Qatar Re View by Qatar Reinsurance Company Limited

ISSUE 6 /2017

INSIDE THIS ISSUE VIEW FROM THE TOP Maintaining order in uncertain times INTRODUCING RVI Protecting the value of core assets EXPERTISE Innovation in Cat modelling LATEST NEWS New appointments around the world NEXT GENERATION Future talent in Marine & Aviation

Spring 2017

Dear Readers

W Editorial 3 View from the top: Risk Management 4 Geopolitical uncertainty brings opportunities among the challenges. Introducing RVI Protecting the residual value of core, commercial assets.

Expertise A new engine for Cat modelling.

Latest News New appointments to the Qatar Re community.

Next Generation Profiling our future talent.

elcome to the first edition of the Qatar Re View of 2017. The past few months have been a really busy time, both in terms of world events, and in the development of Qatar Re.

There were some extraordinary global political developments in 2016 such as Britain’s decision to the leave the European Union and the election of Donald Trump as U.S. President. Chief Risk Officer Andrew Smith looks at some of the uncertainties facing economies around the world and the challenge for Qatar Re to build a platform on these global shifting sands. Internally, we have continued to build our global franchise with a series of key appointments and promotions. Luke Roden is appointed Chief Underwriting Officer (CUO), Short Tail classes, in the Bermuda office and retains his position as Head of Ceded Re. Michael van der Straaten, who joined from Chubb last December, is appointed CUO, Long Tail and Specialty classes, in the London office. In January, Orla Foley-Wright joined as Global Head of Human Resources in London, tasked with working on the company’s organisational DNA. Finally, Vicky Hu was appointed to the Singapore branch last November, as Business Development Director, Asia, joining from Swiss Re Global Partnerships. Residual Value Insurance (RVI) is a niche segment of the global insurance market but it is increasingly being used in the world of asset finance to help in the leasing or purchase of assets such as aircraft, ships and plant and machinery. Nick Hester in our London office is one of the few RVI practitioners in the world and he explains how this market has evolved.

Although catastrophe models have improved significantly in recent years, there are still shortcomings in the existing models. Chief Actuary Mark Cockcroft assesses the limitations, and reveals how Qatar Re’s Natural Hazard Analyst Stefan Hiemer has been looking at different ways of modelling earthquake clustering. Qatar Re is rightly proud of our diverse and talented global team of employees. In a new series, we profile some of our rising young talent, starting with Marine and Aviation Underwriter Araceli Vallés Sales, who describes how her first flight at the age of ten fired a lifelong passion for the world of aviation.

Your Qatar Re View editorial team

VIEW FROM THE TOP

Maintaining solid foundations on the shifting sands of geopolitical uncertainty

BREXIT, UNCERTAINTY IN EUROPE, AND THE ELECTION OF DONALD TRUMP – THE PAST FEW MONTHS HAVE BROUGHT GREAT UNCERTAINTY TO THE GLOBAL RE/INSURANCE MARKETS. CHIEF RISK OFFICER ANDREW SMITH EXAMINES HOW TO BUILD A PLATFORM ON GLOBAL SHIFTING SANDS.

Andrew Smith, Chief Risk Officer

at in a coffee shop on a Monday morning in early January, looking down on the Thames after an overnight flight from Bermuda – not much has changed since 23rd June. The coffee is still better in London than Bermuda, but less good than it is in mainland Europe. The staff have not suddenly become pearly kings and queens, I sit in a café with a French word in the name, as does the one next door – and the sky is still very much London grey. But appearances can be deceptive: the world has changed. That coffee costs a fifth less than it did (in my dollars), at least until inflation catches up with the devaluation of sterling. Since June, every G7 leader bar those from Canada, Japan and possibly Germany, has either changed, or will shortly change, and it would seem we are moving to a world where trade barriers go up, after years of coming down. While the EU/Canada trade agreement may be over the finish line, and the bones of the EU/USA covered agreement for insurance has finally been announced, the financial markets now move every time politicians speak, or Tweet, and we have a market based more on sentiment and feeling than data or analysis. The Ryan tax proposals, if implemented, put the US on a collision path with the World Trade Organisation and will fundamentally change the way the US trades with the world. Border adjustment – effectively an integration of concepts from corporation tax and value added tax – will have an unprecedented impact on US consumers, but also any business that exports to the US regardless of existing tax treaties. The proposals present a tax system that addresses many of the perceived issues with international tax planning, but such a substantial shift is unprecedented, and the specifics very much untested.

More broadly, President Elect Trump’s likely actions remain uncertain. On the domestic stage, there are some difficult choices, seeking to deliver on election promises while balancing with what is workable. To me, one thing seems certain: US domestic investment will increase, potentially fuelling inflation, and at the same time imports will be more expensive, which is also an inflationary driver. The signs would point towards a greater inward focus. On the international stage, it would seem Trump wants to make friends with those who have troubled relationships with their neighbours – Russia, Israel, Taiwan and the UK. Perhaps President Trump has Disney’s Jungle Book in mind: “A friend in need is a friend indeed”. However, some of these evolving relationships increase a risk of change in the global landscape and thus unpredictability and volatility seem likely. Speculation continues as to the future of the Euro. Most commentators agree that the Euro in its current form is unstainable, at least in the less economically strong economies. To succeed, there needs to be greater central control over tax and spending, but it seems a mandate for an acceleration towards a federal Europe is further away today than it was only a year ago. That said, there probably is the political will to maintain a dysfunctional currency for at least the next five to ten years. With the dollar predicted to rise, uncertainty increases. The UK has seen a 20% devaluation in sterling since June and some are predicting a 25% appreciation of the dollar. What does that mean for purchasing power for people in the UK, which is an important market for us?

spectives. Currency markets will remain volatile and the dollar will appreciate, possibly quite a lot, but perhaps not the often touted 25%. The pound will continue to depreciate against global currencies, perhaps quite a lot. Less strong European economies will continue to bounce between feast and famine. The Middle East will have some stabilising and destabilising influences. T he U S w ill s truggle t o i mplement the border adjustment tax. Brexit may or may not ultimately happen, which in turn may reverse some of the foreign exchange movements quite suddenly. Stocks in defence companies and US consumption of raw materials will increase. Mistakes will be made, U-turns will become more frequent, and trading relationships will change. Lots will be announced, but implementation will take longer than will be acceptable to those who think they finally have a voice. In this fast-changing environment, entrepreneurs will thrive. BUT STILL, WHAT DOES IT MEAN FOR BUILDING A GLOBAL REINSURANCE FRANCHISE?

SO WHAT DOES ALL THIS MEAN FOR US AS WE BUILD OUR FRANCHISE IN THIS UNCERTAIN WORLD?

Economic activity will rise in many developed nations and some emerging economies will recede, while others accelerate. This should mean an increased supply of insurable risk. Emerging economies will bring down barriers to transferring risk across borders, while developed economies will put up barriers. To grow the franchise, we need work hard to find w ays t o a ccess m arkets, d irectly o r indirectly. Capital management will become more complex and we will need to work hard to maintain and refresh the virtual proximity of our people.

Let’s start with what seems likely. These are my own views, which are no more valid than opposing per-

This all plays to our strengths. We are a small company that wants to grow as a franchise, without

becoming so big and so complex that we lose what we are. We are a company that is flexible. We support insurance entrepreneurs. We have a committed investor base providing us with a strong foundation. We have experience of finding ways to access different markets – through branches, affiliates and partnerships – and a track record of closing project-based opportunities as well as more routine contracts. We have gone from being an underwriting operation to being a truly established company, with capability in every discipline we need. After three years of growth in a hostile market, we are ready for the opportunity ahead. To take advantage of the opportunities this volatile world will offer, we will need to remain nimble and to adapt. We also need to be bold in the way that we manage our portfolio, reacting quickly to ensure the price we are paid is right for the risk we assume. We must lead, not follow, and we must manage our risks, our profitability, our capital growth, our global footprint, and our people. We cannot control the world nor the shifting sands around us - but we all have a collective and individual opportunity and responsibility to build the franchise we strive for: which is diverse in every way, distinctive, unique, different and special.

Since writing the article on 9 January, President Elect Trump is now President Trump, UK Parliament has debated Brexit and authorised Article 50 to be invoked. The UK is forging a relationship with the new US regime underlining the relevance of the Jungle Book reference. The dollar has not yet advanced and perhaps there are signs of a public response to the rise of populism. Uncertain times indeed. 5

INTRODUCING RVI

PROTECTING THE RESIDUAL VALUE OF COMMERCIAL ASSETS NICK HESTER IN OUR LONDON OFFICE IS ONE OF THE FEW PEOPLE IN THE WORLD WORKING IN THE NICHE SECTOR OF RESIDUAL VALUE INSURANCE (RVI). HE EXPLAINS HERE ITS BENEFITS, HOW THE MARKET HAS EVOLVED, AND OPPORTUNITIES FOR QATAR RE. Nick Hester

ver the past 30 years or so, Residual Value Insurance (RVI) has had some bad press – usually because of a misunderstanding of what it is, but also because policies were difficult to comprehend and almost impossible to claim against. Today, it has become an important tool in the world of asset finance and the demand is growing, allowing prudent underwriters to put together a diversified book of business in noncorrelated asset classes at very attractive rates. RVI, in its traditional definition, indemnifies the insured against a loss which might occur if the sale proceeds of a properly maintained asset are less than the asset’s insured residual value at the point specified in the policy – normally the end of a charter or lease. The objective of RVI is to indemnify the insured for a financial loss due to an unexpected occurrence which causes the future value of the asset to be less than forecast. In the context of ship and aircraft finance, a catastrophic event affecting asset or residual value insurance would occur when the sale and purchase or used aircraft market valued an asset at considerably below the minimum expected insured value when the coverage was purchased. With our RVI policy – known as a “proceeds policy” – all assets go through a 12 or 9 month remarketing period during the final year of the charter/lease to try to obtain the best sales price for the assets, thus mitigating a claim under the policy if the asset can be sold for more than the sum insured. Where clients leasing assets such as ships or aircraft are unwilling or unable to take on any or all of the asset risk involved in the transaction, lessors purchase RVI, which underwrites this risk.

Underwriters are prepared to consider RVI on a diversified range of assets with proven longevity. These include commercial vessels and offshore assets, helicopters, and fixed wing aircraft and other commercial transportation assets, plant and machinery known as “yellow goods”, construction equipment, mining equipment and certain types of commercial property. Prior to the 1980s, there was little activity in the RVI market. Some banks and leasing companies took asset risk through their lease books. The RVI market developed on a small scale during the mid-1980s when Clarendon began offering standalone RVI. Before this, several other insurers had included RVI in package policies – most notably Lloyd’s of London in the late 1970s offered a policy for IBM computers that included RVI. Unfortunately, these early policies were fraught with unforeseen technology issues which resulted in many claims, and to this day, Lloyd’s will not write RVI. The RVI market grew and developed in the early 1990s with the founding of the first dedicated RVI insurer called RVI Guaranty, which is still underwriting business today. Towards the end of the 1990s, when insurance companies faced soft markets and were seeking to exploit the convergence between banking and insurance, some high profile transactions, many of which were effectively RVI deals, were completed. This created a large amount of interest and the market boomed in this period, with many new players entering the sector. Unfortunately, many insurers wrote business on private passenger automobiles and other consumer and consumer-related assets 6

The market for RVI is growing again after most reinsueres withdrew their underwriting capacity in 2008/9. Qatar Re is one of a handful of specialist insurers/reinsurers in this field, offering RVI on most core, commercial assets, specialising in aircraft, ships and “yellow goods”.

Benefits to the lessor in an RVI transaction: n✓ n✓ n✓

Finance at a lower cost from the bank or capital markets, making the purchase/lease of the asset cheaper The security of a guaranteed value at a designated point in time - normally when the lease expires The cost of an expensive high value asset can be spread over its useful life

Benefits to the finance provider in an RVI transaction: n✓ n✓

A high credit rating can be attached to a given percentage of the loan amount Unforeseen asset risk is removed from the bank’s risk assessment and calculation (banks tend to prefer to take only credit risk)

Benefits to the lessee in a RVI transaction: n✓ n✓

Cheaper lease payments The security that the RVI Insurer has conducted thorough due diligence on the asset via the expert valuations

and quickly began to generate losses. Turmoil in the global financial markets over the past few years has caused many insurers to withdraw from their financial products lines and, as a consequence, the majority of insurers withdrew RVI underwriting capacity in 2008 and 2009 – despite the fact that underwriting results on commercial RVI transactions remained largely unaffected by the crisis. Today, the market is growing again, although it is still relatively small and Qatar Re is one of a handful of specialist insurers/reinsurers in this field. RVI does not provide any form of credit cover, however the Insurer is aware that the RVI policy will always be affected, albeit indirectly, by the credit quality of the underlying lessee. Qatar Re offers RVI on most core, commercial assets,

but we specialise in aircraft, ships and “yellow goods”. We are able to offer policies of up to 5 years for “yellow goods”, 10 years for new ships, and 12 years for new aircraft. Since the financial crisis, the changes to the world banking landscape have meant an increased demand for RVI as the financiers are less able to take asset risk. At the same time, the RVI market all but disappeared creating a severe supply demand mismatch. We are confident that Qatar Re’s arrival into the market will mean that some of that growing demand will now be met. Nick Hester is based in London and is responsible for building up the RVI business as a Representative. He has more than 40 years’ experience in key positions in the broking and underwriting industry and is one of less than 10 people in the world doing RVI.

EXPERTISE CATASTROPHE MODELS HAVE INCREASED GREATLY IN THEIR SOPHISTICATION IN RECENT YEARS, BUT THEY HAVE SHORTCOMINGS. CHIEF ACTUARY MARK COCKROFT LOOKS AT RECENT RESEARCH BY QATAR RE’S OWN NATURAL SCIENTISTS THAT COULD LEAD THE WAY TO THE NEXT GENERATION OF MODELS.

Stefan Hiemer has been a Natural Hazard analyst with Qatar Re’s Risk management team since May 2015. His responsibilities comprise geospatial data analysis and catastrophe model development and validation. Besides, Stefan is also responsible for the Qatar Re Zurich football team. Before joining Qatar Re, Stefan did a PhD in Seismology at the Swiss Seismological Service. His thesis entitled ‘Next-generation probabilistic seismicity forecasting’ was focused on the development of Californian and European Seismicity Models. This picture shows Stefan, during his Phd field work, setting up a small-scale seismic array on the Greenland ice shield.

A NEW ENGINE FOR CAT MODELLING Mark Cockroft

he approach widely used in modelling size and frequency of seismic events is more than 70 years old: earthquake sizes follow a powerlaw distribution that was developed in the 1940s. This size distribution, called the Gutenberg-Richter law, is still valid today although the parameters have been updated thanks to the development of more sensitive instruments and the fact that there are more events on record. It is also well known and accepted that earthquakes ‘cluster’ geographically, i.e. earthquake events tend to occur in certain locations more than others, even on a small scale within fault lines. To date, the most commonly used approach to incorporate earthquake clustering has been to divide tectonic plates into smaller zones that are believed to have common size and frequency, and to then model seismicity at the local level. The definition of local zones is usually decided by expert judgment. However, the process has a number of flaws:

flaws was a particular problem. For at least one of the standard commercial CAT models, one of the local zone boundaries for the Arabian Peninsula crossed through Qatar, which meant part of the country was included within a local zone to the north that had much greater seismicity despite Qatar being a low-risk earthquake territory. Research by Qatar Re scientists One of Qatar Re’s natural hazard analysts, Stefan Hiemer, has been looking at a different way of modelling earthquake clustering. The new approach that he has helped develop eliminates the artificial local zones and micro-level parameterisation. Instead, the region is divided into grids of equal size and the frequencies are smoothed between grid points using standard statistical techniques such that the fit to the observed data can be optimised by varying grid size and smoothing assumptions. The Gutenberg-Richter size distribution is kept the same across the whole region.

approach requires fitting multiple distributions, each of which has fewer underlying data points leading to greater parameter uncertainty in the models.

Because this alternative approach is grounded in statistical theory, it can be cross-validated – fitted against a subset of the observed data and tested against the remaining data – and it provides a best fit to the observed data. It also solves the flaws of the approach to date: there is no micro-level parameterisation and no local zone boundaries that can give arbitrary jumps in quake modelling outcomes.

Application in practice

For QIC, Qatar Re’s parent company, the last of these

Qatar Re teamed up with Independent Forecasting (IF) using their open source cat modelling platform, ‘Elements’, to look at Arabian Peninsula earthquake

n Aggregation

of the local models often fails to tally with the wider experience across a fault line or tectonic plate so that the models do not agree with observed data at a macro level. n The

At a given location, especially one near to a boundary edge of a zone, there is great sensitivity to where the boundaries are drawn by the experts.

risk. The open source aspect was important because Qatar Re was able to interrogate the underlying data – the so-called ‘catalogue’ events – of more than 11,000 measured earthquakes since 1980, which is the start of the reliable instrumental record.

But through its cooperation with an open source cat modelling vendor, Qatar Re has developed the engine of a next generation of cat model that addresses the flaws inherent in the existing science and modelling of seismic catastrophes.

The data were analysed for quality, trends and changes. The chosen data were all events exceeding a magnitude of 4.5 since 1985, with the same events since 2008 held back for later cross-validation.

Improved Seismicity Forecast with Spatially Varying Magnitude Distribution, by Stefan Hiemer & Yavor Kamer is available at: http://srl.geoscienceworld.org/content/87/2A/327 For further information please contact Stefan Hiemer: shiemer@qregroup.com

The results of the new method have given a new stochastic source for modelling earthquakes for Qatar and the Arabian region. The new method provides for a consistent fit to the total observed data and crucially still allows for the clustering effect as observed over time. Next steps There is more still to do, including adjusting for differences in types of fault lines (e.g. strike-slip vs subduction) that are known to affect the geographic spread and impact of earthquakes, and applying the vulnerability and financial engines to have a complete cat model.

Qatar Re Chief Actuary Mark Cockroft has more than 20 years’ experience in general insurance actuarial work. Prior to joining Qatar Re, he chaired the Institute of Actuaries’ working party researching the effects of Periodic Pay Orders in the UK. Mark has a BA Honours degree in Mathematics from the University of Oxford and is a Fellow of the Institute and Faculty of Actuaries and founding member of the Gulf Actuarial Society and Zurich Actuarial Society.

LATEST NEWS

NEXT GENERATION

Recent Appointments QATAR RE HAS CONTINUED TO EXPAND AND DEEPEN ITS OFFERING TO THE MARKET THROUGH A SERIES OF PROMOTIONS AND APPOINTMENTS IN THE SINGAPORE, LONDON, AND BERMUDA OFFICES. THE APPOINTMENTS UNDERSCORE QATAR RE’S COMMITMENT TO BUILDING A GLOBAL REINSURANCE FRANCHISE THAT IS WELL POSITIONED TO QUICKLY TAKE ADVANTAGE OF NEW BUSINESS OPPORTUNITIES.

Luke Roden

Chief Underwriting Officer (CUO), Short Tail classes Head of Ceded Re Member of Executive Management Committee Based in Bermuda

Orla Foley-Wright

Michael van der Straaten

Global Head of Human Resources Previous experience: Swiss Re, Torurs, Tokio Marine Kiln Based in London

CUO, Long Tail and Speciality classes Member of Executive Management Committee Previous experience: Lloyd’s, Chubb Based in Europe

Vicky Hu here is no history of aviation in my family, but my first flight, when I was 10 years old, left me with an unquenchable fascination for aircraft.

Business Development Director, Asia Previous experience: Swiss Re, Torus, Asia Capital Re Based in Singapore

Luke Roden has been appointed Chief Underwriting Officer (CUO), Short Tail classes and also retains his role as Head of Ceded Re in the Bermuda office. He will remain a member of our Executive Management Committee. Luke has a track record of developing and maintaining large, profitable portfolios of treaty reinsurance business over the last 24 years and has been central to the development of Qatar Re since he joined in 2012. He has lived and worked in North America, Europe, Bermuda and the Middle East during his career.

Orla Foley-Wright joined as Global Head of Human Resources on January 1, 2017, based in London. Orla has worked at companies such as Swiss Re, Torus and Tokio Marine Kiln, and has extensive international exposure leading HR teams across Europe, USA, India and Singapore. At Tokio Marine Kiln, Orla was instrumental in the integration of Kiln and Tokio Marine. Orla will be leading our HR function globally and working extensively with the senior management team, primarily on the company’s organisational DNA and its development.

Michael van der Straaten has been appointed CUO, Long Tail and Speciality classes, and will join our Executive Management Committee, subject to regulatory approval. Michael began his career in Lloyd’s as a Box Manager and non-Marine Property Treaty Underwriter. He joined Qatar Re in December 2016 from Chubb, where he held the role of Deputy Head of London and Head of Casualty, overseeing the development of their international casualty and motor business. Prior to this, Michael held various underwriting positions with a primary focus on casualty lines alongside wider management responsibilities.

Vicky Hu joined as Business Development Director, Asia, on November 7, 2016, in our Singapore branch office. She is responsible for developing alternative business channels in Asia including business partnerships and project-based opportunities. Prior to joining Qatar Re, Vicky headed up Swiss Re Global Partnerships’ Southeast Asia unit, developing opportunities with governments in the region as well as with the international development agencies. Prior to this, Vicky was involved in setting up Asia Capital Re in Singapore and headed up its marketing team before moving to treaty underwriting. 10

One of Qatar Re’s great strengths is the diversity of its workforce, with each member of staff bringing different perspectives to the business. In this edition, we talk to Marine and Aviation Junior Underwriter Araceli Vallés Sales.

I realised that I would need to major in Maths and Physics as a prerequisite for any career in aviation. This led me to taking a degree Mathematics at the Universitat de Valencia in 2003 followed by a Masters in Aerospace Science and Technology at the Universitat Politècnica de Catalunya in Barcelona. I went on to attain a PhD in Aerospace Science and Technology and completed a business course in airline management. After working in the Aeronautical school at the Universitat Politècnica de Catalunya, I was clear that I wanted to continue in the aviation sector and took a job as a components trading specialist with SR Technics in Zurich. Keen to broaden my understanding of the airline industry further, I joined Qatar Re’s Zurich office in November 2015 as a Marine and Aviation Junior Underwriter. Since I joined Qatar Re, I have been working with insurance market data in order to get a better understanding of the market and our share of the industry. I enjoy the variety of tasks involved every day in the job working with Head of Aviation and Marine, Patrick Cove. I have been engaged in a range of tasks including global underwriting and pricing, managing client relationships, and I have developed tools to better analyse the accumulation of risk and the market share on the portfolio. I developed a set of tools for Aviation, Space, Energy and Marine that can be sent to the customer, enabling them to review their market share and the accumulations of their risks. Qatar Re has a fascinating multicultural environment where is easy to get infected with people’s motivation and where you get benefit with new perspectives. Everyone is really accessible and that improves the

Qatar Re has a fascinating multicultural environment where is easy to get infected with people’s motivation and where you get benefit with new perspectives.

sharing and learning between departments. Qatar Re has provided me with the perfect work environment: a refreshing and dynamic place, where no two working days are exactly the same are and where I feel supported and encouraged to go further. In my life outside of the office, I am passionate about sports and practice it regularly with colleagues from work. Every day for me starts with a long run, so I am in perfect shape to embrace whatever the day brings. Last year I completed the Zurich marathon, but my time is top secret! 11

Bermuda Qatar Reinsurance Company Limited 71 Pitts Bay Road Pembroke HM08 Bermuda Doha Qatar Reinsurance Services LLC 8th Floor, QIC Building Tamin Street West Bay Area P.O. Box 24938 Doha, Qatar Dubai Qatar Reinsurance Company Limited Dubai Branch Level 2, Offices 211-212, Gate Village 4 Dubai International Financial Centre P.O. Box 506752 Dubai, United Arab Emirates London Qatar Reinsurance Company Limited Representative Office 10 Lime Street London EC3M 7AA United Kingdom Singapore Qatar Reinsurance Company Limited Singapore Branch Church Street #12-02, Samsung Hub Singapore 049483 Zurich Qatar Reinsurance Company Limited Pembroke (Bermuda), Zurich Branch Bleicherweg 72 8002 Zurich Switzerland March 2017 - Imprint PUBLISHER: Qatar Reinsurance Company Limited