Sustainability – Insurance Challenges

and Opportunities

Neil Sprackling

Director

Swiss Re

(Sydney)

Slide 2

Agenda

� The changing risk landscape

� Environmental sustainability

� Case studies

� Insurance and weather/renewable energy

Slide 3

Sustainability

Most widely accepted definition:

“meeting the needs of the present without

compromising the ability of future generations

to meet their own needs”

Source: World Commission on Environment and Development (the Brundtland

Commission).

Slide 4

Risks have become

increasingly inter-dependent

GHG emissions

Climate Change

Storms

Flood DroughtSea level Ecosystems

Food security

Health effects

Migration

GHG regulation

ConflictInvestments

Energy security

Slide 5

Risks have become

increasingly more severe

Ocean Drive, FL, 1926

Ocean Drive, FL, 2000

0

10

20

30

40

50

60

70

80

90

100

110

1970 1975 1980 1985 1990 1995 2000 2005

Insured losses, USD billions

earthquake losses

weather-related losses

Insured worldwide cat losses > 40m (property/business interruption) at 2007 price levels in USDbn

Source: Swiss Re Economic Research & Consulting

1992:

Hurricane Andrew,

USD 23bn

1999:

Storms Lothar/Martin,

USD 10bn

2004:

Hurricanes Charley,

Frances, Ivan, Jeanne,

USD 32bn

2005:

Hurricanes Katrina,

Rita, Wilma,

USD 90bn

Clear upward trend!

� increased insurance penetration

� more values

� more values in high-risk areas

� higher vulnerability

� climate change (storm, flood)

Slide 6

The increasing use of risk transfer

instruments in the private sector

Growth of ILS outstanding, life and non-life

securities 1997 – 2007, in USD bn

0

10

20

30

40

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

46% CAGR over 10-years

9.5% CAGR over 13-years

0

20

40

60

80

100

120

140

160

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

at historical exchange rates at today's exchange rates

Growth of traditional catastrophe reinsurance

1994 – 2007, 15 prime markets, in CHF bn

Source: Swiss Re Source: Swiss Re Capital Markets

9.5% CAGR over 13-years

� Protection against tail risk using both traditional insurance and capital market instruments.

Slide 7

Gap between economic and

insured losses is widening

0

50

100

150

200

250

1970 1975 1980 1985 1990 1995 2000 2005

Total economic losses (estimate)

Insured losses

Natural catastrophe losses 1970-2007, in USD billion

� In 2007, natural

catastrophes and

man-made disasters

claimed more than

21 000 human lives

worldwide and

caused total losses

of approximately

USD 70bn

� Only a fraction of

total losses is

covered by

insurance (USD

27.6bn in 2007)

Source: Swiss Re Economic Research & Consulting

Slide 8

For many large loss potentials

the un-insured portion is significant

40-60%0.5%15200windstorm Germany

10-30%0.7%15200windstorm France

30-50%2.7%201000earthquake in SydneyAustralia

30-50%14.4%201000earthquakeIsrael

30-50%1.6%20500earthquake in BCCanada

10-30%1.3%30200windstorm UK

80-90%25.9%501000earthquakePortugal

80-90%5.9%50500earthquakeMexico

70-80%12.6%50500earthquakeTurkey

70-80%2.7%50500earthquakeItaly

60-80%1.1%50200typhoonJapan

40-60%2.3%300200hurricaneUS

80-90%2.3%300200California earthquake US

90-95%11.5%500200earthquakeJapan

of which,

not insured

Economic loss

in % of GDP

Economic loss

in USDbn

Return period

in years, approx.

Reference eventCountry

Source: Swiss Re sigma No. 2/2007

Slide 9

The precautionary principle

Why does Switzerland

have an army?

Applying the precautionary principle is best practice:

Experiences from the past:

asbestosis

unsuccessful

mad-cow disease

successful

Why do we purchase

property insurance?

Slide 10

Case study Mexico: Funding for

immediate relief efforts after earthquake

Solution features

� Insured peril: Earthquake

� Payments to be used for immediate emergency relief after earthquake

� Aggregate insurance limit: USD 450 million

– USD 290 million: Parametric reinsurance coverage

– USD 160 million: Parametric cat bond

� Trigger type: Index, physical trigger (quake magnitude)

� Time horizon: May 2006 – May 2009

� 1st cat bond issued in Latin America

Involved parties

� Insured: Fund for Natural Disasters (FONDEN) of Mexico

� Reinsurer and arranger of cat bond Swiss Re

Slide 11

Case study:

Flood risk securitization in Great Britain

Features

� Structure and placement of USD 150 million of securities

covering catastrophic flood events in Great Britain and

earthquakes in Canada and the United States

� First transaction that transfers flood risks to the capital

markets

� Creation of a parametric index based on flood depths

Involved parties

� Swiss Re structured and placed the securitization for

Allianz Global Corporate & Specialty AG and acted as the

sole bookrunner

� Risk Management Solutions (RMS) as risk modeller

Slide 12

Case study Canada:

Wildfire suppression cost cover

Solution features

� Innovative coverage of wildfire suppression costs

� The loss is calculated by multiplying the area burnt in

hectares with CAD 300 per hectare

� Annual cover of CAD 100m above CAD 100m retention

� The client provides the reinsurer with monthly reporting of

the suppression costs, number of wildfires, and area burnt

Involved parties

� Forest Protection Division of Alberta, Canada

� Swiss Re as the lead reinsurer

Slide 13

The increasing use of risk transfer

instruments in the private sector

9.5% CAGR over 13-years

Growth of weather derivative market 2000-2007, total notional values of contracts (CME*, OTC**) , USD bn

Source: PwC

� Protection against earnings volatility.

4.3 4.2 4.7

9.7

45.2

19.2

2.5

0.0

10.0

20.0

30.0

40.0

50.0

2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 47%

14%

9%6% 6%

18%

* Chicago Mercantile Exchange, ** Over-The-Counter

Energy

Agriculture

Retail

Construction

Transportation

Other

Slide 14

Case study Mexico:

Weather insurance for the government

Solution features

� Small cattle ranchers rely mainly on natural pastureland to feed their animals

� Climatic events such as droughts reduces available biomass, an essential component to

maintain animal’s weight and health

� This very innovative solution provides economic relief to supplement purchase of additional feed

to maintain animal’s minimum weight

� Available biomass is measured by a Vegetation Index

Involved parties

� Insured: Secretariat of agriculture (SAGARPA)

� Local reinsurer: Agroasemex, a Mexican, state-owned reinsurance company

� International reinsurers: Swiss Re and others

Slide 15

Solution features

� Weather derivative contracts covering drought-related food shortages in three Millennium Villages

clusters situated in Sauri (Kenya), Tiby (Mali), and Koraro (Ethiopia)

Involved parties

� Swiss Re partnered with Millennium Promise and the International Research Institute for Climate and

Society (part of The Earth Institute at Columbia University)

Case study Africa:

Drought protection for villages via NGO

� Under the agreement Swiss Re provided up to USD 2m of

financial protection in the case of extreme drought through

Millennium Promise Alliance (NGO)

� Financial instruments use a combined precipitation and

vegetation density index

Business Insurance, September 10, 2007

Slide 16

Parametric Insurance Solutions

VOLUME 3907, JUNE 08 2007

Macquarie arm secures a drought first

MACQUARIE ALTERNATIVE Assets Management Limited (MAAML) has become the first managed investment scheme to incorporate

drought insurance protection for investors.

And it has gone big - with the security of Swiss Re as insurer. MAAML has arranged the drought insurance cover for investors in the

Macquarie Almond Investment 2007.

Anthony Abraham, director and head of retail agribusiness, Investment Banking Group, said MAAML had secured the policy to provide

protection for its investors.

“This is the first time a management investment scheme (MIS) has incorporated drought insurance protection for its investors.”

The drought insurance followed MAAML’s constant endeavor to enhance its services.

The insurance policy is based on the level of rainfall at agreed locations within the catchment areas that provide inflows to the Murray

River.

The policy provides cover in the event that the total rainfall between now and February 2008 is below a pre-agreed level resulting in trees to

be planted this year become unavailable in the first year after planting.

In such circumstance, the policy should cover most of the cost of replanting trees, and to provide investors with a payment for the estimated

loss of one year of income.

This was given that there would be at least an extra year before the trees reached commercial production.

Mr Abraham said the protection came at no extra cost to its investors.

He added that MAAML was committed to delivering agribusiness investments that sought to maximise the return potential and reduce the

downside risk.

Slide 17

Insurance & Renewable Energy

� Non-traditional risk transfer solutions, structured to the specific

needs of the project and clients:

� ELPRO for the Power Generation sector

Electricity price protection not linked to any material loss or

damage

� PRAECIPIO concept for Windfarms

Comprehensive Predictive Maintenance and Risk Transfer

Package, cradle to grave solution

� Renewable Energy

Insurance cover for all kinds on renewable energy sources

- Clean Coal Technologies and Carbon Capture & Storage

- Geothermal: Exploration & Generation

- Solar and Wind: Weather and Price Protections

Slide 18

Carbon Capture & Storage

� For insurance purposes main issues are:

– Gradual or abrupt leakage of CO2

– Definition of damage or harm

– Robust regulatory framework required around

– issue of permanence

– long term liability

� Who should ultimately bear the risks and liability?

– Operator / Owner

– Original polluter

– Government

Slide 19

The Australian Challenge

Source: Garnaut Report

Slide 20

Four strategic priorities

1. Understand the risk & adapt pricing models and risk

mitigation strategies accordingly

2. Leverage the opportunities by developing products &

services for mitigation and adaptation

3. Influence the business environment by raising awareness

at industry & governmental level

4. Address own environmental footprint

Swiss Re’s approach

Slide 21

� Global initiative for all Swiss Re Group employees

� Swiss Re supports a maximum of 50% of any investment

� An employee can claim up to CHF 5’000, or equivalent

over the five-year lifetime of the programme.

� Eligible investments in Australia are

– Hybrid/LPG car purchase (or LPG conversion)

– Rainwater tanks

– Solar panels

– Paid days leave for work with recognised

environment charities

COYou2 Reduce & Gain Programme

Slide 22

Summary

� be aware of increasing inter-dependent nature of risks

� be aware of global solutions

� seize the opportunities

� consider local relevance

� meet current needs….

� but not at the expense of future generations.

Sustainability – Insurance Challenges

and Opportunities

Neil Sprackling

Director

Swiss Re

(Sydney)

This presentation has been prepared for the Finity Niche Insurer Conference held on 5 November 2008. Finity Consulting Pty Limited (ABN 89 111 470 270) wishes it to be understood that opinions put forward herein are not necessarily those of Finity and Finity is not responsible for those opinions. The information presented at the conference was of a general nature and a reader of this presentation must seek their own independent advice before using it for any purpose.