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

2006 General Meeting Assemblée générale 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 General Meeting Assemblée générale Insurance Securitization 1.1 Market Situation 1.2 Capacity

2006 General Meeting Assemblée générale General Meeting Assemblée générale Market Situation – 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 – Frictional costs decline. – Visibility is very high due to current capacity issues.

2006 General Meeting Assemblée générale General Meeting Assemblée générale Market Situation The market continues to evolve: – 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

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

2006 General Meeting Assemblée générale General Meeting Assemblée générale Capacity Capacity Issued

2006 General Meeting Assemblée générale General Meeting Assemblée générale Integration within the Reinsurance Framework 2.1 Important comments 2.2 Perils to Life Portfolio 2.3 Coverage through Securitization

2006 General Meeting Assemblée générale General Meeting Assemblée générale Important Comments Securitization of reinsurance is not best for all clients 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.

2006 General Meeting Assemblée générale General Meeting Assemblée générale Important Comments 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.

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

2006 General Meeting Assemblée générale General Meeting Assemblée générale Coverage through Securitization 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”.

2006 General Meeting Assemblée générale General Meeting Assemblée générale Coverage through Securitization However, mortality might not be “it”… 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 General Meeting Assemblée générale Critical View of Cat Securitization

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

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

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 In Summary 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 General Meeting Assemblée générale 2006 THANK YOU