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abSwiss Re Media Briefing
John Coomber, Chief Executive Officer
Thomas Hess, Head Economic Research & Consulting
Monte Carlo, 13 September 2004
ab
Page 2
Agenda
Welcome John Coomber
Reinsurance is back to profitability Thomas Hess
Underwriting for profit John Coomber
Media Briefing Monte Carlo13 September 2004
ab
Page 3
Agenda
Lessons from 2001-2003
Situation of the industry in 2004
Media Briefing Monte Carlo13 September 2004
Page 4
abLessons from 2001-2003
The combination of the soft market and a stock market crash is a dangerous mix for reinsurers
Liability insurance has to respect the borders of insurability and price for high loss inflation and the risks of legal change
Reinsurance is an attractive product, insurers are willing to pay for
Media Briefing Monte Carlo13 September 2004
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abThe soft cycle shows up in high reinsurance combined ratios*
Combined ratios peaked in 2001, since then they are on a steady decline to profitable underwriting results
80%
90%
100%
110%
120%
130%
140%
150%
90 92 94 96 98 00 02 04
Worldwide US [RAA]
* calendar year view
Source: Swiss Re Economic Research & Consulting, Reinsurance Association of America (US)
Media Briefing Monte Carlo13 September 2004
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ab
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
80 82 84 86 88 90 92 94 96 98 00 02
US P&C Insurers US P&C Reinsurers
2001-2003 was the worst period for US reinsurers since the liability crisis*
ROE of US reinsurers
* calendar year view
Sources: A.M.Best, Swiss Re Economic Research & Consulting
Media Briefing Monte Carlo13 September 2004
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abLiability business has to price for loss inflation and nasty surprises
US [1]Canada
[1]UK [1]
Germany
France Italy Japan
Period1955 -
031975 -
021983 -
021971 -
021971 -
021970 -
021970 -
02
Compound annual growth rate
- Liability claims
10.6% 11.3% 8.8% 7.4% 9.4% 15.9% 13.8%
- Nominal GDP 7.1% 7.3% 6.7% 5.2% 8.0% 11.6% 6.1%
- Health expenditures
10.2% 9.4% 8.7% 7.4% 10.2% n.a. 8.3%
Elasticity [2] of liability claims versus
- Nominal GDP 1.51 1.55 1.31 1.43 1.17 1.38 2.24
- Health expenditures
1.04 1.19 1.02 1.01 0.93 n.a. 1.66
[1] net of reinsurance [2] The GDP elasticity of liability claims measures how many percent claims grow for each percent of GDP or health expenditure growth.Source: Swiss Re Economic Research and Consulting
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abBorders of insurability need to be respected
Exclusions of terror risk have been introduced (also very relevant for property)
Unlimited liability in motor third party has been removed in many countries
Shift to tighter conditions to limit the impacts of the risks of legal change in highly exposed buiness lines (product liability, D&O, E&O, and medical malpractice)
Media Briefing Monte Carlo13 September 2004
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abReinsurance is back
Reinsurance premiums grew by more than 60% in USD terms between 2000 and 2004
020406080
100120140160
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
USD bn
Industrialised Markets Emerging Markets
Source: Swiss Re Economic Research & Consulting
Media Briefing Monte Carlo13 September 2004
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abStrong demand for reinsurance in Emerging markets
Share of Emerging Markets will grow from 14% in 2003 to 20% by 2014.
211 bn USD (80%)
51.9 bn USD(20%)
Media Briefing Monte Carlo13 September 2004
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abAgenda
Lessons from 2001-2003
Situation of the industry in 2004
Media Briefing Monte Carlo13 September 2004
Page 12
abThe situation of the industry in 2004
Reinsurance in a strongly improved state, but not all problems are solved
Capital in the insurance and reinsurance industry is still tight, but starts growing again
Reinsurance prices are attractive and will remain so
Profitability is of high quality
A better capitalisation and reserving of reinsurers together with higher interest rates will lead to improved investment results
Media Briefing Monte Carlo13 September 2004
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abCapacity in the Property & Casualty industry is still tight
Capital and solvency of the 6 major insurance marketsUSD bn
0
150
300
450
600
750
900
98 99 00 01 02 03 04
0%
20%
40%
60%
80%
100%
120%
Capital Premiums Solvency [RHS]
Source: Swiss Re Economic Research & Consulting
Media Briefing Monte Carlo13 September 2004
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abPrices are at attractive levels
Sources: Lloyds, Swiss Re
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
19
94
19
96
19
98
20
00
20
02
20
04
Base 1996
Marine, Lloyds Non-Marine, LloydsAviation, Lloyds Property Fac, Swiss Re
Media Briefing Monte Carlo13 September 2004
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abThe quality of profits is now based on solid underwriting
Profitability of major reinsurers 1999-2004*
-25%
-20%-15%
-10%
-5%0%
5%
10%15%
20%
99 00 01 02 03 04**
U/w result Investment result Operating margin
in % NPE
*calendar year view, excluding Munich Re and Berkshire Hathaway, ** estimate
Source: Swiss Re Economic Research & Consulting
Media Briefing Monte Carlo13 September 2004
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abRecovery of underwriting cash-flow in the US P&C industry
u/w cash-flow in % of Net Premiums Written
-10%
-5%
0%
5%
10%
15%
20%
68 73 78 83 88 93 98 '03
Sources: Fox Pitt, Kelton, A.M.Best, Swiss Re Economic Research & Consulting
Liability crisisAndrew
9/11
Media Briefing Monte Carlo13 September 2004
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ab10-year government bond yields will rise from currently 4-4.5% to 5.5% in 2006
Forecast
Source: Datastream Advance
ALM is the instrument to deal with rising interest rates
Higher interest rates will increase investment results
Media Briefing Monte Carlo 13 September 2004
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10121416
1979
1982
1985
1988
1991
1994
1997
2000
2003
2005
US Germany
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abSummary
Liability business needs to respect borders of insurability and price for the high risks involved
Today premiums reflect the exposures. Industry earns higher premiums for reduced risks
Increasing interest rates and increase of reserves will trigger improved investment returns
Focus in reinsurance has to remain on underwriting
Media Briefing Monte Carlo13 September 2004
abUnderwriting for profitManaging the cycle at its peak
John Coomber
Chief Executive Officer
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abAgenda
Risk is a growth business
Steering capacity to aim for attractive returns
Summary
Media Briefing Monte Carlo13 September 2004
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abRisk is a growth business:Long-term growth assured
1990 = 100
Growth of the property & casualty industry will continue to surpass global GDP growth
100
110
120
130
140
150
160
170
180
190
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Direct premiums Free ceded premiums GDP
Forecast
Source: Swiss Re Economic Research & Consulting
Media Briefing Monte Carlo13 September 2004
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abSwiss Re can accelerate growth by effective cycle management and consolidation gains
illustrative
7% growth
P&C and L&HP&C only
12% growth
Time
Premium
Industry growth 7%
Market outperformance
Transactions 5%Business extension
Swiss Re 12%
1994 - 2004
Media Briefing Monte Carlo13 September 2004
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abAgenda
Risk is a growth business
Steering capacity to aim for attractive returns
Summary
Media Briefing Monte Carlo13 September 2004
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abSwiss Re directs capital to attractive non-life opportunities
Nat cat Property Liability Special lines Industry sectors
Each line of business and geography show its own cycle and pattern
Time
Tech
nic
al p
rofita
bili
ty USA
Europe
Asia
Illustrative
Media Briefing Monte Carlo13 September 2004
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abCapacity (re)allocation during the cycle Premiums earned by line of business
33% 34% 34% 33% 34%
25% 27%32%
22% 21% 18% 18%17%
15% 15%13%
8% 7% 4%
20% 21%
17% 16%
8%8%
0%
20%
40%
60%
80%
100%
2000 2001 2002 2003 1HY 2004
Property Liability Motor Other AccidentMedia Briefing Monte Carlo13 September 2004
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abCapacity (re)allocation during the cyclePremiums earned by division
9% 9% 11% 10% 13%
57% 53% 45% 48%49%
34% 38%44% 42% 38%
0%
20%
40%
60%
80%
100%
2000 2001 2002 2003 1 HY 2004
Asia Europe AmericasMedia Briefing Monte Carlo13 September 2004
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abControl pricing over the cyclePremiums earned by type of business
Based on premiums in calendar years at historic exchange rates Traditional business only
53% 54% 48% 47% 46%
28% 31%35% 36% 36%
19% 15% 17% 17% 18%
0%
20%
40%
60%
80%
100%
2000 2001 2002 2003 1HY 2004
Proportional Non-Proportional FacultativeMedia Briefing Monte Carlo13 September 2004
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abSteer capacity where it generates attractive returns
Underwriting Steering Values
Quarterly reinsurance survey
Underwriting Tracking Tool
Capacity steering for product prioritization
Use steering tools to direct capital to attractive business sectors and clients
Media Briefing Monte Carlo13 September 2004
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abReinsurance Survey:Clear understanding of market trends
Qualitative surveys on recent and expected developments in the re/insurance market
Provides market intelligence as a basis for upcoming market opportunities
Structured quarterly questionnaire collected from 250 client managers, underwriters to gather information regarding:
– Key reinsurance variables
– Lines of Business
– Key competitors
In addition, more frequent qualitative market reports by market units
Media Briefing Monte Carlo13 September 2004
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abUnderwriting Steering ValuesDefinition of price targets
Internal Costs
Capital Costs
Econ. Profit
U/W Costs
ProductionCosts
CycleReferencePremium
RenewalTarget
Premium
Underwriting costs:Is the sum of present value of claims and expenses
Production costs:Will produce minimum return on capital
Cycle Reference Premium: Will produce the RoE target over the cycle
Renewal Target Premium:Set to produce the economic profit margins planned for the next year
Expected Claims
External Costs Note: All measures on expected cash flow, risk based capital requirements and risk free investment return
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abUnderwriting tracking toolBasis for effective capital allocation
Data base capturing contract specific information from all clients
Allows real time monitoring throughout the renewals driving transparency and discipline
Quarterly validation of estimates against actual
Provides information per contract or portfolio:
– Price adequacy
– Expected Combined Ratio
– Expected economic profitMedia Briefing Monte Carlo13 September 2004
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abAgenda
Risk is a growth business
Steering capacity to aim for attractive returns
Summary
Media Briefing Monte Carlo13 September 2004
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abSummary
Cycle will be less pronounced:
– Low interest rate environment
– Greater internal and external transparency
– Capital equilibrium
Pricing levels today are very attractive
Rates will continue above cycle reference levels at next renewal
Media Briefing Monte Carlo13 September 2004
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abQuestions & Answers
Media Briefing Monte Carlo13 September 2004