2. Managing man-made catastrophe risk: A market perspective CAS Special Interest Seminar on Catastrophe Risk Management Atlanta, 7 October 2002 Thomas Holzheu Swiss Re

3. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 2 Catastrophe Events 1970 – 2001 # catastrophes Source: sigma 1/2002

4. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 3 Man-made catastrophes in 2001 Source: sigma 1/2002 # catastrophes

5. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 4 Number of victims 1970 – 2001 # cat victims, logarithmic scale Source: sigma 1/2002

6. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 5 Insured losses [property only] 1970 – 2001 Insured losses, 2001-$ billion Source: sigma 1/2002

7. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 6 Catastrophe Figures (property only) 2001 vs. Average 2001Average 1987-2001 Insurance Losses (USD bn) Natural Catastrophes World10.014.3 USA 8.0 9.1 Man-Made EventsWorld24.4 5.9 USA19.9 2.7 Nat Cat per Peril (World) Storm7.2 8.9 Earthquake0.6 1.6 Flood0.1 0.8 Fatalities World33 00041 000 USA 3 451 800 Source: Swiss Re, sigma

8. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 7 9/11 consensus loss estimates: 40.2 billion in total Source: Insurance Information Institute

9. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 8 How was terrorism insured? Historically, fire insurance covered fire and explosion damage regardless of its cause. Exceptions were war, civil war and civil commotion. Terrorism was not mentioned in war exclusion clauses. Countries with frequent terrorism experience had special regulations or pool solutions with government support in place (UK, Spain, South Africa and Israel).

10. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 9 The global insurance system passed the stress test The insurance industry will fulfill their contractual obligations regarding WTC losses. Insurers didn’t initiate a sell off of stocks. Global insurance diversification worked. Losses were spread widely between US insurers and global insurers as well as between primary insurers and reinsurers.

11. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 10 Limits of insurability are challenged! Terrorism risk is hardly quantifiable today, diversification very hard to achieve. Capital markets don’t like the risk, therefore a very high risk premium is needed to provide cover. Not only insurers have to learn how to assess and manage the new risk, but also financial analysts and rating agencies have to be educated. The main problem is the extremely high and unpredictable loss potential --> 40 Bn USD x ??

12. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 11 The number of terrorist attacks in 2001 actually declined! Source: US Department of State # attacks

13. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 12 North-America shows the lowest frequency of terrorism [1996-2001] Source: US Department of State # attacks

14. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 13 8 of the 10 most costly terrorism losses occurred in US and UK Insured loss* VictimsDateEventCountry 21 00030542001Terror attack against WTC, Pentagon and other buildingsUSA 90711993Bomb explodes in London’s City (near NatWest tower)UK 744-1996Bomb explodes in ManchesterUK 72561993Bomb explodes in garage of WTCUSA 67131992Bomb explodes in London’s financial districtUK 398202001Suicide bombing at Colombo International AirportSri Lanka 25921996Bomb attack on London’s South Key DocklandsUK 1451661995Bomb attack on government building in Oklahoma CityUSA 1382701988PanAm Boeing 747 crashes at Lockerbie due to bomb explosionUK 127-1970Three hijacked passenger airplanes dynamited in ZergaJordan *) in USD m, indexed to 2001, property and business interruption only Source: Swiss Re, sigma No. 1/2002, Insurance Information Institute

15. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 14 WTC losses reduce the reinsurers’ equity by 10 to 25% Source: Morgan Stanley, March 28th.

16. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 15 ”Target” commercial includes: Commercial property, liability and workers’ comp. Sources: A.M.Best, Swiss Re Economic Research & Consulting Capital Myth: P/C industry has $300 billion to cover terrorism Surplus 12/2001 $289 billion 137 In $ billions

17. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 16 Commercial lines surplus is quite stretched as is Sources: [1] A.M.Best, [2] Fox-Pitt, Kelton, [3] Morgan Stanley, [4] Swiss Re Economic Research & Consulting In $ billions

18. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 17 Natural Catastrophe: “Business as usual” Man-made: Dealing with the new Spectre 2001 loss burden below average upward trend, high fluctuations further premium increases necessary huge loss potentials persist new risk landscape, exploration has started apply experience from other extreme risks balance carefully: risk appetite, exposure control, risk and return public-private partnership for a limited time Summary

19. Thomas Holzheu “Managing man-made catastrophe risk” 7 October 2002 Figure 18 Questions? To be put on the mailing list for Swiss Re’s sigma contact: thomas_holzheu@swissre.com Or, download our sigma research from http://www.swissre.com