Reinsurance in the civil aviation sector EALA - 9 th Munich Liability Seminar. 19 th May 2014 Roland Kuesters

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1 Reinsurance in the civil aviation sector EALA - 9 th Munich Liability Seminar 19 th May 2014 Roland Kuesters

2 Agenda 1. Introduction to Reinsurance - Munich Re 2. Aviation reinsurance principles and functions Facultative Reinsurance Obligatory (Treaty) Reinsurance Excess of Loss (XL) Proportional Treaty Retrocession 3. Summary EALA 9 th Munich Liability Seminar 19/05/2014 2

Reinsurance Obligatory (Treaty) Reinsurance Excess of Loss (XL)

3 Introduction to Reinsurance Munich Re

4 Munich Re (Group) History of Munich Re Quelle: ERGO Versicherungsgruppe Munich Re is founded on 19 April 1880 at the instigation of Carl von Thieme, Baron Theodor von Cramer-Klett and Wilhelm Finck. First major loss in the 20th century: the earthquake in San Francisco on 18 April Munich Re's liability: US$ 2.5m. Munich Re acts fast to settle losses on the spot. The insurance groups VICTORIA/D.A.S. and Hamburg- Mannheimer/DKV announce that they will merge under the name of ERGO Versicherungsgruppe AG. ERGO, which belongs to Munich Re, is now represented in more than 30 countries Munich Re pools its international health insurance and reinsurance expertise in a new business segment: Munich Health With the introduction of the new brand, Munich Re redefines its position in the reinsurance markets. With overall losses amounting to some US$ 380bn, 2011 becomes the costliest natural catastrophe year to date. After the terrible earthquake in Japan on 11 March 2011, Munich Re invites internationally recognised experts to assess the event. Company Presentation Munich Re 19/05/2014 4

Munich Re acts fast to settle losses on the spot. The insurance groups VICTORIA/D.A.S. and Hamburg- Mannheimer/DKV announce that they will merge under the name of ERGO Versicherungsgruppe AG.

5 Munich Re (Group) Added value within the group Diversified structure More security Munich Re (Group)* Reinsurance Munich Health Primary insurance Corporate Insurance Partner Great Lakes Reinsurance (UK) PLC KA Köln.Assekuranz Agentur GmbH MSF Pritchard Syndicate 318 Temple Insurance Company Watkins Syndicate Belgium Asset Management * This listing is incomplete and provides no precise indication of shareholdings. Company Presentation Munich Re 19/05/2014 5

Assekuranz Agentur GmbH MSF Pritchard Syndicate 318 Temple Insurance Company Watkins Syndicate Belgium Asset

6 Reinsurance Present in all markets Amelia Atlanta Chicago Columbus Hartford Montreal Philadelphia New York Princeton San Francisco Toronto Vancouver Munich London Madrid Malta Milan Moscow Paris Zurich Beijing Calcutta Dubai Hong Kong Kuala Lumpur Mumbai Seoul Shanghai Singapore Taipei Tokyo Bogotá Buenos Aires Caracas Mexico Santiago de Chile São Paulo Accra Cape Town Johannesburg Nairobi Port Louis Auckland Melbourne Sydney Company Presentation Munich Re 19/05/2014 6

Kuala Lumpur Mumbai Seoul Shanghai Singapore Taipei Tokyo Bogotá Buenos Aires Caracas Mexico Santiago de Chile São

7 Munich Re (Group) Best business model for each risk segment Munich Re (Group) 1 Risk Management 2 Investments 3 Asset Management Well-diversified portfolio based on strictly limited risk appetite Strong integrated risk management with proven track record in financial crisis Sound capitalisation provides strategic flexibility Munich Re s business model [Illustrative] Risk capacity Traditional reinsurance solutions Large individual risk solutions Specialty commercial solutions Personal specialty solutions Standard retail solutions Distribution power Risk know-how Company Presentation Munich Re 19/05/2014 7

provides strategic flexibility Munich Re s business model [Illustrative] Risk capacity Traditional reinsurance solutions Large individual risk solutions

8 Munich Re (Group) Outlook Outlook 2014 Munich Re (Group) GROSS PREMIUMS WRITTEN RETURN ON INVESTMENT NET RESULT bn % bn Target ~ 48bn Target 2014 ~3.3% Target bn Focus on bottom-line growth prevails Solid return given ongoing low interest-rate environment RoRaC target of 15% after tax over the cycle to stand Reinsurance Primary insurance Munich Health COMBINED RATIO COMBINED RATIO COMBINED RATIO % % % Target 2014 ~94% Target 2014 ~95% Target 2014 ~99% NET RESULT NET RESULT NET RESULT bn m m Target bn Target m Target 2014 ~ 100m 1 By segment: Reinsurance slightly above 26bn, primary insurance ~ 16.5bn, Munich Health slightly below 5.5bn. 19/05/2014 8

insurance Munich Health COMBINED RATIO COMBINED RATIO COMBINED RATIO 2013 92.1% 2013 97.2% 2013 98.

9 Munich Re (Group) Investment portfolio Investment portfolio Investment portfolio 1 Land and buildings 2.5 (2.5) Shares, equity funds and participating interests (4.6) % Fixed-interest securities 53.2 (52.9) Portfolio management At Group level, duration gap between assets and liabilities remains very low Expansion of US, Spanish and Italian at the expense of German government bonds Miscellaneous 3 Slight reduction and ongoing geographic 11.5 (11.8) diversification of covered bonds TOTAL 223bn Slight reduction of corporate bonds and structured products Small decrease of equity-backing ratio to 4.2% net of hedges Loans 28.3 (28.2) 1 Fair values as at ( ). 2 Net of hedges: 4.2% (4.5%). 3 Deposits retained on assumed reinsurance, unit-linked investments, deposits with banks, investment funds (excl. equities), derivatives and investments in renewable energies and gold. 19/05/2014 9

9) Portfolio management At Group level, duration gap between assets and liabilities remains very low Expansion of US, Spanish and Italian at the expense of German government bonds Miscellaneous 3

10 Reinsurance property-casualty Combined ratio Profitability still at a very good level Combined ratio % Q Basic losses Nat cat losses Man-made losses Expense ratio Combined ratio % Large losses 2013 % Actual 2013 Avg. annual expectation 10.4 ~ ~ ~ Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Reserve releases basic losses (net 1 ) m %-points 2013 ~759 ~4.7 1 Including reserve releases for basic losses ~ 845m (~5.2%). Run-off result for large losses 86m. Balance sheet press conference

6 96.9 99.3 94.3 89.3 Actual 2013 Avg. annual expectation 10.4 ~12.0 4.7 ~8.5 5.7 ~3.5 89.4 85.7 83.

11 Financial figures Our strengths: Embracing complexity and flexibility Demand trend Balance-sheet management and financing Changing and complex risks Insurability of new risks Efficient coverage of standardised risks Examples Management of cost of capital and leverage Capital flexibility over the insurance cycle Optimisation of balance-sheet figures Financing of growth Higher and more frequent claims due to climate change Growing interdependencies between risks New court decisions regarding long-tail claims Medical inflation New technologies (internet viruses, renewable energy) Extended business interruption covers Longevity Obesity Motor quota shares Buildings insurance Cat XL Mortality Company Presentation Munich Re 19/05/

growth Higher and more frequent claims due to climate change Growing interdependencies between risks New court decisions regarding long-tail claims Medical inflation New technologies

12 Munich Re Aviation Channels Special and Financial Risks - Aviation Reinsurance Lloyd s Syndicates Direct Insurance Shareholdings Great Lakes (UK) GLOBAL AEROSPACE Treaty Proportional Excess of loss Facultative MSF Pritchard Syndicate 318 Watkins Syndicate (Hull War) Fronting of ca. 43% of fac Reinsurance 100% owned by MR S&P: AA- Managing Agency Pool share 49.45% Agency share 40.00% SL 10% USD 250m Munich w/w London London London EALA 9 th Munich Liability Seminar 19/05/

318 Watkins Syndicate (Hull War) Fronting of ca.

13 Aviation claims management 1. Corporate claims management Claims strategy Large loss coordination Claims guidelines, reviews and quality assurance Competence development claims community MRM and IO 2. Aviation claims management Facultative claims Treaty claims 3. Central Procurement (CP) Procurement of professional services, incl. legal services and loss adjusters EALA 9 th Munich Liability Seminar 19/05/

quality assurance Competence development claims community MRM and IO 2.

14 Aviation Reinsurance 14

15 Reinsurance Forms Facultative Obligatory (Treaty) Insurer has the option of ceding a risk Reinsurer has the option to accept or to decline Terms and conditions have to be negotiated individually Insurer and reinsurer enter into an agreement for an entire portfolio of risks The insurer has to cede The reinsurer has to cover EALA 9 th Munich Liability Seminar 19/05/

individually Insurer and reinsurer enter into an agreement for an entire portfolio of risks

16 Aviation Facultative Reinsurance Munich Re Group Insurer (e.g. Great Lakes UK) Insured (e.g. Airline, Manufacturer, Airport) Third Party Fronting Company (e.g. local primary insurer) Munich Re Special and Financial Risks Captive EALA 9 th Munich Liability Seminar 19/05/

17 Aviation Reinsurance Classes Treaty Reinsurance Proportional Quota-Share Non-Proportional XL The ratio of retained liability to ceded liability is the same for each and every risk. The insurer cedes a fixed percentage of liabilities, premiums and claims, irrespective of the sum insured. The treaty limit is a fixed amount. The reinsurer has an obligation towards the direct insurer only if the loss amount exceeds the threshold set forth in the reinsurance treaty (priority). The reinsurer is obliged to indemnify the direct insurer for the loss exceeding the priority (excess loss). XL-Notation: Limit xs Priority EALA 9 th Munich Liability Seminar 19/05/

The reinsurer has an obligation towards the direct insurer only if the loss amount exceeds the threshold set forth in the reinsurance treaty (priority).

18 Sample Aviation Reinsurance Program Maximum line USD 250m any one risk Limit XS Priority Cat Layer USD 200m XS USD 200m (1 Reinstatement) 4 th Layer USD 100m XS USD 100m (1 Reinstatement) 3 rd Layer USD 50m XS USD 50m (2 Reinstatements) USD 190m 2 nd Layer USD 30m XS USD 20m (2 Reinstatements) 1 st Layer USD 10m XS USD 10m (3 Reinstatements) 20% Quota Share Net retention to XOL USD 200m EALA 9 th Munich Liability Seminar 19/05/

(2 Reinstatements) USD 190m 2 nd Layer USD 30m XS USD 20m (2 Reinstatements) 1 st Layer USD 10m XS USD 10m (3

19 Aviation Reinsurance Questionnaire Market standard questionnaire provided to reinsurers detailing client s experience and exposures, including: Schedule A Non US Airlines. Schedule B US Airlines. Schedule C Aviation Products. Combined schedules represent approximately 75% of global airline exposure. EALA 9 th Munich Liability Seminar 19/05/

Schedule B US Airlines. Schedule C Aviation Products.

20 Aviation gross premiums 2013 USD (Bn) Insurance: Reinsurance: Major Risks AL 1.65 GA - ROW 0.70 XL 0.30 Major Risks Products 0.70 TOTAL 4.74 Hull War 0.07 Proportional 0.40 TOTAL 0.76 GA - US 1.50 XS AVN Retro (XL/XL) 0.06 Source: Lloyds broking houses-> rough estimates, especially GA premium ROW and Retro (XL/XL) premiums are very difficult to elaborate) EALA 9 th Munich Liability Seminar 20

21 Summary 1. Insurers provide limits up to $ 2.25Bn a.o.o. 2. Aviation reinsurance forms and classes Facultative reinsurance Obligatory (Treaty) reinsurance Excess of Loss (XL) reinsurance Proportional Treaty reinsurance Retrocession XL/XL 3. Most treaties are XL with attachment points of $ 100m $ 500m (OML) 4. Reinsurers are integrated capacity provider for the aviation industry EALA 9 th Munich Liability Seminar 19/05/

22 Finally Some see reinsurers asa predatory target tobe shot Others asa cowto tobe milked But few are those who see itas asa sturdy horse pulling the wagon EALA 9 th Munich Liability Seminar 19/05/

Tarsim Agricultural Insurance Pool Achievements and future goals. Ankara, 10.4.2013 Brigitte Engelhard

Tarsim Agricultural Insurance Pool Achievements and future goals Ankara, 10.4.2013 Brigitte Engelhard Agenda 1. Munich Re and the Divisional Unit Agro 2. Tarsim Agricultural Insurance Pool Achievements