1

COOKSON WALKER CONSULTING

P&C CRYSTAL BALL 2008

Gordon Crutcher

Aon Re Canada

January 25, 2008

DIRECTIONS IN REINSURANCE

2

CURRENT DIRECTIONSCURRENT DIRECTIONS OF OF

P & C REINSURANCEP & C REINSURANCE

2007 REVIEW - 2008 PREVIEW2007 REVIEW - 2008 PREVIEW

GORDON CRUTCHER, Aon Re Canada 2

3

THEREINSURANCE

MARKET IS

GLOBAL3

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REINSURANCE MARKETREINSURANCE MARKET

The reinsurance market is complex and inter-related.

One reinsurer can rarely respond to all of a client’s needs.

The reinsurance market is complex and inter-related.

One reinsurer can rarely respond to all of a client’s needs.

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REINSURANCE MARKETREINSURANCE MARKET

Insurers usually prefer to have several reinsurers on their treaties.

Better security; more flexibility.

Insurers usually prefer to have several reinsurers on their treaties.

Better security; more flexibility.

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REINSURANCE MARKETREINSURANCE MARKET

In compiling its 2007 edition of Global

Reinsurance Highlights, Standard & Poor’s Ratings Services collected data on

approximately 250 reinsurance organizations from over 50 countries.

(Life + P&C)

In compiling its 2007 edition of Global

Reinsurance Highlights, Standard & Poor’s Ratings Services collected data on

approximately 250 reinsurance organizations from over 50 countries.

(Life + P&C)

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REINSURANCE MARKETREINSURANCE MARKET

Estimated Global Reinsurance:

Shareholders’ Funds: $483 billion

Net Reinsurance Premiums Written: $168 billion

Estimated Global Reinsurance:

Shareholders’ Funds: $483 billion

Net Reinsurance Premiums Written: $168 billion

S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)

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REINSURANCE MARKETREINSURANCE MARKET

Estimated Market Share of the top five World-Wide Reinsurance Groups: 47% (up from 40% in 2005)

(Munich Re, Swiss Re, Lloyd’s, Hannover Re, & Berkshire Hathaway Re)

Estimated Market Share of the top five World-Wide Reinsurance Groups: 47% (up from 40% in 2005)

(Munich Re, Swiss Re, Lloyd’s, Hannover Re, & Berkshire Hathaway Re)

S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)

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REINSURANCE MARKETREINSURANCE MARKET

Estimated Global Reinsurance Capacity:

$2 billion

any one program

Estimated Global Reinsurance Capacity:

$2 billion

any one program

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REINSURANCE MARKETREINSURANCE MARKET

Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks.

Diversification helps make underwriting results more predictable, less volatile – and more profitable.

Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks.

Diversification helps make underwriting results more predictable, less volatile – and more profitable.

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REINSURANCE MARKETREINSURANCE MARKET

• Canada does NOT have a single independent domestic reinsurance company.

• All independent reinsurers operating here are foreign-owned. 11

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COMPARISON OF GROSS COMPARISON OF GROSS CEDED REINSURANCE CEDED REINSURANCE

PREMIUMSPREMIUMS

0

50

100

150

200

World U.S. Europe

Asia Latin America Africa & Mid-East

Canada

Canada

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COMPARISON OF CEDED COMPARISON OF CEDED REINSURANCE PREMIUMSREINSURANCE PREMIUMS

• Information source for Gross Reinsurance Premiums ceded by Region:

International Association of Insurance Supervisors – “Global

Reinsurance Market Report 2007”Published December 12, 2007

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Thus eventsThus eventselsewhereelsewherein the worldin the worldcan impactcan impactCanadian reinsurance Canadian reinsurance ratesrates and and conditionsconditions – as well as – as well as the the security ratingssecurity ratings of of reinsurers doing business in reinsurers doing business in Canada.Canada.

14

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THE CHANGING FACE OF THE CHANGING FACE OF REINSURANCEREINSURANCE

• With the retro market in decline, there has been an amazing increase in the securitization of risks during last few years.

• Capital Market instruments include:

- Catastrophe Bonds;

- Catastrophe Loans;

- Sidecars;

- Industry Loss Warranties;

- Insurance Linked Securities.

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THE CHANGING FACETHE CHANGING FACE OF REINSURANCE OF REINSURANCE

• These types of solutions now account for 30% – 40% of the retro market;

• And between 5% – 10% of the reinsurance market.

According to Goldman Sachs’ Financing Group

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THE CHANGING FACETHE CHANGING FACE OF REINSURANCE OF REINSURANCE

“It’s evident that the steady convergence of the capital markets with the insurance sector is irreversible.”

Source: Jardine Lloyd Thompson – When two worlds converge . . .; May 2007

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THE CHANGING FACETHE CHANGING FACE OF REINSURANCE OF REINSURANCE

“The landmark issuance by State Farm of a $1.2 billion multi peril catastrophe bond, the largest ever issuance of its type, is an example of what we believe is an emerging trend.”

Standard & Poor’s: Global Reinsurance Highlights, September 2007

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REINSURANCE MARKETREINSURANCE MARKET

Remember this slide?

Estimated Global Reinsurance Capacity:

$2 billion any one program

Remember this slide?

Estimated Global Reinsurance Capacity:

$2 billion any one program

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S&P’s outlook for the S&P’s outlook for the GLOBAL reinsurance GLOBAL reinsurance sector remains stable.sector remains stable.

However, However, 2008 could be a2008 could be a

watershed for the watershed for the reinsurance industry.reinsurance industry.

20Standard & Poor’s: Global Reinsurance Highlights, September 2007

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REINSURERS’ COMBINED RATIOS

• Canadian Reinsurers - as per MSA Research

• 2003: 95%• 2004: 93%• 2005: 105%• 2006: 87%• 2007 (@ Q3): 86%

• U.S. Reinsurers – as per R.A.A.

• 2003: 101%• 2004: 106%• 2005: 129%• 2006: 95%• 2007 (@ Q3) 94%

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COMBINED LOSS & EXPENSE RATIOS OF CANADIAN

REINSURERS

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

1991 1993 1995 1997 1999 2001 2003 2005 Q32007

Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2007

Proprietary & Confidential

2323

Reinsurers Combined Ratio Comparison

Sources: RRA and RRC and various publications,

80%

90%

100%

110%

120%

130%

140%

150%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Est.

Global

Canadian

US

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TOTAL REINSURANCE CEDED (Domestic & Foreign Companies)

$4

$5

$6

$7

$8

$9

Billions

1999 2000 2001 2002 2003 2004 2005 2006 Q307

Source: OSFI Financial Data

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TOTAL REINSURANCE WRITTEN (By Canadian Licensed Reinsurers)

$0

$1

$2

$3

Billions

1999 2000 2001 2002 2003 2004 2005 2006 Q307

Source: MSA Research

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LESS BUSINESS AVAILABLE FOR

REINSURERS

• Insurer retentions continue to increase.

• Significant decline in use of Proportional reinsurance.

• Mergers and acquisitions of insurers.• The reinsurance “pie” in Canada is

definitely shrinking.

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LESS BUSINESS AVAILABLE FOR REINSURERS

• Insurance company mergers and acquisitions are NOT good news for reinsurers.

• e.g. neither Allianz Canada, nor Citadel Canada, nor CNS buys an independent treaty program any more.

• SUPPLY of reinsurance has increased but the DEMAND has been declining.

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IMPACT OF BILL C-37 ON CANADIAN REINSURERS?

• Bill C-37 will amend Part XIII of the Insurance Companies Act, (ICA).

• Becomes effective January 1 2009.• Among other provisions, could

eliminate need for a foreign reinsurer to maintain a Canadian branch.

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IMPACT OF BILL C-37 ON CANADIAN REINSURERS?

• “Will this eventually result in an exodus of foreign reinsurers from Canadian soil?”

• Read the article by J. Brian Reeve, Partner, Cassels Brock & Blackwell LLP in the November 2007 issue of Canadian Underwriter.

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CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 Q32007

Total Insurance Premiums Reinsurance Ceded

24%30%31%30%27%

Source: OSFI @ Q4 each year – but Q3 for 2007

24% 26% 26%

Billions $

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RELATIVE EMPLOYMENT OF REINSURANCE BY CANADIAN

INSURERS Ratios of “Reinsurance Ceded” to “Direct Premiums Written”

• State Farm Auto: 0%• Allstate Insurance Co. of Canada: 0%• Wawanesa Mutual Insurance: 2%• Dominion of Canada General: 4%• Chubb Insurance Co. of Canada: 14%• Aviva Insurance Co. of Canada: 17%• Economical Mutual Insurance: 26%• Royal & SunAlliance Canada: 28%• ING Insurance Co. of Canada: 40%• Commonwealth Insurance Company: 76%

Source: OSFI Data as of Q4 2006

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REINSURANCE CEDED TO PREMIUMS WRITTEN

0%

10%

20%

30%

40%

50%

60%

70%

80%

S.F. Allst WAW DOC CHU AVI ECO ING COM

Source: OSFI @ Q4 2006

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CAUTION

• Reinsurance premiums can be ceded:

- to EXTERNAL reinsurers,

- or INTERNALLY for “group” protections.

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IT’S GETTING LONELY OUT THERE!

•Fewer licensed reinsurers.

• Only 19 active, independent markets

left in Canada.

•Used to be 41 in 1991.34

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ACTIVE FEDERALLY – LICENCED

INDEPENDENT REINSURERS

1. Ace2. Aspen Re3. Berkley 4. CCR5. Everest Re6. Folksamerica7. General Re8. Hannover Re9. Lloyd’s10. Mapfre Re11. Munich Re12. Odyssey Re13. Paris Re14. Partner Re15. SCOR Re16. Swiss Re 17. Toa Re18. Transatlantic Re19. XL Re

NEW IN 2007:- None

LOST IN 2007:- None

Note: The FMRP is not an independent reinsurer.

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REVIEW OF 2007

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““The absence of large The absence of large catastrophe losses wascatastrophe losses wasa key factor in the a key factor in the softening of reinsurance softening of reinsurance markets.”markets.”

Guy Carpenter: Global Reinsurance Review – January 2008

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GLOBAL CAT LOSS TREND BEEN STEADILY RISING

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GLOBAL CAT LOSSES

• Natural and man-made catastrophes produced insured losses of some US $25 billion in 2007.

• In comparison, such insured cat losses in 2005 exceeded US $112 billion. (4.5 times higher!)

Source: Swiss Re Sigma39

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$4.7

$100

.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

07**

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

2006 & 2007 were a welcome respite. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming soon

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CAT EXPOSURE IN NORTH AMERICA IS ABSOLUTELY

ENORMOUS

(Originals of this map can be ordered from Risk Management Solutions)

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WHAT WILL IT TAKE TO TURN THE MARKET?

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WHAT WILL IT TAKE TO TURN THE MARKET?

• Probably a ceded loss of US $15 to $25 billion is required to change the direction of the market. Aon Re Canada –

Reinsurance Market Conditions – January 2008

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WHAT WILL HAPPEN IN 2008?

• Predicted to be an active hurricane season.

•Unlikely to have a benign hurricane season two years in a row.

• And an earthquake can happen at any time.

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CANADIAN CAT CANADIAN CAT LOSSES IN 2007LOSSES IN 2007

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REVIEW OF 2007 CANADIAN CAT LOSSES

• “The West had too much weather.”- Severe summer weather warnings;

- Tornados;

- Intense rainfalls;

- Wind storms;

- Hail storms;

- Crop losses.

INSURED LOSSES

OVER $200 MILLION

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REVIEW OF 2007 CANADIAN CAT LOSSES

• Elie, Manitoba – June 22, 2007- Canada’s first documented F5 intensity tornado with winds above 420 km/h.

- An F5 is the highest rating on the internationally recognized Fujita tornado damage scale.

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REVIEW OF 2007 CANADIAN CAT LOSSES

• A number of significant flood events in B.C., last spring. The worst flooding ever in the Prairies.

• Up to 50 cm of snow in Vancouver Island in December.

• Extreme heat and humidity in Alberta, Saskatchewan and Manitoba in July. (The 2nd hottest July on record in Calgary.)

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REVIEW OF 2007 CANADIAN CAT LOSSES

• August 9th – Dauphin, Manitoba.• A spectacular hail storm triggered some

13,000 claims for MPI. Estimated loss of $53 million.

• One of the single largest catastrophic events in MPI’s history.

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REVIEW OF 2007 CANADIAN CAT LOSSES

• Reinsurers will bear only a small proportion of the 2007 Canadian Cat losses.

• Most of these losses will be absorbed instead by insurers.

• The insurers’ share of the losses typically fall within their Cat deductibles.

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REVIEW OF 2007 CANADIAN CAT LOSSES

• Water-related issues are a Property insurer’s biggest problem, and one that will continue to grow.

• Storms and flooding are costing the industry record amounts.

Source: Kathy Bardswick, CEO, Co-Operators Group – BestWeek ,October 1, 2007

Proprietary & Confidential

5252

-50%

-30%

-10%

10%

30%

50%

70%

90%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total

Catastrophe Rates and ExposuresCanadian Catastrophe Rate Changes

Sources: Swiss Re 1990 –2003, Aon Re Canada 2004 - 2008

1991 Calgary

Hailstorm

1998 Ice storm

2001 WTC

2005 KRW

1992

Andrew

2005 Ontario August Rain Storms

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THE JANUARY 1ST, 2008 CANADIAN REINSURANCE

RENEWAL SEASON

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CANADIAN REINSURANCE MARKET – 2008 RENEWALS

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“AN OLD-FASHIONED

SOFT MARKET”

Benfield : Global Reinsurance Market Review – January 2008

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CANADIAN REINSURANCE MARKET – 2008 RENEWALS• “Lackluster January renewals” –

A.M. Best• “Current soft cycle could be a

lengthy one” – Aon Re Canada• “A buyer’s market” – Guy

Carpenter• “Late and low” – Benfield

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CANADIAN REINSURANCE MARKET – 2008 RENEWALS

• “The industry is showing signs of reverting to its historic pattern of feast or famine.”

– Willis Re

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INSURERS’ CONCERNSWHEN BUYING REINSURANCE

1. Cost

2. Security/Ratings

3. Coverage and Conditions

Benfield Report: “Global Reinsurance Market Review – January 2008”

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INSURERS’ CONCERNS

• Insurers no longer consider relationships a key factor when buying reinsurance.

• It is price; then reinsurers’ security,

• Followed by terms & conditions.Benfield: Global Reinsurance Market Review – January 2008

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CANADIAN REINSURANCE MARKET – 2008 RENEWALS• Capacity outstripped demand.

• One of the latest renewal seasons ever.

• No technical issues to deal with.

• Pricing under competitive pressures for all lines.

(As per interviews with various reinsurers)

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CANADIAN REINSURANCE MARKET – 2008 RENEWALS

• Canadian Cat rates-on-line down 5% - 10% from expiring ROL’s.

• Property “Per Risk” rates down 5% - 10%.

• Little change in proportional commissions.

• Casualty rate changes were “choppy, but rates seemed to have weakened overall”.

(As per interviews with various reinsurers)

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CANADIAN REINSURANCE MARKET – 2008 RENEWALS

• Estimates for the reductionin total premiums ceded tolicensed professional reinsurers in Canadafor 2008, (includingLloyd’s), range from $200 to $300 million !!!!

(As per interviews with various reinsurers)

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When the tide goes out . . .

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. . ALLBOATSDROP

TOTHE

SAMELEVEL

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AVERAGE TREATY RATE CHANGES IN CANADA

-10

0

10

20

30

40

50

%

Cat Auto GL

2002 2003 2004 2005 2006 2007 2008

Source: Various Reinsurers

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AUTO REMAINS THE MOST

CHALLENGING CLASS FOR REINSURERS

65

66

.

95% OF ALL THE CLAIMS 95% OF ALL THE CLAIMS THAT REINSURERS SEE THAT REINSURERS SEE

ARE AUTOARE AUTO

Source: Interview with major Canadian reinsurance CEO 66

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TRUCK BURNING AFTER MULTI-VEHICHLE ACCIDENT ON

HIGHWAY 401 67

68

WHILE UNUSUAL FOR PROPERTY, A $2 - $3 MILLION AUTO LOSS

IS COMMON

Source: Interview with a Canadian

reinsurance CEO 68

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CHARACTERISTICS OF TODAY’S INSURERS

• They are retaining a lot more risk.• Common to see $2 to $10 million retentions

– and higher!.• They don’t buy as much reinsurance.• Sophisticated analytical tools help to

increase insurers’ comfort level in retaining higher levels of risk.

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CHARACTERISTICS OF TODAY’S INSURERS

• Consider collection of accurate data for reinsurers is essential.

• A costly and complex exercise, lasting several months.

• If not accurate, can result in company paying thousands of $ more in reinsurance premiums.

Source: Interview with Canadian reinsurance buyer.

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CHARACTERISTICS OF TODAY’S REINSURERS

• Also retaining more risk. Getting larger.

• Top 20 markets write 80% of business.

• Retro market capacity is very limited and expensive.

• Disciplined underwriting.• Focused on bottom-line results.

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CHARACTERISTICS OF TODAY’S REINSURERS

• Require considerable underwriting information.

• Pricing is heavily influenced by risk modeling.

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CHARACTERISTICS OF TODAY’S REINSURERS

• The level of sophistication and capability among local reinsurers has increased dramatically over the last 2 years. Little need for them to rely upon actuaries and models at Head Office.

Source: Interview with major Canadian reinsurance buyer.

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CHARACTERISTICS OF TODAY’S REINSURERS

• Their expenses and costs of doing business are increasing.

• Reinsurers fully aware the world-wide demand for their product is declining. Some are diversifying into insurance.

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WHAT DOES 2008 HOLD FOR REINSURERS?

• Local reinsurers typically expect market will remain soft in 2008.

• When losses increase, or less new capital becomes available to reinsurers, this will increase rates.

• Large losses destruction of capital replenishment of capital unavoidable rate increases.

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“The wind hasn’t stopped blowing and

the earth hasn’t stopped shaking.”

Martin Sullivan, CEO of AIG at 2007 P/C Ins. Joint Industry Forum

7777

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If you would like to receive a copy of this presentation by e-mail, please request one from Gordon Crutcher

at:

Gordon@Crutcher.ca