A.M. Best Credit Ratings and Market Discipline Seminar Series 2014 Beijing, China

Transcription

1 A.M. Best Credit Ratings and Market Discipline Seminar Series 2014 Beijing, China Road to 2 nd Generation Solvency in China Current Capital Position of the China Non-Life Market

2 RUNDOWN: Time Agenda Speakers 8:15am Registration and light breakfast 9:00am Opening remarks Dr Roger Sellek Chief Executive Officer A.M. Best EMEA & Asia Pacific 9:15am Keynote address Mr Ren Xiaobing Senior Vice President Board of Directors China Reinsurance (Group) Corporation 9:30am 10:30am Study on the capital adequacy of the China non-life insurance market Coffee break Ms Vivian Cheung Financial Analyst A.M. Best Asia-Pacific Ltd. 11:00am Credit ratings and market discipline Ms Susanna Lam Managing Director A.M. Best Asia-Pacific Ltd. 11:30am Panel discussion: Solvency development in the China insurance market Ms Daisy Dai Chief Actuary Taiping General Insurance Co Ltd. Mr Sitao Xu Chief Representative, China The Economist Group Director of Global Forecasting, China, EIU Ms Cynthia Yuan Assistant General Manager Actuarial and Risk Management China Reinsurance (Group) Corporation Mr Sifang Zhang Director, Head of Rating Agency Advisory, APAC Aon Benfield Analytics Aon Benfield China Mr Moungmo Lee General Manager, Analytics A.M. Best Asia-Pacific Ltd. Ms Susanna Lam (Moderator) Managing Director A.M. Best Asia-Pacific Ltd. 12:35pm Closing address Dr Roger Sellek Chief Executive Officer A.M. Best EMEA & Asia Pacific 12:45pm Luncheon

3 Opening Remarks Dr. Roger Sellek Chief Executive Officer A.M. Best EMEA & Asia Pacific Roger Sellek is based in London and oversees A.M. Best s ratings, information-services and news businesses throughout Europe, the Middle East, Africa and the Asia-Pacific region. Prior to joining A.M. Best, Roger was Commercial Director for Lloyd s of London for six years, responsible for the market s strategic business relationships with its investor base, brokers, the rating agencies and the financial-analyst community. Shortly after joining Lloyd s, Roger was appointed Head of Commercial Policy and subsequently became Managing Director of Lloyd s Market Risk Unit, where he directed the development and application of the market s risk-based capital system. He had earlier worked as a consultant to the Equitas Project, assuming management responsibility for the analysis of all non-aph liabilities. In addition to 15 years of extensive experience and achievement in the insurance and reinsurance sectors, Roger has a long academic background, graduating with a BSc in mathematical physics from the University of Exeter and with a PhD three years later. Roger also holds an MBA in strategic management from Imperial College at the University of London and carried out post-doctoral research at the University of Cambridge. He has worked in a number of academic positions in the United Kingdom and overseas, including as a lecturer in applied mathematics at the University of Sydney, Australia. He also spent two years as the National Squash Coach for Thailand. 2

4 Keynote address Ren Xiaobing Senior Vice President Board of Directors China Reinsurance Group Corporation Ren Xiaobing is one of the vice presidents and board of directors of China Reinsurance Group Corporation in charge of China Re group s integrated risk management, actuarial management and information technology management. Mr. Ren has more than 20-year experience in insurance industry including great experience in insurance regulation and P&C insurance experience. He worked as a key staff in former insurance regulatory institution, including Financial Management Dept., Non-banking Regulation Dept., and Insurance Regulation Dept. of People s Bank of China. After China Insurance Regulatory Commission is established, he worked as deputy director of Insurance Intermediary Regulatory Dept. Then he worked as chief underwriter and vice president of Huaan P&C Insurance Company. Afterwards, he worked as board director of China Reinsurance Group Corporation as well as deputy director of Insurance Institutions Department of Central Huijin Investment Ltd. 3

5 Study on the capital adequacy of the China non-life insurance market Vivian Cheung Financial Analyst A.M. Best Asia-Pacific Ltd. Vivian Cheung is a Financial Analyst who has been working with A.M. Best Asia-Pacific for more than three years. Vivian joined A.M. Best in September 2010 and is working on the Greater China portfolio. She joined A.M. Best from The Hong Kong Jockey Club, where she was responsible for the business development of the horse racing simulcast business. Prior to The Hong Kong Jockey Club, she was a sell-side equity research analyst with China Everbright Research Limited and the Hong Kong research division of a Taiwanese boutique investment bank. Prior to her roles in sell-side equity research, she undertook a (buy-side) investment analyst role with China Life Insurance (Overseas) Company Limited. Vivian graduated from University of Toronto, Canada, with an Honours Bachelor Degree in Actuarial Science and Economics. 4

6 Study on China Non-life Insurance Capital Adequacy Vivian Cheung Financial Analyst A.M. Best Asia-Pacific Ltd. 26 February 2014 Disclaimer AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling. Study on China Non-life Insurance Capital Adequacy 26 February

7 Preface Objectives CIRC has been actively promulgating the development of the China Risk Oriented Solvency System (C- ROSS) This study investigates the impact of the First Pillar of the new solvency regime on the non-life insurance industry in China Details To illustrate A.M. Best s view on the impact of implementing risk-based solvency regime on the domestic Chinese non-life insurance industry To investigate the major drivers in improving the riskbased solvency ratio Study on China Non-life Insurance Capital Adequacy 26 February Rating key components Insurance Company Financial Strength Balance Sheet Strength Operating Performance Business Profile Enterprise Risk Management + Country Risk Rating Study on China Non-life Insurance Capital Adequacy 26 February

8 Best s Capital Adequacy Ratio (BCAR) Adjusted Policyholder Surplus Net Required Capital + Reported Surplus + Equity Adjustments Unearned Premium Equity Assets Loss Reserve Equity Reinsurance + Debt Adjustments Surplus Notes Debt Service Requirements - Other Adjustments: Potential Catastrophe Losses + (B1) Fixed-Income Securities Risk + (B2) Equity Securities Risk + (B3) Interest Rate Risk + (B4) Credit Risk + (B5) Loss and Loss-Adjustment- Expense Reserves Risk + (B6) Net Written Premium Risk + (B7) Off Balance Sheet Risk - COVARIANCE BCAR SCORE = Adjusted Policyholder Surplus / Net Required Capital Study on China Non-life Insurance Capital Adequacy 26 February Capitalization remains weak, but is expected to improve 700% Best's Capital Adequacy Ratio (BCAR) 600% 500% 400% 300% 200% All Domestic BCAR Domestic Top 10 BCAR Domestic Top BCAR Domestic Top BCAR Rest of Domestic Market 100% 0% F 2014F o The Best s Capital Adequacy Ratio (BCAR) for the overall domestic* non-life market is computed to be 88% as of December 2012, an increase from 64% in 2010 o Empirical evidence suggests that insurers with the largest market shares have weaker riskadjusted capitalization, thus creating downward pressure on the overall market *Note: China Export & Credit Insurance is excluded due to data availability (market share in 2012: 2.58%) China Champion P&C is excluded due to data availability (market share in 2012: 0.008%) Study on China Non-life Insurance Capital Adequacy 26 February

9 Insurance risks have the largest influence on capital adequacy 58% Risk weighting % 2% 12% 6% 3% 19% Fixed Income Risk Equity Risk Interest Rate Risk Credit Risk Reserve Risk Premium Risk o Premium and reserve risks constitute the two largest components of the net require capital o In view of the gradual reform of the capital management framework, asset risk and liquidity risk (fixed-income risk, equity risk, interest rate risk, etc.) are expected to have higher weightings o The overall risk-weighting mix is expected to change Study on China Non-life Insurance Capital Adequacy 26 February Underwriting leverage exhibits inverse relationship with local solvency ratio 350% 300% 250% 200% 150% 100% UW Leverage & Reserve Leverage UW Leverage Reserve Leverage Avg. local solvency ratio o The overall industry experienced decreasing trend in both the UW leverage and the reserves leverage. Ratios in 2012 were 246% and 88%, respectively o High premium leverage creates downward pressure on the local solvency ratios under a Solvency I regime 50% 0% Study on China Non-life Insurance Capital Adequacy 26 February

10 Risk-adjusted capitalization of Top 10 insurers is relatively weaker while premium leverage ratios are higher Market Share Net Premium Leverage % 3.57% 1.95% % Top 1-10 Top Top Overall Market Top 10 Top Rest of the market 1.5 Top BCAR score <100% 100% - 125% 125% - 150% 150% - 175% 175% - 200% >= 200% Market Share 70.1% 17.6% 2.1% 2.6% 2.3% 1.5% # of Co o Within the 11 companies with BCAR lower than 100%, six of them belong to the top 10 o Together these six insurers represent 65.5% of the market Study on China Non-life Insurance Capital Adequacy 26 February Companies with shorter operating history have higher BCAR 500% 2012 BCAR vs Operating history 450% 400% 350% 2012 BCAR 300% 250% 200% 150% 100% 50% 0% Number of years in operation It is important to maintain adequate capital to support business built-up and associated growing risks + Study on China Non-life Insurance Capital Adequacy 26 February

11 Premium growth and capital growth are the major drivers of capital adequacy Premium Growth Market demand Premium rate change Capital Growth Internal: organic growth External: capital injection / debt issuance Study on China Non-life Insurance Capital Adequacy 26 February Capital injection is the most commonlyused measure to strengthen capitalization 25,000 Capital strengthening measures adopted by Top 10 insurers 20,000 RMB million 15,000 10,000 Capital Injection Issuance of sub-debt 5, In this three-year period: o Capital injection totalled RMB 51 billion o Issuance of sub-debt totalled RMB 19 billion Study on China Non-life Insurance Capital Adequacy 26 February

12 Top 10 Insurers by Financial Leverage Top 10 Non-life Insurers - Financial Leverage % 24% 24% 23% ICR Category Best ratings guidelines Financial Leverage Interest Coverage RMB billion % 22% 22% 21% aaa < 15% > 10x aa < 25% > 7 x a < 35% > 5 x % 20% 20% bbb < 45% > 3 x bb < 65% > 2 x % b > 65% < 2 x Capital & surplus External borrowings Financial Leverage o o Larger players utilize more external borrowings than smaller peers Decline in leverage mainly driven by strong growth in C&S Note: Financial Leverage calculated as Borrowings / (Borrowings + C&S) Study on China Non-life Insurance Capital Adequacy 26 February Impact of borrowings on Top 10 insurers by BCAR Equity Credit Awarded to External Borrowings Top 10 insurers by Aggregate BCAR F 2014F 0% (Current) 52% 54% 71% 79% 85% 25% 58% 60% 77% 84% 90% 50% 64% 66% 83% 90% 94% 75% 70% 72% 89% 95% 99% 100% 76% 78% 95% 100% 103% o o Equity credit awarded to debt borrowings contributes to strengthening risk-adjusted capitalization Utilizing subordinated debt alone for solvency purposes would not enhance BCAR above 100% level Study on China Non-life Insurance Capital Adequacy 26 February

13 Scenario Analysis External Capital Injection 2012 Total Reported Surplus = RMB 191 billion Additional Equity Required (RMB billion) % of 2012 Total Reported Equity 2012 BCAR = 88% - - BCAR = 100% % BCAR = 125% % BCAR = 150% % o The industry needs approximately RMB 19.3 billion to improve its 2012 BCAR from 88% to 100% Study on China Non-life Insurance Capital Adequacy 26 February The overall industry has a balanced profit structure while small-to-medium sized insurers rely more on investment earnings Breakdown of Profit before tax 40,000 35,000 30,000 25,000 20,000 15,000 RMB million Other Income/(Expense) Investment Profits Underwriting Profits 10,000 5, Top Top Top 10 Total Non-life Market -5,000 Study on China Non-life Insurance Capital Adequacy 26 February

14 Small-to-medium sized insurers face higher underwriting costs than Top Underwriting Performance 120% 100% 80% 60% Expense Ratio Loss Ratio 40% 20% Top Top Top Total Non-life Market 0% Study on China Non-life Insurance Capital Adequacy 26 February Internal Capital Growth Combined Ratio Operating Environment 2013 BCAR for overall domestic market Lower Profits Base Case Higher Profits Combined ratio 97.0% 93.5% 90.0% Implied ROE* 13.8% 20.0% 25.8% BCAR result 92.0% 98.0% 103.6% *Note: Our analysis focuses on the profitability and its impact to the capital & surplus instead of changes in the capital level itself Study on China Non-life Insurance Capital Adequacy 26 February

15 Internal Capital Growth Combined Ratio 220% 200% 180% 160% 140% 120% 100% BCAR Projection - Combined Ratio o The non-life industry is projected to reach BCAR 150% in 2020 o Given a more favourable combined ratio at 90%, the time taken can be shortened to two years o If the industry experiences a prolonged period of low underwriting profitability, BCAR growth will be slow 80% Year Combined Ratio=97% Combined Ratio=90% Combined Ratio=93.5% Target Level Study on China Non-life Insurance Capital Adequacy 26 February Investment return & ROE were lower in 2012 Net Investment Yield 3.6% 3.4% 3.2% 3.0% 2.8% 2.6% 2.4% 2.2% 2.0% 30% 25% 20% 15% 10% 5% 0% Net Investment Yield & Leverage Net Investment Yield_Top10 Investment Leverage_Top10 Net Investment Yield_Mkt Investment Leverage_Mkt Average Return on Equity Avg ROE_Top10 Avg ROE_Mkt Investment Leverage o Net investment yield (incl. capital gains/losses) was 3.4% for the whole non-life market. The investment leverage was about 3.5 times o Investment leverage for Top 10 was higher than that of the overall market over the three years o Top 10 show stronger average ROE than the overall market Study on China Non-life Insurance Capital Adequacy 26 February

16 Internal Capital Growth Investment Yield Operating Environment 2013 BCAR for overall domestic market Lower Investment Return Base Case Higher Investment Return Net Investment Yield 2.0% 3.5% 5.0% Implied ROE* 16.1% 20.0% 23.5% BCAR result 95.3% 98.0% 100.2% *Note: Our analysis focuses on the profitability and its impact to the capital & surplus instead of changes in the capital level itself Study on China Non-life Insurance Capital Adequacy 26 February Internal Capital Growth Investment Yield 220% 200% BCAR Projection - Net Investment Yield o The non-life industry is projected to reach BCAR 150% in % 160% 140% 120% 100% 80% Year o If the net investment yield is increased by 1.5%, the time taken will be shortened to four years o Improvement in net investment yield can strengthen capitalization, however the benefit may not be as great as improvement in underwriting Net Investment Yield=2% Net Investment Yield=5% Net Investment Yield=3.5% Target Level Study on China Non-life Insurance Capital Adequacy 26 February

17 Scenario Analysis Average ROE Operating Environment 2013 BCAR for overall domestic market Lower ROE Base Case Higher ROE Values 15.0% 20.0% 25.0% BCAR Result 93.3% 98.0% 102.8% *Note: Our analysis focuses on the profitability and its impact to the capital & surplus instead of changes in the capital level itself Study on China Non-life Insurance Capital Adequacy 26 February Scenario Analysis Average ROE 220% 200% 180% 160% 140% BCAR Pojection Based on ROE o If the ROE improves by 5%, BCAR is expected to reach 150% in two years o If the industry experiences a prolonged period of lower ROE, BCAR will improve at a much slower pace 120% 100% 80% Year ROE=15% ROE=20% ROE=25% Target Level Study on China Non-life Insurance Capital Adequacy 26 February

18 GPW growth rates reduced in recent years 40.0% Non-life Gross Premiums Written o Growth in 2011 and 2012 was lower than the peak growth in % 20.0% 21.5% 5-Yr CAGR Growth Rate o GPW is expected to continue the positive growth, albeit at a slower pace 10.0% 0.0% Study on China Non-life Insurance Capital Adequacy 26 February Internal Capital Growth NPW Growth Operating Environment 2013 BCAR for overall domestic market Faster Growth Base Case Slower Growth NPW growth 28.0% 21.5% 15.0% Implied ROE* 20.5% 20.0% 19.1% BCAR result 92.5% 98.0% 104.0% *Note: Our analysis focuses on the profitability and its impact to the capital & surplus instead of changes in the capital level itself Study on China Non-life Insurance Capital Adequacy 26 February

19 Internal Capital Growth NPW Growth 220% 200% 180% BCAR Projection - NPW Growth o If the premium growth of the overall non-life market is higher than the CAGR over the past five years, BCAR is expected to be lower and grow at a slower pace 160% 140% 120% o If premium growth slows down to 15% (approximately 2013 level), BCAR is expected to reach 150% in two years (2016) 100% 80% Year NPW Growth=28% NPW Growth=15% NPW Growth=21.5% Target Level Study on China Non-life Insurance Capital Adequacy 26 February Internal Capital Growth NPW Growth Weaker BCAR Score Stronger (ROE NPW Growth Rate) Smaller Spread (ROE NPW Growth Rate) Larger Spread o Fast NPW growth does not directly translate into same degree of improvement in the ROE. Other factors such as underwriting performance, operating efficiency and investment strategies should be taken into account o BCAR score tends to improve as ROE approaches or exceeds NPW growth o Core importance is to improve earnings quality!!! Study on China Non-life Insurance Capital Adequacy 26 February

20 Scenario Analysis NPW / ROE NPW Growth 2013 BCAR Faster Growth 28% Base Case 21.5% Slower Growth 15% Adverse 10% 82.2% 88.5% 94.4% Return on Equity Base Case 20% 92.5% 98.0% 104% Favourable 30% 100.2% 107.6% 114.5% o BCAR can improve if the spread between ROE and NPW growth rate becomes more positive / less negative Study on China Non-life Insurance Capital Adequacy 26 February International BCAR Comparison AU SG JP KR GPW growth (5-yr average) 6% 6% -1% 15% Average U/W leverage 0.6x 0.3x 0.9x 2.8x Average C&S (USD bn) Average BCAR 354% 408% 221% 284% Average Local Solvency 215% 247% 320%* 286% Average Rating (ICR) a a aa a+ 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% BCAR & Local Solvency 2012 AU SG JP KR Notes: Based on 2012 data Averages are based on companies rated by AMBAP * Japan local solvency ratio is divided by 2 to reflect adjustment factor on local RBC Average BCAR Average Local Solvency Average BCAR of the 4 markets Study on China Non-life Insurance Capital Adequacy 26 February

21 Comparison of BCAR to China local solvency ratio CN Domestic CN Top CN Top CN Top GPW growth in % 14.8% 43.9% 9% U/W leverage 2.5x 3.1x 1.3x 1.3x Average C&S (USD bn) Average BCAR 88% 71% 134% 171% Average Local Solvency 214% 183% 412% 431% 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% CN Domestic BCAR & Local Solvency 2012 CN Top 1-10 CN Top CN Top Average BCAR Average Local Solvency Study on China Non-life Insurance Capital Adequacy 26 February Japan non-life BCAR is exposed to volatility of Japanese equity market 250% Average BCAR trend of Japan Non-life Insurers 200% BCAR 150% 100% 5-year GPW CAGR = -0.5% Japan 50% 0% o Japan experienced very slow growth with capitalization highly exposed to equity market performance Note: Data based on AMB rated companies Study on China Non-life Insurance Capital Adequacy 26 February

22 S. Korea experienced double-digit growth in premium; BCAR on improving trend 300% Average BCAR trend of S. Korea Non-life Insurers 250% 200% BCAR 150% 5-year GPW CAGR = +15.2% Korea 100% 50% 0% o The healthy trend in BCAR suggests capital is growing and supportive of the overall risk profile Note: Data based on AMB rated companies Study on China Non-life Insurance Capital Adequacy 26 February Summary As investment channels gradually broaden, insurers should pay attention to changes in asset risk as well as the impact on capitalization Premature adoption of RBC could have a destructive impact on the industry. A phase-in approach would allow more time for the industry to adapt to changes in solvency regime Larger insurers need more capital and/or reinsurance support to sustain growth Insurers could put strong focus on improving profitability to strengthen returns on capital which, in turn, will attract external capital Study on China Non-life Insurance Capital Adequacy 26 February

23 Questions? Study on China Non-life Insurance Capital Adequacy 26 February Study on China Non-life Insurance Capital Adequacy Vivian Cheung Financial Analyst A.M. Best Asia-Pacific Ltd. 26 February

24 Credit ratings and market discipline Susanna SW Lam Managing Director A.M. Best Asia-Pacific Ltd. Susanna Lam is the managing director of A.M. Best Asia-Pacific Ltd., where she leads A.M. Best s operations throughout the Asia-Pacific region. Susanna oversees the ratings and news businesses of A.M. Best within the insurance and reinsurance sectors in the region, managing existing relationships and developing new relationships with key constituents in the insurance and broader financial services sectors. As a member of the Board, Susanna is responsible for ensuring that the compliance and regulatory requirements of the business are fulfilled. Susanna has over 30 years experience in the reinsurance and insurance industry and is the former general manager reinsurance department of Ping An Property & Casualty Insurance Company of China, Ltd, where, based in Ping An s Shenzhen headquarters, she managed the company s outwards and inwards reinsurance portfolios and headed both the treaty and facultative divisions. Prior to Ping An, Susanna was the director and general manager of Miller Insurance Services (Hong Kong) Ltd, where she set up their Hong Kong office and was responsible for developing and producing business in North Asia. Susanna was also formerly with Swiss Re, where she worked in the company s Hong Kong and Sydney offices. Susanna holds an ACII qualification and a diploma in management studies. 23

25 Credit Ratings and Market Discipline Susanna Lam Managing Director A.M. Best Asia-Pacific Ltd. 26 February 2014 Disclaimer AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling. Credit Rating and Market Discipline 26 February

26 Agenda Introduction to credit ratings How credit ratings can help to enhance market discipline Insurance market development life cycle Credit Rating and Market Discipline 26 February Introduction to credit ratings Independent opinion of an entity s ability to meet its financial obligations/policyholders claims Prospective and long-term in view What is an international credit rating? Comparable across countries and different types of operations/issuers Supported by transparent criteria and methodology supported by historical data Credit Rating and Market Discipline 26 February

27 A.M. Best rating scales Secure FSR A++ A+ A A- a- B++ ICR aaa aa+ aa aaa+ a bbb+ bbb B+ bbb- Investment Grade Vulnerable FSR B B- C++ ICR bb+ bb b+ b C+ b- C C- D bb- ccc+ ccc ccccc c Non-Investment Grade FSR = Financial Strength Rating ICR = Issuer Credit Rating Credit Rating and Market Discipline E = under regulatory supervision F = in liquidation 26 February Impairment studies Cumulative average impairment rates Interactive ratings are forward-looking, impairment studies assess historical performance 1-Year 5-Year 10-Year 15-Year A++/A+ 0.05% 0.64% 1.91% 3.72% A/A- 0.17% 1.93% 4.69% 6.78% B++/B+ 0.77% 5.37% 10.19% 13.86% B/B- 2.17% 10.53% 19.09% 26.13% C++/C+ 3.73% 14.62% 27.07% 33.20% C/C- 5.90% 18.40% 34.59% 46.44% D 7.57% 26.28% 42.33% 51.12% Secure 0.23% 2.05% 4.56% 6.78% Vulnerable 3.76% 14.88% 26.37% 34.10% All 0.65% 3.54% 7.11% 10.04% Source: U.S. Property/Casualty & Life/Health: Best s Impairment Rate and Rating Transition Study 1977 to 2012, Published: March 28, 2013 Credit Rating and Market Credit Rating and Market Discipline 26 February Discipline 26

28 One-year rating transition matrix A++/A+ A/A- B++/B+ B/B- C++/C+ C/C- D A++/A % 6.70% 0.34% 0.02% 0.00% 0.00% 0.00% A/A- 3.65% 92.34% 3.14% 0.48% 0.08% 0.05% 0.10% B++/B+ 0.38% 10.54% 81.68% 5.34% 0.58% 0.28% 0.44% B/B- 0.26% 1.12% 14.43% 75.66% 4.12% 0.98% 1.25% C++/C+ 0.23% 0.76% 2.04% 17.65% 66.80% 5.71% 3.09% C/C- 0.00% 0.64% 0.26% 4.10% 14.87% 66.03% 8.21% D 0.10% 0.67% 1.03% 2.83% 2.93% 3.45% 81.42% Source: U.S. Property/Casualty & Life/Health: Best s Impairment Rate and Rating Transition Study 1977 to 2012, Published: March 28, 2013 Credit Rating and Market Credit Rating and Market Discipline 26 February Discipline Introduction to credit ratings Complimentary to regulatory governance of market discipline, provide independent insight into an entity s operations A prospective viewpoint rather than a point-in-time assessment Credit ratings can provide Global benchmarking and monitoring of a marketplace Transparency and market understanding Credit Rating and Market Discipline 8 26 February

29 Agenda Introduction to credit ratings How credit ratings can help to enhance market discipline Insurance market development life cycle Credit Rating and Market Discipline 26 February Credit ratings and market discipline The role of credit ratings for different stakeholders in the insurance sector Insurers/ issuers Policyholders/ General public Regulators Foster the healthy development of an insurance market Credit Rating and Market Discipline 26 February

30 Credit ratings and market discipline Insurers / issuers Companies benefit from undergoing the rating process on a regular basis, internal driver to improve corporate governance and risk management Allows companies to make direct comparisons with peer group Provides confidence to policyholders & investors Encourages underwriting discipline and market leadership Promotes the effective use of capital (to maintain rating) Encourages in prudent investment decisions Sets business goals and areas of improvement Promotes transparency and healthy competition Credit Rating and Market Discipline 26 February Credit ratings and market discipline Policyholders / General Public Benefit from market stability and transparency Provides financial due diligence on insurers Maintains flows of quality financial information (transparency) Allows purchasing decisions to be made on a more informed basis Creates a sustainable and healthier market Credit Rating and Market Discipline 26 February

31 Credit ratings and market discipline Regulators To protect policyholders via enforcement of standards and rules empowered by law Complimentary to regulatory governance on market disciplines Supplementary tool to enforce standards and rules Supplements understanding and evaluation of inherent risk and default probability Enhances transparency to aid policyholders confidence Credit Rating and Market Discipline 26 February Regulators perspective Credit Rating and Market Discipline 26 February

32 Ratings in regulations Minimum rating requirements on reinsurers have been imposed by regulators in some territories Australia 100% capital charge is applied to unsecured reinsurance recoverables from foreign reinsurer with rating lower than a- Indonesia Overseas reinsurance companies reinsuring Indonesian business should have a minimum rating of bbb * China Foreign reinsurers as lead: minimum rating of a- Foreign reinsurers not as lead: minimum rating of bbb Taiwan minimum ratings for international reinsurers is A.M. Best financial strength rating (FSR) of B+ or equivalent India Insurers should place reinsurance with foreign reinsurers with a minimum rating of bbb Vietnam Foreign reinsurers accepting 10% or more in any reinsurance contract must have a minimum rating of bbb Risk-based capital (RBC) requirement Solvency I capital requirement Credit Rating and Market Discipline * Higher risk charges will otherwise be applied 26 February Ratings in regulations Ratings of reinsurers are used in calculating insurers counterparty risk in many regulatory solvency requirements 25% Malaysia 20% New Zealand 15% Korea 10% Thailand 5% 0% aaa aa a bbb lower than bbb # Australia - APRA authorised reinsurer * Australia - foreign reinsurer, secured RI recoverables * Note: the Australian risk charges for unsecured RI recoverables from foreign reinsurers are not shown in the chart # Note: risk charges for lower than bbb rating categories can be higher than the values indicated in the chart Credit Rating and Market Discipline 26 February

33 Agenda Introduction to credit ratings Development of credit ratings to enhance market discipline Insurance market development life cycle Credit Rating and Market Discipline 26 February Rating - country risk The risk that country-specific factors could adversely affect an insurer s ability to pay its financial obligations Economic Risk Political Risk Financial System Risk Non-Insurance Insurance Macroeconomy Prospects Government Finance Business Environment Government Stability Social Stability Legal System Banking System Reporting Standards & Regulation Sovereign Debt Government & Legislation Supervisory Authority Insurer Accountability CRT-1 Lowest Risk CRT-3 Moderate Risk CRT-5 Highest Risk Credit Rating and Market Discipline 26 February

34 Rating - country risk GDP ($000s) per capita (2012) CRT-1 CRT-2 CRT-3 CRT-4 CRT Ease of doing business CRT-1 CRT-2 CRT-3 CRT-4 CRT Corruption perception index CRT-1 CRT-2 CRT-3 CRT-4 CRT-5 Credit Rating and Market Discipline 26 February CRT and market development Country risk tiers Market development stages Market Development Stage F E D C B A 5b 5a 4b 4a 3 1 & 2 Country Risk Tier Source: A.M. Best Markets can move through different stages of development over their life cycle. The catalyst for this may be different in each market, but there is a clear pattern which emerges. The point at which a market develops at its fastest rate and the industry begins to focus more upon stability rather than growth. Credit Rating and Market Discipline February

35 Facilitating market development The ratings link for market development Transparent and open business environment Corporate accountability Accurate and comparable information Stronger and healthier market development Credit Rating and Market Discipline 26 February Thank you Any questions? Credit Rating and Market Discipline 26 February

36 Credit Ratings and Market Discipline Susanna Lam Managing Director A.M. Best Asia-Pacific Ltd. 26 February

37 Panel discussion: Solvency development in the China insurance market Cynthia Yuan Assistant General Manager, Actuarial & Risk Management China Reinsurance Group Corporation Cynthia Yuan is an assistant general manager of actuarial and risk management for China Re Group. She is a team leader for the risk dependency research working party of C-ROSS (China Risk Oriented Solvency System) for CIRC. She also chairs the non-life working party economic capital modelling in emerging market for Giro. Before working for China Re, Cynthia has more than ten years experience in London market ranging from consultancy, pricing and risk management. Cynthia is a fellow of IFoA. Sifang Zhang Director, Head of Rating Agency Advisory, APAC Aon Benfield Analytics Aon Benfield Sifang Zhang joined Aon in July 2007 and is currently responsible for Aon Benfield s Rating Agency Advisory and Enterprise Risk Management practice in the Asia Pacific region. Assisted by the global rating agency advisory service team and the local analytics team, he helps clients in this region to obtain desired initial rating, to maintain existing rating, to seek upgrade and/or avoid downgrade. He also helps clients assess and improve enterprise risk management practice, and provides advice on insurance regulatory issues. Sifang s prior experience includes public accounting, telecommunications, insurance and banking. Prior to joining Aon, Sifang helped a number of (re)insurers in Asia Pacific with financial strength rating application and/or maintenance. He helped clients optimize reinsurance management, capital management, and enterprise risk management from the rating agency and/or regulatory perspective. Sifang has spoken at various external and internal seminars and lectures. He has also been active in job-related research activities. He is an MBA, CPA, and CFA charter holder. 36

38 Panel discussion: Solvency development in the China insurance market Sitao Xu Chief Representative, China The Economist Group Director of Global Forecasting, China, EIU Xu Sitao is Chief Representative of the Economist Group in China and Director of Advisory Services for Economist Corporate Network in China since He is Director of Global Forecasting, China, at EIU, with a mandate of serving the increasing needs of the overseas drive by Chinese companies. Xu Sitao was the Economist for Indonesia, Korea, and Thailand in Singapore, working for MMS International of Standard and Poor s Group in He then joined Standard Chartered Bank as Regional Treasury Economist in Following this, he became Societe Generale s Chief Economist for Asia (ex- Japan) in Most recently, Xu Sitao worked for ICBC (Asia), the overseas flagship of China s largest bank (the world s largest bank based on market capitalization), as the Head of Economics. Xu Sitao holds a B.A. in Economics from Peking University, an M.A. in Economics from the University of Connecticut, and a M.S. in Finance from Boston College. He has been a columnist for Caijing and 21st Century, China s leading business publications and has contributed frequently to leading regional and international publications, such as Yale Global Magazine, the Asian Wall Street Journal and Financial Times. He appears regularly on CNBC, Bloomberg, CCTV, and other TV shows as a commentator on Asia and an accomplished public speaker and lecturer. Xu Sitao speaks regularly at board meetings of major corporations and major conferences for institutional investors and policymakers. Xu Sitao is on the Speaker Retainer Programme for the Virginia-based CFA Institute and speaks regularly on asset allocation strategy in the context of China to institutional investors. Xu Sitao is a non-executive director of Hunan Valin, one of major steel companies in China, which is partially owned by ArcelorMittal. Xu Sitao is also sitting on the board of Hisun Tech (a Hong Kong listed company). Xu Sitao is also a clinical professor at the School of Economics and Management of Tsinghua University. Xu Sitao is a visiting scholar at Hoover Institution at Stanford University in

39 Panel discussion: Solvency development in the China insurance market Daisy Dai Chief Actuary Taiping General Insurance Co Ltd. Ms. Dai is the Chief Actuary of Taiping General Insurance and is a member of the company s management board. She has over 10 years of experience in actuarial, including pricing, reserving, product development etc. In addition to traditional actuarial fields, Ms. Dai also has ample experiences on strategy, distribution management and project management. She started her career at Ping AN P&C and subsequently joined Taiping General. After leaving Taiping General for a roughly 3-yr period during which she helped founded and was Chief actuary of JinTai P&C, she rejoined the company in Ms. Dai is a Fellow of the Institute and Faculty of Actuaries. Moung Mo Lee General Manager, Analytics A.M. Best Asia-Pacific Ltd. MM Lee is the general manager of analytics at A.M. Best Asia-Pacific Ltd. MM has been with A.M. Best since He is responsible for the analytics of A.M. Best's ratings in the Asia-Pacific region. Prior to assuming his current role, MM served as the lead analyst for numerous companies in A.M. Best's Asia-Pacific portfolio. Before joining A. M. Best, MM worked for SiemensAG and Hypo Bank in Germany. MM received his bachelor's degree in economics from ChungAng University and his master's in economics from Seoul National University. 38

40 Panel discussion: Solvency development in the China insurance market Susanna SW Lam (Moderator) Managing Director A.M. Best Asia-Pacific Ltd. Susanna Lam is the managing director of A.M. Best Asia-Pacific Ltd., where she leads A.M. Best s operations throughout the Asia-Pacific region. Susanna oversees the ratings and news businesses of A.M. Best within the insurance and reinsurance sectors in the region, managing existing relationships and developing new relationships with key constituents in the insurance and broader financial services sectors. As a member of the Board, Susanna is responsible for ensuring that the compliance and regulatory requirements of the business are fulfilled. Susanna has over 30 years experience in the reinsurance and insurance industry and is the former general manager reinsurance department of Ping An Property & Casualty Insurance Company of China, Ltd, where, based in Ping An s Shenzhen headquarters, she managed the company s outwards and inwards reinsurance portfolios and headed both the treaty and facultative divisions. Prior to Ping An, Susanna was the director and general manager of Miller Insurance Services (Hong Kong) Ltd, where she set up their Hong Kong office and was responsible for developing and producing business in North Asia. Susanna was also formerly with Swiss Re, where she worked in the company s Hong Kong and Sydney offices. Susanna holds an ACII qualification and a diploma in management studies. 39

41 Notes 40

42 Founded in 1899, A.M. Best Company is the world s oldest and most authoritative insurance rating and information source. For more information, visit A.M. BEST ASIA-PACIFIC LTD. Unit 4004 Central Plaza, 18 Harbour Road Wanchai, Hong Kong Phone: A.M. BEST COMPANY WORLD HEADQUARTERS Ambest Road, Oldwick, N.J Phone: +1 (908) A.M. BEST EUROPE RATING SERVICES LTD. A.M. BEST EUROPE INFORMATION SERVICES LTD. 12 Arthur Street, 6 th Floor, London, UK EC4R 9AB Phone: +44 (0)