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CANADIAN INSTITUTE

OF ACTUARIES

ANNUAL MEETING

St. John’s, June 28-29, 2005

Gordon Crutcher – Sutton Reinsurance

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P & C REINSURANCEP & C REINSURANCE

2004 REVIEW – PREVIEW2004 REVIEW – PREVIEW

OF 2005 & BEYONDOF 2005 & BEYOND

CURRENT DIRECTIONS CURRENT DIRECTIONS OFOF

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EXECUTIVE SUMMARY

THE

CURRENT

REINSURANCE

MARKET

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CURRENT REINSURANCE MARKET

2004 was a profitable year for most reinsurers, despite an unprecedented frequency of natural disasters.

Underwriting profits were earned in 2003 and 2004.

Continuing good results are expected for 2005.

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CURRENT REINSURANCE MARKET Balance sheets have been

strengthened again. Treaties generally adequately

priced. Capacity is adequate for most

lines.

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CURRENT REINSURANCE MARKET Market has definitely started to

soften (as it has for insurance). Investment gains are rising

(although still 20% below peak in 1998).

Not the bull market of the ’90’s but a global economic recovery appears underway.

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CURRENT REINSURANCE MARKET However, a falling combined ratio

can be a reinsurer’s worst enemy. . . . Times are good. . . . Losses are down. . . . If we soften prices, we gain

more market share. Right?

Source: BestWeek – January 24, 2005

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SURPRISES AHEAD ?

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JUST STARTING THE RIDE DOWN?

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HOW SERIOUS ARE REINSURERS ABOUT MAINTAINING PRICING DISCIPLINE IN 2005?

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THIS SERIOUS?

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INTERESTING OBSERVATION

“The underwriting cycle is back with a vengeance and will have no mercy this time around. Pricing, reserving and underwriting blunders will prove far more lethal, far more quickly in today's lethargic investment environment, especially if potential investors flee following the recent spate of insurance industry scandals.”

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist, Insurance Information Institute (www.iii.org)

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ANOTHER INTERESTING OBSERVATION

P/C Insurance Will Always Be An Impossible Business:

“Impossible to use past information to determine prices today for a product sold tomorrow for claims that may arise in the distant future AND expect to be right.”

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist, Insurance Information Institute (www.iii.org)

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2004 – A BRIEF REVIEW Once again, it was an

“interesting time” for insurers, reinsurers and brokers.

Challenges came from:

- Nature - Economy

- Public - Regulators

- Ourselves

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REINSURERS’ COMBINED RATIOS

Canadian Reinsurers 2000: 113% 2001: 119% 2002: 110% 2003: 96% 2004: 92%

U.S. Reinsurers 2000: 114% 2001: 143% 2002: 121% 2003: 101% 2004 105%

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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%

1990 1992 1994 1996 1998 2000 2002 2004

Source: Annual Statistical Issues of Canadian Underwriter Magazine

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NET PREMIUMS WRITTEN BY CANADIAN REINSURERS

$0

$1

$1

$2

$2

$3

Billions

1990 1992 1994 1996 1998 2000 2002 2004

Source: Annual Statistical Issues of Canadian Underwriter Magazine

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TOTAL CANADIAN REINSURANCE ASSUMED

$3

$4

$5

$6

Billions

2000 2001 2002 2003 2004

Source: Canadian Insurance 2005 Statistical Issue

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LESS BUSINESS FOR REINSURERS TO WRITE

Reinsurance “pie” continues to shrink in Canada.

Insurer retentions continuing to increase.

One major insurer significantly increased its retention for 2004.

Another has done so for 2005.

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LESS BUSINESS FOR REINSURERS TO WRITE

Insurance Company mergers and acquisitions are not good news for reinsurers.

Allianz Canada no longer buys an independent treaty program.

Supply of reinsurance has increased but demand is flat – or declining.

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CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS

0

5

10

15

20

25

30

2000 2001 2002 2003 2004

Total Insurance Premiums Reinsurance Ceded

24%30%31%30%27%

Source: OSFI @ Q4 each year

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RELATIVE IMPORTANCE OF REINSURANCE TO CANADIAN INSURERSRatios of “Reinsurance Ceded” to “Net Premiums Written”

Wawanesa Mutual Insurance: 2% Dominion of Canada General: 3% Co-operators General 6% Aviva Insurance Co. of Canada: 18% ING Insurance Co. of Canada: 23% Economical Mutual 26% Zurich Insurance Company: 33% R & SA Insurance Co. of Canada: 37% Commonwealth Insurance Company: 65%

Source: http://www.osfi-bsif.gc.ca/ Data as of Q4 2004

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REINSURANCE CEDED TO PREMIUMS WRITTEN

0%

10%

20%

30%

40%

50%

60%

70%

WAW DOC CO-OP

AVI ING ECO ZUR RSA COM

Source: OSFI @ Q4 2004

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IT’S GETTING LONELY OUT THERE!

• Fewer licensed reinsurers

• Now only 19 active markets in Canada

Used to be 41

in 1991

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ACTIVE FEDERALLY – LICENCED INDEPENDENT REINSURERS

1. Aspen Re2. AXA Re3. CCR4. Endurance Re5. Everest Re6. Folksamerica7. GE/ERC8. General Re9. Hannover Re10. Lloyd’s11. Mapfre Re12. Munich Re13. Odyssey Re14. Partner Re15. SCOR Re16. Swiss Re17. Toa Re18. Transatlantic Re19. XL Re

NEW IN 2004:- Endurance Re- Mapfre Re

LOST IN 2004:

- Converium Re

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CANADIAN CATASTROPHES

• July 2, 3, 7, 11: Rain, hail and flooding July 2, 3, 7, 11: Rain, hail and flooding in in Edmonton: Edmonton: ($170 million)($170 million)• July 15 - 20: Rainstorms and flooding July 15 - 20: Rainstorms and flooding in in Peterborough: Peterborough: ($90 million)($90 million)• September 8: Rainstorm and flooding September 8: Rainstorm and flooding in in Kingston/Ottawa & Niagara: Kingston/Ottawa & Niagara:

($60 million)($60 million)• Wildfires in B.C.: Wildfires in B.C.: ($50 million)($50 million)

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CATS ELSEWHERE WERE THE PROBLEM

INSURED LOSSES HIT NEW RECORD LEVELS IN 2004!

$42 billion! 300 Cats $18.5 billion in 2003. $37 billion in 2001. (Remember

September 11?)

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WORLD – WIDE CAT LOSSES IN 2004

4 hurricanes in Florida within 6 weeks. (>$22 billion total loss)

(Hurricane Andrew was $20.3 B in 1992)

10 typhoons in Japan (>$6 billion) Asian earthquake & tsunami

(>$5 billion and >295,000 deaths)

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EXCEPTIONAL CAT LOSSES IN 2004

The exceptional world-wide Catastrophe loss experience in 2004 no doubt dampened increasing competitive pressures on rates.

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DECEMBER 26TH

- What A Disastrous Date!

In 2004: Asian earthquake & tsunami: >295,000 killed

In 2003: Earthquake in Iran:

>41,000 killed In 1999: Winter storm Lothar

in Europe: $6.5 billion

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CAT LOSS TREND IS STEADILY RISING

Source: Swiss Re Sigma

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CAT LOSS TREND IS DISTURBING

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INSURED LOSSES BY CATEGORY IN 2004

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CAT EXPOSURE IN NORTH AMERICA IS ENORMOUS

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

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ANOTHER CATASTROPHE?

Elliot Spitzer Permanent significant

impact on market

practices, broker

revenues and

disclosure.

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SPITZER . . . To say nothing what he has done to

Marsh McLennan’s share price !

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SPITZER’S IMPACT ON REINSURANCE

Modest impact generally on reinsurance industry.

Could see changes in broker structure and distribution.

Finite reinsurance under intense scrutiny – but it’s a very small line in Canada.

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CANADIAN REINSURANCE MARKET – 2005 RENEWALS

Reinsurance renewal pricing for Jan 1,

2005 in Canada was firmer and less

competitive than

originally

expected.

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CANADIAN REINSURANCE MARKET – 2005 RENEWALS

Pricing continues to be based on modeling results → less volatility.

Final underwriting decision on many treaties made in London, Europe, Bermuda, or the U.S.

No significant changes in treaty terms and conditions.

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INSURERS’ CONCERNS

WHEN BUYING REINSURANCE

1. Price

2. Terms and conditions3. Security

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INSURERS’ CONCERNS

Insurers no longer consider relationships an important factor when buying reinsurance.

It’s price, terms and conditions.

Followed by reinsurer security.

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CANADIAN REINSURANCE MARKET – 2005 RENEWALS

Canadian Cat rates decreased slightly (10% - 15%).

As did Property “Per Risk” covers. Little change in proportional

commissions. Casualty rates generally held firm,

except for lower layers where rates increased.

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AVERAGE TREATY RATE CHANGES IN CANADA

-10

0

10

20

30

40

50

%

Cat Auto GL

2002 2003 2004 2005

Source: Swiss Re Canada

Est. for 2005

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AUTO IS NOT A POPULAR LINE WITH REINSURERS

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REINSURERS CONTINUE TO

SEE LARGE AUTO CLAIMS

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CANADIAN REINSURANCE MARKET – 2005 RENEWALS

While public is not reporting small collision & comprehensive losses to private insurers (frequency is down) – “fear induced frequency suppression” – reinsurers are seeing higher severity for A.B. & liability losses.

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CANADIAN REINSURANCE MARKET – 2005 RENEWALS

HIGHER SEVERITY e.g. Laura Browne claim (1997) $13 million settlement in 2004. Passenger in a leased car. $3 M from State Farm; $10 M from

AIG. Vicarious liability involved.

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CHARACTERISTICS OF TODAY’S INSURERS

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

retentions. 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

They are very price conscious. The security rating of their reinsurers is

important - but the predominant issue is price!

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CHARACTERISTICS OF TODAY’S REINSURERS

Also retaining more risk. Getting larger.

Top 10 markets write 80% of business.

Retro market capacity is still limited and expensive.

Disciplined underwriting (so far). Focused on bottom-line results.

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CHARACTERISTICS OF TODAY’S REINSURERS

Require considerably more underwriting information.

Pricing is directly tied to risk modeling.

Little room for rate negotiation.

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WHAT DOES 2005 HOLD?

The biggest risk is the most predictable:

- the cyclical nature of the market!

Periods of strong profitability have historically been followed by cyclical downswings in pricing.

Continuing aggressive weather patterns:- frequency and severity of Cats.

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WHAT DOES 2005 HOLD?

Profitability should continue but rate of growth in profits will be lower.

Premium growth is faltering. Real premium growth in 2005 will be near zero.

Source: Best Week of June 20, 2005

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WHAT DOES 2005 HOLD?

Big changes are happening in global reinsurance industry, most coming from Europe.

Fundamental shifts (or updates) in strategy.

EC allowing European reinsurers more business mobility with less expense and better use of capital.

Source: Best Week of June 20, 2005

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WHAT DOES 2005 HOLD?

Business mix changing. Reinsurers seeking more life business to offset impact of the P&C cycle.

Focus on emerging markets in Asia and Pacific Region.

Some major reinsurers retreating from U.S. market for better prospects in Europe.

Source: Best Week of June 20, 2005

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WHAT DOES 2005 HOLD?

Additional adjustments for reserve deficiencies.

Likely other mergers or withdrawals. Subtle shifts in strategy expected. Volatile investment environment. Another major terrorism loss?

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TERRORISM Authorities in the U.S. have

envisaged a scenario, (involving conventional explosives), where a terrorism loss could exceed $25 billion.

A loss on this scale would severely test the market’s ability to respond.

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TERRORISM Uncertain if the world’s largest

reinsurance program – TRIA – will be extended beyond Dec. 31, 2005.

Without TRIA, market capacity for U.S. terrorism reinsurance likely only about $750 million.

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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:

gcrutcher@SuttonReinsurance.com