CLIMATE AND ITS EFFECT ON ITS RATING STRUCTURES Presentation : A - PowerPoint PPT Presentation

THE ECONOMIC CLIMATE AND ITS EFFECT ON ITS RATING STRUCTURES Presentation : A general overview of the international market post crisis and Discussion : Its impact on the local market. James N. Portelli MSc FCII FIRM 1 of 26 pages James Portelli FCII FIRM Chartered Insurance Practitioner

Acknowledgements / References  Swiss Re Sigma: www.swissre.com  www.iaiswed.org  Key Financial Stability Issues (Jul 2010), Geneva Association  http://www.spiegel.de/international/business/0,1518, 707231,00.html  CRO Assembly presentations, November 2009  ‘New Normal’ (B. Gross & M. El-Erain, 2009): – http://www.forbes.com/forbes/2010/0208/investing-mutual- funds-stocks-pimco-new-normal.html; – http://www.forbes.com/forbes/2010/0208/investing-mutual- funds-stocks-pimco-new-normal.html; – http://www.bloomberg.com/news/print/2010-08-16/bank-loan- terms-eased-last-quarter-even-as-demand-little-changed-fed- says.html .  Legislation, regulation and supervision: – www.fsa.gov.uk ; – www.cea.eu ; – www.risk.net . 2 of 26 pages James Portelli FCII FIRM

Agenda To be rated or not to be rated (and what a question!!)  How important are insurance / credit ratings  What is rated? A global view  A geographical view of main market blocs  A macro view of leading markets  Rule of thumb market differentiators The financial crisis and insurance  Ivy-league and other insurance centres  Legislation, regulation and supervision  Solvency II: Regional or global? 3  of 26 pages James Portelli FCII FIRM Conclusion: flirting with the crystal ball

To be rated or not to be rated (.. And what question!) To be rated or not to be The main compulsion for being rated : rated  For reinsurers a minimum rating of BBB meant  How important are that they were of a level which is considered to be insurance / credit internationally acceptable to accept business from ratings certain sources.  For primary market players the main drivers were  What is rated? (a) certain large insurance purchasers stipulate an A rated carrier and (b) for others it was / is nothing more than a ‘nice to have’ badge. But is it really a badge / certification if what Rating Agencies provide is a learned opinion? 4 of 26 pages James Portelli FCII FIRM

What is rated? To be rated or not to be A.M. Best: rated  A++ to E : Comprehensive analysis of the  How important are company’s balance sheet operating performance insurance / credit and business profile; ratings  I to XV : financial size of the company from less than a US$ 1 m to over US$ 2 b.  What is rated? S&P:  Insurance Financial Strength Ratings: Assess an insurer’s ability to pay its policies and contracts. (AAA to NR)  Insurance Financial Enhancement Ratings: Assess an insurer’s willingness to pay financial guarantees on a timely basis. (A-1 to D) 5 of 26 pages James Portelli FCII FIRM

What is rated: Rating Detail  Business Review on distribution, competition, To be rated or not to be market diversity, operational competitively / rated costs, brand loyalty etc.  How important are  Management and Corporate Strategy deal with insurance / credit corporate / financial checks and balances and ratings strategic implementation.  Operational Analysis look at operational  What is rated? performance trends and ratios.  Earning Adequacy calculations.  Diversification of Investments. Until prior to the crisis rating agencies maintained that each of the above areas also dealt with the respective risk management issues. Now some of them have a separate ERM assessment module. 6 of 26 pages James Portelli FCII FIRM

A geographical view of the main market blocs   Inflation-adjusted, global insurance premiums Global view amount to just over US$ 4,500 billion.  Main market blocs   Life premiums dropped marginally while non-life Industrialised vs. emerging markets is showing signs of market hardening.  Overall premiums grew by 6% (2010 to 2011) while world economies grew by 3% (effect of depreciated US$ dollar?)  Global premium is approximately split into just under 60% life premiums and over 40% non-life premiums;  Over 85% of global premium is generated in the industrialised countries. Source: Swiss Re SIGMA 2/2010 and 3/2012 [www.swissre.com] 7 of 26 pages James Portelli FCII FIRM

A geographical view of the main market blocs Pre to post crisis view 4-year regional premium development (US$ millions)  Global view  Main market blocs 5,000,000  Industrialised vs. 4,000,000 Oceania Africa emerging markets 3,000,000 Asia 2,000,000 Europe 1,000,000 Americas 0 2006 2007 2008 2009 Share of world premium [2009] 1%2% 24% 33% 40%  Source: Swiss Re SIGMA 3/2008 and 2/2010 [www.swissre.com] 8 of 26 pages James Portelli FCII FIRM

A geographical view of the main market blocs Pre to post crisis view 4-yr comparison Industrialised Emerging  Global view  5,000,000 Main market blocs 4,000,000  Industrialised vs. 3,000,000 emerging markets 2,000,000 1,000,000 0 2006 2007 2008 2009 Share of world market [2009] 13% Premiums: % of GDP Per capita Industrialised 8.61% US$ 3,405 Emerging 2.89% US$ 92 87%  Source: Swiss Re SIGMA 3/2008 and 2/2010 [www.swissre.com] 9 of 26 pages James Portelli FCII FIRM

A macro view of leading markets 4-year % 2009 Premium Pre to post crisis view Movement Per Capita % of GDP USA -3% US$ 2,107 8%  The 10 leading Japan 15% US$ 840 10% UK -15% US$ 1,051 13% countries France 13% US$ 1,289 10%  Maturity and Germany 18% US$ 1,519 7% potential in various Italy 20% US$ 850 8% markets China 130% US$ 40 3% Netherlands 18% US$ 4,509 14% Canada 13% US$ 1,644 7% Top 10 ranking South Korea -9% US$ 710 10% USA 4-yr development of 10 leading markets maintained in Japan 2010 / 2011 UK 2009 France Germany 2008 Italy China 2007 Netherlands 2006 Canada South Korea 0 1,000,000 2,000,000 3,000,000 4,000,000 10 of 26 pages James Portelli FCII FIRM

A macro view of leading markets  USA, UK and South Korea (and other markets i.e.  The 10 leading Taiwan) suffered significant downturn in 2006 – countries 2009 premium because of their higher reliance on  Maturity and life assurance; potential in various markets  UK (15% 2006 – 9 drop) has significantly increased its business development efforts in, e.g. China, Far East, Middle East and India;  The countries who saw stronger growth in non-life business pre-crisis (Japan, Continental Europe, China, Middle East etc.) suffered less during the economic downturn. 11 of 26 pages James Portelli FCII FIRM

Rule-of-thumb market differentiators Markets that are … Market / Criteria Mature Emerging Legislation / In place, clear & Obsolete or being Supervision implemented. changed. Lacks proper supervision. Competition Transparently Protectionist or competitive. aggressive. Accounting Internationally May be ambiguous. Practices accepted. Information Availability of Unavailable or market statistics. unreliable statistics. Technical results Proportionately Significantly more more predictable. volatile. Expertise Skilled workforce Absence or mismatch available. of skills.  Source: www.iaisweb.org 12 of 26 pages James Portelli FCII FIRM

The financial crisis and insurance  Insurance is sometimes a product of its own right  Insurance as a and sometimes a complement to another product. product.  Why was  When insurance is a complement to another insurance less product its elasticity of demand diminishes. susceptible to the crisis? Therefore, reduction in demand is less than  proportionate to other changes. Which insurance markets were most adversely  Markets where insurers operate more in the price effected? elastic segment of a demand curve have been more  Is the worst still to severely effected by the economic downturn. come? Conversely, emerging markets have been less immediately effected by the crisis (although statistics suggest a ‘delayed’ impact). 13 of 26 pages James Portelli FCII FIRM

The financial crisis and insurance  Insurance companies generally have naturally liquid  Insurance as a balance sheets and cash flows; product.  Insurance companies have typically lower leverage  Why was than banks, are less capital market dependent and insurance less pose a much lower systemic threat; susceptible to the  The S&P insurance downgrades (14%) and negative crisis? outlooks (19%) over the period corresponding with  TImeline the crisis were mostly to do with the economic  Is the worst still to consequences of the turmoil. Of these, there were come? also 8% rating upgrades in 2009 and 4% of outlooks turning positive;  Insurance companies may suffer more indirectly as a result of a regulatory whiplash than through their own doing!  Source: S&P Presentation at CRO Assembly, Nov. 2009 14 of 26 pages James Portelli FCII FIRM