conference on catastrophic risks and ...powerpoint presentation this document is circulated for...
Post on 26-Aug-2020
2 Views
Preview:
TRANSCRIPT
DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
CONFERENCE ON CATASTROPHIC RISKS AND INSURANCE
22-23 November 2004
THE USE OF RISK LINKED SECURITIES TO MANAGE CATASTROPHIC RISKS
Christian Mumenthaler (Swiss Re)
Powerpoint presentation
This document is circulated for Session 2 of the Conference on Catastrophic Risks and Insurance, to be held on 22-23 November 2004 at the OECD Headquarters, 2 rue André Pascal, 75016 Paris, starting at 9:00 a.m.
For further information on this conference, please contact Cécile Vignial, Financial Markets Division (Cecile.Vignial@oecd.org), or Yosuke Kawakami or Morven Alexander, Outreach Unit for Financial Sector Reform (Yosuke.Kawakami@oecd.org or Morven.Alexander@oecd.org)
The use of risk linked securities to manage catastrophic risks
Dr. Christian Mumenthaler
Head of Group Retro & Syndication, Swiss Re
OECD Conference
22 November 2004
Page 2
Agenda
Nat cat risks: A success story
Terrorism: An open issue
Page 3
Insurance and reinsurance industry have lost 20% of their equity
0
100
200
300
400
500
600
700
800
Capital, end of2000
Estimatedcapital
destroyed
Capital raised Estimatedcurrent capital
Global P&C industry capital (USD bn)
Source: Swiss Re Economic Research & Consulting
WTC losses
Equity market downturn
Dr. Christian MumenthalerOECD Conference22 Nov 2004
Page 4
Most reinsurers have been downgraded
Swis
s R
e
Mun
ich
Re
Ber
kshi
re H
atha
way
Empl
oyer
s R
e
Han
nove
r Re
Ger
ling
Glo
bal R
e
Lloy
d’s
Alli
anz
Re
SCO
R
AXA
Re
Con
veriu
m(1
)
S&P rating
11 Sept ‘01
8 Nov ‘04
Dr. Christian MumenthalerOECD Conference22 Nov 2004
AAA
AA+
AA
AA-
A+
A
A-
BBB+ and less (1) Since Dec ‘01
Page 5
Five peak risks in the world of P&C reinsurance
Peak risk: Geographical zone with
- high risk of natural hazards (eg earthquakes)
- high density of insured values (eg buildings)Dr. Christian MumenthalerOECD Conference22 Nov 2004
Page 6
Increasing value concentration(Hurricanes Atlantic)
Projected population change1994-2015
Source: National Oceanic and Atmospheric Administration (NOAA).
Hurricanes recorded in the US in the last 110 years
Source: Swiss Re’s Nat Cat team
Dr. Christian MumenthalerOECD Conference22 Nov 2004
3020100
Page 7
Consequence: Building a well-balanced book of business is difficult
Dr. Christian MumenthalerOECD Conference22 Nov 2004
USA (EQ + TC) (1)
WS Europe
EQ Japan
TC Japan
EQ Australia
EQ Canada
EQ Italy
EQ Columbia
EQ Israel
EQ Mexico
EQ Portugal
EQ South Africa
World wide coverage (CHF bn)
Legend: EQ = Earthquakes, WS = Windstorms, TC = Tropical cyclone
(1) No separation available between EQ and TC risks in the US market
Ideal level reinsurance would take for optimal diversification
Peak risks would ideally be ceded to capital markets, which are better able to diversify these risks
Worldwide cover bought in R/I market per peril in 2003
Page 8
Capital markets are an answer for Swiss Re
Transformed by Swiss Re and/or underwritten by Swiss Re Capital Markets (lead or co-lead)Sponsored by Swiss Re and underwritten through Swiss Re Capital Markets (sole)
Dr. Christian MumenthalerOECD Conference22 Nov 2004
1997 1998 1999 2000 2001 2002 2003
2 132
714 724825
1 122967 990
Trinity Re I
Res Re I
Pacific Re
SR EarthquakeTrinity 99
Parametric
Mosaic Re
Res Re II
Seismic
Atlas Re
Alpha W ind
Res Re 2000
NeHi
Med RePrime Cal Quake
Eurowind
PrimeHurricane
Mosaic Re II
Domestic
Halyard Re
Concentric
Res Re III
Juno Re
Namazu
Gold Eagle I
W estern
SR W ind A2
SR W ind A1
Gold Eagle
Trinom
Res Re 20 01
Atlas Re II
Redwood I
Redwood II
St AgathaRes Re 20 02
Fujiyama
Studio Re
PIONEER
Phoenix Quake
Phoenix QuakeWind
Arbor
USAA Res Re 2003
Redwood IV
Vita Capital
Formosa
Pylon BPylon A
Redwood III
PIONEERPhoenix QW II
New issue volume of insurance linked securities (in USD millions)
Oak CapitalGi Capital
Sequoia CapitalHelix 04
Res Re 2004
Arbor I
580
2004to date
Page 9
Securitization prices have fallenabout 20% since mid-2002
Dr. Christian MumenthalerOECD Conference22 Nov 2004
Secondary market spreads (as of 30 September 2004)
Hurricane Ivan
Page 10
Terrorism: An open issue
Dr. Christian MumenthalerOECD Conference22 Nov 2004
Page 11
New stage ahead?
Insurance
Reinsurance
?
1666 fire in London, growing importance of sea-borne trade leads to creation of first insurers
1680 1840
Catastrophic fires in Hamburg and Glarus lead to creation of first reinsurers
2002
Terrorism and other new risks make the creation of new capacity sources inevitable
IndustrializationConcentration of population in urban centersValue concentration
GlobalizationInterconnectivity leads to higher system sensitivityNew risks
Dr. Christian MumenthalerOECD Conference22 Nov 2004
Page 12
Terrorism:Whence the threat today
After Afghanistan, Iraq: al-Qaida weakened as operational network, but strengthened as source of inspiration for radical Islamists (Bin Laden as ‘hero’)
Terrorist cells increasingly operate independently from al-Qaida. Presence estimated in 60 countries
OECD countries/ US still ‘targets of preference’, but more difficult to penetrate with tightened security. al-Qaida attacks more likely in countries with less security resources (M. East, SE Asia)
9/11 as ‘benchmark’ for indiscriminate use of violence by any terrorists (al-Qaida and others) -> escalating terror (eg Beslan)
Seeking to acquire weapons of mass destruction (nuclear, chemical, bio)
Terror attack fatalities 2002-04 by group
0
200
400
600
800
1000
2002 2003 2004 TD
OthersHamas/ IsraelChechensQaida & allies
Terror attack fatalities 2002-04 by location
OECDRussiaM.East&N.AfricaE.&.S.AsiaOthers
Dr. Christian MumenthalerOECD Conference22 Nov 2004
Page 13
Insurability criteria
Assessibility: loss probability and severity must be quantifiable
Randomness: time of occurrence must be unpredictable, occurrence itself must be independent of the will of the insured
Mutuality: numerous exposed parties must join together to form a risk community, to share and diversify the risk
Economic feasibility: Private insurers must be able to charge a premium which is commensurate with the risk
Dr. Christian MumenthalerOECD Conference22 Nov 2004
?
?
Yes
The challenge: Is new terrorism risk insurable?
?major issue
for securitization
Page 14
Dr. Christian MumenthalerOECD Conference22 Nov 2004
How much would you ask for insuring these objects?
Sears towers,
Chicago
Swiss Re building
Zurich
Even without model, there is a price (although probably a high one) at which you would insure them
Page 15
Hypothesis:Without model, securitization could work in two areas
Risk
high very low
30%-50% spread for the cover
target: hedge funds
With just 2-3 deals the risk is nearly diversified away
Quick payback over time
1%-2% spread for a risk which is perceived to be close to zero
target: banks, pension funds who want some spread pickup with minimal risk
“If it happens, it’s going to impact the world economy and other portfolios anyway”
attractive unattractive attractive
FIFA deal
Dr. Christian MumenthalerOECD Conference22 Nov 2004
Page 16
Insurance-linked securities have worked very well for Swiss Re with natural catastrophe risks– underlying threats are growing and well understood
– win-win situation given: these risks are eating up a disproportionate amount of capital for reinsurers
– Markets have become more efficient, prices have fallen
Securitizing terrorism risk will be a significant challenge
– underlying risk is not well understood (new and constantly changing risk)
Some potential in the two areas where models might not be essential:
1. Very low risk area (FIFA deal) where investors basically think it is not possible or very remote
2. High risk area where investors would basically “bet” and get a high return
Dr. Christian MumenthalerOECD Conference22 Nov 2004
Final remarks
top related