ILS Market and Transfer of Financial Disaster Risk to Global Investors

1. and transfer of financial disaster risk to global investors
Henning Ludolphs, Managing Director
Hannover Re, Retrocessions & Capital Markets
DRR financing workshop
Istanbul, 4 - 5 October 2018
ILS market

2. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Disclaimer
This presentation does not address the investment objectives or financial situation of any particular person or
legal entity. Investors should seek independent professional advice and perform their own analysis regarding
the appropriateness of investing in any of our securities.
While Hannover Re has endeavoured to include in this presentation information it believes to be reliable,
complete and up-to-date, the company does not make any representation or warranty, express or implied, as
to the accuracy, completeness or updated status of such information.
Some of the statements in this presentation may be forward-looking statements or statements of future
expectations based on currently available information. Such statements naturally are subject to risks and
uncertainties. Factors such as the development of general economic conditions, future market conditions,
unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the
actual events or results to be materially different from those anticipated by such statements.
This presentation serves information purposes only and does not constitute or form part of an offer or
solicitation to acquire, subscribe to or dispose of, any of the securities of Hannover Re.
© Hannover Rück SE. All rights reserved.
Hannover Re is the registered service mark of Hannover Rück SE.

3. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Performance of different market segments
1
Relative Performance
Cat bonds have historically shown a good performance with a low volatility
0%
50%
100%
150%
200%
250%
300%
350%
400%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
MSCI World Index Swiss Re Catbond Index Barclays BB Corporate Bond Index
ILS market

4. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Catastrophe bonds: Strong impact from the financial crisis ...
0
2
4
6
8
10
12
14
1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Thousands
New issuance volume per year in bn. USD
... however, the market has recovered
2
First catastrophe
bond ever issued
by Hannover Re
Until 2005:
“Boutique market”,
only small group
of investors
Significant volume of
new money enters the
ILS market
Many investors
leave the market
New
record
Catastrophe bonds

5. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
 More complex and time consuming
 Less flexible
 Only one limit available over the term
 Structured release of collateral
 Still relatively small market
 Requires specific expertise
 Sufficient capacity available
(if price is right)
 Very low counterparty credit risk
( reduced capital charges)
 Diversification of reinsurance
capacity
 Multi-year transactions
 Access to reinsurance market
 Diversification
Pros and cons of catastrophe bonds
3
 Usual quantities: USD 100 m. - 300 m. per issuance
Different perspectives of sponsors and investors
Originator’s perspective Investor’s perspective
Catastrophe bonds

6. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Type of catastrophe risks
4
Europe Wind
332 Japan
2,947
Life
1,685
Multi-Peril
7,967
US Earthquake
3,635
US Hurricane
3,591
US Multi-Peril
7,607
Other
1,813
Total Volume
~ 30 bn.
Catastrophe bonds outstanding as of December 2017 in million USD
US dominates
Hannover Re data base
Catastrophe bonds

7. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
ILS market participants
5
A large number of different parties
Market participants
Sponsor/
protection
buyer
Reinsurer
(Large)
Insurer
(Non-) Government
Institution
Placement
agent
InvestorBroker
Transformer
Modelling
agency
Legal
firmsRating
agency
Index
provider
Hannover Re3
Munich Re1
Tokio
MilleniumRe2
Reinsurance
broker:
AonBenfield,
GuyCarpenter,
JLT, Willis, etc.
Banks:
BNP, Citibank,
Goldman Sachs,
etc.
(Re-)insurers
Hedge funds
Pension funds
Dedicated ILS
funds
AIR
RMS
Perils
PCS S&P A.M.BestFitch
Swiss Re1
Allianz Risk Transfer2
1: Catastrophe bonds; 2: Collateralised reinsurance; 3: Both
Catastrophe bonds

8. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Variety of trigger mechanism
6
 The attachment point is most often defined as indemnity trigger
• Payment is determined by the actual loss suffered by the sponsor
 However, in order to allow an easy and full understanding of the risks and a quick evaluation
of the loss there are synthetic triggers as follows:
• Parametric (geophysical index)
− Payment is determined by using geophysical parameters of the actual event
(e.g. wind speed, location of hurricane, magnitude and location of EQ, etc.)
• Industry loss index
− Payment is determined by using an aggregate industry loss index (e.g. PCS or PERILS)
• Modelled loss
− Payment is determined by the application of a third-party model to the portfolio of exposures, fixed in advance, using
parameters of the actual event
 Basis risk generally reflects the possibility that a catastrophe bond with a synthetic trigger
may not be partially or fully triggered (for covered perils) even when the sponsor of the
catastrophe bond has suffered a loss
Some entail basis risk
Catastrophe bonds

9. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
ILS market: More than catastrophe bonds
7
Strong growth of Collateralised Reinsurance
8
3 4 5 4 6 8 9 7 7
12 12
9
13 12 9 9
10
13 15 17 18
18
23
1 1 2 6 10
16
22
30
36
45
55
60
18 17 18
20
24
33
43
54
60
70
85
95
0
10
20
30
40
50
60
70
80
90
100
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
New issuances Outstanding catastrophe bond volume excl.
new issuances
Collateralised Reinsurance
ILS market volume in bn. USD
Hannover Re data base
 We assume that in addition investors will invest in ILWs of 3 - 5 bn. USD p.a.
Collateralised reinsurance

10. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
 Trust account or LOC negotiations
 Collateral release needs to be agreed
on
 Not tradable
 (Almost) same as traditional
reinsurance
 Additional capacity
 Investor provides collateral
 Another route to insurance-based
risks
 Covers wider non-life reinsurance
spectrum
Collateralised reinsurance - strong growth
8
 Range of risks transferred to capital markets is larger than in catastrophe bond space
 Usual quantities: ~ USD 2 m. - 5 m., but could go up to USD 100 m. in some cases
 Suitable only for short-tail risks
Reinsurance contracts with the limits being collateralised
Originator’s perspective Investor’s perspective
Collateralised reinsurance

11. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
ILS market
9
 Catastrophes 2017
• ILS market has proven to be stable and losses did not have a negative impact on investor’s
ability to renew business at January 1, 2018
• Catastrophe bond investors only lost 2-3% of their investments
− e.g. total loss of a Mexican earthquake bond of USD 150 m.
• On the collateralised reinsurance side approx. USD 10 – 20 bn. (or 20% – 30%) were lost
(difficult to make precise judgements)
• Lost money has not only been reloaded by new money but new inflow even exceeded
losses
 Significant ILS money comes from pension funds which invest through dedicated
ILS funds
• More money is sitting on the side ready to be allocated to ILS
 Investors’ supply does not seem to find corresponding demand from reinsurers’
buyer perspective
 Substantial increase in collateralised (re)insurance business
Current trends and developments
Trends

12. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Sponsor‘s (government‘s) perspective
 Quick money for first aid
 Help the uninsured
 Rebuild infrastructure
Parametric/Index-based disaster finance protection
10
Quick payouts after a natural catastrophe
+ Investor‘s perspective
 Diversifying risk
 Index based
Catastrophe bond investors require a (reliable) model for the risk
 Protect sovereign rating
 Offset loss in tax income
 Avoid budget reallocations
Disaster finance

13. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Disaster Finance
11
Examples of parametric /index-based catastrophe bonds
Mexico
 2017 EQ/HU USD 360 m.
 2015 EQ/HU USD 315 m.
 2009 EQ/HU USD 190 m.
Chile/Colombia/Mexico/Peru
 2018 EQ USD 1.360 m.
Disaster finance

14. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Disaster finance
12
 Romania has already installed a mandatory system for people to buy earthquake
coverage
 A disaster finance cover would allow quick access to cash (first aid, help the
un/underinsureds, rebuild infrastructure, cover tax holes, protect sovereign rating)
Functioning: Example Romania
B
A
For illustration purposes only
Disaster finance

15. ILS market Catastrophe bonds Collateralised reinsurance Trends Disaster finance
Disaster finance (cont'd)
13
 A payout scale is created to protect the key zones
Functioning: Example Romania
Magnitude A B Bucharest
<6.5 0% 0% 0%
≥6.5 0% 0% 50%
≥7.0 50% 75% 75%
≥7.5 100% 75% 100%
≥8.0 100% 100% 100%
 Location of earthquakes and magnitude factors are combined to determine payout
A
B
 Trigger parameters*
• Attachment probability: 3.35%
• Expected loss: 2.25%
• Exhaustion probability: 1.00%
 Example: 7.6 magnitude EQ
• in Box A leads to 100% payout
• in Box B leads to 75% payout
• less than 30km away from Bucharest
leads to 100% payout
For illustration purposes only
* Numbers based on models provided by AIR Worldwide
Disaster finance

16. Thank you for your attention.