REINSURANCE CONTRIBUTION UNDER SOLVENCY II STANDARD APPROACH (RISA) Athens, 19 May 211 & Nicosia, 2 May 211 Dr. Norbert Kuschel Solvency Consulting, Integrated Risk Management
Agenda 1. Quantitative case study: Impact of reinsurance on typical non-life insurer 2. Munich Re s RISA: Ways to control the standard approach in SCR non-life 3. Solvency Consulting: Munich Re NOT IF, BUT HOW! 2
QUANTITATIVE CASE STUDY: IMPACT OF REINSURANCE ON TYPICAL NON-LIFE INSURER
Quantitative case study Business Mix of our sample company Underwriting figures for our sample company Sample company s portfolio Property 18% Personal accident 13% TOTAL 413m Motor liability 46% MOD 23% Total premium: 413m Motor liability 189m MOD 97m Personal accident 54m Property 73m Combined ratio: 99.95% 4
Quantitative case study Economic balance sheet Solvency I QIS5 valuation Assets 249 274 Investments 248 272 Reinsurance 1 Other assets 1 2 Liabilities 166 153 TP Best Estimate 142 Risk Margin 12 Other liabilities Own funds 83 121 Share capital 121 in m 5
Quantitative case study Available capital in Solvency I and QIS5 Solvency I balance sheet in m QIS5 balance sheet in m 83 68 121 143 249 166 274 153 Assets Liabilities Solvency I capital requirement Assets Available capital Tech prov + other Capital requirement Assets Liabilities QIS5 capital requirement Assets Available capital Tech prov + other Capital requirement Solvency ratio: 83 / 68 = 122 % Solvency ratio: 121 /143 = 84 % Increase of available capital is mainly driven by valuation of investments and technical provision. 6
Quantitative case study SCR in QIS5 split in risk categories SCR in QIS5 split in risk categories in m 2 18 16 14 12 1 8 6 4 2 23 41 26 12 2 131 143 14 Non-Life Health Market Default Div BSCR Op. SCR Segment Div BSCR SCR Non-Life UW risk dominates SCR. 7
Quantitative case study Market risk Solvency Capital Requirement in m Market risk component in m SCR 143 Market 26 Adjustments Basic SCR Operational Diversified market risk components Risk for undertakings excluded from group supervision 131 12 26 Div 43 Market Health Default Life Non Life Intang. 26 2 23 14 1 Interest rate Div 9 Equity Property Currency Concentration Illiquidity Spread 6 12 15 2 The main drivers in market risk are property risk & equity risk 8
Quantitative case study Counterparty default risk Solvency Capital Requirement in m Couterparty risk component in m SCR Default 143 23 Adjustments Basic SCR 131 Operational 12 Div Div 43 Market Health Default Life Non Life Intang. 26 2 23 14 1 Type 1 Type 2 exposure exposure 1 23 The main driver in default risk ist Type 2 exposure. 9
MUNICH RE S RISA: WAYS TO CONTROL THE STANDARD APPROACH IN SCR NON-LIFE
Munich Re s RISA Original R/I programme Property Property- WCXL MTPL MTPL-WXL MH MH-CXL PA PA-WXL PA-CXL 11
Munich Re s RISA SCR for Non-Life & Health UW risk Original Solvency Capital Requirement in m Total UW risk in m SCR UW Risk 143 16 Div Adjustments Basic SCR Operational 18 131 12 Non SLT 2 Premium / Reserve NL Cat Lapse 86 41 Div 43 Div 23 Market Health Default Life Non Life Intang. 26 2 23 14 1 Health 2 Non-Life 14 Non-Life premium and reserve risk dominates the UW risk. 12
Munich Re s RISA SCR split for Non-Life & Health UW risk Original SCR split for underwriting risk in m 16 14 12 1 41 2 41 8 6 4 86 16 2 Non-Life Premium / Reserve Non-Life Cat Non-SLT Health Div NL & Health Improve diversification by reducing Non-Life premium and reserve risk. 13
Munich Re s RISA Risk capital per UW-LoB gross* vs net (original) Risk capital per UW-LoB, gross* vs net (original) in m 3 25 2 15 1 5 2 2 27 62 88 144 13 41 4 83 22 2 18 189 21 21 16 68 7 MTPL MOD Fire NL Cat nslt Div SCR * contained reserves are net of past R/I gross net ceded Main risk driver in UW risk is Motor. 14
Munich Re s RISA Alternative R/I program Original with Motor-Quota-Share in 211 Property Property- WCXL MTPL MTPL-QS MTPL-WXL MH MH-QS MH-CXL PA PA-WXL PA-CXL 15
Munich Re s RISA Premium and NP Adj Net (original) vs. net (with Motor-QS) SCR split for market risk in m 3 25 2 188 15 1 5 94 96 48 61 61 54 54 MTPL MOD Fire nslt Premium, net Premium, net (alt) Reduction of net premium in Motor leads to a new premium split. 16
Munich Re s RISA SCR for Non-Life & Health UW risk net (original) vs net (with Motor-Quota-Share) Total UW risk (original) in m Total UW risk (with Motor-QS) in m UW Risk UW Risk 16 78 Div Div 18 17 Non SLT 2 Premium / Reserve NL Cat Lapse 86 41 Non SLT 2 Premium / Reserve NL Cat Lapse 58 36 Div Div 23 18 Health Non-Life Health Non-Life 2 14 2 75 Premium/reserve risk reduced significantly by Motor-Quota-Share. 17
Munich Re s RISA SCR split for Non-Life & Health UW risk net with Motor-Quota-Share SCR split for underwriting risk in m 12 1 2 36 8 36 6 4 2 58 78 Non-Life Premium / Reserve Non-Life Cat Non-SLT Health Div NL & Health Reduction of premium/reserve risk decreased NL & Health UW risk. 18
Munich Re s RISA Risk capital per UW-LoB net (original) vs net (with Motor-Quota-Share) Risk capital per UW-LoB, net (original) vs net (with Motor-QS) in m 18 16 14 12 1 8 6 4 2 5 2 2 1 36 62 41 52 9 18 18 28 21 12 78 23 16 45 68 MTPL MOD Fire NL Cat nslt Div SCR net (orig) net (alt) ceded Most reduction in SCR is in MTPL premium/reserve risk. 19
Munich Re s RISA Risk capital per UW-LoB net with Motor-Quota-Share Risk capital per LoB, net with Motor-QS in m 14 12 2 1 8 36 52 6 4 12 18 78 2 45 MTPL MOD Fire NL Cat nslt Div SCR net (alt) Reduction of premium/reserve risk improves diversification. 2
Munich Re s RISA SCR in QIS5 split in risk categories net with Motor-Quota-Share SCR in QIS5 split in risk categories in m 16 14 12 1 8 2 26 23 39 16 6 4 75 15 121 2 Non-Life Health Market Default Div BSCR Op. SCR Segment Div BSCR SCR Reduction of premium/reserve risk decreased SCR. 21
Munich Re s RISA Available capital Original and alternative (with Motor-QS) R/I QIS 5 original R/I in m QIS 5 with Motor-QS in m 274 121 143 153 274 121 121 153 Assets Liabilities QIS5 capital requirement Assets Available capital Tech prov + other SCR Assets Liabilities QIS5 capital requirement Assets Tech prov + other Available capital SCR Solvency ratio: 121/143 = 84% Solvency ratio: 121/121 = 99% Decrease of SCR improves the Solvency II ratio in 211 by 15 %. 22
Munich Re s RISA Alternative R/I program to 213 with Motor-Quota-Share (from 211 to 213) Property Property- WCXL MTPL MTPL-QS (3 years) MTPL-WXL MH MH-QS (3 years) MH-CXL PA PA-WXL PA-CXL 23
Munich Re s RISA SCR for Non-Life & Health UW risk with Motor-Quota-Share 211 vs 213 Total UW risk (211) in m Total UW risk (213) in m UW Risk UW Risk 78 7 Div Div 17 17 Non SLT 2 Premium / Reserve NL Cat Lapse 58 36 Non SLT 2 Premium / Reserve NL Cat Lapse 48 36 Div Div 18 17 Health Non-Life Health Non-Life 2 75 2 67 Premium/reserve risk reduced significantly by Motor-Quota-Share. 24
Munich Re s RISA SCR split for Non-Life & Health UW risk net with Motor-Quota-Share in 213 SCR split for underwriting risk in m 12 1 8 2 34 6 36 4 2 48 7 Non-Life Premium / Reserve Non-Life Cat Non-SLT Health Div NL & Health In 213 the Non-Life reserve risk reduced significantly. 25
Munich Re s RISA Risk capital per UW-LoB net with Motor-Quota-Share in 213 Risk capital per LoB, net with Motor-QS in 213 in m 14 12 1 8 36 2 49 6 4 2 18 1 7 35 MTPL MOD Fire NL Cat nslt Div SCR net (alt) Excellent diversification with Motor-Quota-Share in SCR_UW. 26
Munich Re s RISA Risk capital per UW-LoB net with Motor-Quota-Share in 211 vs in 213 Risk capital per UW-LoB, net (211) vs net (213) in m 14 12 2 2 3 1 8 6 4 2 1 35 45 1 1 12 18 18 36 36 49 52 8 7 78 MTPL MOD Fire NL Cat nslt Div SCR net (orig) net (alt) ceded Reduction with Motor-Quota-Share in 213 is very good. 27
Munich Re s RISA SCR in QIS5 split in risk categories net with Motor-Quota-Share in 213 SCR in QIS5 split in risk categories in m 16 14 12 1 26 23 38 16 8 2 6 4 2 67 98 114 Non-Life Health Market Default Div BSCR Op. SCR Segment Div BSCR SCR Reduction of premium/reserve risk decreased SCR. 28
Munich Re s RISA Available capital Alternative R/I with Motor-QS in 211 and 213 QIS 5 with Motor-QS in 211 in m QIS 5 with Motor-QS in 213 in m 121 121 121 114 274 274 153 153 Assets Liabilities QIS5 capital requirement Assets Available capital Tech prov + other SCR Assets Liabilities QIS5 capital requirement Assets Tech prov + other Available capital SCR Solvency ratio: 121/121 = 99% Solvency ratio: 121/114 = 16% In 213 the Solvency II ratio can be over at 16 %. 29
Munich Re s RISA Reinsurance under Standard Approach (RISA) Conclusion Possible further improvements with Reinsurance Property: Reduction of premium/reserve risk with a Quota Share Property: Reduction of (Nat) Cat risk by reduction of retention in Nat Cat XL Reduction of Solvency Capital Requirement (SCR) with Reinsurance Reinsurance is the simplest and most flexible way of managing an economic balance sheet For long-tail business reserve risk: START NOW! For short-tail business: Beginning to think now! Solvency II will start on 1 January 213 - NOW start preparing your RI structure! 3
SOLVENCY CONSULTING: MUNICH RE NOT IF, BUT HOW!
Solvency Consulting Munich Re offers tools that help clients meet Solvency II requirements and generate new business Operational units Integrated Risk Management Solvency Consulting Solvency Consulting is a subdivision of Munich Re s Integrated Risk Management: Preparing Munich Re s operational units for the new world : risk modelling, ERM, Transparent modelling services, such as PODRA In-depth market and industry expertise helps to compensate for any lack of client data Expertise from own Solvency II preparations (from QIS5 to sophisticated modelling on a group basis) Service products: client-oriented through ongoing contact with operational units Combined set-up for life, health and non-life business 32
Solvency Consulting Solvency Consulting Non-life products and services Internet Knowledge Series Sales presentations Specimen company MISS Non-Life GoST RISA PODRA Solvency IIrelated information Initiating client dialogue Reinsurance impact measurement Business and risk strategy, interactive workshop on pillar 1 Interactive workshop on Pillar 2 Quantification of reinsurance effect on capital relief in QIS5 Stochastic modeling/ quantification of reinsurance effect on capital relief Market events, conferences, dialogue Client cooperation with Munich Re 33
Solvency Consulting PODRA PillarOne Dynamic Reinsurance Analysis based on open source software www.pillarone.org Whole account perspective Includes correlation assumptions Diversification effects Gross and net perspective (after R/I) Segment: SCR non-life Modelling set-up Data requirements Data and calibration Gross evaluation Reinsurance structure Net evaluation Customised scoping of analysis project, based on clients needs, e.g. solvency stress Data and evaluation support where client data incomplete Calibration of clients portfolios based on Munich Re s market expertise (shared with clients) In-depth analysis of risk drivers in clients portfolios Simulation of different reinsurance structures Effects of risk capital relief are made obvious Optimisation of R/I structures from capital management perspective, comparison with funding alternatives 34
Solvency Consulting PODRA: Risk mitigation effect of reinsurance Risk drivers and risk capital relief options SCR by line of business, gross vs. net in m 3 25 2 15 78 97 1 14 25 16 16 91 24 115 1 19 5 87 11 85 48 22 Property MTPL MH PA Div Total 133 Gross Net Ceded The effects of reinsurance are fully reflected 35
Solvency Consulting PODRA: Cost of reinsurance More or less than a funding alternative? Cost of reinsurance m Value of reinsurance m 14 12 1 8 6 4 2 15 1 5 R/I premium (- commission) Expected loss ceded Cost of R/I 14 12 1 8 6 4 2 133 SCR gross 48 SCR net 85 SCR relief 1 5 5 Cost of R/I 85 SCR relief Cost of R/I Capital cost ratio * = SCR relief * No diversification impact from other risks assumed (e.g. ALM) = 6% Compare this ratio with other financial instruments 36
THANK YOU FOR YOUR ATTENTION. Dr. Norbert Kuschel Solvency Consulting Tel.: +49 (89) 3891-4349 Fax: +49 (89) 3891-74349 E-mail: nkuschel@munichre.com
APPENDIX: Standard formula or (partial) internal model? Approach determines reinsurance effect 38
Appendix The insurer s model approach follows its business complexity Simplified standard formula Standard formula Company-specific standard formula Partial internal model Internal model Standard formula Simulation of main module(s) Simulation of all relevant risks What happens when reinsurance is to be considered? 39
Appendix Effects of common reinsurance types? Depending on modelling approach R/I contract type Standard formula (QIS5) (Partial) internal model Traditional QS/Surplus Reducing SCR for NL PR via premium volume High capital relief effect Risk XL Reducing SCR for NL PR via risk measure AAL/AAD not directly reflected in QIS5 Cat XL Reducing SCR for NL CAT Risk limiting effects of AAL should be taken into account Effect of reinsurance structure (incl. AAL/AAD) is risk-adequately reflected Stop Loss/Agg. XL NL PR : not reflected directly in QIS5 NL CAT : similar to Cat XL Relief: Low/not recognised Medium/partially recognised High/fully recognised Proportional reinsurance: High solvency relief effect Non-proportional reinsurance: Cannot be directly reflected in QIS5 4
Appendix Effects of specialised reinsurance types? Depending on regulator s recognition R/I contract type Standard formula (QIS5) (Partial) internal model Structured QS Recognition as insurance risk mitigation except finite and similar reinsurance As long as recognised, structural elements not reflected directly in QIS5 No general restriction on structural elements Modelling approach must adequately reflect risk-limiting structural elements. Pre-/Post funding Usually categorised as FinRe, therefore no allowance as insurance risk mitigation according to current draft of IM Modelling approach must adequately reflect risk-limiting structural elements. Parametric trigger Recognition as insurance risk mitigation as long as basis risk not material Even if material, still recognised as long as basis risk is captured in SCR Basis risk should be captured in risk modelling. Relief: Low/not recognised Medium/partially recognised High/fully recognised Standard formula: Finite Re not recognised as insurance risk mitigation Internal model: Structural elements risk-adequately modelled 41
Appendix Effects of retrospective reinsurance? Depending on regulator s recognition R/I contract type Standard formula (QIS5) (Partial) internal model Traditional LPT Reducing SCR for NL PR via reserve volume Structured LPT Recognition as insurance risk mitigation as long as no finite As far as recognised, structural elements not reflected in QIS5 full solvency relief as traditional LPT No general restriction on structure elements Modelling approach must adequately reflect risk-limiting structural elements. Traditional/Structured ADC No reflection in QIS5 unless USP Reducing SCR for NL PR via reserve volatility Modelling approach must adequately reflect risk-limiting structural elements. Relief: Low/not recognised Medium/partially recognised High/fully recognised Retrospective covers: Steering the economic balance sheet 42