Social Unrest and the South African Insurance Industry. Jaco van der Merwe Deloitte & Touche Actuarial & Insurance Solutions

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2 Social Unrest and the South African Insurance Industry Jaco van der Merwe Deloitte & Touche Actuarial & Insurance Solutions

3 Agenda Background Current occurrence and trends What be done? Sasria Sasria & risk management Summary & closing

4 Background

5 Background Social Unrest / Civil Disobedience Political protests (vs government) Labour strikes / protests Terrorism Non-political Protests (service delivery) General strikes (public transport costs)

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7 Background Social unrest a topical issue in South Africa PAGAD Planet Hollywood bombing Xenophobic attacks Metropolice strikes Taxi strikes Mining strikes & unrest However, not limited to South Africa. Terrorist examples include: The Oklahoma City bombing, Oklahoma City 1995 Mumbai attacks, India 2008 WTC, New York 1993 & 2001 Amerithrax, Washington 2001 Protests, unrest elsewhere: Spain, China, Greece, etc

8 Background United States 2001 Significant terrorist attacks: Highest fatalities Maiduguri, Nigeria 2009 Iraq 2007 Abadan, Iran 1978 Beslan, North Ossetia, Russia 2004 Air India 1985 Mumbai (Bombay), India 1993 Kenya & Tanzania 1998 Beirut, Lebanon 1983 Ben Talha, Algeria

9 Background Riccardo Pravettoni, UNEP/GRID-Arendal

10 Current Trends Wage related strikes mines, farms, bus drivers, teachers Unemployment high, and rising (significant youth portion of unemployed population) Service delivery becoming more prevalent Double digit wage demands with sub 5% economic growth SA braces for strike season (Fin24 6 May 2013) working days lost in 2010 Longest recorded strike in 2011 lasted 67 days!

11 How is this dealt with in our market? By an Act! known as the Conversion of the Sasria Act No.134 of 1998 Sasria SOC Ltd is state owned company, covering the following perils (among others): 1. Any act directed to overthrow the Government (local, provincial, national or tribal authority) by means of fear, violence or terrorism; 2. Any act directed to bring about damage in order to achieve political, social or economic change, or in protest against any Government or for the purpose of inspiring fear in the public; 3. Any riot, strike or public disorder (includes civil commotion, labour disturbances or lockouts. Formed in 1979 due to Soweto uprisings SA ST industry became nervous to cover special risks SASRIA (Special Risk Insurance Association) the old name!! Later added strikes & social disturbance

12 Sasria - Background Sasria business model: Key business metrics: Capital cover IM QIS Capital Required 28% 284% Capital Available 500% 445% Available / Required 17.6x 1.56x Item R (million) Gross Premium Gross Claims 231 Profit after tax 275 Item R (million) Total Assets Total Liabilities 620 Equity 3 867

13 Sasria - Background Premiums collected R 1, 2 bn R1, 093 bn Growth rate = 15% R790,8m R1, 002 bn R661,2m R512,6m R487,7m R555,9m R331,8m R377, 8m R228,5m R251,5m

14 Sasria - Background For which classes are the most premiums recovered? Split per class 2012/'13 Standing Charges 15% Sasria wrap 4% Contract Works 4% Goods in Transit 1% Motor 18% Fire 58%

15 What is driving premiums up? Its not just business volumes severity & frequency of losses are increasing Loss ratio >40%

16 What is driving premiums up? Nearly 50% of the historic top 15 claims have occurred in the last 3 years. # Date of loss Peril Claim value 1 11-Jun-11 Strike R Jan-13 Strike R Jun-11 Strike R Oct-12 Strike R Oct-12 Strike R Sep-12 Strike R Apr-10 Strike R Jun-10 Strike R Jan-08 Non Political Riot R Nov-05 Non Political Riot R Jun-10 Strike R Jan-13 Strike R Oct-05 Non Political Riot R Aug-06 Strike R Jun-10 Strike R

17 Who else can insure this risk? According to the Act only Sasria can, unless they give dispensation (e.g. case of contingent business interruption) However, that does not mean that Sasria cover is compulsory! An underlying Fire/Property policy is required to be able to takeout Sasria cove Policy must contain standard SAIA exclusions (riot, strike, war, rebellion, revolution, ect )

18 Structure of Sasria cover Primary coupon: Up to R500m one insured limit Covers material damages standing charges and/or net profit coverage. Per insurance period (typically 1 year) Riot Wrap (Excess of Loss Coupon): Similar to an Excess of Loss, covering R1bn after the R500m coverage of the primary coupon Does not cover net profit business interruption Normally priced individually Basic pricing Separate pricing Usually bought by the large corporates and state owned entities (Utilities, logistics companies, financial services companies).

19 Risk management in Sasria Primarily a SAM focus Key risks: Underwriting & Catastrophe Credit & counterparty default Market Liquidity Operational Legal & Strategic Regulatory view Economic view

20 Risk management in Sasria Underwriting & Catastrophe risk Sasria s main risk adverse claims experience Reserving risk is somewhat less material Challenges Range of claims losses can be extreme Lack of data: Large & Cat claims Sometimes lack of data through agents Nature of risk unlike any other SA insurer Heavily dependant on effect of reinsurance Reinsurance gives rise to credit risk So first priority = quantification of underwriting risk

21 Correlations Risk management in Sasria Underwriting & Catastrophe risk Attritional Large Catastrophe Property/Fire Motor Etc. Reinsurance Structures: QS, XOL, StopLoss, CatXL, etc Reinstatements, Commissions, Recoveries, etc

22 Risk management in Sasria Underwriting & Catastrophe risk NB process & input: PML studies: Probable Maximum Loss 1. Regularly reviewed 2. Input from reinsurance brokers using reinsurance CAT models 3. Expert bomb studies 1. Size of explosive 2. Blast radius 3. Area of maximum damage 4. Key risk/target areas 5. Insured property in area 6. Etc.. 4. Political analysts, threat assessors

23 Risk management in Sasria Credit & Counterparty default Investments: Large amount of short, secure assets (cash/near, bonds etc) Material investment credit risk Reinsurance: Reinsurance credit risk becomes material in stressed scenario Probability of default increases across industry Blend of regulatory charges & economic view Rely on available credit rating info Working towards full economic calculation blend in

24 Risk management in Sasria Market & liquidity Market risk First approach: use regulatory charges per asset type But move toward full economic view ultimately Would require ESG incorporation Must be done consistently with credit risk beware correlations Liquidity risk: Short term nature of business & liabilities Liquidity position is key for all ST insurers Limited explicit calculation not explicit under SAM IM/QIS Focus more on short term earnings at risk

25 Risk management in Sasria Operational, Strategic & Legal Operational Regulatory approach = inappropriate, does not work! Have perception of risk levels (e.g. systems, data, people, etc ) On-going risk register & matrix => develop a risk taxonomy Comprehensive consideration of risks Limited data & quantification Strategic & Legal Key risk = loss of monopoly Poor strategic decisions may give rise to strategic risk e.g. go into market x.

26 Risk management in Sasria Ultimately Aggregation of risks Options; Where possible, practical and sensible: correlated additions Otherwise: Straight Sum (no correlation/diversification) Heuristic rule of thumb (Square Root of Squares) Mostly, in line with regulatory approach Available capital = regulatory available capital

27 Metric 1 Metric 2 Metric x Risk management in Sasria Ultimately Use calculated risk capital Regulatory solvency reporting and compliance Own internal/economic view of risk-capital requirements Articulate expressions of Risk Appetite Capital at Risk (VaR1, VaR2, etc ) -> longer horizon, confidence level Earnings at Risk (EaR1, EaR2, etc ) -> shorter term view, more practical How much capital are we prepared to loose? How much capital do we stand to loose? Mostly, in line with regulatory approach Tie into Risk Strategy Preference for risks to be taken in pursuit of strategic objectives Identify Return Measure, in line with Risk Philosophy Limits & thresholds

28 Risk management in Sasria Embedding this in the business: 1. Capital requirements for regulatory solvency & reporting Proper understanding of true risk Can justify why so much capital must be held -> impacts dividend policy Shareholder considerations 2. Reinsurance assessments & selections Choice of reinsurance heavily affects risk & hence capital Reinsurance is pricey! Return on capital measures equally sensitive Make sure capital works for us 3. Enhance investment strategy setting Selection of investments in line with stated risk appetite Understand risk-reward relationship of selected strategies under SAM basis 4. Pricing & product design decisions Develop products that are in line with our appetite for risk Price products to maintain RORAC Avoid simply following market fortunes & rates -> more informed processes & decisions

29 Stepping back All 3 SAM Pillars in context 1. Pillar 1 A major focus thus far Previously much too simplistic, not realistic Informed view of risk numbers obtained 2. Pillar 2 Need to establish an effective system of governance and risk management Otherwise Pillar 1 will be useless!! All about running the business along the stated principles Takes Pillar 1 as input 3. Pillar 3 Reporting & disclosure

30 Risk Management Framework Policy Stepping back Pillar 2 overview setting up a risk management system Risk Strategy Risk Appetite Insurance Risk Policy Procedures Process maps, rules Governance Structures Functions/Roles Committees Charters,TORs R&Rs Market Risk Credit Risk Policy Policy Procedures Procedures Process maps, rules Process maps, rules Key business processes Ops. risk Policy Procedures Process maps, rules Reserving policy Reinsurance policy Etc. Strategic Risk Policy Procedures Process maps, rules ORSA (Own Risk & Solvency Assessment)

31 In summary Sasria & Social Unrest Risk Management Approach 1. Sasria covers special risks Unique monopoly Insurers often not keen on this sort of risk Claims can be extremely volatile: Low frequency High severity Alarming recent trends in SA and across the world 2. Even non-cat experience is very volatile Use of informed risk management practices becomes critical Need a robust approach: Pillar 1: able to quantify the risks & capital implications - LT and ST views are needed Pillar 2: set up proper governance and risk management systems 3. The hardest part The hardest part is not doing the calcs or putting policies, procedures in place The hardest part is making it a day-to-day BAU reality: Implementation

32 Thank you Jaco van der Merwe Deloitte & Touche Actuarial and Insurance Solutions Tel: Cell:

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