Reinsurance cessions in 2012: Set to rise or fall? The impact of reinsurance on risk capital

Transcription

1 Reinsurance cessions in 2012: Set to rise or fall? The impact of reinsurance on risk capital Solvency II Market Event, Turkey Istanbul, 15 July 2009 Ali Majidi Solvency Consulting Integrated Risk Management, Munich Re

2 Agenda Current status of Solvency II Practical insights: Sample Company Reinsurance cessions in 2012: Set to rise? Or fall? 2

3 The three-pillar approach goes beyond pure regulation, Pillars I and II will result in reviews of reinsurance strategy will be mandatory for all insurance companies in the EU Quantitative supervision Minimum capital requirements Solvency capital requirements Qualitative supervision Solvency II Supervisory process Supervisory review process (SRP) Internal control system Risk management Market discipline External reporting... and provides motivation to introduce internal models 3

4 A.M. Best study, March 2008: Solvency-related trends for insurance markets Countries where some segments may be more heavily impacted: UK Unit-linked and annuity writers France Mutuals Some Scandinavian countries and Luxembourg Captives Countries where most companies and segments face little change in their regulatory capital requirements Countries where the picture is still unclear 4

5 From local GAAP to a Solvency II balance sheet Economic view The overall objective of prudential regulation must be to ensure that an insurer maintains, at all times, financial resources which are adequate, both as to amount and quality, to ensure there is no significant risk that its liabilities cannot be met as they fall due. (CEIOPS Consultation Paper 20, 2.2) Statutory value of assets Available capital Statutory value of liabilities. Market value of assets Own funds Risk margin Best estimate of liabilities. Ratio of required to available capital Solvency Capital Requirement Minimum Capital Requirement Market value of technical provisions Traditional Solvency II 5

6 QIS4 calculation of the overall SCR P&C reinsurance works mainly in the SCRnl module! SCR: Solvency Capital Requirement BSCR: Basic SCR Adj: Adjustments SCRop: Operational risk Non-life Premium and reserve Catastrophe Market Currency Property Fixed interest Equity Spread risk Concentrations Health Long term UW Short term UW Workers compensation Counterparty/default Life Revision Mortality Longevity Disability Lapse Expense Catastrophe 6

7 Agenda Current status of Solvency II Practical insights: Sample Company Reinsurance cessions in 2012: Set to rise? Or fall? 7

8 A brief description of our sample company (1) Underwriting figures for our sample company 13% sample company s portfolio 18% 46% Total premium: 413m Motor liability 189m Other motor 97m Personal accident 54m Property 73m 23% Combined ratio: 99.95% Motor liability Pers. accident Other motor Property 8

9 A brief description of our sample company (2) Investment structure of our sample company Investment structure Investments: 314m 3% 65% Real estate 56m Participations 9m 18% 79% 12% Other 249m 2% of which equities: 38m of which bonds 204m Real estate Participations Other investments Bonds Equities % invested in equities: 12.1 % 9

10 A brief description of our sample company (3) Our sample company s balance sheet Assets: 314m Real estate 56m Participations 9m Equity & liabilities: 314m Equity 112m Liabilities 202m Other 249m 10

11 A brief description of our sample company (4) Key figures for our sample company (in m) Investments: 314 Property 56 Participations 9 Other 249 of which equities: 38 of which bonds: 204 Total premium: 413 Motor liability 189 Other motor 97 General personal accident 54 Windstorm/household 73 % invested in equities: 12.1% Combined ratio: 99.95% 11

12 A brief description of our sample company (5) Solvency calculation under Solvency I Available capital: 112m Capital requirement: 70m Solvency ratio: 160% Our Company Capital EAGLE is a safe partner! The Board decided to take part in QIS4. The objective: to obtain an estimation of the capital needed according to the new solvency requirements 12

13 Our sample company s QIS4 study (1) The move to an economic balance sheet Solvency I balance sheet QIS4 balance sheet Assets Liabilities Solvency I capital req Assets Liabilities QIS4 capital requirement Investments Liabilities Available capital Capital requirement Investments Best estimate Market value margin Available capital SCR Solvency ratio: 112/70 = 160% Solvency ratio: 186/187= 99% 13

14 Our sample company s QIS4 study (2) QIS4 risk capital (SCR) before reinsurance NL UW risk Health risk Market risk Default risk Op. risk Diversification SCR SCR NL UW risk Health risk Market risk Default risk Op. risk Diversification Underwriting risk is the main driver by far of the poor solvency situation 14

15 Our sample company s QIS4 study (3) Underwriting risk capital for non-life before reinsurance Pr.& R Risk. Cat. Risk Diversifikation NL uw Risk Pr.& R risk. Cat. risk Diversification NL UW risk A major part of the underwriting risk results from the catastrophe exposure 15

16 Summary of QIS4 Solvency calculation for our sample company according to QIS4 Available capital: 186m Capital requirement: 187m Solvency ratio: 99% Is our Company Capital BEAGLE still such a safe partner??? The Supervisory Board has called for immediate action by the Directors. The objective: to maintain an adequate capital level without the need for a capital increase 16

17 Impact of reinsurance programmes The reinsurer has modelled various reinsurance programmes Peak risk cover (PeakRisk) Pure non-proportional covers with high first-loss retentions Pure non-proportional cover (NP) Pure non-proportional covers with low first-loss retentions MTPL quota share and NP cover (MTPL50+NP) Cession of quota share in motor third party liability to improve diversification and nonproportional reinsurance cover of the amount retained with a low first-loss retention Pure non-proportional cover with low first-loss retentions in the other classes Quota shares and NP cover (All 50+NP) Cession of quota share in all classes Non-proportional reinsurance cover for amount retained with low first-loss retention 17

18 Reduction in underwriting risk capital using PeakRisk under QIS4 (SCRNL) Underwriting risk capital for non-life after reinsurance with the "PeakRisk" programme Change in NL underwriting risk capital under QIS4 with the "PeakRisk" programme Pr.& R. risk Cat. risk Diversification NL UW risk Pr.& R. risk Cat. risk Diversification NL UW risk NL UW risk Pr.& R risk. Cat. risk Diversification NL UW risk Pr.& R risk. Cat. risk Diversification The capital requirement for catastrophe risks can be brought down considerably by reducing peak risks This results in a capital saving of 32% of the (gross) underwriting capital requirement 18

19 Reduction in required risk capital (SCR) using PeakRisk under QIS4 QIS4 risk capital (SCR) after "PeakRisk" reinsurance programme Change in QIS4 risk capital (SCR) after "PeakRisk" reinsurance programme , NL uw risk ,2-1 Health risk Market risk DefaultrRisk Op.rRisk Diversification SCR NL uw risk Health risk Market risk Default risk Op. risk Diversification SCR The capital requirement for underwriting is reduced substantially Less diversification at module level Resultant capital saving is 27% of the (gross) QIS4 capital requirement 19

20 Comparison of the effects of different RI programmes on QIS4 risk capital In comparison with the PeakRisk programme, the NP programme improves the risk situation, but underwriting risk capital is higher Risk capital after reinsurance No reins. PeakRisk NP MTPL50+NP All 50+NP Risk capital can be significantly reduced with the help of reinsurance However, the model can still produce implausible results 20

21 General approach to defining the model Collection and preparation of data Stochastic simulation of the portfolio Gross distribution of aggregate losses Definition of distributions of aggregate losses for each class of business and whole portfolio 5% 4% 3% 2% 1% 0% Definition of distributions of aggregate losses allowing for reinsurance 5% 4% 3% 2% 1% Distribution of aggregate losses NP and gross 0%

22 Impact of reinsurance programmes Comparison of the effect on risk of the four reinsurance programmes Probability 10% 8% 6% 4% 2% 0% Distribution of aggregate losses Losses ( m) No reins. PeakRisk NP MTPL50+NP All 50+NP Risk capital No reinsurance: 133m PeakRisk: 53m NP: 49m MTPL50 + NP: 36m All 50 + NP: 24m Risk capital can be significantly reduced by reinsurance, enabling it to be aligned with a company s appetite for risk 22

23 Comparison of the effects produced using a stochastic model: Risk capital after RI QIS4 vs. partial internal model Risk capital after reinsurance No reins. PeakRisk NP MTPL50+NP All 50+NP QIS4 standard approach QIS4 partial internal model By the efficient use of reinsurance, we can be even stronger than we were, without the need for a capital increase and even under Solvency II the company will still merit the name Capital EAGLE! 23

24 Agenda Current status of Solvency II Practical insights: Sample Company Reinsurance cessions in 2012: Set to rise? Or fall? 24

25 Summary of the comparative analysis (1) For Solvency II, a risk-based view of companies in their entirety is needed in order to achieve greater transparency depict the complex correlations that exist A deeper insight into the risk situation as whole is necessary to achieve the required transparency In property-casualty insurance, underwriting is the main driver of risk and complexity The switching of the focus to risk can have a dramatic effect on the capital situation (the Solvency II solvency calculation can lower the solvency ratio considerably) Increased transparency and complexity in the risk situation, for which the implementation of Solvency II will act as a catalyst

26 Summary of the comparative analysis (2) Quantitative models help provide a better holistic view of an insurance company s risk situation An important factor is the effect of reinsurance on underwriting risk A standard model often fails to depict underwriting properly because of the heterogeneity of insurance portfolios This shortcoming is further aggravated by the availablity of tailor-made reinsurance solutions Due to the complexity of individual business models, quantitative (partial) internal models will be needed

27 Reinsurance cessions in 2012: Set to rise? Or fall? Reinsurance cessions in 2012: Set to fall? Or rise? Reinsurance in 2012 will be more tailor-made! Portfolio structure (classes of business, regional structure) Size and structure of company and Reinsurance in 2012 will be more comprehensive! Diversification (growth opportunities for smaller companies) What Securitisations is YOUR view? (larger companies will benefit)

28 Reinsurance cessions in 2012: Set to rise? Or fall? What will reinsurance mean in 2012? Traditional reinsurance Non-traditional reinsurance Holistic view of companies balance sheets Are companies making enough use of reinsurance for balance-sheet management? Falling cession rates in recent years despite the fact that reinsurance is the simplest and most flexible way of managing a balance sheet and hence will remain one of the best balance-sheet management tools (even) under Solvency II, especially for small and medium-sized companies

29 Reinsurance cessions in 2012: Set to rise? Or fall? What is your view?

30 Thank you for your attention. Dr. Ali Majidi Solvency Consulting Integrated Risk Management, Munich Re

31 Appendix Impact of reinsurance programmes Cost-benefit analysis of reinsurance programmes Risk-benefit analysis Net premium-loss expectancy in m Risk capital (99.5% quantile) in m Gross PeakRisk NP MTPL50+NP All 50+NP * Net premium + (Commission - costs) Gross PeakRisk NP MTPL50+NP All 50+NP Net premium* - Losses Risk capital (Net premium - Losses)/Risk capital 64% 157% 159% 193% 167% 31

32 Appendix Impact of reinsurance programmes Cost-benefit analysis of reinsurance programmes Gross PeakRisk NP MTPL50+NP All 50+NP Net premium* - Losses Risk capital (Net premium* - Losses)/Risk capital 64% 157% 159% 193% 167% * Net premium + (Commission - costs) Gross PeakRisk NP MTPL50+NP All 50+NP (1) Technical result (2) Difference from gross risk capital (SCR) according to QIS4 partial internal model Result/difference ( (1)/(2) ) - 3,58 % 12,66 % 4,48 % 3,88 % 32