The Reinsurance industry: market overview Fabrice de Dianous SCOR Global P&C YALTA CONFERENCE 17 to 21 st of September 2012

2 12/01/09 - 9pm Recent years have been hit particularly hard: be it by financial, economic, social shocks…  Global Economic Slowdown  US Debt and Budget Crisis and S&P Downgrade  Persistently High Unemployment  European Sovereign Debt, Bank & Currency Crises  Manmade Disasters (e.g., Deep-water Horizon)  Political Upheaval in the Middle East  Inflation/Deflation  Era of Fiscal Austerity  China Becomes no 2 Economy in the World Are “Black Swans” everywhere or does it just seem that way? 2

3 … or large insurance shocks like catastrophic events 2011 witnessed exceptionally high Natural Catastrophes activities, with more than $100bn 1) losses 1)Source : AM Best (as of 23 April 2012) Australia floods New-Zealand earthquake Thaïlande floods Earthquake & tsunami in Japan The crisis started with a financial angle, which carried on with economic, and then political and social aspects

4 We are still facing a large, and increasing, number of uncertainties  Timing and nature of the recovery ?Reduction of public spending and monetary base will slow down the economy : stagnation or recession ? ?Low credit activity and liquidity constraints weight on growth  Public debt bubble ?Current course of public debt appear unsustainable : increase in taxes or reduction of public spending ? ?Capacity to overcome increasing political and social difficulties ?  Accumulating inflationary pressures ?Creation of Central bank money in the US and Europe ?Inflation already rising on certain markets and for certain goods Macro-economic(Re)insurance related  Impact of macro-economic developments on (re)insurance pricing ?If there is an inflation surge, will the market turn for long tail lines of business?  Exposures’ measure and role of models ?Is recent increase in Cat activity an indication that we have been basing our models on wrong return periods? ?What role should models play in decision making?  Equilibrium between on balance sheet and off balance sheet risk bearing ?How will market-based techniques complement traditional (re)insurance? ?Structural shift in competitive landscape: ILS fund rising / Cat monoliners declining?

5 Even though apparent (re)insurance capacity has been steadily increasing, working capacity is in fact stable… Source: Guy Carpenter, SCOR Long-term evolution of the Guy Carpenter Global Reinsurance Composite companies’ shareholders’ funds  At first glance, the (re)insurance industry appears to certain observers as overly capitalized  However, recent Cat events have led the industry to re-assess its real exposures  The (re)insurance industry has broadly remained disciplined so far, and “working” capacity has actually remained stable for some time now

6 Reinsurers remained disciplined and delivered positive returns Global Reinsurance – Return on Equity: U.S./Bermuda vs. European "Big 4.“ 2) 1)Standard & Poor’s 2)Includes Munich Re, Swiss Re, Hannover Re, SCOR; Source : AM Best, SCOR Industry Trends – Non-Life Combined Ratio 1)  Since the beginning of the financial crisis, and despite severe shocks on the liabilities side, reinsurers have been able to deliver positive returns  This has been achieved largely through increased diversification, and thanks to sophisticated Enterprise Risk Management frameworks  This contrasts with equity markets’ valuation, which ask key questions: ?Do reinsurers charge enough for the risks they take on? ?Are on-going and future uncertainties properly reflected in reinsurers’ pricing?

7 The main danger for Reinsurers in this period of crisis is inflation  Globalization, which has had a disinflationary effect so far, may become inflationary because of persistent tensions in oil, raw materials and foods and growing tensions over wage purchasing power in emerging Asia (especially in China and India).  If real interest rates are positive, returns on the asset side will partially compensate for that. But if real interest rates are negative, inflation will bite hard as return on assets won’t compensate at all.  Insurers will be all the more affected since insurance goods and services tend to be more sensitive to inflation than CPI.  Motor and home insurance prices have increased significantly faster than CPI over the past 20 years – in the case of motor this is partly due to the cost of bodily injuries.  Casualty insurance has been severely impacted by increasing court awards  Medical CPI is continually rising at a higher rate than all other CPI items, due to greater market power and lower productivity gains in the medical sector

8 Most growth in the P&C EPI originates from emerging markets Source: Guy Carpenter, SCOR Other sources: Swiss Re Sigma, OECD, Bloomberg consensus 2011 GDP forecasts, Conning, Standard & Poor’s, Guy Carpenter estimates Note: Currencies not normalized. Most Japan and ANZ growth driven by currency changes. Best Estimate of Total Global P&C Reinsurance Premium: $156.6 billion Most growth has come from global emerging markets, particularly China, India, SE Asia Best Estimate of Total Global P&C Reinsurance Premium: $156.6 billion

9 Financial Strength Ratings play a key role in the reinsurance industry: Reinsurer Ratings For The Past Six Years Source: Standard & Poor’s

10 Thank you!