ratio will always be better than your net loss ratio unless you have substantial losses Reinsurance Premium = Expected Losses + reinsurer margin Evolution of Reinsurance from handshake to highly modelled and analytic approach. 31

32 Wrap Up and Key Points We operate in a global reinsurance marketplace Reinsurers spread their risks around the globe Diversification is key allows Reinsurers multiple utilisation of capital Reinsurers have strong appetite for non-correlating Australian exposures including crop Asia Pacific becoming more prevalent on the global scale How a global event can effect local reinsurance market conditions 32

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