Syndicate Capital Briefing

Transcription

1 Syndicate Capital Briefing 24/01/2018 1

2 Agenda Capital reviews 2017 Lloyd s capital review process Capital results for 2018 YoA Looking forward March and beyond Lloyd s Internal Model Questions 2

3 Capital reviews 2017 Objectives 3

4 Capital and Planning Group Changes in 2017 Capital reviews Staggered submission dates, based on market feedback Hurricanes did have an impact on the timetable Technical committee and peer reviews continue to ensure consistency SAG disbanded Responsibility shared between CPG, respective teams and (new) oversight managers Account management New approach introduced to assist the market in communicating with Lloyd s 4

5 US windstorms created more work Many agents wanted to resubmit business plans Assuming better rates And higher volumes This impacts capital materially More profit means less capital for same exposure Important to also consider impact on reinsurance rates Lloyd s challenged Changes to exposure more business wanting to be written because of the better rates? Feasible? Change in rate realistic or aspirational Increased rates lower planned loss ratio results in lower volatility given risks? Increase in inwards rates should be accompanied by increase in outwards rates. Reserve roll forward allow for known claims. Impact on reserve risk? Cat risk exposures impact on net natural catastrophe? 5

6 Lessons learnt Q Resubmissions in March Advise Lloyd s as soon as reasonable if deterioration of ECA is >10% LOCs allowance and timing All change to LOCs have to be PRA approved to be allowable Deadlines still apply HIM lessons learnt Is risk being captured appropriately Excess capital helps in quicker turnaround One year reserve vs plan Consistency in reserves and plan loss ratios should be maintained 6

7 Capital Results for 2018 YOA 7

8 Drivers of the movements Capital loading Risk aggregation loadings: Market net natural catastrophe exposure Gearing of catastrophe losses to syndicates and central fund Review process: revised SCRs based on feedback on Premium and reserve risk issues Low volatility ULR inconsistencies Overstated profits Plan resubmissions: To allow for anticipated rate changes in 2018 Including volume growth CPG loadings/ulr loading: ULR difference with plan Other (RITC, operational concerns, model validation, etc.) 8

9 Drivers of the movements Common themes Discounting credit: Increased due to change in risk free rate Change in profit: Consider five/ten year trend of rate movements And analyse impact on premium risk/capital Reinsurance/risk mitigation Risk mitigation using reinsurance/risk transfer has increased Thus liquidity risk has become more important Ensure the risk is considered appropriately 9

10 (Another) Year of transition How did it go? 10

11 Major model change Objective (Hope?) - What we achieved March resubmission LCR reviews MMC review Summer MMC reviews September SII approved model Risk based capital setting Few MMC reviews 11

12 Validation Changes in 2017 Moved to a targeted approach with 3-year plans Reviewed in July and most of the market has signed up for it Not adequately referenced in the validation report Some changes to the review template To ensure thematic feedback and other issues are captured better New thematic areas need embedding E.g. SII P&L attribution, validation of outwards reinsurance and non-modelled catastrophe risk, model drift Cat vendor model outputs used without consideration Some very good reports reviewed! Will be covered in detail in the validation workshop 12

13 Lloyd s process 13

14 Capital Reviews Top down approach step 1 Analysis of change Changes causing a movement: Risk profile, parameterisation, model structure, FX Movement in risk relative to exposure helps negate impact of FX change Compare movement in 1:200 and the mean for consistency direction and magnitude Understand nature of change Identify areas for detailed review 14

15 Capital Reviews Top down approach step 2 and 3 Quantitative deep dive Qualitative deep dive Review more granular information (e.g. class level) Refer to the methodology document for details of risk Compare to market ratios Understand rationale behind parameterisation Assess relationship with other risk categories Review validation tests Refer to tests (e.g. stress test, ST-2) to understand impact of assumption Discussion with agent and underwriting performance Form a view Form a view 15

16 Lloyd s review process Supplementary Questionnaire Class Name Net Premium Mean Net Claims CAT Exposed? ULRs including Catastrophe Mean 50th 75th 90th 95th 99.5th A Yes 71% 70% 75% 80% 83% 92% B Yes 68% 66% 75% 83% 89% 107% C Yes 77% 76% 83% 89% 93% 106% D No 74% 74% 77% 80% 82% 88% E No 77% 77% 82% 87% 90% 100% F Yes 69% 53% 79% 117% 135% 216% G No 70% 69% 77% 85% 90% 106% H No 78% 78% 81% 84% 86% 92% I No 62% 59% 71% 84% 93% 122% J Yes 81% 80% 86% 92% 95% 107% K No 73% 72% 78% 83% 86% 97% L No 73% 72% 79% 86% 90% 102% M No 76% 61% 64% 66% 68% 926% Mean = Median Is the distribution symmetric? 99.5 th less than 100%. Is it making profit at the 1:200? All other Total Yes 63% 63% 66% 68% 70% 77% 16

17 Lloyd s review process Supplementary Questionnaire Joint exceedance Probability 50% 45% 40% 35% 30% 25% 20% 15% 10% Fully Dependent Gumbel Copula (Tau = 0) Modelled Clayton Copula (Tau = 0) Independent Close to independence. Is it right? 5% 0% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% Percentile 17

18 Capital Reviews Other considerations Major model changes Past performance and issues Operational changes Quality of documentation Capital modelling team 18

19 Capital Reviews Forming a view...involves answering some questions: Is the model capturing material risks? Validation tests are often useful to evidence that What alternative assumptions could have been used? What would the impact be on overall capital? Again validation tests can inform the reviewers Are the special characteristics of the risk sufficient to explain lower/higher risk at the tail? Should Lloyd s carry out additional work e.g. on site model walkthrough Peer reviews carried out Franchise board (FB) guidelines, feedback from other teams, impact on market-wide risk appetite taken into account Reviewed by multiple panels before coming to a final decision. Data checks Capital review Peer review Technical committee CPG 19

20 Not to forget Reinsurance contract boundaries 20

21 RI contract boundaries Current status All agents asked to model the impact Still uncertainty over the definition and adjustments to capital figures Inconsistency with reported QMC impact on reported TPs we will use this going forwards. Distorts capital ratios more profit and lower premium risk 21

22 RI contract boundaries Worked example 300 For the average syndicate September/October Larger impact on modelled Q4 TPs than reported Q2 TPs (more RI purchased at 1/1 than 1/7) So positive RICB adjustment to SCR needed March Modelled TPs = actual reported TPs So adjustment only needed for loss of ECU as a result of moving SCR to TPs i.e. 35% of RICB impact Lloyd s makes adjustment based on reported QSR make sure it is correct! ECU RICB Adj RICB (SCR) SCR RICB (TPs) TPs ECA Overall RICB adjustment will decrease as capital shifts to TPs Sep/Oct Mar 22

23 RI contract boundaries FAQs Can we get rid of the requirement around contract boundaries? NO. It is consistent with current regulatory requirements. So we do need the model to allow for it. Why do we need the adjustment? Whilst it does not impact one-year SCR, nor does it impact the TP + SCR stack (if both on Q4). This means a reduction in ECU (35% uplift). Risk remains the same, so FAL should not reduce. Why should Lloyd s do it? Can we not do it ourselves? We have noted inconsistencies between returns (QSR/LCR). Also, the concept is still not clear to everyone. So we will continue to make this adjustment. 23

24 Detailed results 24

25 Results for 2018 YOA: user beware LCR risks vs. exposure: an update from last year Based on November 2016 CiL and December 2017 CiL data Keep in mind the caveats / limitations this is a partial selection of metrics the exposure measures are not optimal gaps/jumps may occur near the percentiles shown excludes new syndicates means are volume weighted 25

26 Results for 2018 YOA: user beware Remember: distance from the market mean is not a validation test The caveats mentioned previously if using in validation Common theme for 2018 YoA vs YoA: means / lower percentiles mostly stable upper percentiles have increased for most cases 26

27 Ultimate SCR vs. net premium Ult SCR: F309 Net PI: F313 table 1 col D row 1 27

28 Ultimate SCR vs. exposure (net premium + ½ net reserves) Ult SCR: F309 Exposure: Net PI + 0.5*Net Reserves 28

29 Premium risk vs. net premium Ult premium risk (pre diversification): F309 Net PI: F313 table 1 col D row 1 29

30 Reserve risk + risk margin vs. reserves Reserve risk (pre Diversification) F309 Risk margin: F312 col P total Net Reserves: F312 cols H+I-J Total less Proposed YOA 30

31 Market risk vs. available assets Market risk (pre Diversification): F309 Available assets: F312 col Q Total less Proposed YOA + F313 table 1 col D row 1 31

32 RI credit risk vs. 1:200 recoveries RI credit risk (pre Diversification): F309 1:200 Recoveries (approximated): F311 table 1 col G row 4 less row 3 32

33 Operational risk vs. net premium Operational risk (pre Diversification): F309 Net PI: F313 table 1 col D row 1 33

34 U/W profit vs. uscr Ult SCR: F309 U/W Profit: F314 premium risk mean 34

35 U/W profit vs. uscr Ult SCR: F309 U/W Profit: F314 premium risk mean 35

36 What happens in March & beyond? 36

37 Specific re-submissions in March Same as previous years For a number of agents the CPG feedback was to require a resubmission in March either a material point to resolve; or a result of uncertainty in rate assumptions (and resultant planned volumes) not every case was where a capital loading applied we are currently working with agents on these. Some agents have agreed a submission with Lloyd s due to special cases e.g. RITC For everyone else MB Y5113 applies: Managing Agents to re-submit an LCR pro-forma where there has been material change to syndicate ultimate SCR from that agreed for December CIL. 37

38 High level principles of the March reassessments Highlights of SCR Re-assessments: Resubmissions for material (greater than 10%) movements excluding FX/risk in the SCR to ultimate. Also resubmit the revised one-year SCR. May request some resubmissions. Resubmissions must be made at the year-end exchange rates (US$:GBP rate was 1.35), see MB Y5149 for all currencies LCRs should be re-submitted by 1pm, 1 March 2018 Where no resubmission is required and the current SCR is still valid, agents should confirm this to Lloyd s via QMC form 990 Remember: We will adjust ECAs for year end exchange rates, movements in risk margins and RI CB changes for mid-year CiL 38

39 Our mutual interest Few things to note More spread out and targeted review process Don t review for the sake of it Use other approaches more e.g. model walkthrough Syndicates to be subject to a deep-dive/detailed review at some point over the year Capital review Major model change review Model walkthrough better understanding of modelling approach Major model change process remains the same June August window In addition to at both mid-year and year-end CiL No major changes in LCR forms planned Working towards moving to a different submission platform 39

40 Emerging topics Cyber Continues to be an area of focus Covers business written Incidental cyber affecting relationship with other classes Impact on operations of a managing agency Vendor models Outputs often used without adjustment Ensure outputs represent the risk written Validation tests should play a key role in such transitions Check for model drift Major model change process remains the same June August window In addition to at both mid-year and year-end CiL No major changes in LCR forms planned Working towards moving to a different submission platform 40

41 Next steps Considering options of a new review process Will carry out market consultations (LMA) Managing agents and members agents Will keep you updated Market bulleting, workshops etc 41

42 Lloyd s Internal Model 42

43 Lloyd s Internal Model - Lloyd s Chain of Security Risks are quantified at a syndicate level before being aggregated to establish risk to Lloyd s centrally Lloyd s Chain of Security Simulate losses for all risk types Produce syndicate results/ SCR Allocate to Members Calculate hit on Central Fund Class 1 Class 2 Synd 1 Synd 2 Member A Central Operational risk, Central Asset Risk, Pension Risk Class 3 Synd 3 Member B Central Fund losses Member Y Class n Synd x Premium Trust Funds (PTF) Funds At Lloyd s (FAL) Central Fund (CF) All other (attritional) losses Catastrophe losses from LCM Other risks, e.g. market, credit, operational Additional Central Fund (ACF) losses 43

44 Market view vs syndicate Lloyd s Internal Model (LIM) LIM is important for estimating the risk to the Central Fund And for ensuring SII compliance of the market It is a market level view of risk Hence there are differences at syndicate level Market vs syndicate perspective Reinsurance Dependencies Class structure Loss type Data availability Lloyd s might request a sample of managing agents for risk code mapping to their modelled classes 44

45 Summary Wrap up Profit and the entire distribution is as important as the tail Risk beyond the can be a material consideration for the Central Fund Cat risk appetite will continue to monitored Hurricane losses Reinsurance contract boundaries New capital review process (possibly) Market vs syndicate view 45

46 Questions 46

47 This information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. It is the responsibility of any person publishing or communicating the contents of this document or communication, or any part thereof, to ensure compliance with all applicable legal and regulatory requirements. The content of this presentation does not represent a prospectus or invitation in connection with any solicitation of capital. Nor does it constitute an offer to sell securities or insurance, a solicitation or an offer to buy securities or insurance, or a distribution of securities in the United States or to a U.S. person, or in any other jurisdiction where it is contrary to local law. Such persons should inform themselves about and observe any applicable legal requirement. 47

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