Reinsurance Trends and Regulatory Issues Donald F. Behan, Ph.D., F.S.A. Georgia State University 14th Annual Meeting of ASSAL

Trouble in the Market Concerns in the early 1990s A soft market with high claims Global financial crises cause concern On the edge

September 11, 2001 An unanticipated catastrophe The largest insured catastrophe of all time Shocks to many different lines of business Uncertainty about the future

Premiums Increasing in 2000

A Shock to the System Reinsurance claim: $25 Billion versus $125 Billion total capital Loss of confidence in catastrophe models Claims correlated Capital market decline Then comes asbestos (again)

Impact on Global Regulation Reinsurance already on the agenda Combination of forces Lack of information Declining financial strength

Availability Curtailed Five major companies downgraded Several others suspend operations New and expanding markets are the first to be hit

High Level Attention World Bank/IMF “reinsurance is an important element of global financial stability” OECD “Decision on the Exchange of Information on Reinsurers” IAIS – Several efforts completed or under way

The Context Financial Stability Forum Financial Sector Assessment Program International Accounting Standards Board The Joint Forum World Bank/IMF/BIS OECD The Basel Committee

Prudential Regulation IASB – Fair Value of Liabilities U.S. and E.U. Risk-Based Capital Transparency Information exchange

Fair Value of Liabilities (General Insurance) Theory versus practicality huge difficulty estimating losses The chicken and the egg

Risk-Based Capital Formulas and parameters The square root! Where are the data? Automatic action level Dynamic methods

Transparency The mystique of reinsurance Absence of regulation A tangled web systemic risks

Market Conduct Sophisticated participants Generally don’t need to be protected Link to prudential regulation credit for reinsurance ceded low price for low risk make the credit match the risk

Financial Sector Assessment Program (FSAP) World Bank/IMF Includes reinsurance 100 countries by the end of 2003 Strengthens the hand of the regulator Strong market pressure to participate

Conclusion Troubled times Pressure for improved regulation Many sources of international assistance An opportunity to improve stability