2017 Insurance Market Briefing - France - AM Best · 3/28/2017 · o 1986 – Acte unique –...

2017 Insurance Market Briefing - France

Hotel Napoleon

28 March 2017


2017 Insurance Market Briefing - France 28 March 2017 2

Welcome

Nick Charteris-Black Managing Director, Market Development – EMEA

William Mills

Director, Market Development

Agenda


10:10 Keynote Speech: The Challenge of De-Globalization for Reinsurance

Bertrand Labilloy, Chairman and Chief Executive Officer for CCR Re

10:50 Thematic Session: Analysis of Reinsurance Purchasing Trends Within Europe's Major Cedant Groups & Leading National Insurers

Carlos Wong-Fupuy, Senior Director

11:20

11:40 Methodology Update Presentation: An Update on A.M. Best's Credit Rating Methodology (BCRM) for (Re)Insurance Companies & Best's Capital Adequacy Ratio (BCAR) Model

Charlotte Vigier, Senior Financial Analyst

12:10 Thematic Session: Major Challenges Facing the Insurance Industry & the Potential Impact on Credit Quality Ghislain Le Cam, Director, Analytics and Alex Rafferty, Financial Analyst

13:00

Disclaimer


© AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.

Disclaimer


US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating where a person involved in the sales or marketing of a product or service of the CRA also participates in determining or monitoring the credit rating, or developing or approving procedures or methodologies used for determining the credit rating.

No part of this presentation amounts to sales / marketing activity and A.M. Best’s Rating Division employees are prohibited from participating in commercial discussions.

Any queries of a commercial nature should be directed to A.M. Best’s Market Development function.

6

Conférence AM Best Paris 2017 La RÉASSURANCE à l’ÉPREUVE de la DÉ-MONDIALISATION

Bertrand LABILLOY 28 mars 2017

7

o De l’OIC à l’OMC en passant par les accords du GATT :

7 rounds de négociations du GATT de 1947 à 1979

Uruguay round (1986-1993) :

o Accord sur les services (AGCS) :

engagements volontaires & exclusions sectorielles

traitement NPF

prudential carve out

Introduction : mondialisation et dé-mondialisation

Du GATT à l’OMC : les nombreux rounds multilatéraux L’enrayement de la dynamique du libre-échange

La multiplication des accords régionaux de libre-échange

o Faiblesse du système de médiation de l’OMC

o Essoufflement de la dynamique des accords commerciaux

o Remise en cause des fondements théoriques du libre-échange

o Tassement du commerce international

o Dé-mondialisation financière

o Echec des politiques d’adaptation à la désindustrialisation

o Développement des substituts aux droits de douane

o Retour des mesures protectionnistes et de rétorsion

o Rejet de la mondialisation par les peuples souverains

La résurgence du protectionnisme

2015 (TFTA)

1994 (NAFTA)

1957 (UE) 1991 1992

8

Introduction : mondialisation et dé-mondialisation

1° La réassurance : une activité internationale, qui ne nécessite aucune protection

particulière

2° La liberté des échanges : longtemps une évidence, ancrée dans les faits

3° La dé-mondialisation touche la réassurance, pour les mêmes raisons que les autres

secteurs

4° Des effets néfastes sur la concurrence et la résilience des économies

Conclusion : enjeux et réponses potentielles

Sommaire

9

1° Une activité internationale par nature…

Une …ce que confirment les calculs actuariels

La mutualisation géographique, cœur du modèle économique Des De fait, tous les acteurs ont un portefeuille d’activités global

…sans nécessairement avoir d’implantation locale

5% Californie

26% Floride

7% France

1,8% Japon

19%

41%

40%

8%

64%

28% 45

% 25%

30%

Européens Tier 1 Bermudiens Asiatiques

Réassureurs RC auto / 15% XS Cat S/P 100% / S/P 25%

(A) 100%

Européen

(B) 50% Europe

50% Asie

Ratio S2 selon bilan 155% 210%

Probabilité de perte à 1 an 20% 13%

10


11

1° Une activité internationale par nature…

Une …ce que confirment les calculs actuariels

La mutualisation géographique, cœur du modèle économique Des De fait, tous les acteurs ont un portefeuille d’activités global


5% Californie

26% Floride

7% France

1,8% Japon

19%

41%

40%

8%

64%

28% 45

% 25%

30%

Européens Tier 1 Bermudiens Asiatiques

Réassureurs RC auto / 15% XS Cat S/P 100% / S/P 25%

(A) 100%

Européen

(B) 50% Europe

50% Asie

Ratio S2 selon bilan 155% 210%

Probabilité de perte à 1 an 20% 13%

12

1° …qui ne nécessite aucune protection particulière

Peu d’enjeu de souveraineté économique Pas d’enjeu de stabilité financière

Pas d’enjeu de protection des consommateurs Peu d’enjeu économique ou financier

Vie France : primes cédées 1985 M€ (taux de cession : ns)

~1600 employés en France

IARD France : primes cédées 3380 M€ (taux de cession : 6,5%)

Cause des faillites d’assureurs sur les 40 dernières années

13

2° La liberté des échanges : longtemps une évidence…

La suppression de tous les obstacles à la LPS en Europe …mais un suivi étroit par les agences de notation

Une libéralisation des cessions avec l’ouverture des économies Longtemps, une absence de supervision publique directe…

Notation des créances sur les réassureurs notés

Et, le cas échéant, collatéralisation des créances

Dépôt espèces Nantissement de titres

VS.

o 1957 – Traité de Rome – 4 libertés de mouvement

o 1966 - 1ère directive réassurance

o 1986 – Acte unique – Liberté de mouvement des capitaux

o 1990 – Traité de Schengen

o 1992 – Traité de Maastricht

o 2001 – Directive droit des sociétés (société européenne)

o 2005 – 2ème Directive réassurance

o 2009 – Directive Solvabilité 2

14

Une libéralisation des cessions avec l’ouverture des économies

2009 (50%)

2001 (60%*)

2001 (10-15%)

2012 (10%)

2007 (100%->40%)

2006-2016 (20%->5%)

15

2° La liberté des échanges : longtemps une évidence…

La suppression de tous les obstacles à la LPS en Europe …mais un suivi étroit par les agences de notation

Une libéralisation des cessions avec l’ouverture des économies Longtemps, une absence de supervision publique directe…

Notation des créances sur les réassureurs notés

Et, le cas échéant, collatéralisation des créances

Dépôt espèces Nantissement de titres

VS.

o 1957 – Traité de Rome – 4 libertés de mouvement

o 1966 - 1ère directive réassurance

o 1986 – Acte unique – Liberté de mouvement des capitaux

o 1990 – Traité de Schengen

o 1992 – Traité de Maastricht

o 2001 – Directive droit des sociétés (société européenne)

o 2005 – 2ème Directive réassurance

o 2009 – Directive Solvabilité 2

16

2° …confirmée par la réalité économique

Une

Des flux de réassurance importants entre grandes régions… Des Des déséquilibres qui devraient s’amplifier à l’avenir…

Source : Moody’s

…et nourrir la dynamique des échanges internationaux

0

5

10

15

2004

2005

2006

2007

2008

2009

2010

2011

2012

Expo

rt.

010203040506070

2004

2005

2006

2007

2008

2009

2010

2011

2012

Impo

rt.

… ayant pour origine les déséquilibres offre / demande

31%

55%

14%

Amerique EMEA

Asie-Pac

48%

28%

24%

Amerique EMEA

Asie-Pac

Acceptations Cessions

CAGR: 15,66% 5,28% 10,61% CAGR : 7,68%

17

3° La dé-mondialisation touche la réassurance…

Le cas particulier des embargos Degré d’ouverture des marchés aux réassureurs étrangers

Les principaux obstacles à la réassurance transfrontalière

o Interdiction de la LPS active / passive

o Collatéralisation obligatoire des engagements

o Cessions obligatoires à un réassureur local

o Autres obstacles

Décisions récentes de « fermeture » des marchés

Inde Traitement préférentiel pour les acteurs locaux

2016

Zone CIMA Cession obligatoire à un réassureur local 2016

Allemagne, Belgique Fermeture aux acteurs non équivalents S2 2016

Chine Non reconnaissance des réassureurs équivalents

2016

Indonésie Cession locale à 100% 2016

Afrique du Sud Crédit moindre accordé aux réass. étrangers 2017

Russie Cession obligatoire à un réassureur local 2017

18

3° …pour les mêmes raisons que les autres secteurs

Le protectionnisme financier Le protectionnisme stratégique

o Limiter les sorties de capitaux

o Favoriser les investissements locaux

o Centralisation des cessions pour un meilleur pricing power

o Théorie de la protection d’une industrie dans l’enfance

o Acceptation par l’OMC des mesures de sauvegarde temporaires

o Application à la réassurance

19

4° Des effets néfastes sur la concurrence…

Une concurrence locale limitée aux grands réassureurs

0%

20%

40%

60%

80%

100%

1980 1990 2000 2010 2015

Les 5 premiers Les 10 premiers Les autresSource : APREF

Plus de 70%

Alors que le secteur est globalement de plus en plus concentré

Un frein à l’internationalisation des réassureurs nationaux

Société Rang 2016 Progression / 2006

% international

China Re 8 Nouvel entrant

17%

Korean Re 11 +4 24%

GIC 18 +17 26%

Toa Re 21 +9 50%

Taiping Re 33 Nouvel entrant

2,5%

African Re 39 Nouvel entrant

4,1%

Peak Re 40 Nouvel entrant

42%

Parts de marché en Chine réassureurs onshore

Réassureurs étrangers agréés en Inde

Des surcoûts pour tous les acteurs, payés par les cédantes

Coûts directs pour les cédantes

o Pouvoir de négociation

o Capacités disponibles

o Couverture de certains

risques

o Gestion du risque

contrepartie

=> Compétitivité réduite

Coûts indirects (via

réassureurs)

o Coûts administratifs

o Contrôle des risques

o Gestion de la trésorerie

o Gestion des actifs

=> Prix de la réassurance accrus

12%

27%

6% 5%

49%

1%

MunichRe

Swiss Re

20

4° …et la résilience des économies

Un gap de protection pour les Cat qui se réduit peu… Une forte vulnérabilité économique aux grands séismes…

…ainsi qu’aux tempêtes majeures … et dont la couverture passe par les réassureurs étrangers

Tremblement de terre d’occurrence 250ale

21

Conclusion : enjeux et réponses potentielles

Les marchés émergents : un relais de croissance nécessaire L’efficacité limitée des solutions traditionnelles

Pour une extension des pools Cat adossés au marché mondial La diversification géographique, remède à la baisse des prix

o L’arrogance inutile des plaidoyers pro domo

o L’illusion de la transparence

o L’essoufflement des accords commerciaux multilatéraux

o Les risques de l’harmonisation des cadres prudentiels

o L’avenir de la réassurance est hors des marchés développés

o A contrario, fortes perspectives dans les pays SAAME

o Le gap de protection est un enjeu majeur pour les pays

émergents

o La diversification des portefeuilles Cat est clé pour les

réassureurs

o Trade off possible à CT sur les Cat..

o .. ouvrant la voie pour les autres risques

Globalisation Dé-mondialisation

Internationalisation des

portefeuilles

Afflux de Nx Nouveaux entrants

Baisse du coût du portage des risques

Baisse des prix sous

l’effet de la concurrence

Hausse du coût de

portage des risques

Baisse de la concurrence et

hausse des prix De la

réassurance

22

Bertrand LABILLOY Directeur Général

T : +33 1 44 35 32 31 Email : [email protected]



Carlos Wong-Fupuy Senior Director

Thematic Session: Analysis of Reinsurance Purchasing Trends

Within Europe's Major Cedant Groups & Leading National Insurers

Reinsurance Cessions Trends in Europe


Annual Change (%) for Top 20 European Cedants

-8.2% -4.3%

17.9%

0.3% -0.7%

6.3%

-10%

-5%

0%

5%

10%

15%

20%

2013 2014 2015

ReinsuranceCeded

GrossPremiumsWritten



2013 Optimisation of global reinsurance treaty programmes

Group programmes / separate divisions and even new legal entities

Centralised enterprise risk management practices

Cessions decreased 8.2%

Gross Premiums Written slight increase of 0.3% Retention ratios increased by 1.2%



2013 – 2014

2014 – 2015

Taking advantage of soft markets

Capital optimisation / Solvency II

Product diversification

Centralisation of reinsurance practices

Reversal in trends



Reinsurance Ceded (Non-Life) (EUR millions) Gross Premiums Written (Non-Life) (EUR millions)

Company Name (Top 10) Country 2015 2014 2016 H1 2015 H1 2015 2014 2016 H1 2015 H1

Lloyd's of London United Kingdom 7,690 6,713 6,127 5,783 36,218 32,281 23,106 21,981

Chubb Switzerland 5,581 4,503 … … 21,794 17,491 … …

Zurich Insurance Group Switzerland 5,157 4,503 4,001 2,703 33,102 32,711 19,276 19,795

Allianz Germany 4,933 3,961 2,743 3,159 51,597 48,322 28,856 29,182

MAPFRE Spain 3,442 2,599 2,420 2,593 17,441 16,370 9,511 9,639

AXA France 3,224 2,907 … … 34,931 32,872 … …

HDI Germany 3,065 2,718 2,060 2,014 13,633 11,934 9,842 10,016

Aviva United Kingdom 1,847 822 381 490 11,857 11,429 5,875 6,467

RSA Insurance Group United Kingdom 1,229 1,268 782 999 9,306 9,326 4,504 5,260

Munich Reinsurance Company Germany 1,161 1,021 644 655 24,789 23,654 12,883 12,794

Total (Top 20) 44,208 37,510 21,879 21,242 333,336 313,907 154,089 156,070

Growth (Top 20) 17.86% 6.19%

Notes: For the full Top 20 listing, please see A.M. Best’s Briefing, “European Cedants Continue to Increase Reinsurance Buying but Demand for Cover Slows” Source: Best's Statement File -- Global, A.M. Best data and research



2016-2017 (?)

Trend seems to continue, but less pronounced

Limited room for further reinsurance rates decreases

Differences between large, internationally sophisticated groups and medium-sized / domestic companies

Retention ratios: Company specific factors


Retention Ratios

Company Name 2015 2014 Change 2016 H1 2015 H1 Change Achmea B.V. 97.7% 98.2% 98.7% 98.5%

Munich Reinsurance Company 95.3% 95.7% 95.0% 94.9%

Assicurazioni Generali 94.6% 94.1% 94.7% 94.4%

UnipolSai Assicurazioni 94.0% 95.0% 93.6% 93.4%

Covea 93.0% 92.9% … …

AXA 90.8% 91.2% … …

Allianz 90.4% 91.8% 90.5% 89.2%

SCOR 88.8% 89.5% 88.7% 89.8%

Groupama 88.4% 89.0% 89.2% 89.4%

RSA Insurance Group 86.8% 86.4% 82.6% 81.0%

Notes: For the full Top 20 listing, please see A.M. Best’s Briefing, “European Cedants Continue to Increase Reinsurance Buying but Demand for Cover Slows” Source: Best's Statement File -- Global, A.M. Best data and research

Taking advantage of soft markets


Limited room for further rate decreases

Partly explains the reversal in trends

Potential difficulties to renew multi-year contracts under the same terms

Reinsurers under pressure to cover their cost of capital



77.3% 60.2% 56.5% 56.2% 56.2%

62.3% 61.3%

31.5% 31.6%

32.3% 33.5% 34.2% 31.9% 32.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013 2014 2015 2016 Q3 5yr Avg

Loss

Res

erve

Dev

elop

men

t

Com

bine

d Ra

tio

Loss Ratio Expense Ratio Loss Reserve Development

Global Reinsurance Market Trends

Note: Based on a selection of European, Bermudan and US companies Source: A.M. Best data & research



Combined Ratios by Reinsurance Sector

107% 91% 91% 92% 92% 96%

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013 2014 2015 2016Q3

Loss Ratio Expense Ratio

112% 93%

87% 87% 89% 92%

2011 2012 2013 2014 2015 2016Q3

108%

91% 87% 88% 90%

2011 2012 2013 2014 2015 2016Q3

European “Big Four” U.S. & Bermuda Lloyd’s


1.9%

12.4% 13.0% 11.6%

9.5%

7.7%

0%

2%

4%

6%

8%

10%

12%

14%

2011 2012 2013 2014 2015 2016 Q2



Global Reinsurance Market Trends Return on Equity and Five-Year Average




Return on Equity by Reinsurance Sector

European “Big Four” U.S. & Bermuda Lloyd’s

6.6%

13.0% 13.1% 11.0% 11.5% 9.7%

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015 2016Q3 -2.8%

15.1% 16.2%

14.7%

8.9%

2011 2012 2013 2014 2015 2016Q3

2011 -0.9%

10.6%

11.4%

10.9%

7.5% 7.7%

2011 2012 2013 2014 2015 2016Q3


Product diversification


Trend seems to continue, but less pronounced

Limited room for further reinsurance rates decreases

Differences between large, internationally sophisticated groups and medium-sized / domestic companies

Capital Management / ERM


Centralised Enterprise Risk Management frameworks

Reduction in SCR volatility

Reinsurance as an efficient way of alternative capital

Highly rated reinsurers remain well capitalised

Top domestic cedants – different drivers


Reinsurance Ceded (Non-Life) (EUR millions)

Gross Premiums Written (Non-Life) (EUR millions)

Company Name (Top 10) 2015 2014 2015 2014

AXA S.A. 32,240 29,070 349,310 328,720

Société de Groupe d'Assurance Mutuelle Covéa 8,091 7,925 115,734 111,707

SCOR SE 6,410 5,180 57,230 49,350

Groupama S.A. 5,810 5,500 50,040 49,920

Humanis Prévoyance 5,091 7,526 19,732 24,812

Groupe BTP-Prévoyance 3,721 3,499 22,114 22,404

ViaSanté Mutuelle 3,677 3,141 6,187 5,916

GPP Klesia Assurances 3,440 3,128 10,000 9,434

BNP Paribas Cardif 3,424 3,055 29,313 28,165

Crédit Agricole Assurances 3,070 3,170 43,570 40,590

Total (Top 20) 93,793 89,267 823,886 789,274

Growth (Top 20) 5.1% 4.4% Notes: For the full Top 20 listing, please see A.M. Best’s Briefing, “France’s Largest Cedants Demonstrate Stable Reinsurance Purchasing” Source: Best's Statement File -- Global, A.M. Best data and research

Top domestic cedants – different drivers


Retention Ratios

Company Name 2015 2014 Change

Assurances du Crédit Mutuel IARD S.A. 96.5% 96.4%

Macif 95.8% 95.3%

Société de Groupe d'Assurance Mutuelle Covéa 93.0% 92.9%

Crédit Agricole Assurances 93.0% 92.2%

AXA S.A. 90.8% 91.2%

SCOR SE 88.8% 89.5%

Groupama S.A. 88.4% 89.0%

BNP Paribas Cardif 88.3% 89.2%

La Mutuelle Générale 86.2% 85.2%

Malakoff Mederic Prévoyance (MMP) 85.0% 85.4%

Notes: For the full Top 20 listing, please see A.M. Best’s Briefing, “France’s Largest Cedants Demonstrate Stable Reinsurance Purchasing” Source: Best's Statement File -- Global, A.M. Best data and research

Expectations / Impact on Ratings


Trend to continue, albeit not as pronounced

Different drivers between European Top 20 and the rest

Changes in reinsurance buying not material enough to translate into direct ratings impact

Indirect impact: Capital optimisation / Balance Sheet protection / ERM


Q&A Carlos Wong-Fupuy

Senior Director



Charlotte Vigier Senior Financial Analyst

Methodology Update Presentation: An Update on A.M. Best's Credit Rating Methodology

(BCRM) for (Re)Insurance Companies & Best's Capital Adequacy Ratio (BCAR) Model

Agenda


Update on proposed changes to Best Credit Rating Methodology (BCRM) Update on proposed changes to Best Capital Adequacy Ratio (BCAR) model Case study – BMF (fictitious company)

A.M. Best Rating Methodology – Key Rating Components


Balance Sheet Strength

Operating Performance

Business Profile

Enterprise Risk Management

+ Country Risk

Rating

Insurance Company Financial Strength

Methodology Update

2017 Insurance Market Briefing - France 28 March 2017

• Impetus for change

– Transparency and consistency

– Move towards best practices

– A way to integrate new tool: application of BCAR

• Methodology still subject to changes

• No fundamental change to rating analysis

44

Timeline


45

Draft BCRM & PC BCAR

criteria released for comment

Comment period included public updates

as specific issues raised

Comment period extended to coincide with

release of all BCAR models

Comment period ends

Comments incorporated as necessary into BCRM and all BCAR criteria

BCRM and BCAR criteria is published and

becomes effective

10-MAR-2016

Q3/4 2017

1-MAR-2017

Building Block Approach


• The building blocks themselves will remain the same • Components of the building blocks are currently reviewed

A.M. Best’s Rating Process

46

Stochastic-Based BCAR


• Best’s Capital Adequacy Ratio (BCAR) – Comprehensive quantitative tool that evaluates many of the risks to the

balance sheet simultaneously – Generates an overall estimate of the required level of capital to support those

risks and compares it with available capital

• Key components remain:

47

BCAR Model Changes


• Going forward, four scores calculated – instead of one: 95%, 99%, 99.5% and 99.6% confidence levels

• The BCAR formula itself is changing

• Better alignment with risk appetite/tolerance statements

BCAR = ( Available Capital - Net Required Capital) x 100Available Capital



Balance sheet strength is now broken down into several parts – Rating unit balance sheet strength assessment

– BCAR (not the sole determinant of Balance Sheet Strength or rating) – Other qualitative and quantitative factors

– Holding company impact assessment – Country risk impact Country Risk

Rating Unit Balance Sheet

Strength Assessment

Holding Company

Impact Assessment


Baseline (e.g.,

bbb+)

49

Applying BCAR scores


• BCAR is the starting point in the assessment of balance sheet strength

VaR Confidence Level (%) BCAR BCAR Assessment

99.6 > 25 at 99.6 Strongest99.6 > 10 at 99.6 & ≤ 25 at 99.6 Very Strong99.5 > 0 at 99.5 & ≤ 10 at 99.6 Strong99 > 0 at 99 & ≤ 0 at 99.5 Adequate95 > 0 at 95 & ≤ 0 at 99 Weak95 ≤ 0 at 95 Very Weak

50

Balance Sheet Strength Assessment


51

Holding Company Impact Assessment


Country Risk Balance

Sheet Strength

Baseline

Rating Unit Balance Sheet

Strength Assessment

Consolidated BCAR Financial Leverage

Operating Leverage Coverage

Financial Flexibility/Liquidity Intangible Assets

Holding Company Impact

Assessment

52

Balance Sheet Strength Assessment


Combined Balance Sheet Strength Assessment (Lead Rating Unit and Holding Company)

Holding Company

Lead

Rat

ing

Uni

t Positive Neutral Negative Very Negative

Strongest Strongest Strongest Very Strong Adequate Very Strong Strongest Very Strong Strong Weak

Strong Very Strong Strong Adequate Very Weak Adequate Strong Adequate Weak Very Weak

Weak Adequate Weak Very Weak Very Weak Very Weak Weak Very Weak Very Weak Very Weak

53

The Baseline Assessment


Overall Balance Sheet Strength Assessment

Com

bine

d Ba

lanc

e Sh

eet A

sses

smen

t (R

atin

g U

nit /

Hol

ding

Com

pany

) Country Risk Tier CRT-1 CRT-2 CRT-3 CRT-4 CRT-5

Strongest a+/a a+/a a/a- a-/bbb+ bbb+/bbb

Very Strong a/a- a/a- a-/bbb+ bbb+/bbb bbb/bbb-

Strong a-/bbb+ a-/bbb+ bbb+/bbb/bbb- bbb/bbb-/bb+ bbb-/bb+/bb

Adequate bbb+/bbb/bbb- bbb+/bbb/bbb- bbb-/bb+/bb bb+/bb/bb- bb-/b+/b

Weak bb+/bb/bb- bb+/bb/bb- bb-/b+/b b+/b/b- b/b-/ccc+

Very Weak b+ and below b+ and below b- and below ccc+ and below ccc and below

54

Baseline Adjusted for Performance


• Variety of quantitative and qualitative measures to evaluate operating performance • Using appropriate benchmark • Looking at level, trend and volatility

55

Operating Performance Rating Drivers

Underwriting performance Investment performance

Total operating earnings Prospective financial forecasts

Other considerations Unique to LOB, region of operation, structure

Operating Performance Assessment

Adjustment (Notches)

Very Strong +2

Strong +1

Adequate 0

Weak -1

Very Weak -2/3

Baseline Adjusted for Business Profile


• The factors that influences our view of business profile have not materially changed • Eight main key rating factors qualitatively judged to be positive, neutral or negative • Other metrics may be included if deemed relevant by the analyst

56

Business Profile Rating Drivers

Product/Geographic Concentration

Product Risk

Market Position Degree of Competition

Pricing Sophistication & Data Quality

Management Quality

Regulatory, Event & Market Risks

Distribution Channels

Business Profile Assessment

Adjustment (Notches)

Very Favorable +2

Favorable +1

Neutral 0

Limited -1

Very Limited -2

Baseline Adjusted for Enterprise Risk Management (ERM)


• Assessment of the overall risk management framework in place • Assessment of the rating unit’s risk profile relative to its risk management capabilities • Overall assessment of ERM

57

ERM Rating Drivers

Product and Underwriting Risk Investment Risk

Reserving risk Legislative/Regulatory/Judicial/

Economic Risk

Concentration Risk Operational Risk

Reinsurance Risk Liquidity and Capital

Management Risk

ERM Assessment Adjustment (Notches)

Very Strong +1

Adequate 0

Weak -1/2

Very Weak -3/4

Balance Sheet Strength – Case Study


• BMF Insurance Company (BMF) (fictitious company) 2016 BCAR scores

• BCAR starting point assessment of balance sheet strength is “Very strong”

CRT1 CRT2 CRT3 CRT4 CRT5



Strong a-/bbb+ a-/bbb+ bbb+/bbb/bbb- bbb/bbb/bb+ bbb-/bb+/bb



Very Weak b+ and below b+ and below b+ and below ccc+ and below ccc and below

58

2016 Var 95 Var 99 Var 99.5 Var 99.6

Standard 35.1% 22.2% 17.3% 15.2%

Stressed 30.5% 17.6% 14.3% 11.5%



• Volatile BCAR scores – Risk-adjusted capitalisation improved in 2016 due to de-risking of assets – Deterioration expected in 2017 due to strong anticipated growth

• Adequate reserving – Regular reviews by external actuary annually – Small positive reserve development in most years

• Good liquidity and ALM • High dependency on reinsurance • Limited financial flexibility with high dividend payout ratio

59



• Rating unit balance sheet strength assessment decreases from “Very Strong” to “Strong” when considering additional analytical factors

• BMF is domiciled in a Country Risk Tier 1 (CRT1) • No holding company impacting the rating unit assessment • Balance sheet baseline: a-

CRT1 CRT2 CRT3 CRT4 CRT5



Strong a-/bbb+ a-/bbb+ bbb+/bbb/bbb- bbb/bbb/bb+ bbb-/bb+/bb



Very Weak b+ and below b+ and below b+ and below ccc+ and below ccc and below

60

Operating Performance – Case Study


• Good return on equity, averaging 14% over the past five years • Diverse product range has supported relatively stable underwriting

performance • Combined ratios average 91% over the past five years • Combined ratio consistently outperforming the market by five to 10

percentage points • Operating expenses expected to increase slightly as result of setting up a

new subsidiary

61

Operating Performance – Case Study


Operating performance assessment: Strong (+1)

Operating Performance Assessment

Adjustment (Notches) Key Operating Performance Characteristics

Strong +1 Historical operating performance is strong and consistent. Trends are neutral/slightly positive and prospective operating performance is expected to be strong. Volatility of key metrics is low to moderate.

Country Risk

Balance Sheet

Strength

Baseline a-


“Strong” (+1)

a

Business Profile


Comprehensive Adjustment

Rating Lift/ Drag

Published Issuer Credit Rating

62

Business Profile – Case Study


• Well-established company: in existence for 70 years • Good competitive position: fourth-largest insurer in its country of domicile • GWP growth slightly below market over the past five years • Well diversified insurance portfolio by line of business • Currently concentrated in its domestic market which is highly competitive • Opening branch in a neighbouring country in 2017 to diversify geographically • Strong planned growth driven by new branch and moderate rate increases

domestically • Distribution: 70% brokers / 30% direct

63

Business Profile – Case Study


Country Risk

Balance Sheet

Strength

Baseline a-


“Strong” (+1)

a

Business Profile

“Neutral” (0) a



Rating Lift/ Drag


Business Profile Assessment

Adjustment (Notches) Key Characteristics of Business Profile

Neutral 0 The company is not a market leader, but is viewed as competitive in chosen markets. It has some concentration and/or limited control of distribution. It has moderate product risk but limited severity and frequency of loss. Its use of technology is evolving and its business spread of risk is adequate.

Business profile assessment: neutral (0)

64

ERM - Case Study


• ERM capabilities improved in past three years • Defined risk appetite and risk measures • Aim to maintain a solvency II SCR ratio above 150 • ERM framework implemented throughout the company • Using third parties to model natural catastrophe exposure • Increase use of stress testing • Risk profile aligned with risk management capabilities

65

ERM - Case Study


Country Risk

Balance Sheet

Strength

Baseline a-


“Strong” (+1)

a

Business Profile

“Neutral” (0) a


“Neutral” (0)

a


Rating Lift/ Drag


ERM Assessment Adjustment (Notches) Key Characteristics of ERM

Neutral 0 The insurer’s ERM framework is well developed and is adequate given the size and complexity of its operations. Risk management capabilities are good and are adequate for the risk profile of the company.

ERM assessment: neutral (0)

66

Case Study - Outcome


Country Risk

Balance Sheet

Strength

Baseline a-


“Strong” (+1)

a

Business Profile

“Neutral” (0) a


“Adequate” (+0)

a


“None” (+0)

a

Rating Lift/ Drag

“N/A” (+0)

a


A.M. Best’s Rating Process

BMF rating recommendation of “a” ICR 67

A.M. Best’s Rating Translation Table


bbb-

A++ aaa aa+

A+ aa aa-

A a+ a

A- a-

B++ bbb+ bbb

B+

FSR ICR/IR

FSR = Financial Strength Rating ICR = Long-Term Issuer Credit Rating

B bb+ bb

B-

C++ b+ b

C+ b-

C ccc+ ccc

C-

FSR ICR/IR

bb-

ccc- cc

The rating symbols A++, A+, A, A-, B++, B+ are registered certification marks of A.M. Best Rating Services, Inc.


Q&A Charlotte Vigier

Senior Financial Analyst



Thematic Session: Major Challenges Facing the

Insurance Industry & the Potential Impact on Credit Quality

Ghislain Le Cam Director, Analytics

Alex Rafferty Financial Analyst

Looking back…


2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Lehman Brothers bankruptcy

Greek bailout

Sovereign Downgrades (USA, France, Italy, Spain…)

Recession Europe

Brexit

Sterling Depreciation

Depressed oil prices

Emerging markets slowdown (China)

Liquidity Crisis Sovereign Debt Crisis Low Interest Rate Environment

Hurricanes Gustav & Ike Floods in Australia New Zealand EQ

Japan EQ / Tsunami European and Alberta

Floods

German Hailstorms

Hurricane Sandy

Thai Floods

Fires in Southern CA

Chile EQ

European Storm Klaus

Zika Virus Tianjin Ebola

Italian Earthquakes

Canadian Wildfires European Storm Kyrill

Subprime crisis US Elections

Looking forward…


Threats and

Opportunities

Insurance Pricing

Reserving Competition

Excess capacity Premium growth

Nat Cat Climate change

Pandemic Terrorism

Man-made disasters Accumulation Concentration

Mortality / morbidity

Economic Growth / slowdown

Interest rates Inflation Currency

Regulation Indirect exposures

(e.g. banking, affiliates)

Political Brexit

Elections Instability / conflict

Change in government policies

Technology Distribution

Disruptive innovation Big data

Block chain Driverless cars

Cyber Drones

Other Globalisation

Energy Medical advances

Power outages / blackouts

Looking forward…


Insurance Pricing

Reserving Competition

Excess capacity Premium growth

Nat Cat Climate change

Pandemic Terrorism

Man-made disasters Accumulation Concentration

Mortality / morbidity

Economic Growth / slowdown

Interest rates Inflation Currency

Regulation Indirect exposures

(e.g. banking, affiliates)

Political Brexit

Elections Instability / conflict

Change in government policies

Technology Distribution

Disruptive innovation Big data

Block chain Driverless cars

Cyber Drones

Other Globalisation

Energy Medical advances

Power outages / blackouts

Threats and

Opportunities

Deficient Loss Reserves


• Reserves set up to meet future claims payments are insufficient

Threat

Concern

• Results over past five years supported by substantial reserve releases

• Pressure on current year underwriting and investment earnings, so insurers increasingly reliant on reserve releases for profitability

• Terms and conditions deteriorating • Level of releases unsustainable as

confidence levels decline • Reserve strengthening required,

depleting earnings and capital

US Property / Casualty Impairment Causes (2000-2015)

Impairments - leading cause


Fraud - Adjudged or Alleged, 6.5% Affiliate Problems,

6.2%

Catastrophe Losses, 5.3%

Rapid Growth, 4.7%

Investment Losses, 3.3%

Reinsurance Failure, 0.3%

Unlicensed Insurance Product, 0.3%

General Business Failure (deficient loss reserve / inadequate

pricing), 73.4%

Source: A.M. Best data and research

US P / C: Reserve Development


-15%

-10%

-5%

0%

5%

10%

15%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Y+1 Y+2 Y+3 Y+4 Y+5 Y+6 Y+7 Y+8 Y+9

10-Year Reserve Development


US P / C: Reserve Development


0

50

100

150

200

250

300

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Y+1 Y+2 Y+3 Y+4 Rate movement

10-Year Reserve Development – First Four Years and Rate Movements


UK – Reserve Releases


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

UK Non-Life Reserve Releases

Notes: Net reserve releases as a percentage of reserves brought forward. Outliers have been removed from years 1989, 2010, 2011 and 2015. Source: Prudential Regulation Authority returns for firms reporting on an accident-year basis, A.M. Best research

Deficient Loss Reserves


T O

• A leading cause of insurer impairments • Historical correlation between

underwriting and reserving cycles • Have recent releases eroded confidence

levels? • Reserve strengthening could affect

earnings, capital adequacy and reputation

Threat

• Actuarial departments have been strengthened

• Improvements in modelling and data analytics

• Proactive companies with robust feedback loops likely to emerge relatively unscathed

• Positioned to take advantage of any contraction in capacity and subsequent price increases

Opportunity

Growth


Excessive growth is one of the main reasons for insurance failure

Growth Profitability

Financial Stability

The Right Balance

• Is growth important for insurers? • Is it sensible to grow in the current

economic environment? • Are there any opportunities to grow?

A few questions

Growth: GDP vs. GWP


-10%

-5%

0%

5%

2009201020112012201320142015

North America

-8%

-6%

-4%

-2%

0%

2%

4%

2009 2010 2011 2012 2013 2014 2015

Europe

-15%-10%

-5%0%5%

10%15%20%

2009 2010 2011 2012 2013 2014 2015

Oceania

-5%

0%

5%

10%

15%

2009 2010 2011 2012 2013 2014 2015

Latin America

-2%

0%

2%

4%

6%

8%

10%

2009 2010 2011 2012 2013 2014 2015

Asia & Middle East

-5%

0%

5%

10%

15%

2009 2010 2011 2012 2013 2014 2015

Africa

Notes: Gross Domestic Product (GDP) Gross Written Premium (GWP) (Unadjusted insurance growth) Source: A.M. Best data and research, Swiss Re sigma “World Insurance” series

Growth


• Aggressive growth in tough market conditions

• Fierce competition and pricing pressure in many segments and markets

• Low investment returns, declining ROEs • Increased pressure and focus on

underwriting • Limited benefits for further cost

reductions • Greater pressure to enhance market

profiles

Threat

• Portfolio consolidation and realignment of strategy

• Focus attention on select products and territories

• Innovate into niche / non-traditional lines

Opportunity

T O

Accumulation Risk


• Potential for significant accumulation of risk growing in an increasingly interconnected world

• Detection and management of accumulations more challenging as complexity grows

• Likelihood of balance sheet impairing losses increasing

Source: A.M. Best research and World Economic Forum “The Global Risks Report 2016”

Property vs Casualty Accumulations


• Geographically defined • Scale of loss determined relatively

quickly • Sophisticated catastrophe modelling

tools available, albeit with limitations • Use of historical loss data • Global supply chains – local events can

lead to international losses

Property

• Driven by legal and socio-economic factors

• Losses may occur over multiple years and territories

• Use of deterministic realistic disaster scenarios

• Difficult to predict future losses from past events

• Technological advances and growing global networks increase accumulation risk

Casualty

Accumulation Risk – Casualty


Managing Casualty Accumulations

Emerging risk analysis

Expert knowledge

Scenario analysis

Advancements in modelling techniques

Enhanced policy information

Application of big data

Event footprints

Identify supply and distribution

chains

Accumulation Risk


• Globalisation of production and trade • Widespread use of new technology • Give rise to:

- complex interdependencies and exposures

- large unexpected loss accumulations - potential pressure on earnings, capital

and liquidity

Threat

• Economic growth and innovation – new risks requiring insurance

• Develop superior understanding of risk drivers and interdependencies: - manage accumulations,

reduce / increase exposure - develop new insurance products - better address clients’ risk transfer

needs

Opportunity

T O

Energy: Overview


Alternative Sources

Oil and Gas

Environment Risks

Low Oil Prices

Reduced Investment

Declining Rates Supply and Demand

Geopolitical Risks

Economic Risk

2030405060708090

100110120

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17

USD

(per

Bar

rel)

Energy: Oil Prices


Notes: Europe Brent Spot Price (US Dollars per Barrel). Data to March 13, 2017. Source: United States Energy Information Administration

Oil prices have fallen to their lowest levels over the last decade

Energy: Downstream Losses


Source: Willis Towers Watson/Willis Towers Watson Energy Loss Database as of March 1 2016 (figures include both insured and uninsured losses). Energy losses excess of USD 1 million.

Downstream energy losses 2000 –2016 vs. estimated global downstream premium income

Energy: Geopolitical Risk


12.5 11.6

3.7 3.2

3.0 3.0

2.6 2.2

1.8 1.8

0.9

0 5 10 15

Saudi…Russia

UAEBrazil

MexicoKuwaitNigeria

QatarAlgeria

KazakhstanAzerbaijan

Contribution to World Oil Production (2014) (%)

Over 50% of oil production from emerging economies

Sources: United States Energy Information Administration, International Monetary Fund, IMF Regional Economic Outlook Middle East and Central Asia, October 2015, and A.M. Best research.

93 105

52

98

58

96

68

61

83

0

20

40

60

80

100

120

Fisc

al B

reak

even

Pric

e (U

SD p

er b

arre

l)

Fiscal Breakeven (US Dollar per barrel)

Energy: Investment Risk


20

40

60

80

100

120

140

160

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

GCC Stock Markets and Brent Crude Indexed to January 2014 = 100


Energy: Currency Risk


-

50

100

150

200

250

300

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Oil Exporter Currencies and Brent Crude Indexed to January 2014 = 100

Brent Crude Nigerian Naira Algerian Dinar Ghana Cedi Brazilian Real

Mexico Peso Russia Ruble Kazakhstan Tenge Azerbaijan Manat

Low oil prices and currency depreciation a major concern for many insurers operating in emerging markets


Energy


• Insurers in emerging markets feel economic strain - Economic slowdown - Currency depreciations - Austerity measures - Volatility in equity and real estate

markets - Pressure on credit ratings

• Negative pressure likely to persist for energy insurers

Threats (Short term)

• Suppressed inflation for mature markets • Greater demand for insurance related to

alternative energy sources

Opportunities (Short term)

Energy


• Geopolitical risks likely to persist • Countries operating below fiscal budgets

are likely to experience further economic strain

• Uncertainty regarding supply and demand, e.g. Iran

• Risk of currencies being de-pegged • Higher energy prices may increase

inflationary pressure for oil importers

Threats (Long term)

• Higher prices should increase economic development and stability in emerging markets

Opportunities (Long term)

T O

Low Interest Rates


-1012345678

Inte

rest

Rat

e (%

) Italy

Spain

France Germany

USA

UK

Sources: European Central Bank, OECD

• Prevailing low interest rate environment continues indefinitely

Threat

• High proportion of investments in interest rate sensitive assets (such as bonds)

• Offer interest rate sensitive products to customers (life insurers)

Concern

Impact on insurers


• Lower interest rates: - increase present value of liabilities - increase market value of fixed-

income assets • Sensitivity depends on duration • Insurance liabilities tend to have a

longer duration than assets • Direct impact on capital and solvency • Lower investment returns hit profits

ASSETS (fixed income)

LIABILITIES

SURPLUS

Life Insurers Most Affected


• Exposure depends on: - asset allocation - duration mismatch - level of guarantees in life insurance products

• Larger insurers usually better diversified by line of business, asset class and geography

• Life insurers: - typically match long-term liabilities with long-term bonds - products may contain financial guarantees to policyholders

Life insurers that have large government bond portfolios and offer high guarantees to policyholders are most vulnerable

Industry Response


• Lower guarantees on new products • Shorter duration contracts • Shift from savings products to

underwriting mortality risks • Increase in unit-linked products • Greater diversification • Sale of capital intensive books of

business

Products

• Search for yield – increase in credit risk and duration

• Alternative investments: - infrastructure - commercial real estate - direct lending - private equity

• Increased use of interest rate derivatives

Investments

Low Interest Rates


• Inadequate duration matching has a direct impact on solvency

• Downward pressure on profits: - lower investment returns - guaranteed products more expensive

• Other concerns: - competition – insurance attractive to

investors - M&A – in absence of investment

opportunities

Threat

• Take advantage of favourable pricing to issue debt

• Product innovation • Alternative investment strategies • Opportunistic acquisition of books of

business

Opportunity

T O

Pandemic: Major threat?


• Rare events – reoccurrence rates between 30-50 years

• Consequences can be devastating • Substantial global financial risk

Is a pandemic a major risk?

Estimated global cost of a pandemic according to the World Bank is USD 800 billion (1-10% of global GDP). Insurance loss is difficult to predict.

Disease When? Casualties

Spanish Flu 1918-20 40-50 million*

Asian Flu 1957 1-2 million

Hong Kong Flu 1968 Approx. 1 million Notes: Two of these pandemics comprised bird flu with human flu viruses. *Some estimates (World Health Organisation) suggest up to 100 million lives

Pandemic: Viruses and Diseases


Risk Year Description

Hendra Virus 1994 Virus from horses – contained to Australia

Nipah Virus 1999 Related to Hendra; cannot be transferred to humans

Cholera 1960s; 1970s Present outbreaks relate to poor sanitation. Developed a greater resistance to antibiotics

Small Pox N/A Mortality rates of 30%. Largely eradicated

HIV / AIDS 1980 to present Over 25 million deaths. Effective vaccines are difficult to develop.

Bubonic Plague 1300s Killed 30%-60% of Europe’s population

Others: MRSA, SARS, Ebola, Zika Virus, Lassa Fever, Marburg Virus

Pandemic: Risk to Companies


Understanding how the risk has changed

• Better drugs • Co-ordinated responses • Development of influenza models • Better communication methods • Healthier population • Significant investment / research

Positive Effects

• Globalisation • Global travel • Larger population size • Higher concentration in urban areas • Diseases can have greater resistance to

drugs • Unknowns: time to prepare a new

vaccine

Negative Effects

Pandemic: Affect on credit quality


• A major pandemic could have greater financial consequences than a natural or man-made disaster, which could significantly impact the balance sheet strength of life and health (re)insurers

• There may also be some indirect consequences for the non-life market

Threat

• Pandemics are likely to be underinsured with a significant difference between the economic cost and the cost to the insurance market

• Improved modelling capabilities and confidence in medical advances may provide opportunities for the market

Opportunity

T O

Conclusion


Impact on Credit Quality

Largest

Smallest TerrorismGlobalisationCurrency risk

BrexitGeopolitics

Oil PricesClimate Change

PandemicsInflation

Cyber riskDistribution

Big dataLow interest rates

GrowthAccumulation risk

Nat CatsDeficient reserves

Threat Opportunity


Q&A Ghislain Le Cam

Director, Analytics Alex Rafferty

Financial Analyst


Hotel Napoleon

28 March 2017

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