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Reinsurance Opportunities for BanksABIA 2003 Annual Conference
October 9, 2003
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Panelists
Steven Lash, Ernst &Young
Ken Baldes, HSBC Insurance
Joe Picarello, Chase Insurance
Jay Votta, Ernst &Young
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What is Reinsurance?
“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”
Sharing of the profits and risks of the underlying insurance product.
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Source: Life, Health, & Annuity Reinsurance, John E. TillerSource: Life, Health, & Annuity Reinsurance, John E. Tiller
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Why Reinsure?
Substantial increase in long term revenue and income for the bank
Further increase in partnership for bank and insurer
Increased shelf space for the reinsurer
Better persistency for bank and the insurer
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What is Reinsured?
Credit Life
Fixed Annuities
Variable Annuities
Term Life
Lender Placed Hazard
AD&D
Mortgage Insurance
Vendors Single Interest
Universal Life
Title
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Who Reinsures?
73
36 32 2511
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11 1312
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0
10
20
30
40
50
60
70
80
90
Credit Annuities L/H P/C Title
Planning
Current
Source: ABIA Study of Leading Banks in Insurance 2002Source: ABIA Study of Leading Banks in Insurance 2002
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Who Reinsures?1Q ’03 Revenue
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Insurance Bank Holding Insurance Insurance U/W % of Revenues Company Underwriting Brokerage Total
1 $5,478.3 Metlife, Inc. $4,837.5 $640.8 88.3%2 $855.0 Citigroup Inc. $494.0 $361.0 57.8%3 $184.9 Countrywide Financial Corp. $171.1 $13.7 92.5%4 $107.0 Bank One Corp. $31.0 $76.0 29.0%5 $30.0 Bank of America Corp. $29.0 $1.0 96.7%6 $266.0 Wells Fargo and Co. $28.0 $238.0 10.5%7 $54.0 J.P. Morgan Chase $17.0 $37.0 31.5%8 $16.0 Commerce Bancorp, Inc. $16.0 $0.0 100.0%9 $27.3 Abn Amro North America $13.5 $13.8 49.5%
10 $26.5 National City Corp. $11.0 $15.5 41.5%11 $16.0 HSBC USA Inc. $10.5 $5.6 65.6%12 $74.0 Wachovia Corp. $10.0 $64.0 13.5%13 $22.5 U.S. Bancorp $8.6 $13.9 38.2%14 $8.5 F.N.B. Corp. $8.5 $0.0 100.0%15 $8.3 Old National Bancorp $7.5 $0.8 90.4%16 $4.7 Huntington Bancshares $4.7 $0.0 100.0%17 $4.0 Fifth Third Bancorp $4.0 $0.0 100.0%18 $88.7 BB&T Corp. $3.3 $85.3 3.7%19 $16.4 PNC Financial Services $2.8 $13.6 17.1%20 $3.1 Sunflower Banks, Inc. $2.2 $0.9 71.0%
Source: Singer Annuity and Funds Report, Aug/Sept 2003Source: Singer Annuity and Funds Report, Aug/Sept 2003
October, 2003
Reinsurance Opportunities for BanksKen Baldes
ABIA 2003 Annual ConferenceOctober 9, 2003
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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.
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HSBC Insurance (USA)
Wealth Management
Commercial Banking
Small BusinessPrivate Banking
Personal Banking
Mortgage
Credit Card
Bancassurance Opportunities
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Bancassurance Model
Middle Market Has Been Abandoned
Trusted Advisor
Ease of Purchase
Convenience
Multiple Channels to meet Customer Needs (Face to Face, Phone, Mail, Internet, etc)
Deepen Customer Relationships
Reinsurance Opportunities
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Revenue Stream Expansion
Private Mortgage Insurance
Vendors Single Interest
HSBC Reinsurance (USA) Inc.
Credit Insurance (USA, Canada, Panama)
Life Insurance
Marmid Life Insurance Co.
Annuity Reinsurance
HSBC Life Insurance (Cayman) Ltd.
HSBC Insurance (USA)
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Overriding Considerations with Reinsurance
Scale of Business
Business Unit Rapport
Risk Transfer
Carrier Reinsurance Expertise
Reconciliation of data
Monitoring Controls
Actuarial Support
Captive Management Support
Annual Stress Testing
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Private Mortgage Insurance
Arrangements
Quota Share
Excess of Loss
Additional Considerations
Capital Requirements for cedes over 25%
Domicile Flexibility
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Traditional Insurance & Annuities
Arrangements
Quota Share
Modified Co-insurance
Additional Considerations
Investment Policy
Credit Losses
Interest Rate Risk/Spreads
ABIA Annual Conference October 8-10, 2003
Joe PicarelloChase Insurance Group
Building Income – Reinsurance of Bank Sold Insurance Products
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The Line of Business is the Customer
CRB Small Business Financial Services
Chase InsuranceGroup
Product DevelopmentCarrier ManagementProduct Management
Reinsurance / UnderwritingData-miningTechnologyCompliance
Legal
Private Bank
Middle Market Financial Services
Chase HomeFinance
Chase CardServices
Chase Auto Finance
CRB Personal Financial Services
CRB Retail Financial Services
Licensing
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Business Model
Design, source, deliver and service superior insurance and financial security solutions
Integrated cross-sell model
Alignment with LOB strategies
Strategic Partnering
Reinsure to capture incremental SVA
“Thin” insurance agency model
“Open architecture” business system
Manufacturing, only very selectively
Centralized expertise
Centralized utilities
Card services Home finance Auto finance CFS
PFS RFS SBFS
MMBG Private Banking
Card services Home finance Auto finance CFS
PFS RFS SBFS
MMBG Private Banking
Retail Direct Response
Retail Direct Response
Retail Face-to-face
Retail Face-to-face
Commercial Face-to-face
Commercial Face-to-face
Private Banking Face-to-face
Private Banking Face-to-face
Convenience Competitive
price Trusted advisor
access Product
transparency Service quality Brand Customer
knowledge
Convenience Competitive
price Trusted advisor
access Product
transparency Service quality Brand Customer
knowledge
LOB Partners DistributionCustomer Value
Proposition
Strategy, Product Design
and Management
Strategy, Product Design
and Management
Targeting and Solicitation
Targeting and Solicitation
Underwriting/ Reinsurance
Underwriting/ Reinsurance
Compliance/Legal/
Licensing
Compliance/Legal/
Licensing
Segmented Customer Service
Segmented Customer Service
Marketing, Sales and
Structuring
Marketing, Sales and
Structuring
Value Chain Infrastructure
Strategic Partners Strategic Partners
Insurance Carrier Sourcing and Management
Chase Insurance Group Business Model
Multi channel distribution: 25% face-to-face; 75% direct marketed
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Focus on Business Model
Core Business Model
• Integrated cross sell
• Alignment with LOB strategies
• Distribution leverage
• Strategic Partnering
• Reinsure to capture incremental SVA
Business Structure
• “Thin” insurance agency model
• “Open architecture” business system
• Manufacturing, only very selectively
• Centralized expertise
• Centralized utilities
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Performance and growth
Line of Business Revenue Composition (2003F) Product Revenue Composition (2003F)
1999 2000 2001 2002 2003F
Revenue
NEBT
SVA($MM) 57 69 96 153 191
Home Finance18%
Investment Income
6%
Credit Card57%
CRB15%
PBG / MM4%
Other0%
PMI/Hazard Reinsurance
15%
Annuities11%
Credit Insurance / Debt Suspension
54%
Life 13%
N.I.I. / Other6%
Employee Benefits / P&C1%
CAGR’s:•Revenue 22%
•NEBT 28%
•SVA 38%
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Risk/Reward Opportunity Assessment
The Decision to Reinsure
Drivers
'99 '01 '03 '05 '07
Proven distribution success
Thorough understanding of profit dynamics of the business
Favorable risk/ reward equation
Reinsurance
Commission/ Fees
Experience / Understanding
S
U
C
C
E
S
S
Profit Sharing
Direct Writing
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Risk/Reward Opportunity Assessment
The Decision to Reinsure
Drivers
'99 '01 '03 '05 '07
Proven distribution success
Thorough understanding of profit dynamics of the business
Favorable risk/ reward equation
Reinsurance
Experience / Understanding
S
U
C
C
E
S
S
Lender Placed
Mortgage Insurance
Credit life, disability &
unemployment
AD&D
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Insurance Legal Entities
Life Reinsurance Companies
WHLIC
SSLIC
P&C Reinsurance Companies
GLIC
CCIC (Vermont)
Chase Re (Bermuda)
Annuity Direct Writing Companies
CLACNY (New York)
CLAC
FormationProliferationRationalizationConsolidation
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Reasons for Reinsurance
Quota Share
• EOL: Reinsurer responsible for all losses in excess of specified level, up to the reinsurer’s overall policy limit
• EOL: Reinsurer responsible for all losses in excess of specified level, up to the reinsurer’s overall policy limit
Excess of Loss
Structure Alternatives
Increase Underwriting Capacity
Diversify Risks
Source of Capital
Assumption Reinsurance (Profit Center)
• Quota Share: Reinsurer shares all losses and premium on a pro-rata basis according to quota share %
• Quota Share: Reinsurer shares all losses and premium on a pro-rata basis according to quota share %
Reinsurer
REINSURER
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Risk Assessment Challenges
Corporate New Products
Corporate Accounting/Risk Transfer
Product Development
and Product
Management
Process
CIG Executive Committee
LOB New Product Committee
Corporate New Products
Treasury, Credit, Market, Tax, Legal, Compliance, Insurance, Controllers, etc…….
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Risk/Reward Opportunity Assessment
The Decision to Manufacture
Drivers
'99 '01 '03 '05 '07
Proven distribution success
Core Competencies of Firm
Captive Distribution
JPMF Asset Management
Interest Rate Risk Management
Leverage Brand Value
Experience / Understanding
S
U
C
C
E
S
S
Direct Writing/ Manufacturing
Deferred Fixed
Annuities
Bank Managed Debt
Cancellation Contracts
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Reinsurance Risk/Reward
Full participation in value of business
Mitigate regulatory risk
Learning
Alignment of interests
Potential volatility in revenue and expenses
True appetite for Risk
Capital intensive
Maintaining Alignment
Benefits Challenges
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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
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Issues & Considerations
Transaction Structuring and Negotiation
Quota Share Level
Product Return Requirements/Risks
Accounting treatment and recognition of commissions earned on policies reinsured
Crediting Rate Process
Level of Bank Cash Outlay
Portfolio Segmentation/Earned Interest Crediting/Capital Gains
Results Monitoring
Financial Reporting Needs
Offshore Company Establishment
Required Capital Considerations
Start up time/Costs
In initiating a transaction, there are a number of critical success factors which need to be explored:
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Q&A