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Insurance Risks and Industry Trends [Autosaved]
- 1. 1 Clarine Usher, CTP TowerGroup, Inc. VP- Finance cusher@twrgrp.com 646-625-3597 781-801-9133 TMANE Conference 17 May 2013 Insurance Risks and Industry Trends
- 2. 2 “The insurance industryhas changed over time through different product offerings, globalization, evolving technology, and changes in the economic environment.” National Association of Insurance Commissioners NAIC Insurance Industry
- 3. What is Insurance? Thetraditional business of insurers and the underlying doctrine of every insurance transaction is risk transfer. The essence of the insurance industry is spreading risk over multiple policy holders, while maintaining close match between assets and liabilities. 3 What is Insurance?
- 4. Overview of InsuranceIndustry • Insurance Industry Background • Reserves and Risk Based Capital (RBC) • Resiliency in the Marketplace 4 Overview of Insurance Industry
- 5. Overview of InsuranceIndustry • Ancient times – Marine Insurance - Limit Risk by Redistributing Cargo Among Several Vessels • Property Insurance as we know it today began in 1666 in England after “The Great Fire of London” • Life Insurance in US was established in U.S in 1759 with the “Presbyterian Ministers’ Fund 5 Insurance Industry Background
- 6. Reserves and Risk BasedCapital (RBC) “ In the first three months of 2012, the U.S. P/C industry experienced a 44% decline in catastrophe- related losses due to the absence of any major catastrophic events. Events of note during the quarter included a rare January tornado outbreak in the central and eastern United States; a powerful winter storm in February that spawned tornadoes in the Midwest; and an onslaught of tornados in March stemming from a significant weather outbreak.” AM Best 6 Reserves and Risk Based Capital (RBC)
- 7. Reserves and Risk BasedCapital (RBC) RBC formula separates into 4 categories: C1 – Asset Risks C2 – Insurance Risks C3 – Interest Rate Risks C4 – Business Risks RBC calculations moving from a formula to a principles based reserving in Solvency II. 7 Reserves and Risk Based Capital (RBC)
- 8. 8 Insurance Risks • Mortalityrisk – All living creatures, when is likelihood of death expected – What populations are more at risk – Baby Boomers – US Census Bureau that in U.S. “2013 there are 78 Million boomers between ages of 49 – 67 years” Insurance Risks Life Insurers
- 9. 9 Insurance Risks • Longevityrisk – UN estimate that by 2013 there will be 3 Million centenarians – Low interest rate “Lost interest rate decade in Japan” will that occur in U.S? Insurance Risks Life Insurers
- 10. 10 Insurance Risks Catastrophic Events –An event that causes $25 million or more in direct insured losses to property Demographics – In 2011 global population considered to have been 6,973,738,433 and over 7 billion in 2012 Insurance Risks Personal and Commercial Lines
- 11. 11 Insurance Risks Lawsuits – In2002 in U.S.16 Million civil cases heard – “Americans spend more on civil lawsuits and have more lawyers per capita than any other industrialized country.” How Many Lawsuits are There in the U.S. & What are They For? An Amazing Overview by www.SixWise.com Insurance Risks Personal and Commercial Lines
- 12. 12 Insurance Risks Black SwanEvents – Random and Unexpected” – 9/11/2001 – Growing Threat of Terrorism Globally and in U.S – Tsunami – Japan and Asia – Earthquakes over 8.0 in Richter Scale – Weather patterns are changing - Storm Sandy estimated damage was over $50B > than any U.S. hurricane except Katrina Insurance Risks Personal and Commercial Lines
- 13. 13 Three Drivers • Regulatory •Technology • Globalization Leading the Charge - 3 Drivers
- 14. 14 Three Drivers • Regulatory –Banking Act of 1933 (Glass-Steagall) Act – Gramm- Leach- Bliley Act of 1999 • Technology – Legacy Systems – Data Warehouses – Big Data • Globalization Leading the Charge - 3 Drivers
- 15. Technology – Banking Actof 1933 (Glass-Steagall) Act – Gramm- Leach- Bliley Act of 1999 – Solvency II • Greater Transparency and Disclosures 15 Leading the Charge – Regulatory
- 16. Technology • Legacy Systems •Data Warehouses • Social Media • Mobile Devices • “Big Data” 16 Leading the Charge – Technology
- 17. Globalization • Company Size •Multi-National Insurance Corporations • Appetite for Risk • Growth and Migration in Global Population 17 Leading the Charge – Globalization
- 18. Regulatory Issues • GreaterTransparency and Disclosures • Stronger Internal Controls and Compliance • Solvency II 18 Insurance Regulatory Issues
- 19. Regulatory Issues • SolvencyII –Effective January 1, 2014 – Three Pillar Approach • Pillar I – Quantitative Requirements – Involving Measurement of Assets, Liabilities, and Capital • Pillar II - Assessment of Risk Exposures – Governance and Supervision includes ORSA – Own Risk and Solvency Assessment • Pillar III – Group Risk Capital and Prospective Solvency Assessment – Disclosure and Transparency 19 Insurance Regulatory Issues
- 20. Regulatory Issues – FinancialFlexibility – Liquidity – Enterprise Risk Management – Competitive Position - Investments - Capital - Operating Performance - Management Corporate Strategy Standard &Poor’s 2011 20 Rating Agencies Major Factors for Rating Insurance Companies
- 21. 21 Industry Trends • Mergersand Acquisitions Activity • Hedge Funds • Survival of the Fittest Insurance Industry Trends
- 22. 22 Industry Trends – “Propertyand Casualty (P&C) deal activity suffered from low valuations, concerns about the prolonged soft pricing market and reserve adequacy. – Life and Health deal activity also suffered from the malaise of 2011 as poor investment yields took a toll on earnings and surplus.” Top Ten Issues for Insurance M&A in 2012 by Deloitte – 2013 - Still a soft market however that may change for latter half of year Insurance Industry Trends Mergers and Acquisitions Activity
- 23. 23 Industry Trends • GuggenheimPartners – Buys Equi Trust Life Insurance Company in Des Moines, IA in Dec 30, 2012 and in Aug 17,2012 AM Best issues new rating to bbb+ from bbb- • Apollo Global Management – Buys Aviva U.S. operations on Dec 21, 2012 for US$1.55 B • Fairfax Financial Holdings – Filed suit in 2006 on hedge funds SAC Capital, Exis Capital and Lone Pine Capital for stock manipulation Insurance Industry Trends Hedge Funds
- 24. 24 Industry Trends • Propertyand Casualty – Less natural disasters • Life Insurance Companies – Improvements in technology • Applies to Both – Strong Capital Surplus – Rising Interest Rate – Control of Costs – Diversification of Product Lines and Geography Insurance Industry Trends Survival of the Fittest
- 25. 25 Industry Trends – LowInterest Rate Environment – Surplus Requirements – Changing Regulatory Landscape – Growth and Diversification – Raising Capital – Demographic Changes Insurance Industry Challenges
- 26. • Capital Strength –Holistic Approach to Working Capital Enhancement – Strong Capital Reserves – Close Match between Assets and Liabilities • Diversification – Product line, Distribution and Geography • Reduce Risks and Vulnerability – Appetite for Risk 26 Better Insurance Practices
- 27. • Enterprise RiskManagement (ERM) – Top – Down Approach • Better Customer Service “Wow Me” – “Press 1 if you want to….press 9 if you want to” – Informed Consumer – Plethora of insurance and financial choices 27 Better Insurance Practices
- 28. • Robust modeltesting – Include probability of extreme events – “Black Swans” • Partnerships – Rating Agencies • Sarbanes- Oxley – Strong Internal Controls and Transparency 28 Better Insurance Practices
- 29. 29 Q & A InsuranceRisks and Industry Trends
- 30. The views expressedare those of the presenter and not of the Company. Material taken from the presenter’s insurance industry experience and from the following sources: AM Best – Supplement to Best’s Review November 2012 NAIC – The Center for Insurance Policy and Research (CIPR) Study April 2012 30 Insurance Risks and Industry Trends
- 31. Clarine Usher, CTP cusher@twrgrp.com 646-625-3597 781-801-9133 InsuranceRisks and Industry Trends