Canadian Institute of Life Insurance Securitization Actuaries Francois

Canadian Institute of Life Insurance Securitization Actuaries Francois Dagneau Aon Re Canada 2006 General Meeting Assemblée générale 2006 Chicago, Illinois L’Institut canadien des actuaires

2006 General Meeting Assemblée générale 2006 Plan of the Presentation 1 - Insurance Securitization 2 - Integration within a Reinsurance framework 3 - A critical view of Securitization

2006 General Meeting Assemblée générale 2006 1 Insurance Securitization 1. 1 Market Situation 1. 2 Capacity

1. 1 Market Situation 2006 General Meeting Assemblée générale 2006 – – The cat bond market is a relatively young fixed income market with inception dating back only 11 years. New issuance of cat bonds over the past six years has averaged about $1. 4 billion per year. Sharp increase in 2006. Frictional costs decline. Visibility is very high due to current capacity issues.

1. 1 Market Situation • The market continues to evolve: 2006 General Meeting Assemblée générale 2006 – – • Shelf transactions Second event bonds Life Mortality bonds (Vitas) Embedded value bonds, reserve funding bonds, etc. Indemnity versus Index-based – Investors’s comfort with indemnity reduced following Katrina

1. 2 Capacity – 2006 General Meeting Assemblée générale 2006 – – Capital market capacity for property risk continues to grow. Cat bond fund managers are increasing size of funds under management allocated to Cat bonds are a source of “clean” insurance industry risk to hedge funds.

2006 General Meeting Assemblée générale 2006 1. 2 Capacity Issued 2000 -2005

2006 General Meeting Assemblée générale 2006 2 Integration within the Reinsurance Framework 2. 1 Important comments 2. 2 Perils to Life Portfolio 2. 3 Coverage through Securitization

2. 1 Important Comments • Securitization of reinsurance is not best for all clients 2006 General Meeting Assemblée générale 2006 • • Reinsurance brokers analyze the various alternatives and select the one better suited for the client Better indicated when: • • • Low return period loss activity Tight capacity Large size (fixed costs remains very high) External modeling is available Security is a big concern Result: USA, Europe, Japan dominate the market with retro covers being very common.

2. 1 Important Comments 2006 General Meeting Assemblée générale 2006 • Some insurers will buy both Cat bonds and traditional reinsurance – • Important to align the covers to one another – easier with indemnity based. Quota-share is sometimes the cheapest form of coverage. – – As long as exclusions, limitations and solvency are not a worry. If so, then back to gross exposure at some point along the curve.

2. 2 Perils to Life Portfolio 2006 General Meeting Assemblée générale 2006 • • Pandemic Natural catastrophe Terrorism War Industrial accident Wind Earthquake

2. 3 Coverage through Securitization 2006 General Meeting Assemblée générale 2006 • Adverse mortality stop loss calculated over a 2 -year period is an excellent form of coverage for a life insurer – – – • All perils Multi-waves scenario is covered Multi-year is better Proximate cause of death can be an issue with “per event covers”.

2. 3 Coverage through Securitization • However, mortality might not be “it”… 2006 General Meeting Assemblée générale 2006 • • Medical expenses Income replacement benefits Equity market, Operational risks, etc. Abnormal mortality only covers…mortality! – Can buy more to compensate but…

2006 General Meeting Assemblée générale 2006 3 Critical View of Cat Securitization

3 Critical View of Cat Securitization • 2006 General Meeting Assemblée générale 2006 • • • Non-Mortality Exposure Basis risk (less for individual life business) Costs Peril-specific, not all risks

3 Critical View of Cat Securitization 2006 General Meeting Assemblée générale 2006 • • • Spread is NOT independent of the reinsurance market Less flexible (think Scottish Re) Very high attachment points – – D is 103 * WTC, B is 206 * WTC 1918 only hits tranche D

In Summary 2006 General Meeting Assemblée générale 2006 • • Securitization is a tool with growing importance in your risk management tool box. It is not all bad: security, multi-year capacity+fixed pricing, looks good, etc.

2006 General Meeting Assemblée générale 2006 THANK YOU