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Crisis Appearance in Reinsurance Development: Former Soviet Union
Dmitry GARMASHDeputy Managing director, PhD
Unity Re Ltd.
III International conference «Insurance in Central Asia», Almaty, Kazakhstan, 19-20 March 2009
International market before 2008…
Situation and tendencies:
• soft market
• enough re- and retro capacity
• high business growth rates (7-15% annually in the average)
• active new investment capital new market players
• active growth of investments and M&A + geographical expansion
• key investment goal – long-term prospective development
• active & significant investment compensation of technical/underwriting results
…and beyond 2008
• double impact: cycle phaze + investment collapse both assets and liabilities of (re)insurers are affected
• investment & technical losses outflow of investors narrowing of available capacity, esp. retro
• stake of active technical correction of results rise of re- and retro cover price by 5-25% av.
• active redistribution of business development strategies + potential movements in and among echelons of international reinsurers
• stake on short-term prospective development
• need for new approach to market regulation
• need for new approach to ratings
…and beyond 2008
2008 among the last 10 years happened to be:
• the 4th as per the amount of insured losses• the 3rd as per the number of nature disasters
• average effect of Ike & Gustav claims on reinsurers’ assets: - 1,5-6,5%• average effect of financial markets dynamics & investment result on
reinsurers’ assets: - 5-30%
Some results:
• ING Group – about 1B euro loss for 2008• Swiss Re – net loss of about 0.86 billion CHF for 2008• Munich Re – profits fall about 2,5 times• AIG – 60 billion USD loss for 4Q 2008 = world maximum since 2002 (Time
Warner – 54 billion USD)
World reinsurance premium distribution:
• Total insurance premium (2007) - 4 trillion USD, non-life segment – about 1,6 trillion USD.
• Total reinsurance NPW (2007) – 168 billion USD (9,8% rise)
Source: International Insurance Fact Book; Standard & Poors
Former USSR market
56%
4%
26%
9%
2%
Source: Swiss Re - Sigma
3%
Russian & CIS before 2008…
• Relatively high economic growth rates growth of insurance & reinsurance sectors (average rate of 20-30% annually)
• Key engines for (re)insurance – investment oriented sectors: mortgages & real estate, consumer credits, construction & development
• Formation of ‘middle class’ in society as a factor of growth development
• Active increase of foreign participation – investments, M&A
• Soft reinsurance market + significant non-price competition
• Premium growth rates much higher than claims growath rates fuzzy cycle dynamics & phazing acceptable aggregate loss ratio (25-40%)
• Stake of western reinsurance treaty security with excessive capacity
• Major business growth factor – economy and market growth thereselves (good performance mainly depends on reliable customer attracting policy)
Country Number of insurance (reinsurance) companies
Insurance premium non-life, USD
Inward reinsurance premium, USD
Out-ward reinsurance premium, USD
Russia 857 (29) 29,6 billion 2,536 billion 2,2 billion
Ukraine 446 (1) 3,6 billion 1 billion 1,27 billion
Kazakhstan 41 (0) 1,2 billion 130 million 510 million
Azerbaijan 30 (1) 175 million n/a n/a
Uzbekistan 27 (1) 56 million 4,8 million 22 million
Tajikistan 15 (0) 27,5 million 24 thousand 18,5 million
Kyrgyzstan 14 (0) 5 million n/a n/a
Source: Asia Insurance Review; Forinsurer.com; FSIS of RF; Orien Insurance; RP News.
Russia & CIS before 2008…
…and beyond 2008
Reinsurance sector – “downstream”-direction: mediated, smoothed, buffered effect of crisis uncertainty for period & scales of effect
Industrial, commercial, banking
sectors
InsuranceReinsurance
Common predictions:
• fall of premiums and slowdown of development
• decrease in number of market players caused by closing business, bankruptcies and M&A
• tough competition among & selection of professional staff
• key survival remedy – struggle for clients, market place & development of new business niches & strategies
Market position
Capitalization
Assets
Change of benchmarks
Markets • New niches sources by rising demand for alternative capacity• Stake on ‘soft’ niches• Stake on reliable cooperation & own audit and evaluation of
partners
Cedants • Rising role of R/I in backing insurer’s stability additional demand + reconsideration of retentions/limits policies
• Increasing number of markets in security lists to decrease individual credit risk exposure of cedant
Brokers • Global increase of brokers’ role as distribution channel – lower acquisition costs, attracting various-scale businesses, regional clients, alternative capacity
Competition & New players
• Growth of price competition + softening of alternative markets• Селекция игроков за счет ухода и M&A
Regulatories & legislation
• Strengthening & restructurisation of state influence to (re) insurance sector
Capital & rating • Rise of qualitative requirements to capital & rating• Rise of demand for international rating• More tough conditions for rating & capital modelling
Change in business environment
Market position Clients’ field cover; speed of reaction; capacity; rating
Management Professional selection of staff; corporate unity; ERM
Corporate strategy Intensifying development; optimization & rationalization
Investments, liquidity, financial mechanism
Tough control of accounts receivable; quality of investments & assets; conservative strategy
Capitalization Tough control of reserves adequacy; retro cover & additional counterparty selection
Change in key points of analysis
• new trend – not just an evaluation but a full-size reengineering tool!
• integral attribute & competitive advantage
• demand for rating gets higher – opportunities of obtaining get lowe due to crisis affecting the key rating factors
• crisis reconsideration of approaches & evaluations, models & qualitative methods
• 43 000 entities rated around the world – in Russia России just 84; in CIS – just about 110
• Forecast for 2008-09: more 45-60 companies WOULD HAVE obtained international rating
• Number of ratings in Russia for 2007 = number of ratings for 1998-2003 = 39
• (re) insurance companies with international ratings = 15 (Russia) + 5 (CIS)
Change in rating approach
• different crisis nature to other world (credit crisis burdened by overall economy overheating)
• dumping as a key marketing tool rise of losses + final burden is on reinsurer!
• “extensification” of development (blowing up the portfolio without enough prudent risk selection and whole book enhancement)
• no market barriers for poor risks
• rise of fraud claims inflow & severity
• rise of accounts receivable receivables management as one of the key tools to be employed with a company during crisis!
• excessive number of market players
• strengthening of roles of major international reinsurers
• back of reciprocity business basics
• more tight binding to world loss ratios, trends, cycle
Change in market challenges
THANKS FOR YOUR ATTENTION!
Unity Re LtdMoscow, Russian Federation
T: +7 495 956 6589F: +7 495 956 6598E: [email protected]: www.unityre.ru