6 nmg

Impact of RBC on Solvency 23rd September 2011

SOAT Non-Life Insurance Forum 2011 “Reducing Uncertainty, Creating Values” 1

Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore & Australia Conclusions

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About NMG Starting out as an actuarial consulting company, NMG Group consists of diverse businesses (consulting, intermediary, research) focused solely in insurance and wealth management segments.

Morgan Ash Teleunderwriting services provider

NMG Group Holding Company

NMG Consulting UK Strategy Consulting Welton, Parent Inc. CAN Actuaries & Retirement Planning

NMG Consulting /BQM CAN

Bakehouse UK Specialist Marketing Communications Agency

NMG-IFS SUI International Financial Services

NMG Consultants & Actuaries RSA Corporate Health Intermediary

Business Quality Management Interactive Research Consulting Program

NMG Consulting Asia Pacific Strategy & Actuarial Consulting & Information Services

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About NMG NMG Consulting BQM GSCN

INS

ACS PMG

Specialist sector skills As a multi-national consulting firm focused on the insurance and wealth management industries, NMG has developed specialist financial and actuarial skills to support our clients in the sectors of our dedicated focus, namely: □ Non-Life insurance □ Health insurance □ Reinsurance □ Wealth management □ Takaful □ Alternative Financial Services Providers We believe there is a strong financial component to any development or strategic initiative. Our consultants accordingly have substantial experience in business modeling and cash flow projections across all financial services sectors.

We offer the following key services to our clients: □ Reserve Calculation (Statutory reporting) □ Company valuation (M&A) □ Product development and pricing □ Capital management (Risk Based Capital modeling) □ Reinsurance optimization Territories covered: □ Malaysia □ Singapore □ Sri Lanka

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Role “Reducing Uncertainty, Creating Values” Actuaries: Professionals who deals with the financial impact of risk and uncertainty. ►

As actuaries, we add value by: -

Making sense of risks Being able to quantify upside and downside potential Managing risks and identifying business opportunities Communicating uncertainty to key stakeholders

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Presentation Objectives What is RBC? How is it applied in the region? â–ş

Singaporean, Malaysian and Australian examples

What has been the experience post implementation?

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Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore and Australia Conclusion

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Risk Based Capital Risk Based Capital and its framework: â–ş

Level of capital that is commensurate with risk level - Higher risk, potentially higher rewards, need more capital to sustain volatility of results - Risk-adjusted return on capital

â–ş

Typical RBC Framework - Formula-based - Higher risk charge on higher risks - General considerations: Exposure to risk, parameters, correlation, risk charges, capital available - Enables comparison and better transparency

8

Evolution of Capital Simple Formulae ► ► ►

Minimum $ Value % of Premiums % of Reserves

Advanced Formulae ► ►

More detailed Risk Interaction Industry benchmarks

Internal Capital Assessment ►

Requires regulator validation

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Risk Based Capital We see a worldwide trend that more and more countries are beginning to implement RBC. ► ► ► ► ► ► ► ► ► ► ►

1992: USA (RBC model by NAIC) 1999: Canada (DCAT – Dynamic Capital Adequacy Testing), Indonesia 2002: Australia (Prudential Standard GPS110 – Capital Adequacy) 2004: Singapore 2005: UK (Consultation Paper 190 – Capital requirements, assessments) 2006: Switzerland (Swiss Solvency Test), South Korea 2007: Philippines 2008: China 2009: Malaysia 2011/12: Thailand Future: Sri Lanka, Europe (Solvency II)?

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Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore & Australia Conclusion

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Methodology Data source: ►

Singapore (RBC has been implemented 7-8 years): - MAS Insurance Returns 2005-2009

►

Malaysia (RBC recently introduced, about 2-3 years): - BNM Annual Insurance Statistics 2005-2010 - Analysis to determine pre-RBC CAR

►

Australia (RBC has been implemented 9-10 years): - APRA Half-Yearly General Insurance Bulletin

►

Focus on general insurance companies - exclude composite insurers

12

Methodology Approach: â–ş

Level of analysis: -

Asset class, liability type Split by GI companies, aggregate by insurers Pre and post RBC implementation, trends over time Approximate capital available, capital required, capital adequacy ratio

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Methodology Singapore:

Malaysia:

Australia:

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Methodology - Singapore Risk charges under Insurance (Valuation and Capital) Regulations â–ş

C1 (Insurance Risk) (~68% of total risk charge) - Claims Liability : 20% - 30% - Premium Liability : 124% - 136%

â–ş

C2 (Market, Credit, Mismatch Risks) (~31%) -

â–ş

Equity investment risk (8% specific risk, 8% general risk) Debt investment risk ( 0%-8% specific risk, 0%-12.5% general risk) Liability adjustment requirement (adjustment to interest rate) Loan investment risk (0%-12%) Property investment risk (16%) Foreign currency mismatch risk (8%) Derivative counterparty (0%-12%) Miscellaneous (0%-100%)

C3 (Concentration Risk) (~1%) 15

Methodology - Singapore Insurance policy liabilities are the major contributor to risk charge (approx. 68% of total risk charge).

Changing the mix in business written can significantly impact the risk charge required for the insurance liability: â–ş â–ş

Look for profitable classes with lower risk charge Level of (claims liability) risk charge by class: - 20% : PA, Health, Fire - 25% : Cargo, Motor, WC, Bonds, CAR&Eng - 30% : Hull, Liability, Professional indemnity

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Methodology - Malaysia Risk charges under BNM RBC Framework: ►

Credit risk charge (~5%-10% of total risk charge) - Debt obligation (counterparty) : 0% - 12% - Debt obligation (property) : 3% - 12% - Other assets : 0% - 12%

►

Market risk charge (~5%-10%) -

►

Equity : 16% - 35% Property : 0% - 20% Interest rate : 0% - 8% Currency: 8%

Insurance risk charge (~80%) - Claims liabilities : 20%-30% - Premium liabilities (75% URR) : 30%-45%

►

Operational risk charge (~5%) - Operational risk charge : 1% of total assets

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Methodology - Malaysia Insurance policy liabilities are the major contributor to risk charge (approx. 80% of total risk charge).

Changing the mix in business written can significantly impact the risk charge required for the insurance liability: ► ► ►

Context: predominantly a motor market Look for profitable classes with lower risk charge Level of (claims liability) risk charge by class: - 20% : Bonds, Fire, Motor Non-Act, Offshore, PA, Others - 25% : Cargo, CAR&Eng, Medical, Motor Act, WC&EL - 30% : Aviation, Liabilities, Hull

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Methodology - Malaysia Risk charges under BNM RBC Framework: ►

Credit risk charge (~5%-10% of total risk charge) - Debt obligation (counterparty) : 0% - 12% - Debt obligation (property) : 3% - 12% - Other assets : 0% - 12%

►

Market risk charge (~5%-10%) -

►

Equity : 16% - 35% Property : 0% - 20% Interest rate : 0% - 8% Currency: 8%

Insurance risk charge (~80%) - Claims liabilities : 20%-30% - Premium liabilities (75% URR) : 30%-45%

►

Operational risk charge (~5%) - Operational risk charge : 1% of total assets

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Methodology - Australia Risk charges under APRA GPS 110: ►

Investment risk charge (~25%) - Covers credit risk, market/mismatch risk and liquidity risk - Risk charge against each asset

►

Insurance risk charge (~45%) - Outstanding Claims : 9%-18% - Premium liabilities : 13.5%-27%

►

Concentration risk charge (~30%) - Highest aggregation of risks of an insurer: Maximum Event Retention

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Methodology - Australia Insurance policy liabilities are the main contributor to risk charge (approx. 75% of total risk charge). ► ►

45% retrospective 30% prospective

Changing the mix in business written can impact the risk charge required for the insurance liability: ► ►

Look for profitable classes with lower risk charge Level of (claims liability) risk charge by class: - 9% : Household, Motor, Travel - 11% : Fire & ISR, Marine, Aviation, Consumer Credit, Mortgage, Others - 15% : CTP, Public & product liability, Employer’s liability, Prof.

Indemnity 21

Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore & Australia Conclusion

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Results - Singapore RBC solvency capital regime implemented since 2004 Millions

Capital Adequacy Level 3,500 299%

3,000

350%

320% 288%

287%

270%

266%

300%

2,500

250%

2,000

200%

1,500

150%

1,000

100%

500

50%

-

0% 2005

2006

2007

Financial Resources

* non-composite, direct general insurers

2008 Risk Requirement

2009

2010 CAR

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Results - Singapore Spread of capitalised general insurers’ CAR:

Industry CAR 500% 450% 400% 350% 300% 250% 200% 150% 100%

Industry Median

50%

25% percentile 75% percentile

0% 2005

2006

2007

2008

2009

2010 24

Results - Singapore CAR movement of top 10 general insurers (by NWP FYE 2009): CAR Ratio for Selected General Insurers 600% 500% 400%

2005 2006 2007 2008 2009

300% 200% 100% 0% 1

2

3

4

5

6

7

8

9

10

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Results - Singapore Relationship between CAR vs. NWP (FYE 2009): CAR vs. NWP (FYE 2009) 1000% 800%

CAR

600% 400% 200% 0% 100

1,000

10,000

100,000

1,000,000

FYE 2009 NWP ($'000)

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Results - Singapore Changes in asset mix: Mix of Assets SIF + OIF

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

2005

Cash & Deposits 0%

Debt Securities 0%-20%

Loans

0%-12%

2006

2007

2008

2009

Land & Buildings

Equity Securities

Others

16%

16%

0%-100%

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Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore & Australia Conclusion

28

Results - Malaysia Table 1.9 of BNM Annual Insurance Statistics 2010:

Source: http://www.bnm.gov.my/files/publication/dgi/en/2010/1.9.pdf

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Results - Malaysia RBC Framework implemented in 2009 for conventional insurers: ►

Reliance and limitations of public data Industry estimated CAR (TCA/TCR): Millions

►

Estimated Capital Adequacy Level

9,000

300%

7,500

250% 209% 191%

6,000

194%

203% 183%

208%

187%

200% 193%

4,500

150%

3,000

TCA TCR TCA TCR CAR CAR

1,500 2004

2005

2006

2007

2008

2009

100% 50% 0%

2010

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Results - Malaysia Spread of capitalised general insurers’ estimated CAR: INDUSTRY 25%tile median 75%tile

Industry estimated CAR 400% 350% 300% 250% 200% 150% 100% 50% 0% 2004

2005

2006

2007

2008

2009

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Results - Malaysia Capital position of general insurers (from BNM annual insurance statistics 2010, i.e. FYE 2009): Estimated CAR based on BNM Annual Insurance Statistics 2010 (FYE 2009) 700% Company CAR

600% 500% 400% 300% 200% 100% 0% -100%

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Results - Malaysia Estimated CAR movement of top 10 companies (by NWP FYE 2009): Estimated CAR movement (top 10 companies*) 500% *ranked by NWP (FYE 2009)

400% 2004

2005

2006

2007

7

8

2008

2009

9

10

300% 200% 100% 0% 1

2

3

4

5

6

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Results - Malaysia Relationship between estimated CAR vs. NWP (FYE 2009):

Estimated CAR vs. NWP (FYE 2009) 600%

Estimated CAR

500% 400% 300% 200% 100% 0% 0 -100%

200,000

400,000

600,000

800,000

1,000,000

FYE 2009 NWP (RM'000) 34

Results - Malaysia Changes in asset mix: Mix of Assets

50%

2004

2005

2006

2007

2008

2009

40% 30% 20% 10% 0% Cash & FD

0%

Govt Rec'vries Bond

0%

1%

Corp Debt

Loans

Other Assets

4%

4%

8%

Prop, Inv Prop Others Foreign Plant, (incl Assets Equip Equity)

8%

16%

20%

+8%

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Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore & Australia Conclusion

36

Results - Australia

Millions

RBC solvency capital regime implemented since 2002 Capital Adequacy Level

30,000

300%

25,000

250%

20,000

200%

15,000

150%

10,000

100% TCA

5,000

TCR

50%

CAR

0 Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Source: http://www.apra.gov.au/GI/Pages/gi-half-yearly-statistics.aspx

0% Jun-10

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Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore & Australia Conclusion

38

Malaysia, Singapore & Australia Comparison of asset risk charges: Malaysia: ► Credit risk (0%-12%) ► Interest rate (0%-8%) ► Equity (16%-35%) ► Property (0%-20%) ► Currency risk (8%)

Singapore: Australia: ► Debt investment risk ► Generally similar (0%-20%) ► Each asset has a risk ► Equity (16%) charge that covers ► Property (16%) credit, market / ► Foreign asset (8%) mismatch and liquidity risk

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Malaysia, Singapore & Australia Comparison of claims liability risk charge: ► ► ►

Malaysia: (20%-30%) Singapore: (20%-30%) Australia: (9%-18%)

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Malaysia, Singapore & Australia Comparison of premium liability risk charge: ►

Malaysia: (30%-45%) - Risk factor x 75% URR E.g. UPR = RM 5m, 75% URR = RM 4m, Risk Factor = 30% 30% * RM 4m = RM 1.2m

►

Singapore: (124%-136%) - Max [0, Risk factor x 75% URR - PL ] E.g. UPR = $ 5m, 75% URR = $ 4m, Risk Factor = 130% Max [0, $ 5.2m - $ 5m] = $ 0.2m

►

Australia: (13.5%-27%) - Risk factor x Premium Liabilities E.g. UPR = $ 5m, 75% URR = $ 4m, Risk Factor = 22.5% 24% * $ 5m = $ 1.2m 41

Malaysia, Singapore & Australia Statutory CAR requirements: Malaysia:

Singapore

Australia

►

S-CAR

130%

120%

MCR (100%)

►

I-CAR:

~ 165% - 200%

Supervisory CAR (exception)

??

42

Contents

► ► ► ► ► ► ► ►

Introduction Risk Based Capital Methodology Results (Singapore) Results (Malaysia) Results (Australia) Malaysia, Singapore & Australia Conclusions

43

How to improve CAR How a company can improve their CAR: ►

Change in asset mix, or business mix (liability mix) - Moving from classes with higher risk charge to lower risk charge - Moving from long-tailed classes to short-tailed classes

► ►

Reducing business volumes Reinsurance arrangements - E.g. Loss Portfolio Transfer (immediate impact), Quota Share (gradual impact)

►

Capital injection

44

Conclusions Singapore ► ► ► ► ►

RBC introduced in 2004 Increasing trend in CAR, except for 2008 Top 10 companies have a relatively higher CAR ratio than Malaysia Main asset classes: cash & debt.

Decreasing trend in equity, increasing trend in loans and others.

45

Conclusions Malaysia ► ►

► ► ►

RBC recently introduced (2009) CAR deteriorates from 2004-2009, improves from 2009-2010, driven by the increase in TCA A quarter of general insurers quite close to S-CAR Larger companies tend to have lower CAR Increase in government bond and decrease in corporate debt proportion

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Conclusions Australia ► ► ►

RBC introduced in 2002 While Capital Required has been increasing, the CAR has been stable Evidence of companies managing their CAR

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Conclusions Conclusion of results: â–ş

Malaysia vs. Singapore vs. Australia - Differences in the CAR calculation - Different durations since implementation

Our opinions on RBC â–ş

RBC concept is positive - Helps insurers understand risks better - Creates better transparency within industry and enables comparison between jurisdictions

48

Conclusions Should not rely on the RBC requirements alone ►

►

Need to view RBC as part of a more holistic approach e.g. Stress test Risk management, reinsurance management, etc…

Actuarial community need to “step up” ►

►

Senior management are looking at RBC in more detail to better understand the risks in their businesses.

Responsible to communicate to stakeholders the risks involved in the insurance business.

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Actuarial involvement How actuaries can be more involved: ►

►

►

Under RBC statutory requirements, we need to be able to understand the risks involved, identify opportunities and communicate them to stakeholders.

Developing internal models for individual companies – to determine economic capital requirements. We can help in model building, assumption setting and communicating the uncertainty within the model.

RBC is only an initial step - Stress Tests - Capital Management Structures - Company wide Risk-Framework

►

Beyond the calculations, we can contribute in qualitative risk management (ERM).

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Thank you

►

Matthew Maguire Partner NMG Actuarial Matthew.Maguire@NMG-Group.com +65 6325 9842

►

Kelvin Hii Consultant NMG Actuarial Kelvin.Hii@NMG-Group.com +60 3 2283 6427

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