1. ACE EUROPEAN GROUP Non-Life Securitisation CAE Conference – May 2008 Graham Fulcher Chief Actuary ACE European Group Chairman Securitisation of Non-Life Insurance Working Party GIRO 2008

2. ACE EUROPEAN GROUP Agenda  Basic Concept  Supply and Demand Arguments  Deals to Date Volumes cf insurance cycle  Past, present and future

3. ACE EUROPEAN GROUP The Concept

4. ACE EUROPEAN GROUP Securitisation  Pooling, repackaging and often commoditisation of the cash- flows associated with financial assets (or less commonly liabilities) into marketable securities, so that the investors in these securities assume the benefits of the cash-flows  Most commonly loans -mortgage backed securities - credit cards - car loans - student loans

5. ACE EUROPEAN GROUP Asset Backed Securitisation - Examples

6. ACE EUROPEAN GROUP Catastrophe Bond – Basic Concept Special Purpose Vehicle Reinsurer Investor Insurer Premium Interest Capital at maturity Claims Initial investment Traditional Reinsurance w/o credit risk Traditional Bond Claim = Default

7. ACE EUROPEAN GROUP Supply and Demand Argument

8. ACE EUROPEAN GROUP Original Supply Side Argument $20Tn$200Bn $50-100Bn

9. ACE EUROPEAN GROUP Original Supply Side Argument Source: weather.unisys.com: Hurricane #6 1926

10. ACE EUROPEAN GROUP Original Supply Side Argument Source: www.hurricanecity.com

11. ACE EUROPEAN GROUP Original Supply Side Argument Source: http://www.miamibeachfl.gov Ocean Drive, Miami 1924-6 Ocean Drive, Miami 2006

12. ACE EUROPEAN GROUP Original Supply Side Argument Source: Pielke et al – Normalised Hurricane Damage in US Estimated original economic loss$105M Price inflation2.9% p.a. X 9.29 Growth in real wealth per household1.7% p.a.X 3.71 Growth in exposed housing units4.7% p.a.X 38.51 Estimated 2005 Economic Loss$139.5Bn Crude Estimated 2005 Insured Loss$70Bn

13. ACE EUROPEAN GROUP Supply side Argument - Developments  Catastrophe model recalibration  Rating downgrades  Increasing credit risk concentration  Climate Change Source: ClearTheAir.org following Emanuel (2005)

14. ACE EUROPEAN GROUP Original Demand Side Argument

15. ACE EUROPEAN GROUP Demand side Argument - Developments  Sub-Prime bought zero-beta firmly into focus  Spreads on catastrophe bonds tightened 2007 credit crunch at the same times as corporate bond spreads increased hugely  Assisted by two-years of low catastrophe activity leading to reinsurance market softening  Reaction of investors to a loss has not been tested  Sub-prime losses also raised questions about securitisation e.g. use of “black-box” models postulating 1 in 100 year events

16. ACE EUROPEAN GROUP Comparison to Other Forms of Securitisation Transfer of extreme uncorrelated risk Realisation of cash-flow including intangibles Reduce regulatory or economic capital XXX (US) AXXX (US) Embedded value securitisation Catastrophe bonds Extreme mortality bonds Longevity bonds Mortgage backed securitisation

17. ACE EUROPEAN GROUP Market Developments

18. ACE EUROPEAN GROUP Insurance Linked Securitisation over time Source: Guy Carpenter

19. ACE EUROPEAN GROUP Insurance Linked Securitisation over time Source: Guy Carpenter

20. ACE EUROPEAN GROUP Global issuance of Asset-Backed Securities Source: Bank Of England April 2008 Financial Stability Report (data Dealogic)

21. ACE EUROPEAN GROUP Catastrophe Bond Share of Market Source: Guy Carpenter as of 31.12.07

22. ACE EUROPEAN GROUP Past, Present and Future PAST Traditional Approach PRESENT Existing Developments FUTURE Possible future developments - Sponsors of ILS - Catastrophe Perils and Territories Covered - Type of (non-life) insurance risk or asset securitised Investors in ILS

23. ACE EUROPEAN GROUP Sponsors PAST Insurers Reinsurers Governmental pools PRESENT Theme Parks Power company Industry Captive Railway company Lloyd’s market Energy company Governments Hedge Funds FUTURE Charities Airlines International Group

24. ACE EUROPEAN GROUP Catastrophe Perils and Territories Covered PAST East Coast Windstorm California Quake Japanese Quake European Windstorm Japanese Typhoon PRESENT European Hail New Madrid Quake Pacific Northwest Quake Mediterranean Quake Hawaii Wind Puerto Rico Windstorm Mexican Earthquake Australian Typhoon Australian Quake Taiwan Earthquake US Tornado and Hail UK River Flood FUTURE BRIC territories Terrorism Tsunami Volcanic losses

25. ACE EUROPEAN GROUP Insurance Risks or Assets securitised PAST Catastrophes PRESENT Excess general liability Motor Reinsurance receivables FUTURE Casualty run-off Goodwill Travel/A&H/Household Capacity constrained lines (e.g. construction) Volatile lines (e.g. Aviation/D&O)

26. ACE EUROPEAN GROUP Investors - 1999 Source: Swiss Re

27. ACE EUROPEAN GROUP Investors - 2007 Source: Swiss Re

28. ACE EUROPEAN GROUP Non-Life Securitisation CAE Conference – May 2008 Graham Fulcher Chief Actuary ACE European Group