insurance risks and industry trends [autosaved]

1

Clarine Usher, CTP Tower Group, Inc.

VP- Finance cusher@twrgrp.com

646-625-3597 781-801-9133

TMANE Conference 17 May 2013

Insurance Risks

and

Industry Trends

2

“The insurance industry has changed over

time through different product offerings,

globalization, evolving technology, and

changes in the economic environment.” National Association of

Insurance Commissioners

NAIC

Insurance Industry

What is Insurance?

The traditional 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?

Overview of Insurance Industry

• Insurance Industry Background

• Reserves and Risk Based Capital (RBC)

• Resiliency in the Marketplace

4

Overview of Insurance Industry

Overview of Insurance Industry

• 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

Reserves and

Risk Based Capital (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)

Reserves and

Risk Based Capital (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

Insurance Risks

• Mortality risk – 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

Insurance Risks

• Longevity risk

– 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

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

Insurance Risks

Lawsuits – In 2002 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

Insurance Risks

Black Swan Events –

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

Three Drivers

• Regulatory

• Technology

• Globalization

Leading the Charge - 3 Drivers

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

Technology

– Banking Act of 1933 (Glass-Steagall) Act

– Gramm- Leach- Bliley Act of 1999

– Solvency II

• Greater Transparency and Disclosures

15

Leading the Charge –

Regulatory

Technology

• Legacy Systems

• Data Warehouses

• Social Media

• Mobile Devices

• “Big Data”

16

Leading the Charge –

Technology

Globalization

• Company Size

• Multi-National Insurance Corporations

• Appetite for Risk

• Growth and Migration in Global Population

17

Leading the Charge –

Globalization

Regulatory Issues

• Greater Transparency and Disclosures

• Stronger Internal Controls and Compliance

• Solvency II

18

Insurance Regulatory Issues

Regulatory Issues

• Solvency II –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

Regulatory Issues

– Financial Flexibility

– 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

Industry Trends

• Mergers and Acquisitions Activity

• Hedge Funds

• Survival of the Fittest

Insurance Industry Trends

22

Industry Trends

– “Property and 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

Industry Trends

• Guggenheim Partners

– 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

Industry Trends

• Property and 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

Industry Trends

– Low Interest Rate Environment

– Surplus Requirements

– Changing Regulatory Landscape

– Growth and Diversification

– Raising Capital

– Demographic Changes

Insurance Industry

Challenges

• 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

• Enterprise Risk Management (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

• Robust model testing

– Include probability of extreme events – “Black Swans”

• Partnerships

– Rating Agencies

• Sarbanes- Oxley

– Strong Internal Controls and Transparency

28

Better Insurance Practices

29

Q & A

Insurance Risks

and

Industry Trends

The views expressed are 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

Clarine Usher, CTP

cusher@twrgrp.com

646-625-3597

781-801-9133

Insurance Risks

and

Industry Trends