Catastrophe Risk RenaissanceRe Holdings Ltd. Kevin J. ODonnell - - PowerPoint PPT Presentation

Closing the Protection Gap for Natural Catastrophe Risk

RenaissanceRe Holdings Ltd. Kevin J. O’Donnell November 29, 2017

Proprietary and Confidential Information renre.com | pg. 2

Harvey Irma Maria

[Storm Track Image]

First Landfall (US) Aug 25th 10:00PM; Rockport, Texas Homes affected, damaged or destroyed 225,000+ Businesses damaged or destroyed 4,100+ First Landfall (US) Sept 10th 9:10AM; Cudjoe Key Max Wind speed 185 mph Death toll ~88 First Landfall (Puerto Rico) Sept 20th 6:15AM; Yabucoa Power outages ~95% left without electricity Agricultural impact ~80% of crops destroyed Key Themes:

Flood protection gap, NFIP, Auto portion of storm losses

Key Themes:

Test Florida market (AOB, FHCF, etc.), Lack of loss adjusters, Caribb. losses, $100B – what if Miami?

Key Themes:

Accuracy of Cat models, Code sufficiency, Business Interruption, demand surge

Q3 2017 – Reminder that natural catastrophes occur

17th Aug 30th Aug 16th Sept 3rd Sept 3rd Oct

Sources: Weather Predict Consulting, Aon Benfield Analytics, National Hurricane Center, various media outlets

Proprietary and Confidential Information renre.com | pg. 3

This year is on track to be one of the largest loss years ever…

Historical Annual Insured Losses

$17 $19 $28 $29 $61 $126 $19 $33 $57 $29 $51 $134 $73 $50 $42 $36 $54 $25 $90 $10

20 40 60 80 100 120 140 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Half Year Losses Q3 Estimated Losses Q4 Estimated Losses (Cali Wildfire)

$100B Loss

KRW Tohoku, Thai Flood, NZ EQ Sources: VJ Dowling (IBNR), RNR Holdings Ltd Earnings Call Q3 2017, modelling agencies, PCS Historic Losses

Losses ($B)

“2017 will be the third year having more than $100B of insured losses over the previous 15”

Proprietary and Confidential Information renre.com | pg. 4

Responding to natural catastrophes

• Natural catastrophes are unavoidable
• Impact of natural catastrophes include:

‒ Economic loss

‒ Can be quantified monetarily ‒ Theoretically insurable

‒ Social impact – loss of life, displaced families, etc.

‒ Difficult to quantify monetarily ‒ Insurance not a perfect substitute (e.g., post-disaster emigration)

• Knowing that there will be natural catastrophes, society makes tradeoffs

between: ‒ Investing in physical resilience (mitigation, land usage, building codes, etc.) ‒ Ex ante risk financing (insurance, reinsurance, risk transfer, etc.) ‒ Ex post risk financing (debt, govt. assistance, unintended self-insurance, charity, etc.)

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Mitigation and risk transfer reduce impact of catastrophes Economic Losses Natural Catastrophes Insurance Recoveries Uninsured Losses Protection Gap

Mitigation reduces economic loss Ex ante risk financing reduces uninsured loss

Ex post financing

Tradeoff #1

Tradeoff #2

Proprietary and Confidential Information renre.com | pg. 6

Significant protection gap

Harvey, Irma and Maria highlight the extent of the insurance “Protection Gap”; the industry is striving to close this gap by growing the insurable pool of risk… Estimate of 3Q Cat Losses & Source of Claims Payment

Sources: Moody’s, AIR, RMS, PCS, FEMA, FHCF, Artemis, Q3 Financials, etc.

In region of 70% of estimated economic loss for HIM not insured ~$238B $20B $19B ~$11B ~$20B $23B

~$145B

$0B $50B $100B $150B $200B $250B Economic Loss Private Insurance Loss Reinsurance Loss Third-Party Capital Loss Unidentified Expected Insured Losses Govt / Public Insurance Loss The "Protection Gap"

Ex Ante Financing

(Mutuals + Non-US?)

Losses ($B)

Proprietary and Confidential Information renre.com | pg. 7

The protection gap is even greater in the developing world…

Global Avg. Developing Countries e.g. Haiti

Proprietary and Confidential Information renre.com | pg. 8

Cost of the protection gap – effect on GDP

Source: BIS Working Paper No 394, Unmitigated disasters?

• Ex post financing results in significant decrease in GDP post-disaster
• Ex ante financing (insurance) results in permanent increase in GDP post-

disaster

Proprietary and Confidential Information renre.com | pg. 9

Example of Protection Gap - 2015 Nepal Earthquake

• Magnitude 7.8 earthquake
• Economic cost - $6B
• Social impact - 9,000 fatalities, extreme displacement of families
• Insufficient mitigation and ex ante risk financing

‒ Mitigation - Most of population live in unreinforced masonry buildings ‒ Risk Transfer - P&C Insurance penetration .5% of GDP

Source: Insurance Information Institute

Nepal GDP $19.2B Economic Loss $6B Insured Loss $160M

Proprietary and Confidential Information renre.com | pg. 10

Why is there a protection gap?

• Economic losses must be absorbed - Why chose ex post financing?
• Developing countries

‒ Ex ante funding may not be economically feasible ‒ Lack of awareness of risk ‒ Underdeveloped insurance market/regulatory framework ‒ Poor construction/weak building codes

• Developed countries

‒ Government crowding out – “Why should I buy insurance if the government will bail me out?” ‒ Political incentives to defer recognition of costs – budgets are tight ‒ Time inconsistency of preferences

‒ Politicians will spend any insurance surplus on more pressing needs

‒ Impossibility of governments to save for natural catastrophes

Proprietary and Confidential Information renre.com | pg. 11

Role of public/private partnerships in closing the protection gap - Flood Re

• Private reinsurance transforms ex post

government insurance to ex ante financing ‒ Makes government part of the solution

• Government transfers contractual duty to

save to private insurer, which cannot ex post finance – shrinks protection gap

• Reduces many drawbacks of ex post

financing

• Flood Re is a great example of how the

public/private approach can work to close the protection gap Private Reinsurance Customer Private Insurer

Proprietary and Confidential Information renre.com | pg. 12

NFIP – recognizing the value of reinsurance $4B xs $4B $4B Retention

• NFIP historically dependent on ex post funding
• Demonstrated by its $30B+ of unfunded losses (i.e., taxes)
• Purchasing private reinsurance is a step towards real ex ante financing and

decreasing the protection gap

• Anticipate full limit loss on $1 billion reinsurance purchase
• Strong private market appetite for flood

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Closing the protection gap - collaboration and alliances are key…

DRF

Proprietary and Confidential Information renre.com | pg. 14

Lloyd’s Disaster Risk Facility

 Solutions to help developing

economies tackle underinsurance and improve their resilience against the economic impact of natural catastrophes

 Emerging economies across Latin

America, Africa, and Asia currently contribute 40% to global GDP, yet represent only 16% of global insurance premiums

 $445 million of capacity from 8

syndicates

DRF

Proprietary and Confidential Information renre.com | pg. 15

Summary

 Every society must make tradeoffs between mitigation, ex ante risk financing

and ex post risk financing

 Many of these tradeoffs are difficult, and can result in a protection gap

‒ Especially in developing countries

 In developed countries, the protection gap is often a function of political reality

and inappropriate incentives

 Private risk transfer can help close the protection gap

‒ Flood Re – example of effective public/private partnership ‒ NFIP – strong private market demand for flood risk ‒ Lloyds’ DRF – helping to address the protection gap in emerging markets

Proprietary and Confidential Information renre.com | pg. 16

RenRe – Significant investment in hazard and risk assessment

Proprietary and Confidential Information renre.com | pg. 17

Nepal earthquake: social impact on children “We don’t know when we will have a new house.” “We don’t have safe drinking water.” “We are living in a tent and cannot sleep at night.” “I’d like to go to school just like before.”