World Meteorological Organization Catastrophe Reinsurance and Cat Bonds

World Meteorological Organization Catastrophe Reinsurance and Cat Bonds Geneva December, 2007 W

Catastrophe Risk From Session 2 Panel Discussion: • Catastrophe Risk: same event affects multiple insureds • Catastrophe Risk is a unique class of risk • Reinsurers provide coverage to insurance companies for exposure to catastrophe risk 2 W

Exposure to Catastrophe Loss Measuring Exposure to the Insurer • • • Inventory risks – Location – Construction – Occupancy – Protection – Policy Coverage Create electronically held data base Quality control of data inventory Aggregate risks by exposure and geography Model impact of catastrophe events on portfolio of properties 3 W

Modeling Catastrophe Risk Fundamentals of Catastrophe Modeling is the stochastic simulation of hypothetical events and their affect on an inventory of insured risks. 4 W

Modeling Catastrophe Risk Source: NOAA/NHC 5 W

Modeling Catastrophe Risk Source: NOAA/NHC 6 W

Modeling Catastrophe Risk Hypothetical Example Output Hypothetical Portfolio: • Location: State on the US Gulf of Mexico • Portfolio: 14, 915 properties 7 W

Catastrophe Risk Program Considerations 1. The buyer is expected to retain risk (retention, deductible): • • • smaller events a minimum amount of loss on larger events function of price of reinsurance, cost of capital and capital strength 2. Protection to. 4% probability of exceedance. 8 W

Catastrophe Risk Program Hypothetical Program Structure $117. 1 million xs $1. 8 million, structured as follows: 9 W

Catastrophe Risk Program Outline Sample Agreement Reinsured: Coverage: Type: Period: Layer: Limit: Hypothetical Insurance Company Property losses arising from a single Event. Indemnity Excess of Loss 12 months 1 January 200 Q – 31 December 200 Q Layer IV Up to US$32, 800, 000 UNL excess of US$86, 100, 000 UNL. US$xx, xxx Premium: Other Conditions: Definition of Event Definition of UNL Exclusions etc. 10 W

Capital Markets View Hypothetical Program – Layer 4 Cat Bond 11 W

Capital Markets View Capital Markets convert physical catastrophe risk into financial risk of default: insurance linked investment risk. If reinsurance market premium for risk equals or exceeds capital markets charge for default risk the catastropheinsurance-linked security will attract investor interest. Complicating factors: – Value added of capital markets • Credit strength (collateral) • Risk transfer trigger – Diversification value of insurance-linked risk • ILS not tied up with sub-prime crisis 12 W

Capital Markets View Transfer of Catastrophe Risk 13 W

Cat Bonds Dislocation in reinsurance market post 2004 and 2005 storms created conditions for increased investment in insurance-linked securities. Cat bonds (ILS-investments) are now generally accepted asset class, managed as risk portfolios rather than as arbitrage opportunities. Cat bonds bring outside capital to support insurance risk. Source: Willis Capital Markets 14 W

Cat Bonds Characteristics of Cat Bonds Trigger Mechanisms • Indemnity • Modeled Loss • Index Based - Loss Indices (e. g. PCS, Swiss Re Sigma) - Parametric (e. g. Saffir-Simpson Scale, wind speed) All triggers based on modeling. 15 W

Cat Bonds Parametric Triggers and Financing Public Relief Parametric Triggers can be utilized flexibly • Pay on the event • Can be utilized in non-insurance and insurance formats • Create opportunity for financing in the wake of catastrophe event • Investor markets accept parametric triggers • underlying data sufficiently robust • accurate, reliable and prompt reporting • recognized index • Critical Issue: establishing in advance the financial support required in wake of event 16 W

Meteorological Services and Cat Risk Importance of Meteorological Data • Public Safety • Warnings • Prediction • Financing of Public Relief • Commercial • Modeling of storms and storm damage • Capital adequacy of financial institutions • Climatology of Extreme Events • Long term improvement of international data base • Short term issues: • attenuation of storms after landfall • storm behavior at sea • storm related flood risk 17 W

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