PEAK TIMES. Peak Re grows its January renewals book of business. Peak Re strengthens Product Underwriting and Analytics team

Transcription

1 Issue 3 March 2016 PEAK TIMES Peak Re grows its January renewals book of business Peak Re strengthens Product Underwriting and Analytics team Thriving in a modern regulatory environment Europe operations a complementing integral part of Peak Re s overall organisation Evolution of China Agriculture Insurance Thailand Heading towards a more sophisticated insurance market

2 Editorial Dear Readers, In this year s first edition of Peak Times we would like to share with you some examples of Peak Re s successful expansion into the further geographies, markets and lines of business. But before we discuss these topics, let me just reflect on a few corporate achievements. At the end of last year, A.M. Best once again affirmed our company s financial strength rating of A- (Excellent) and issued a credit rating of a-, both with a stable outlook. According to A.M. Best the ratings reflect our supportive risk-adjusted capitalization and the experience of our senior management in the reinsurance industry. Most importantly, they also recognize Peak Re s improved diversification by region and lines of business, development of in-house risk management functions, as well as the improving trend in the management expense ratio. These assessments are a great encouragement to Peak Re because they testify that our efforts in building a strong and independent reinsurer are paying off and give a positive recognition to clients and stakeholders. Following the recent renewal season, we are pleased with the outcome of only our third year-end renewal since our establishment at the end of For 2016, we wrote about US$ 337 million of non-life treaty reinsurance business from the January 1 renewals, an increase of 60% over the prior year s renewable portfolio of US$ 211 million. in excess of 150%, turning Thailand into one of Peak Re s key markets globally. In Europe, where we opened an office in Zurich last fall, we saw a good showing of business in mature markets and wrote business with clients in altogether twelve European markets. Another achievement is our involvement in government-subsidized agriculture insurance in China, the world s second ranked agriculture insurance market, where we continue to take leading positions. Not just in China, but also in Korea, India, Australia and Europe are we committed to further advancing this important line of business. A sound risk management framework has always been at the core of our risk culture. Even more so we welcome the increased sophistication and further developments in insurance regulation and supervision in Hong Kong and China. As a consequence, we feel well-positioned to embrace new opportunities arising as we go forward and thus further improving our financial performance. As always, we look forward to receiving your feedback on this edition of Peak Times. Yours sincerely Backed by Fosun and the International Finance Corporation, it is one of our key goals to participate in advancing the region s insurance industry. One example is our engagement in the Thai market, where Peak Re has been active since our inception. In the last January 1 renewals, premiums grew Franz Josef Hahn Chief Executive Officer Peak Times Issue 3 March 2016

3 Peak Re grows its January renewals book of business During the last January 1 renewals, Peak Re has written approximately US$ 337 million in non-life treaty reinsurance business, an increase of 60% over the prior year s renewable portfolio of US$ 211 million. solutions which we address through private deals. For the full year 2016, Peak Re expects further significant growth. Asia Pacific continues to be our core market while diversification into Europe and the Americas markets progresses according to plan. Our Asia business continued to develop steadily in the past year, with a 68% increase in written premium compared to our 2015 Jan 1 renewal. The real focus of growth lay in China and South East Asia. Thailand, in particular, saw a 164% increment increase over the same renewal in Growth in Europe was aided by our new operation in Zurich, opened in September 2015, which saw a 95% increase in written premium compared to the year before. Peak Re s expansion into the Americas benefited from reinsurance obtained as a result of our agreement to acquire a 50% stake in Caribbean insurance group NAGICO, announced in July The transaction is currently waiting for final regulatory approvals. We are very pleased with the outcome of our third year-end renewal, since following Peak Re s establishment in late Once again, our longterm oriented, non-opportunistic underwriting approach has proven successful in attracting high quality clients. Before we enter into a client relationship, we apply in-depth analysis because we intend to grow over time with our partners. As a result, our premium growth is very much driven by developing larger shares and new business with our existing clients. Testifying to Peak Re s underwriting discipline, we wrote only 50% of the new contracts offered to us. Peak Re strengthens Product Underwriting and Analytics team On February 23, Peak Re announced the appointments of Lawrence Cheng as Head of Underwriting, responsible for the Company s Property & Casualty product underwriting function and Iain Reynolds as Head of Analytics. Lawrence has been part of the Peak Re team since the beginning and has played an important role in laying the foundation of our analytics capability. With Peak Re s unique underwriting model, bringing together our market underwriting, product underwriting and analytics into our holistic risk evaluation process, Lawrence has gained solid understanding of our underwriting and risk management principles. By taking on this new role, he will bring fresh insights to our product underwriting function. Iain joins Peak Re from Guy Carpenter where he served as Head of Catastrophe Modelling for South East Asia, Korea and India. He is a very experienced CAT modeller with diverse experience and a track record in designing appropriate risk assessment tools for the benefit of both regional and global clients. With Iain on board, our analytics function will continue as one of the best in the region, and is destined to grow into a class leading position. Both appointments will allow Peak Re to further strengthen our underwriting, analytics and risk assessment capabilities for the benefit of multiple stakeholders. Throughout the region, Peak Re is also benefiting from our ability to offer bespoke transactions to clients wishing to avoid placements in the open market. In a number of instances we have worked with clients on products and solutions which have translated into specific reinsurance Lawrence Cheng Head of Underwriting lain Reynolds Head of Analytics

4 Thriving in a modern regulatory environment Peak Re s risk management framework Rapid pace of regulatory change in Asia Peak Re is domiciled in Asia s dynamic high-growth markets. The momentum of the region s socio-economic and insurance market development is matched by a rapid modernisation of the regulatory landscape. This is particularly true for our home market Hong Kong as well as for Mainland China. The sophistication of insurance regulation and supervision will be of paramount importance for the region to sustain premium growth whilst maintaining market stability and promoting customer protection. A strong home regulator is critical for Peak Re s ability to write business on a global scale. SOLVENCY II I II III Hong Kong s adoption of Risk-Based Capital (RBC) For the past three decades, Hong Kong has applied a rule-based capital adequacy regime for insurers, which is based on a predefined formula to determine the solvency margin requirement. In recent years, it has been recognized globally that the capital adequacy framework should take into account different risk factors of different insurers, and be conducive to enhancing the corporate governance, enterprise risk management (ERM) and public disclosure practices of insurers. The International Association of Insurance Supervisors (IAIS) the global standard-setter for the insurance industry has issued new Insurance Core Principles (ICPs) in relation to RBC requirements in late All insurance supervisors, including the Insurance Authority (IA) of Hong Kong, are obliged to comply with these new ICPs as soon as practicable. Hong Kong is implementing this in a multi-year effort with an objective of becoming fully in line by As a first step an Independent Insurance Authority has become introduced as of 1 January The new framework will be based on the ICP but be reflective of Hong Kong s peculiar and highly diverse market structure. The framework will consist of the following three pillars, in line with the Solvency II concept in Europe: Pillar 1 Quantitative requirements such as the consistent valuation of assets and liabilities, capital requirements, available capital and the quality of capital resources Pillar 2 Qualitative requirements and supervision: Corporate governance, enterprise risk management (ERM) and own risk and solvency assessment (ORSA) Pillar 3 Reporting requirements: Statutory reporting to the IA and public disclosure Pillar 2 is generally considered to be particularly important as it includes minimum processes and procedures needed to identify, measure, monitor, manage and report risks, including their interdependencies. In addition, insurers need to produce risk tolerance statements and risk limits as well as a formal policy governing Asset-Liability Management (ALM). Furthermore, insurers will be required to conduct an ORSA which links together the outputs of risk, capital and strategic planning to determine the current and future capital requirements of the insurer, having regard to its business strategy and the external environment. Regulatory sea change in China Mainland China is arguably leapfrogging several stages of regulatory development in insurance as the market continues to display a remarkable growth momentum in all of the nonlife, life and health sectors. In 2014, the State Council (the central government cabinet) announced a strategic plan to boost insurance penetration (premiums as a share of GDP) to 5 percent, up from today s 3 percent. Against this backdrop, the country s insurance regulator rapidly developed the China Risk Oriented Solvency System (C-ROSS), a new three-pillar risk and solvency framework. Peak Times Issue 3 March 2016

5 Similar to Hong Kong s proposed new framework, the new solvency capital regime will be more reflective of individual risk profiles and ERM program quality, with the latter being viewed vital to the sector s future healthy development. Particular emphasis is being laid on Pillar 2. An insurer s ERM quality can even impact the final minimum capital requirement. Risk management as a strategic imperative Risk-based capital requirements and effective risk management framework has been part of Peak Re s DNA from the very beginning and not simply in order to prepare for the earliest possible compliance with these widely anticipated regulatory changes. We rather embraced the principles of economic capital modelling (ECM) and ERM, based on its conviction that these are pivotal to making optimal pricing, underwriting, asset management and capital management decisions. ECM is a powerful management tool to compare different options should we grow our China property book or rather use our scarce capital to invest in Japanese bonds? on a consistent basis in view of optimising the risk return profile of the company. However a model always remains just that a model limited by the data and assumptions that go into it. This is why we put equal emphasis on judgement and expertise of our people. It all starts with Peak Re s risk culture. At the top it is evidenced by a combined experience of more than 120 years of the Company s Board of Directors Risk Committee Members and a dedicated risk management function, currently led by our Chief Risk Officer, Eckart Roth, who has almost 25 years of experience. In addition, risk management processes and competencies are firmly embedded in key corporate functions such as underwriting, investment management and IT. The CRO function cuts across the entire organisation and includes facilitating and continuously enhancing formalised risk appetite and tolerance limits. It takes charge of managing risk identification processes, such as developing risk registers leading into a risk map, and working with risk owners to ensure that key risks are identified and quantified in a consistent manner. Furthermore, it prepares a risk report for the quarterly Board Risk Management Committee meetings, develops hedging and other mitigation strategies for various risks in order to optimise the risk return profile of Peak Re. The ECM assesses solvency and capital needs and supports the implementation of capital based pricing tools. Monitoring compliance with regulatory and fiduciary requirements, supporting the rating processes and Internal Audit responsibility embed the function firmly in the day to day operation of the company. Peak Re welcomes the regulatory evolution across the region. Rather than considering additional quantitative and qualitative supervision as an onerous compliance requirement, we recognise the opportunity to build a stronger industry with new opportunities for a strong reinsurer prepared to exploit them.

6 Europe operations a complementing integral part of Peak Re s overall organisation In the January 2016 renewals Peak Re almost doubled its European premium income, as compared to the prior year. Furthermore, we broadened our presence by adding the Netherlands and Italy to the countries in our book. As of this year, Peak Re has clients in twelve European countries. By the end of 2015, Europe represented 12% of our premium income a share which is expected to rise further during the course of Our European portfolio very much mirrors the lines of business which we are writing in Asia: Motor and property account for almost 80% of the portfolio. The remainder is fairly evenly split between engineering, marine and casualty, with some additional business in agriculture and credit & surety. and Spain. Strong premium growth and further geographic diversification within the region is aided by the opening of our Zurich office in autumn This reinforces Peak Re s commitment to Europe as an important pillar of our global growth strategy. Even with our new office in Europe, Peak Re continues to operate as a single entity, applying the processes and logic which serve us well in Asia Pacific. We continue to ensure a seamless process between the three core functions of market underwriting, product underwriting and analytics. Peak Re aims to form partnership with clients who share our focus on building long-term relationships. We are looking for cedants to whom the diversity offered by our unique capital and the distinct expertise we bring to the table add value. As a consequence, we tend to be more attractive as a counterparty to small-to-mid sized insurers, often mutuals, that appreciate our entrepreneurial approach, lean setup, flat structure and ability to offer relevant solutions. We are convinced that given the current challenges facing our clients, we need to maintain a lean and efficient operational model to support them. This is imperative to achieve returns in today s squeezed margin environment. In terms of premium, Scandinavia (Norway, Denmark and Sweden) dominates our portfolio with a share of roughly 40%. UK business has grown from almost nil to more than 13%. Portugal and Switzerland are both at about 10%, followed by France, Belgium Peak Times Issue 3 March 2016

7 Evolution of China s Agriculture Insurance Initial start With the foundation of the People s Insurance Company of China (PICC) in 1949 as the sole insurer in new China, the country s agriculture insurance industry kicked-off in However, it lasted only a short time before being suspended all together for over two decades until the early 1980 s. In 1982, PICC restarted agriculture insurance on a wide scale. Four years later, Xinjiang Production and Construction Corps Crops and Livestock Production Insurance Company, the former entity of China United Insurance Company (CIC), was established as the first specialty agricultural insurance company. This early form of agro insurance received no government support and thus was more like a seedling on a piece of barren land with no hope of ever growing and flourishing. Up until the mid to late 90 s, China s agriculture insurance premiums were only around US$100 million and marginalized as a subordinated line of business. of government-subsidized agriculture insurance ( policy insurance ) was officially launched. National expansion Since 2007, the government-subsidized agriculture insurance has been expanding nationwide and in 2012 the Premier signed the Agriculture Insurance Ordinance which was put into effect the following year and became the first specific agriculture insurance decree. Between 2007 and 2013, the compound annual growth rate of agriculture insurance premium was as high as 34%. Together with non-government subsidised agriculture insurance ( commercial insurance ), agriculture insurance now covers crops, livestock, forestry and aquaculture with more than 170 crop products. In billion mu (97 million hectares) of arable land was covered by crop insurance, 59% of total arable land. 70% is now protected by insurance for the three major staple grains of rice, corn and wheat. In terms of premiums, China is ranked the second largest agriculture insurance market and the first largest in livestock and forestry insurance in the world today. Period of reform Current form launched in 2007 It was agreed during, the 3rd Plenary Session of the 16th Central Committee of the Communist Party of China held in 2003 that an exploratory agro insurance policy system should be set up. As from the following year, the very first document issued by the central government at the beginning of each year was on the topic of Agriculture, Rural Area and Farmers, demonstrating the paramount importance of these three agro related factors for the development of modern China. This document has been called The No.1 Document of the Central Government. In 2007, the Ministry of Finance issued stipulations in regard to government subsidised schemes for insurance premiums for five crops in six pilot provinces. The modern form Government subsidies Agriculture insurance that is subsidized by the central government covers fifteen product categories earmarked as essential for livelihood, including corn, rice, wheat, oil-bearing crops, cotton, potato, sugar, breeding sow, dairy cow, fattening pig, as well as forestry. In 2014, premiums for subsidised products accounted for 97.36% of total premiums. Most of the subsidies are shared between the central government, local provincial/municipal and county-level governments. Central government s subsidy accounts for 30% to 65% of the total premiums, whereas the total subsidy generally amounts to 80% of total premiums. Besides central government-subsidized products, local provincial governments also encourage innovative insurance products through support of their own subsidies. The central government is trying to relieve the burden of county-level governments because they usually have insufficient budget to match the subsidy. On January 8, 2016, the Ministry of Finance issued a notice on the increase of subsidies for counties with high agriculture production.

8 Insurance entity qualifications Currently there are twenty-three Property & Casualty (P&C) companies plus one mutual company qualified to offer agriculture insurance in China. Five of them are specialist agriculture insurance entities. In April 2013, the China Insurance Regulatory Commission (CIRC) issued a notice regarding the strengthening of the management of agriculture insurance qualifications. In order to be qualified to write agriculture insurance, an insurer must fulfil the following criteria: sound grassroots service networks in the province; specialist agriculture department and staff; comprehensive agriculture insurance internal control system; and sufficient solvency ratio etc. This is based on the Agriculture Insurance Ordinance issued previously to stress the importance that only those companies being able to provide real-value services to farmers can be qualified to write agro business. Win-win solution This nationwide non-discriminatory government-subsidized form of agriculture insurance has been proven to be very successful. It created a winwin situation for the insured and the insurer thanks to the following benefits: reasonable premium rates; elimination of anti-selection risk; and geographical diversification. In times of regional natural disasters, insurance has played an important role in relieving farmers hardship over lost harvest. In 2013 serious flooding occurred in Heilongjiang Province in Northeast China. Agriculture insurance claims payment reached US$450 million accounting for 18% of direct economic loss. For the severe drought in Liaoning Province in 2014, insurers paid US$150 million, 20% of the direct economic loss. These percentages are much higher than those of property insurance payments against total economic losses for natural disasters in China. Meanwhile, insurers also accumulated surplus earnings in earlier or fat years, which helped them to prepare for years with higher claims. For better utilization of these surpluses, at the end of 2013, the Ministry of Finance issued a regulation on Severe Perils Reserves for Agriculture Insurance, stipulating clearly how insurers should take agriculture reserves out of their surplus for potential future severe perils. This is in addition to the pre-existing catastrophe reserves for agriculture insurance which had been accounted for by insurers based on agriculture premiums. Rapid Development of products and coverage Former coverage Sum insured of crops used to cover 80% of material cost for producing the crops including cost of seeds, fertilizers, and pesticide etc. Livestock and forestry insurance follow the same principle. Premium rates are set by insurers actuaries after consultation with the Government. Covered perils used to be named perils. Before 2015, drought was not covered in many provinces. Product upgrade In February 2015 the CIRC, together with the Ministry of Agriculture and the Ministry of Finance, decided to enhance all agro insurance products. As a result, agriculture insurance products were greatly improved for the benefit of the insured: The sum insured was increased to cover 100% of material cost for many products; in many provinces the coverage was expanded to insure all natural perils, accidents and all diseases; deductibles were basically eliminated; indemnity ratios during various growing periods were increased; loss caps on the direct side are no longer allowed and premium rates were adjusted accordingly. On November 13, 2015, the CIRC announced that this round of products upgrading had been successfully completed and many of enhanced products were already being implemented. The whole process involved a total of 738 insurance products from 22 insurance companies, covering 15 types of crops and 6 types of livestock. In 2016, these products will be launch on a wide scale. We estimate that this policy change will push the final loss ratio up by at least 5%-10%, depending on the products mix. Peak Times Issue 3 March 2016

9 New growth opportunities In 2014 the so called Ten New Rules of the State Council were announced, providing guidelines on how to ameliorate the insurance industry s development while specifically mentioning innovative products in agriculture insurance. Local governments are encouraged to support new insurance products e.g. products based on yield, price or revenue; weather index products; price index products; insurance for aquaculture, poultry or other regional characteristic produce. Now price index insurance has covered 26 provinces. Among the price index products, the most popular one is the hog price index whose benchmark is the average ratio of hog price against corn price. The nationwide ratio is published by the Development and Reform Commission every week. Reinsurance Treaty forms China s agriculture reinsurance programs mainly include regional Quota Share, nationwide Variable Quota Share, Regional Stop Loss triggered by section, Nationwide Stop Loss triggered by branch or section, and nationwide Umbrella Excess of Loss triggered by branch or section. China Agriculture Reinsurance Pool (CARP) In November 2014 CARP was initiated by twenty-three insurers with agriculture insurance qualifications together with China Property and Casualty Reinsurance Company Ltd (China Re P&C). After its establishment, membership was open to all P&C insurers. Upon the first anniversary of CARP, another ten insurance entities submitted applications to join the pool. All direct company members of the pool are obliged to cede at least 50% of their agricultural reinsurance programs into the pool. The remaining shares of the programs can be placed in the open market. In 2015 the CARP s market share was 53%. Members also have the choice to subscribe to the pool s business according to their own capacity, no retrocession allowed. In this way, an insurer without agricultural qualifications but looking to add agriculture business to its portfolio, can achieve their objective by subscribing to agriculture business from CARP. As the manager of the pool, China Re P&C s subscription share is fixed at 50%. Peak Re s involvement Peak Re has been actively participating in China s agriculture insurance market, taking leading positions in both traditional and innovative products in support of our clients. In addition to China, Peak Re also provides agro reinsurance in Korea, India, Australia and in Europe. In 2015, our total agriculture premiums accounted for 12% of our total P&C portfolio. Going forward, we will maintain our commitment to this line of business and intend to grow alongside our clients. Gina Gao Senior Vice President Underwriting

10 Thailand Heading towards a more sophisticated insurance market declared as flood disaster zones, and over 20,000 square kilometres (7,700 sq mi) of farmland was damaged. Economic loss estimated by the World Bank reached US$45.7 billion, making the 2011 Thai floods one of the most costly Nat Cat events in modern history. Thailand s non-life insurance sector is highly fragmented with the presence of 66 players chasing premium growth in a relatively stagnant market. The regulator, the Office of Insurance Commission (OIC), identified the need for a consolidation in the sector to assure its viability and to protect policyholders from potentially detrimental consequences of prolonged price wars. Furthermore, OIC is keen to enhance the overall the risk management practices of the insurance industry and has, hence, introduced various regulatory changes and guidelines in the recent years to raise the standards of Thailand s insurance industry to international practices. Implementation of RBC framework In September 2011, Thailand implemented a Risk-Based Capital (RBC) framework aligning the Thai insurance industry to other Asian economies such as Indonesia and Malaysia. The initial statutory minimum capital adequacy ratio was 125% which was then increased to 140% in January This move to a new RBC framework was a positive step in developing a more sophisticated risk management system for the Thai insurance industry. Impact of 2011 Thai flood Coincidently in the same year, Thailand experienced the worst flood damage in decades. Traditionally, local capacity in Thailand is limited and most of the risk exposures are ceded to the international market. This dependency became fully apparent during the 2011 Thai floods, which became known as the worst flooding yet in terms of the amount of water and people affected. The event caused 65 out of 77 Thailand provinces to be Sweeping regulatory changes Out of the US$45.7 billion economic loss, US$15 billion was insured. Thailand s domestic insurance capacity is constrained. Since a significant proportion of risks affected in the 2011 flooding event were reinsured in the international markets, this led to additional layers of complication and disputes when it came to recovering losses. A number of the domestic players had issues in paying claims to affected policyholders as they had difficulties in collecting payments from their reinsurers. Thai cedants were also relying heavily on single reinsurers to provide them with the necessary coverage, which led to high concentration and counterparty risks. Since in recent years some reinsurers either pulled out of the market or closed down their operations in Thailand, their cedants were left with Peak Times Issue 3 March 2016

11 the severe financial burden to settle the claims. In response, the OIC has become more stringent. Primary insurers are no longer allowed to rely on a single reinsurer but have to maintain a panel of reinsurers in order to limit and diversify counter-party credit risk. The insurance rates surged following the floods, but these increases have then evaporated due to the price declines in the following years, particularly in property. The Thai insurance market suggests that underlying rates have now returned to pre-flood level, with some of the policies even falling below pre-flood levels. Peak Re s commitment to the market Since 2013, Peak Re has been active in the Thai insurance market. With the lessons learnt from the 2011 Thai floods, primary insurers are now keen to partner with reinsurers who not only have a strong financial background and a capital base distinct from most other players, but are also willing to understand local conditions and practices. Peak Re is committed to establishing long-term partnership and growing with our cedants. We understand the importance of knowledge transfer and exchange. In 2014, Peak Re hosted its first thought-leadership seminar on earthquake risk, another underestimated peril in Thailand, which was attended by representatives from more than 80% of the market players. Local cedants are particularly looking for solvency relief products, and we are here to provide products that enable cedants to meet tighter capital requirements while reducing their reinsurance counter-party credit risk. The amount of business written in Thailand confirms Peak Re s successful development in the market. In the 2015 January renewals, Peak Re s premiums increased by 63%, driven primarily by new business from existing clients, testifying our clients growing confidence in Peak Re. In the most recent January 2016 renewals, Peak Re grew its Thai premiums even more drastically, in excess of 150%. This success also reflects a widening of our customer base and includes business from clients hitherto unseen in the open market. Insurance protection is about a promise to settle claims swiftly when needed, and hence speedy claims settlement has always been part of Peak Re s culture. According to our record as of 30 June 2015, 80% of our claims were settled within 5 working days and Peak Re is very proud of this achievement. Thailand is a well-developed non-life insurance market in Emerging Asia. With enhanced regulations and better understanding of the counter-party credit risk, we are confident that the Thai insurance industry will become more resilient and sophisticated. Peak Re will continue to contribute to the development and growth of the sector as a whole, rather than just taking reinsurance premiums out of a competitive primary market. Jasmine Miow Senior Vice President South Asia & South East Asia

12 For more information, please contact Property & Casualty: Life & Health: General: Tel: Fax: Address: Rm , ICBC Tower, 3 Garden Road, Central, Hong Kong