ACE EUROPEAN GROUP Non-Life Securitisation CAE Conference – May 2008 Graham Fulcher Chief Actuary ACE European Group Chairman Securitisation of Non-Life Insurance Working Party GIRO 2008
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ACE EUROPEAN GROUP
Non-Life Securitisation
CAE Conference – May 2008
Graham FulcherChief Actuary
ACE European Group
Chairman Securitisation of Non-Life Insurance
Working Party GIRO 2008
ACE EUROPEAN GROUP
Agenda
Basic Concept
Supply and Demand Arguments
Deals to DateVolumes cf insurance cycle
Past, present and future
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The Concept
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Securitisation
Pooling, repackaging and often commoditisation of the cash-flows associated with financial assets (or less commonly liabilities) into marketable securities, so that the investors in these securities assume the benefits of the cash-flows
Most commonly loans - mortgage backed securities- credit cards- car loans- student loans
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Asset Backed Securitisation - Examples
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Catastrophe Bond – Basic Concept
Special Purpose Vehicle
Reinsurer
InvestorInsurer
PremiumInterest
Capital at maturity
ClaimsInitial
investment
Traditional Reinsurancew/o credit risk
Traditional BondClaim = Default
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Supply and Demand Argument
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Original Supply Side Argument
$20Tn $200Bn
$50-100Bn
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Original Supply Side Argument
Source: weather.unisys.com: Hurricane #6 1926
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Original Supply Side Argument
Source: www.hurricanecity.com
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Original Supply Side Argument
Source: http://www.miamibeachfl.gov
Ocean Drive, Miami 1924-6 Ocean Drive, Miami 2006
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Original Supply Side Argument
Source: Pielke et al – Normalised Hurricane Damage in US
Estimated original economic loss $105M
Price inflation 2.9% p.a. X 9.29
Growth in real wealth per household 1.7% p.a.X 3.71
Growth in exposed housing units 4.7% p.a.X 38.51
Estimated 2005 Economic Loss$139.5Bn
Crude Estimated 2005 Insured Loss $70Bn
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Supply side Argument - Developments
Catastrophe model recalibration
Rating downgrades
Increasing credit risk concentration
Climate Change
Source: ClearTheAir.org following Emanuel (2005)
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Original Demand Side Argument
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Demand side Argument - Developments
Sub-Prime bought zero-beta firmly into focus
Spreads on catastrophe bonds tightened 2007 credit crunch at the same times as corporate bond spreads increased hugely
Assisted by two-years of low catastrophe activity leading to reinsurance market softening
Reaction of investors to a loss has not been tested
Sub-prime losses also raised questions about securitisatione.g. use of “black-box” models postulating 1 in 100 year events
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Comparison to Other Forms of Securitisation
Transfer of extreme
uncorrelated risk
Realisation of cash-flow
including intangibles
Reduce regulatory
or economic capital
XXX (US)
AXXX (US)
Embedded value
securitisation
Catastrophe bonds
Extreme mortality
bonds
Longevity bondsMortgage
backed securitisation
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Market Developments
ACE EUROPEAN GROUP
Insurance Linked Securitisation over time
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Year
Ris
k C
ap
ital
($B
n)
0
5
10
15
20
25
30
Nu
mb
er
issu
ed
Source: Guy Carpenter
ACE EUROPEAN GROUP
Insurance Linked Securitisation over time
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Year
Ris
k C
ap
ital
($B
n)
0
20
40
60
80
100
120
140
160
180
200
Avera
ge r
ate
on
lin
e U
S C
at
(1997 =
100)
Source: Guy Carpenter
ACE EUROPEAN GROUP
Global issuance of Asset-Backed Securities
Source: Bank Of England April 2008 Financial Stability Report (data Dealogic)
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Catastrophe Bond Share of Market
US Only Property Limits $81Bn
TraditionalReinsurance (82%)Industry LossWarranties (12%)Catastrophe Bonds(6%)
Source: Guy Carpenter as of 31.12.07
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Past, Present and Future
PAST Traditional ApproachPRESENT Existing DevelopmentsFUTURE Possible future developments
- Sponsors of ILS- Catastrophe Perils and Territories Covered- Type of (non-life) insurance risk or asset securitised
Investors in ILS
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Sponsors
PAST
Insurers
Reinsurers
Governmental pools
PRESENT
Theme Parks
Power company
Industry Captive
Railway company
Lloyd’s market
Energy company
Governments
Hedge Funds
FUTURE
Charities
Airlines
International Group
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Catastrophe Perils and Territories Covered
PAST
East Coast Windstorm
California Quake
Japanese Quake
European Windstorm
Japanese Typhoon
PRESENT
European Hail
New Madrid Quake
Pacific Northwest Quake
Mediterranean Quake
Hawaii Wind
Puerto Rico Windstorm
Mexican Earthquake
Australian Typhoon
Australian Quake
Taiwan Earthquake
US Tornado and Hail
UK River Flood
FUTURE
BRIC territories
Terrorism
Tsunami
Volcanic losses
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Insurance Risks or Assets securitised
PAST
Catastrophes
PRESENT
Excess general liability
Motor
Reinsurance receivables
FUTURE
Casualty run-off
Goodwill
Travel/A&H/Household
Capacity constrained lines (e.g.
construction)
Volatile lines(e.g. Aviation/D&O)
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Investors - 1999
InsurerReinsurerMoney managerBankHedge FundDedicated Fund
Source: Swiss Re
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Investors - 2007
InsurerReinsurerMoney managerBankHedge FundDedicated Fund
Source: Swiss Re
ACE EUROPEAN GROUP
Non-Life Securitisation
CAE Conference – May 2008
Graham FulcherChief Actuary
ACE European Group
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