The role of reinsurance in economic development and industry by keara

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									                            The role of reinsurance in economic
                            development and industry challenges
                            in Latin America




                            Luc Albert
IAD - FIDES - ASSAL Forum   Head of Latin America
Washington, DC
November 7, 2005            Swiss Re
                            Agenda

                               The role of reinsurance in economic development

                               Industry challenges in Latin America




IAD - FIDES - ASSAL Forum
Washington, DC
November 7, 2005



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                            Agenda

                               The role of reinsurance in economic development

                               Industry challenges in Latin America




IAD - FIDES - ASSAL Forum
Washington, DC
November 7, 2005



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                            Functions of reinsurance

                             The reinsurer takes over a portion of the hazards or
                             risks assumed by the direct insurer



                             Main effects to the direct insurer

                                Balanced portfolio

                                Protected balance sheet

                                Reduced cost of capital for covering risks

IAD - FIDES - ASSAL Forum       Increased underwriting capacity
Washington, DC
November 7, 2005                Enhanced technical knowledge

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                            Value creation by reinsurance

                            Capital cost saved
                            by the direct insurer   >   Additional capital cost
                                                        incurred by the reinsurer




IAD - FIDES - ASSAL Forum
Washington, DC
                            Before           After                 Before           After
November 7, 2005
                            reinsurance      reinsurance           reinsurance      reinsurance

 Page 5                     Direct insurer                         Reinsurer
                            Impact of reinsurance on the economy

                               Supply capital to insure large infrastructure projects
                                which are key for economical development.

                               Free risk-bound capital of the insurance sector and
                                the insured that can be allocated for other means.

                               Reduce the exposure of the insurance sector to
                                liquidity problems and, in that sense, protect tax
                                payers and the state treasury.

                               Provide capital relief and cushion the effect of large
IAD - FIDES - ASSAL Forum       man-made losses and natural catastrophes.
Washington, DC
November 7, 2005
                               Offer know-how on risk management techniques.
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                            Agenda

                               The role of reinsurance in economic development

                               Industry challenges in Latin America




IAD - FIDES - ASSAL Forum
Washington, DC
November 7, 2005



 Page 7
                            Lack of transparency: “Corporate governance”

                               Informal nature of the reinsurance business may
                                cause uncertainty and limited transparency, thus
                                creating an operational risk to its stakeholders.

                               Need to identify processes and establish guidelines
                                that add both transparency and clarity to a
                                company’s daily operations through:
                                     - Clear definition of contract wordings,
                                     - Timely execution of transactional documents,
                                     - Registration of contract data,
IAD - FIDES - ASSAL Forum
Washington, DC                       - Archiving of transactions,
November 7, 2005
                                     - Periodical compliance audits.
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                            Underwriting challenges

                               Transparency and improvement in data quality
                                 – Appropriate assessment of risks,
                                 – Definition of prices.

                               Sophisticated underwriting
                                 – Increase retention levels (balance “risk appetite”),
                                 – Increase independence in underwriting (ie, non-
                                   proportional covers).

                               Drive innovation
                                 – New products (ILS, liability, agricultural products),
IAD - FIDES - ASSAL Forum
Washington, DC                   – New distribution techniques with a sound underwriting (ie,
November 7, 2005                   electronic platforms such as SwiftRe),
                                 – New administration and more sophisticated pricing tools.
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                            Low penetration of insurance (I)

                                                                             2.0%                    1.0%

                                                         4.7%




                                                                             90.3%                  88.8%
                                                        76.9%



                                 8.5%

                                 13.9%
IAD - FIDES - ASSAL Forum
Washington, DC
November 7, 2005
                               Population                GDP           Non-Life premiums       Life premiums

                                            Industrialized Countries   Latin America & Caribbean
 Page 10                                                                        Source: Swiss Re Economic Research & Consulting
                            Low penetration of insurance (II)

                            Factors that influence demand for insurance coverage:
                               Economic growth,

                               Property rights, legal (un)certainty,

                               The Abraham Maslow Pyramid,

                               Welfare, income distribution,

                               Distribution channels,

                               Price of reinsurance,

                               Education,
IAD - FIDES - ASSAL Forum
Washington, DC
                               Exposure to natural perils,
November 7, 2005

                               Role of the government and the international markets.
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                            Low penetration of insurance (III)
                            Consequences:
                               Large amounts of state-owned infrastructure (roads,
                                bridges, etc.) are currently not insured.

                               A large and important part of the population’s property is
                                currently not insured.

                               Due to the lack of available information, part of the
                                property portfolio in Latin American countries is currently
                                not insurable.

                               A large natural catastrophe may have a very severe
IAD - FIDES - ASSAL Forum
                                impact on a country’s economy and population:
Washington, DC                   – High recovery costs,
November 7, 2005
                                 – High reconstruction expenses,

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                                 – Significant economical loss to sudden halt of activities.
                            Alternative: Catastrophe bonds (I)

                                                                             Swap            3
                                                                          Counterparty

                                    Insured

                                                                  Scheduled          Investment
                                                          1        interest           earnings
                                                                                                       2
                                                    Reinsurance
                                                     premium              Issuer (SPR)                Notes
                                    Ceding
                                                                                                                 Investors
                                   Company
                                                    Contingent             Collateral
                                                      claim                                         Cash
                                                                           Account
                                                     payment                                      proceeds




                            1. Ceding company enters      2. The SPR capitalizes itself by issuing            3. A Swap counterparty
                               into a reinsurance            notes to investors in the capital markets.          guarantees the return
                               contract with a Special       The principal amount of notes issued is             on the investments in
                               Purpose Reinsurer (SPR).      equal to the SPR’s potential obligations            the collateral account.
IAD - FIDES - ASSAL Forum      The SPR is specifically       under the reinsurance contract.
                               set up for the
Washington, DC                                                The proceeds from sale of the notes are
                               transaction.
                                                              held in a collateral trust account and are
November 7, 2005                                              invested in highly rated securities.
                                                              Investors lose their principal to the
                                                              extent there are losses under the
 Page 13                                                      reinsurance contract.
                            Alternative: Catastrophe Bonds (II)

                               Provide fully collateralized, multi-year reinsurance
                                cover.

                               Eliminate counter-party credit risk and lock in the
                                price of a cover over a multi-year period.

                               Offer mechanistic claims recovery and unambiguous
                                payment terms.

                               Parametric index triggers increase transparency and
                                makes it a viable alternative in international markets.

IAD - FIDES - ASSAL Forum      Possible solution for insuring natural catastrophe
Washington, DC                  exposures which were not insurable by alternative
November 7, 2005
                                methods (low income housing, bridges, roads),
                                providing relief in case of a major event.
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                            The role of reinsurance in economic
                            development and industry challenges
                            in Latin America

                            Thank you for your atention

                            Luc Albert
IAD - FIDES - ASSAL Forum   Head of Latin America
Washington, DC
November 7, 2005            Swiss Re

								
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