2006 General Meeting

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Canadian Institute of Actuaries
LInstitut canadien des actuaires
Life Insurance Securitization Francois
Dagneau Aon Re Canada

• 2006 General Meeting
• Assemblée générale 2006
• Chicago, Illinois

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Plan of the Presentation

• 1- Insurance Securitization
• 2- Integration within a Reinsurance framework
• 3- A critical view of Securitization

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1 Insurance Securitization

• 1.1 Market Situation
• 1.2 Capacity

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1.1 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 2006.
• Frictional costs decline.
• Visibility is very high due to current capacity
  issues.

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1.1 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
• Investorss comfort with indemnity reduced
  following Katrina

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1.2 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.

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1.2 Capacity
Capacity Issued 2000-2005
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2 Integration within the Reinsurance Framework

• 2.1 Important comments
• 2.2 Perils to Life Portfolio
• 2.3 Coverage through Securitization

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2.1 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.

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2.1 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.

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2.2 Perils to Life Portfolio

• Pandemic
• Natural catastrophe
• Terrorism
• War
• Industrial accident
• Wind
• Earthquake

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2.3 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.

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2.3 Coverage through Securitization

• However, mortality might not be it
• Medical expenses
• Income replacement benefits
• Equity market, Operational risks, etc.
• Abnormal mortality only coversmortality!
• Can buy more to compensate but

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3 Critical View of Cat Securitization
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3 Critical View of Cat Securitization

• Non-Mortality Exposure
• Basis risk (less for individual life business)
• Costs
• Peril-specific, not all risks

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3 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

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In Summary

• Securitization is a tool with growing importance
  in your risk management tool box.
• It is not all bad security, multi-year
  capacityfixed pricing, looks good, etc.

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• THANK YOU