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THE ECONOMIC CLIMATE AND ITS EFFECT ON ITS RATING STRUCTURES Presentation : A general overview of the international market post crisis and Discussion : Its impact on the local market. James N. Portelli MSc FCII FIRM 1 of 26 pages James
James Portelli FCII FIRM 1
Presentation: A general overview of the international market post crisis and Discussion: Its impact on the local market. James N. Portelli MSc FCII FIRM Chartered Insurance Practitioner
James Portelli FCII FIRM 2
Acknowledgements / References
Association
707231,00.html
– http://www.forbes.com/forbes/2010/0208/investing-mutual- funds-stocks-pimco-new-normal.html; – http://www.forbes.com/forbes/2010/0208/investing-mutual- funds-stocks-pimco-new-normal.html; – http://www.bloomberg.com/news/print/2010-08-16/bank-loan- terms-eased-last-quarter-even-as-demand-little-changed-fed- says.html .
– www.fsa.gov.uk ; – www.cea.eu ; – www.risk.net .
James Portelli FCII FIRM 3
Agenda
To be rated or not to be rated (and what a question!!)
A global view
The financial crisis and insurance
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To be rated or not to be rated (.. And what question!)
The main compulsion for being rated:
that they were of a level which is considered to be internationally acceptable to accept business from certain sources.
(a) certain large insurance purchasers stipulate an A rated carrier and (b) for others it was / is nothing more than a ‘nice to have’ badge. But is it really a badge / certification if what Rating Agencies provide is a learned opinion?
To be rated or not to be rated
insurance / credit ratings
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What is rated?
A.M. Best:
company’s balance sheet operating performance and business profile;
than a US$ 1 m to over US$ 2 b. S&P:
insurer’s ability to pay its policies and contracts. (AAA to NR)
an insurer’s willingness to pay financial guarantees on a timely basis. (A-1 to D)
To be rated or not to be rated
insurance / credit ratings
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What is rated: Rating Detail
market diversity, operational competitively / costs, brand loyalty etc.
corporate / financial checks and balances and strategic implementation.
performance trends and ratios.
Until prior to the crisis rating agencies maintained that each of the above areas also dealt with the respective risk management issues. Now some of them have a separate ERM assessment module.
To be rated or not to be rated
insurance / credit ratings
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A geographical view of the main market blocs
amount to just over US$ 4,500 billion.
is showing signs of market hardening.
while world economies grew by 3% (effect of depreciated US$ dollar?)
under 60% life premiums and over 40% non-life premiums;
industrialised countries.
Source: Swiss Re SIGMA 2/2010 and 3/2012 [www.swissre.com]
emerging markets
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A geographical view of the main market blocs
Pre to post crisis view
emerging markets
Share of world premium [2009] 33% 40% 24% 1%2% 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 2006 2007 2008 2009
4-year regional premium development (US$ millions)
Oceania Africa Asia Europe Americas
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A geographical view of the main market blocs
Pre to post crisis view
1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 2006 2007 2008 2009
4-yr comparison
Industrialised Emerging
emerging markets
Share of world market [2009]
87% 13%
Per capita % of GDP Premiums: US$ 3,405 8.61% Industrialised US$ 92 2.89% Emerging
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A macro view of leading markets
Pre to post crisis view
4-yr development of 10 leading markets
1,000,000 2,000,000 3,000,000 4,000,000 2006 2007 2008 2009 USA Japan UK France Germany Italy China Netherlands Canada South Korea
countries
potential in various markets
Top 10 ranking maintained in 2010 / 2011
2009 Premium 4-year % % of GDP Per Capita Movement 8% US$ 2,107
USA 10% US$ 840 15% Japan 13% US$ 1,051
UK 10% US$ 1,289 13% France 7% US$ 1,519 18% Germany 8% US$ 850 20% Italy 3% US$ 40 130% China 14% US$ 4,509 18% Netherlands 7% US$ 1,644 13% Canada 10% US$ 710
South Korea
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A macro view of leading markets
countries
potential in various markets
Taiwan) suffered significant downturn in 2006 – 2009 premium because of their higher reliance on life assurance;
its business development efforts in, e.g. China, Far East, Middle East and India;
business pre-crisis (Japan, Continental Europe, China, Middle East etc.) suffered less during the economic downturn.
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Rule-of-thumb market differentiators
Emerging Mature Market / Criteria
Obsolete or being
proper supervision. In place, clear & implemented. Legislation / Supervision Protectionist or aggressive. Transparently competitive. Competition May be ambiguous. Internationally accepted. Accounting Practices Unavailable or unreliable statistics. Availability of market statistics. Information Significantly more volatile. Proportionately more predictable. Technical results Absence or mismatch
Skilled workforce available. Expertise
Markets that are …
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The financial crisis and insurance
and sometimes a complement to another product.
product its elasticity of demand diminishes. Therefore, reduction in demand is less than proportionate to other changes.
elastic segment of a demand curve have been more severely effected by the economic downturn. Conversely, emerging markets have been less immediately effected by the crisis (although statistics suggest a ‘delayed’ impact).
product.
insurance less susceptible to the crisis?
markets were most adversely effected?
come?
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The financial crisis and insurance
product.
insurance less susceptible to the crisis?
come?
balance sheets and cash flows;
than banks, are less capital market dependent and pose a much lower systemic threat;
the crisis were mostly to do with the economic consequences of the turmoil. Of these, there were also 8% rating upgrades in 2009 and 4% of outlooks turning positive;
result of a regulatory whiplash than through their
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The financial crisis and insurance
product.
insurance less susceptible to the crisis?
markets were most adversely effected?
come?
Enterprise Risk Management in Insurance Companies
Liability Risks:
Underwriting, Claims, Pricing, Reserving, Reinsurance Protections (Amount & Quality), Accumulation Etc.
Asset, Credit & Liquidity Risks
Investment allocation / distribution, Solvency & Capital Adequacy Calculations, Credit Mgt (debtors from insurance /reinsurance recoveries), etc.
Operational Risks
Health & Safety, Assets, Technology, Business Continuity, Reputation, Legal & Regulatory, etc.
Core Operations Subsidiary Ancillary Strategic and Emerging Risks encompassing all three areas
Main ERM risk exposures for Insurance companies Credit risk is subsidiary to core activities
Source: James Portelli FCII FIRM Chartered Insurance Practitioner
James Portelli FCII FIRM 16
The financial crisis and insurance
product.
insurance less susceptible to the crisis?
come?
Enterprise Risk Management in Banks
Asset and Liability Risks:
Lending and Deposit-taking, collateralisation, and securitization, Solvency & Capital Adequacy Calculations, ALM structuring, etc.
Intermediation and Other Asset Risks
Investment allocation / distribution, Bancassurance, etc.
Operational Risks
Health & Safety, Assets, Technology, Business Continuity, Reputation, Legal & Regulatory, etc.
Core Operations Subsidiary Ancillary Strategic and Emerging Risks encompassing all three areas
Main ERM risk exposure for banks is credit related. Ensuing credit risk subsidiary to core activities
Source: James Portelli FCII FIRM Chartered Insurance Practitioner
James Portelli FCII FIRM 17
The financial crisis and insurance
product.
insurance less susceptible to the crisis?
come?
Direct impact to the industry from the Sub-prime crisis: Limited to AIG and other insurers with derivative and/or bank exposures. Economic stagnation impacted certain insurance classes such as life assurance, marine cargo, marine hull, construction / engineering & mortgage-related products. As reinsurance capacity remains high, insurers continue to ‘write more for less’ and 2009 / 10 emphasis is/was on consolidation 2011 / 2012 were earmarked as the years of economic
READY FOR TAKE-OFF”.
2008 2009 2010 2011 - 2012
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The financial crisis and insurance
The following is a comparison of the ‘Big 4’ industrialised insurance markets and the emerging ‘BRIC’ + UAE (because of the unprecedented growth in Dubai post-2001):
product.
insurance less susceptible to the crisis?
markets were most adversely effected?
come?
Percentage Movement in Total Premium (Gap in rate of growth): 2006-9 Gap 2008-9 2007-8 2006-7
3% 22% 28% Brazil
1% 31% 34% Russia
17% 2% 35% India
16% 52% 31% China
3% 40% 27% UAE 2006-9 Gap 2008-9 2007-8 2006-7
1% 5% USA 8% 5% 14%
Japan
28% UK
3% 3% 7% France
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The financial crisis and insurance
would become a self-fulfilling prophecy!
– Price of oil; – Geo-political factors (i.e. Middle East; Russia vis-à-vis neighbours etc.); – The economic recovery of the USA; – Sourcing of / willingness of banks to finance trade and investment; – Consumer behaviour / willingness to borrow; – Economies ability to generate liquidity; – Global ‘double-dip’ recession or protracted recovery?;
product.
insurance less susceptible to the crisis?
markets were most adversely effected?
come?
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Ivy-league and other insurance centres
supervision;
Some predicted growth in the captive / affiliated insurance as a result of the economic
have precluded this from happening. Will it happen post-2012?
insurance centre?
insurance centres.
centres.
effected them?
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Ivy-league and other insurance centres
insurance centre?
insurance centres.
centres.
effected them?
the London market); Germany (reinsurance); Switzerland (finance and reinsurance); New York (the US ‘financial’ capital).
Bermuda (plus proximity to New York and US markets); Cayman and Vermont (plus proximity to US markets); Guernsey and Jersey (plus proximity to London / UK)
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Ivy-league and other insurance centres
insurance centre?
insurance centres.
centres.
effected them?
Man, Gibraltar, Bahamas, Barbados, Labuan.. Mainly offering ‘easier entry’ and lower taxation and thrive on the proximity to large markets / target client bases.
Both established as EU-onshore centres focusing
states, clear / transparent legislation, some cost benefits.
Bahrain … losing out due to political instability.
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Ivy-league and other insurance centres
insurance centre?
insurance centres.
centres.
effected them?
behaviour
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Solvency II: Regional or global?
been delayed. This regulatory regime is based on 3 main pillars namely:
– PILLAR 1: Quantitative Requirements, i.e. Reserving, Minimum Capital or Solvency Requirements and Investment; – PILLAR 2: Supervisory Review, i.e. Quantitative requirements, financial services supervision, Regulators’ power remit; – PILLAR 3: Market Discipline, i.e. Transparency, disclosure requirements and competition elements.
Solvency Test) already have a similar regime in place. Bermuda’s regime has also been accepted as being similar to/compatible with Solvency II. USA seem to be responding to it the same way they initially responded to the 2 world wars, “vaguely aware of it … but it concerns Europe not us!!”
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Conclusion: Flirting with the crystal ball
From the ‘insurance-joe-bloggs-on-the-street.’ Solvency II
companies would still not be prepared;
escalated because of Solvency II;
will not impact pricing (ceteris paribus). Return on investment will;
because these are essentially governance / operational risk related and not quantitative issues.
Post-Recession
reinsurance and will slide back to pre-crisis, revenue driven strategies (when the proverbial hits the fan again they’ll say, “oh, but this time it’s different!”);
within the coming 5 years (India?) possibly knocking Canada or South Korea off the list.
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James N. Portelli MSc FCII FIRM Chartered Insurance Practitioner http://ae.linkedin.com/in/jamesportelli http://www.insuranceguild.wordpress.com