Time for fundamental change Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Walter B. Kielholz, CEO Swiss Re Monte Carlo, 10 September 2002 Attitudes toward risk The insurance industry today Actions the insurance industry must take Swiss Re’s comprehensive response

Page 2 Risk and opportunity Perception of threat Safety- oriented attitude Survival- driven Focus on hazard Opportunity realisation Innovation- oriented attitude Incentive- driven Focus on chance Risk acceptance Risk in opportunityOpportunity in risk Attitudes toward risk Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Today’s attitude: oriented towards safety

Page 3 Outline Attitudes toward risk The insurance industry today Actions the insurance industry must take Swiss Re’s comprehensive response Summary Walter B. Kielholz Monte Carlo 2002 Time for fundamental change

Page 4 Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Insurance and risk: a classical view Conditions for insurance: what we have learned... Losses should be fortuitous / accidental Large number of risks (spreading the risk) Loss estimates should be possible Premium obtained should be adequate to risk … and traditional view toward risk Risk in opportunityOpportunity in risk PharmaCyberrisks

Page 5 Pharma: extensive loss history Time [years] DES L-Tryptophane Factor VIII (AIDS) Breast implants Thalidomide Mexaform (SMON) Dalcon Shield Fen/Phen Hip implants Rezulin Baycol/Lipobay Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Extensive loss history, back to 1960 Increase in frequency and severity Scenarios: have to be shared with industry Premium is still not adequate to risk

Page 6 Cyberrisks: “cyberquakes” as new exposure Within 1 single day: world economy infected Economic loss: USD 8.75 bn Uncontrollable accumulation of losses Walter B. Kielholz Monte Carlo 2002 Time for fundamental change “I love you” virus

Page 7 Walter B. Kielholz Monte Carlo 2002 Time for fundamental change To sum up: status quo New risk: cyberrisks, biotechnology Old risk, fundamentally changed landscape: terrorism, D&O Not transferable risks: contingent business interruption Lawsuits Risk: new or old ? Not very helpful: risk changes Hostile environment, increased aggressiveness Insurance industry Higher frequency and severity in very large claims Insufficient premium, destruction of capital Risk appetite: low at present time Capacity: will not increase due to uncertain environment Fundamental change inevitable

Page 8 Outline Attitudes toward risk The insurance industry today Actions the insurance industry must take Swiss Re’s comprehensive response Summary Walter B. Kielholz Monte Carlo 2002 Time for fundamental change

Page 9 Change area 1: underwriting “back to the basics” Sound, professional underwriting Combined ratio must be below 100% for each single line of business Time for unlimited cover is past, especially in Motor No cover without agreed wording Primary insurance (property & casualty) Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Reinsurance Improve wordings (named perils) Shift to facultative / non-proportional Active claims handling (claims cooperation clause)

Page 10 Change area 2: risk management “strategic view, improved dialogue” Research, pooling of activities within insurance industry Follow technological development, changes in risk perception Strengthen scenario-based thinking Understand correlation: interline (non-life, life) and across the balance sheet (assets and liabilities) Strategic risk management: increased resources necessary Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Improve dialogue Address “hot issues” Intensify and improve dialogue with industry, insurers, governments and NGOs

Page 11 Comprehensive defense strategies and procedures Globalize handling procedures Leverage skills Develop claims handling concepts Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Rigid defenses Defend the capital base Fight the predator Change area 3: claims management “strategic process, pro-active handling”

Page 12 Outline Attitudes toward risk The insurance industry today Actions the insurance industry must take Swiss Re’s comprehensive response Summary Walter B. Kielholz Monte Carlo 2002 Time for fundamental change

Page 13 Swiss Re’s attitude toward risk More professionalism in wording, contract definition No unlimited covers; named perils treaties Shift to facultative / non-proportional Revival of claims cooperation clause where appropriate Risk underwriting Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Risk management Improve scenario-based thinking Risk dialogue: Executive Board has “Top Topics” and “Centre for Global Dialogue” in Rüschlikon Strategic risk management is part of Executive Board process

Page 14 Swiss Re’s attitude toward claims Separation of powers Strong influence on loss regulation Operational Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Tactical / strategic Strengthen scenario-based thinking in claims management Build up tactical and strategic claims management units Put the experience loop into underwriting Strategic claims management is part of Executive Board process

Page 15 Outline Attitudes toward risk The insurance industry today Actions the insurance industry must take Swiss Re’s comprehensive response Summary Walter B. Kielholz Monte Carlo 2002 Time for fundamental change

Page 16 Summary Underwriting: back to basics, combined ratio below 100% Risk management: more research, better dialogue Risk and claims management: scenario-based thinking Walter B. Kielholz Monte Carlo 2002 Time for fundamental change Insurance industry must change Swiss Re has changed processes and will increase dialogue Underwriting: shift to facultative / non-proportional Risk management and external dialogue: reinforce Claims: tactical and strategic units, rigid defense

Page 17 Walter B. Kielholz Monte Carlo 2002 Time for fundamental change