The Price of Risk in Insurance
Presented by Michel M. Dacorogna
?, Moscow, Russia, April 23-24,2008
Although all reasonable care has been taken to ensure the facts stated herein are accurate and that the opinions contained herein are fair and reasonable, this document is selective in nature and is intended to provide an introduction to, and overview of, the business of Converium. Where any information and statistics are quoted from any external source, such information or statistics should not be interpreted as having been adopted or endorsed by Converium as being accurate. Neither Converium nor any of its directors, officers, employees and advisors nor any other person shall have any liability whatsoever for loss howsoever arising, directly or indirectly, from any use of this presentation.
The content of this document should not be seen in isolation but should be read and understood in the context of any other material or explanations given in conjunction with the subject matter.
This document contains forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. It contains forward-looking statements and information relating to the Company's financial condition, results of operations, business, strategy and plans, based on currently available information. These statements are often, but not always, made through the use of words or phrases such as 'expects', 'should continue', 'believes', 'anticipates', 'estimated' and 'intends'. The specific forward-looking statements cover, among other matters, the reinsurance market, the outcome of insurance regulatory reviews, the Company's operating results, the rating environment and the prospect for improving results, the amount of capital required and impact of our capital improvement measures and our reserve position. Such statements are inherently subject to certain risks and uncertainties. Actual future results and trends could differ materially from those set forth in such statements due to various factors. Such factors include general economic conditions, including in particular economic conditions; the frequency, severity and development of insured loss events arising out of catastrophes; as well as man-made disasters; the outcome of our regular quarterly reserve reviews, our ability to raise capital and the success of our capital improvement measures, the ability to exclude and to reinsure the risk of loss from terrorism; fluctuations in interest rates; returns on and fluctuations in the value of fixed income investments, equity investments and properties; fluctuations in foreign currency exchange rates; rating agency actions; the effect on us and the insurance industry as a result of the investigations being carried out by US and international regulatory authorities including the US Securities and Exchange Commission and New York’s Attorney General; changes in laws and regulations and general competitive factors, and other risks and uncertainties, including those detailed in the Company's filings with the US Securities and Exchange Commission and the SWX Swiss Exchange. The Company does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Please further note that the Company has made it a policy not to provide any quarterly or annual earnings guidance and it will not update any past outlook for full year earnings. It will however provide investors with perspective on its value drivers, its strategic initiatives and those factors critical to understanding its business and operating environment.
This document does not constitute, or form a part of, an offer, or solicitation of an offer, or invitation to subscribe for or purchase any securities of the Company. Any securities to be offered as part of a capital raising will not be registered under the US securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the US securities laws.
And so on …
Value-at-Risk(1%) = 30 USD
Expected Loss = 10 USD
Structure and Capital
Measures typical size of fluctuations
Measures position of 99th percentile, „happens once in a hundred years“
Expected Shortfall (ES) is the weighted average VaR beyond the 1% threshold.
Typical gross natural catastrophe exposures VaR and ES (in MUSD).
As can be seen, if the risks diversify, the risk loading per policy reduces the more, the more policies are in the insurer’s portfolio
Diversification is significantly reduced if there are underlying risk factors affecting all policies simultaneously (e.g. a crooked croupier)
P = Premium-Losses-Expenses
Treaty Features &
X = NPV(Premium-Losses-Expenses)
Steering the portfolio through pricing.
Dependence between Line of Business (LoB)’s
Dependence between contracts
for all LoB Y and all risks X in Y.
Treaty Features &
2nd LayerPrg. A
2nd Layer Prg. D
Active Portfolio-Management: An Example