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Reinsurance Opportunities for Banks ABIA 2003 Annual Conference ...

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Reinsurance Opportunities for Banks ABIA 2003 Annual Conference ...

  1. 1. Reinsurance Opportunities for Banks ABIA 2003 Annual Conference October 9, 2003 !@ Quality In Everything We Do
  2. 2. Panelists <ul><li>Steven Lash, Ernst &Young </li></ul><ul><li>Ken Baldes, HSBC Insurance </li></ul><ul><li>Joe Picarello, Chase Insurance </li></ul><ul><li>Jay Votta, Ernst &Young </li></ul>
  3. 3. What is Reinsurance? <ul><li>“ The process whereby one insurance company, referred to as the reinsurer, for a consideration, agrees to indemnify another insurance company, referred to as the ceding company or the reinsured, against all or part of a loss which the ceding company may incur under certain policies of insurance which it has issued” </li></ul><ul><li>Sharing of the profits and risks of the underlying insurance product. </li></ul>!@ Quality In Everything We Do Source: Life, Health, & Annuity Reinsurance, John E. Tiller
  4. 4. Why Reinsure? <ul><li>Substantial increase in long term revenue and income for the bank </li></ul><ul><li>Further increase in partnership for bank and insurer </li></ul><ul><li>Increased shelf space for the reinsurer </li></ul><ul><li>Better persistency for bank and the insurer </li></ul>Quality In Everything We Do !@ Quality In Everything We Do
  5. 5. What is Reinsured? <ul><li>Credit Life </li></ul><ul><li>Fixed Annuities </li></ul><ul><li>Variable Annuities </li></ul><ul><li>Term Life </li></ul><ul><li>Lender Placed Hazard </li></ul><ul><li>AD&D </li></ul><ul><li>Mortgage Insurance </li></ul><ul><li>Vendors Single Interest </li></ul><ul><li>Universal Life </li></ul><ul><li>Title </li></ul>Quality In Everything We Do !@ Quality In Everything We Do
  6. 6. Who Reinsures? Source: ABIA Study of Leading Banks in Insurance 2002 Quality In Everything We Do !@ Quality In Everything We Do
  7. 7. Who Reinsures? 1Q ’03 Revenue Quality In Everything We Do !@ Quality In Everything We Do Source: Singer Annuity and Funds Report, Aug/Sept 2003
  8. 8. Reinsurance Opportunities for Banks Ken Baldes ABIA 2003 Annual Conference October 9, 2003 October, 2003
  9. 9. HSBC Group Who We Are The HSBC Group is one of the world’s largest banking and financial services organizations, with major personal, commercial, corporate and investment banking and insurance business operating in the Asia-Pacific region, Europe, the Americas, the Middle East and Africa.
  10. 10. HSBC Insurance (USA) Wealth Management Commercial Banking Small Business Private Banking Personal Banking Mortgage Credit Card Bancassurance Opportunities
  11. 11. Bancassurance Model <ul><li>Middle Market Has Been Abandoned </li></ul><ul><li>Trusted Advisor </li></ul><ul><li>Ease of Purchase </li></ul><ul><li>Convenience </li></ul><ul><li>Multiple Channels to meet Customer Needs (Face to Face, Phone, Mail, Internet, etc) </li></ul><ul><li>Deepen Customer Relationships </li></ul><ul><li>Reinsurance Opportunities </li></ul>
  12. 12. Revenue Stream Expansion <ul><li>Private Mortgage Insurance </li></ul><ul><li>Vendors Single Interest </li></ul>HSBC Reinsurance (USA) Inc. <ul><li>Credit Insurance (USA, Canada, Panama) </li></ul><ul><li>Life Insurance </li></ul>Marmid Life Insurance Co. <ul><li>Annuity Reinsurance </li></ul>HSBC Life Insurance (Cayman) Ltd. HSBC Insurance (USA)
  13. 13. Overriding Considerations with Reinsurance <ul><li>Scale of Business </li></ul><ul><li>Business Unit Rapport </li></ul><ul><li>Risk Transfer </li></ul><ul><li>Carrier Reinsurance Expertise </li></ul><ul><li>Reconciliation of data </li></ul><ul><li>Monitoring Controls </li></ul><ul><li>Actuarial Support </li></ul><ul><li>Captive Management Support </li></ul><ul><li>Annual Stress Testing </li></ul>
  14. 14. Private Mortgage Insurance <ul><li>Arrangements </li></ul><ul><li>Quota Share </li></ul><ul><li>Excess of Loss </li></ul><ul><li>Additional Considerations </li></ul><ul><li>Capital Requirements for cedes over 25% </li></ul><ul><li>Domicile Flexibility </li></ul>
  15. 15. Traditional Insurance & Annuities <ul><li>Arrangements </li></ul><ul><li>Quota Share </li></ul><ul><li>Modified Co-insurance </li></ul><ul><li>Additional Considerations </li></ul><ul><li>Investment Policy </li></ul><ul><li>Credit Losses </li></ul><ul><li>Interest Rate Risk/Spreads </li></ul>
  16. 16. ABIA Annual Conference October 8-10, 2003 Joe Picarello Chase Insurance Group Building Income – Reinsurance of Bank Sold Insurance Products
  17. 17. The Line of Business is the Customer CRB Small Business Financial Services Private Bank CRB Personal Financial Services CRB Retail Financial Services Licensing Chase Insurance Group Product Development Carrier Management Product Management Reinsurance / Underwriting Data-mining Technology Compliance Legal Middle Market Financial Services Chase Home Finance Chase Card Services Chase Auto Finance
  18. 18. Business Model <ul><li>Design, source, deliver and service superior insurance and financial security solutions </li></ul><ul><li>Integrated cross-sell model </li></ul><ul><li>Alignment with LOB strategies </li></ul><ul><li>Strategic Partnering </li></ul><ul><li>Reinsure to capture incremental SVA </li></ul><ul><li>“ Thin” insurance agency model </li></ul><ul><li>“ Open architecture” business system </li></ul><ul><li>Manufacturing, only very selectively </li></ul><ul><li>Centralized expertise </li></ul><ul><li>Centralized utilities </li></ul><ul><li>Card services </li></ul><ul><li>Home finance </li></ul><ul><li>Auto finance </li></ul><ul><li>CFS </li></ul><ul><ul><li>PFS </li></ul></ul><ul><ul><li>RFS </li></ul></ul><ul><ul><li>SBFS </li></ul></ul><ul><li>MMBG </li></ul><ul><li>Private Banking </li></ul><ul><li>Convenience </li></ul><ul><li>Competitive price </li></ul><ul><li>Trusted advisor access </li></ul><ul><li>Product transparency </li></ul><ul><li>Service quality </li></ul><ul><li>Brand </li></ul><ul><li>Customer knowledge </li></ul>LOB Partners Distribution Customer Value Proposition Strategy, Product Design and Management Targeting and Solicitation Underwriting/ Reinsurance Compliance/ Legal/ Licensing Segmented Customer Service Marketing, Sales and Structuring Value Chain Infrastructure Strategic Partners Insurance Carrier Sourcing and Management Chase Insurance Group Business Model Multi channel distribution: 25% face-to-face; 75% direct marketed Retail Direct Response Retail Face-to-face Commercial Face-to-face Private Banking Face-to-face
  19. 19. Focus on Business Model <ul><li>Core Business Model </li></ul><ul><li>Integrated cross sell </li></ul><ul><li>Alignment with LOB strategies </li></ul><ul><li>Distribution leverage </li></ul><ul><li>Strategic Partnering </li></ul><ul><li>Reinsure to capture incremental SVA </li></ul><ul><li>Business Structure </li></ul><ul><li>“ Thin” insurance agency model </li></ul><ul><li>“ Open architecture” business system </li></ul><ul><li>Manufacturing, only very selectively </li></ul><ul><li>Centralized expertise </li></ul><ul><li>Centralized utilities </li></ul>
  20. 20. Performance and growth Line of Business Revenue Composition (2003F) Product Revenue Composition (2003F) SVA($MM) 57 69 96 153 191 Home Finance 18% Investment Income 6% Credit Card 57% CRB 15% PBG / MM 4% Other 0% <ul><li>CAGR’s: </li></ul><ul><li>Revenue 22% </li></ul><ul><li>NEBT 28% </li></ul><ul><li>SVA 38% </li></ul>
  21. 21. Risk/Reward Opportunity Assessment The Decision to Reinsure Drivers <ul><li>Proven distribution success </li></ul><ul><li>Thorough understanding of profit dynamics of the business </li></ul><ul><li>Favorable risk/ reward equation </li></ul>Reinsurance Commission/ Fees Experience / Understanding S U C C E S S Profit Sharing Direct Writing
  22. 22. Risk/Reward Opportunity Assessment The Decision to Reinsure Drivers <ul><li>Proven distribution success </li></ul><ul><li>Thorough understanding of profit dynamics of the business </li></ul><ul><li>Favorable risk/ reward equation </li></ul>Reinsurance Experience / Understanding S U C C E S S Lender Placed Mortgage Insurance Credit life, disability & unemployment AD&D
  23. 23. Insurance Legal Entities <ul><li>Life Reinsurance Companies </li></ul><ul><li>WHLIC </li></ul><ul><li>SSLIC </li></ul><ul><li>P&C Reinsurance Companies </li></ul><ul><li>GLIC </li></ul><ul><li>CCIC (Vermont) </li></ul><ul><li>Chase Re (Bermuda) </li></ul><ul><li>Annuity Direct Writing Companies </li></ul><ul><li>CLACNY (New York) </li></ul><ul><li>CLAC </li></ul><ul><li>Formation </li></ul><ul><li>Proliferation </li></ul><ul><li>Rationalization </li></ul><ul><li>Consolidation </li></ul>
  24. 24. Reasons for Reinsurance Quota Share <ul><li>EOL: Reinsurer responsible for all losses in excess of specified level, up to the reinsurer’s overall policy limit </li></ul>Excess of Loss Structure Alternatives <ul><li>Increase Underwriting Capacity </li></ul><ul><li>Diversify Risks </li></ul><ul><li>Source of Capital </li></ul><ul><li>Assumption Reinsurance (Profit Center) </li></ul><ul><li>Quota Share: Reinsurer shares all losses and premium on a pro-rata basis according to quota share % </li></ul>Reinsurer REINSURER
  25. 25. Risk Assessment Challenges Corporate New Products Corporate Accounting/ Risk Transfer Product Development and Product Management <ul><li>Process </li></ul><ul><li>CIG Executive Committee </li></ul><ul><li>LOB New Product Committee </li></ul><ul><li>Corporate New Products </li></ul><ul><ul><li>Treasury, Credit, Market, Tax, Legal, Compliance, Insurance, Controllers, etc……. </li></ul></ul>
  26. 26. Risk/Reward Opportunity Assessment The Decision to Manufacture Drivers <ul><li>Proven distribution success </li></ul><ul><li>Core Competencies of Firm </li></ul><ul><ul><li>Captive Distribution </li></ul></ul><ul><ul><li>JPMF Asset Management </li></ul></ul><ul><ul><li>Interest Rate Risk Management </li></ul></ul><ul><li>Leverage Brand Value </li></ul>Experience / Understanding S U C C E S S Direct Writing/ Manufacturing Deferred Fixed Annuities Bank Managed Debt Cancellation Contracts
  27. 27. Reinsurance Risk/Reward <ul><li>Full participation in value of business </li></ul><ul><li>Mitigate regulatory risk </li></ul><ul><li>Learning </li></ul><ul><li>Alignment of interests </li></ul><ul><li>Potential volatility in revenue and expenses </li></ul><ul><li>True appetite for Risk </li></ul><ul><li>Capital intensive </li></ul><ul><li>Maintaining Alignment </li></ul>Benefits Challenges
  28. 28. Revenue Illustration Revenue derived from businesses where risk is assumed has become the majority our business Credit Insurance 2003 Revenue Mix PMI/Hazard Reinsurance I Debt Suspension
  29. 29. Issues & Considerations <ul><li>Transaction Structuring and Negotiation </li></ul><ul><li>Quota Share Level </li></ul><ul><li>Product Return Requirements/Risks </li></ul><ul><li>Accounting treatment and recognition of commissions earned on policies reinsured </li></ul><ul><li>Crediting Rate Process </li></ul><ul><li>Level of Bank Cash Outlay </li></ul><ul><li>Portfolio Segmentation/Earned Interest Crediting/Capital Gains </li></ul><ul><li>Results Monitoring </li></ul><ul><li>Financial Reporting Needs </li></ul><ul><li>Offshore Company Establishment </li></ul><ul><li>Required Capital Considerations </li></ul><ul><li>Start up time/Costs </li></ul>In initiating a transaction, there are a number of critical success factors which need to be explored: Quality In Everything We Do !@ Quality In Everything We Do
  30. 30. Q&A

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