Title here
presented by
John Doe
Date here ASSOCIATION
SOUTH AFRICAN INSURANCE
Catastrophes and Balance Sheets
presented by
Nico Esterhuizen
Programme Manager: SAM
nico@saia.co.za
Short-term Insurance Strategic Risk Forum
June 2013
Discussion Points
• Balance sheet basics
• Regulatory Capital
– Regulatory Catastrophe Capital
• Economic Catastrophe Capital
• Risk Mitigation options for Balance sheets
• Impact of catastrophes on the solvency
position of Insurers and Reinsurers
Balance Sheet basics
• A statement of financial position:
– A picture of financial strength at a specific date
– Assets
– Liabilities
• Insurance Liabilities
• Other Liabilities
– Capital
– Accounting balance sheet
– Regulatory balance sheet
Balance Sheet basics
• Accounting Balance Sheet:
– South Africa: IFRS rules
– Insurance Liabilities are accounted for according to
IFRS 4 and other standards (IFRS 9)
– (Past) Equalization reserves for future catastrophes
and other losses. A long-term reserve that an
insurance company keeps for the purpose of a
significant unforeseen catastrophe.
Balance Sheet basics
• Regulatory Balance Sheet:
– Solvency Assessment and Management:
• Mark-to-Market / Model valuation
• Assets / Other Liabilities: Mainly IFRS
• Technical Provisions: Best estimate cash flow and
risk margin
Regulatory Catastrophe Capital
• Insurer or Reinsurer must hold regulatory
capital against insurance risk, including
catastrophes risks:
– “The risk of loss, or of adverse change in the
value of insurance liabilities, resulting from
significant uncertainty of pricing and
provisioning assumptions related to extreme
or exceptional events”
Regulatory Capital
• Regulatory Capital:
– Current:
• FSB Board Notice 169 of 2011
• Regulatory Capital Requirement includes
Insurance Risk
– Solvency Assessment and Management:
• Capital requirements includes a comprehensive
Insurance Risk charge
Regulatory Catastrophe Capital
• Solvency Assessment and Management:
– CAT risk will be calculated by using one of the
following methods:
• Standardised Scenarios
– South African exposures
• Factor Based Method
– Outside of South Africa and Miscellaneous
exposures
– The CAT risk capital requirement is calibrated
to a 1 in 200 year loss event
Regulatory Catastrophe Capital
• Solvency Assessment and Management:
– Agriculture (Fire):
• Sum Insured of the largest concentration of
exposures, across the insurer/reinsurer’s largest
footprint, for crop line of business (100%)
• Sum Insured of the largest concentration of
exposures across 26kha footprint, for forestry line
of business (100%)
• Sum Insured of the largest concentration of
exposures across the insurer/reinsurer’s largest
footprint of blood and live stock (50%)
• Reinsurance included *
Regulatory Catastrophe Capital
• Solvency Assessment and Management:
– Earthquake:
• Sum Insured for residential business by zone
(100%) Includes business interruption
• Sum Insured for commercial business by zone
(100%) Includes business interruption
• Sum Insured for Engineering property by zone
(100%) Includes all risks, etc.
• Sum Insured for fire for Motor property by zone
(100%)
• Apply formula
• Reinsurance included
Regulatory Catastrophe Capital
• Solvency Assessment and Management:
– Aviation:
• Mid-air collision of the two largest exposures
including public and private liability
• Assume a 100% loss
Economic Catastrophe Capital
• Solvency Assessment and Management:
– Own Risk and Solvency Assessment:
•
•
•
•
•
•
•
Appropriateness of scenarios
Appropriateness of factors
Demand Surge & Liquidity
Frequency of (small) losses
Severity of losses
Exposure change
Reinsurance reinstatements
Economic Catastrophe Capital
• Solvency Assessment and Management:
– Own Risk and Solvency Assessment:
•
•
•
•
•
•
Capacity of domestic reinsurers
Foreign reinsurers’ ability to pay
Diversification of lines of business
Diversification of reinsurers
Credit rating of reinsurers
Effect of (natural) disaster on financial markets and
asset value
SA QIS 2
Non-Life Underwriting Risk
Premium and
reserve risk
69%
Non-life
Catastrophe
Lapse risk
Diversification Underwriting
risk
risk
1%
41%
12%
120%
100%
80%
60%
40%
20%
0%
Premium and reserve
risk
Lapse risk
Catastrophe risk
Diversification
Non-life Underwriting
risk
Natural CAT as per SA QIS2
• Natural catastrophe exposures split into
earthquake risk, hail and horizontal scenario
risk: *
Rand (R’bn)
Earth
Hail
Horizontal
Total
Before
mitigation
R41, 446
R540
R42
R42, 028
After
mitigation
R3, 077
R36
R15
R 3, 218
% of
exposure
98.3%
1.2%
0.5%
100%
# of
insurers
26
3
2
31
* FSB Report
Mitigation options for
Balance Sheets
• Reinsurance
• Retrocessions
• Solvency Capital Capital
– For CAT event
– Thereafter likely not sufficient
• Tiering of capital: Liquidity
• Spreading of capital
• Other Reserves (No-Claim)
• National / Government arrangements
• CAT bonds
Impact of disaster on insurers
• In 2012*:
– Natural catastrophes and man-made
disasters claimed 14 000 lives
– Economic losses: $ 186 Billion
– Cost to insurers: $ 77 Billion ($71bn Nat-Cat)
– 3rd highest year since 1970
– 318 events
• 168 where natural disasters
* Swiss Sigma Report
Impact of disaster on insurers
• Africa in 2012:
– Claimed 2 000 lives
– Economic losses: $ 1.5 Billion
– Cost to insurers: $ 0.2 Billion
– Hailstorm in South Africa: $100 million
• Most expensive natural catastrophe in terms of
insured losses
– Account for 1.10% of total insurance market
Impact of disaster on insurers
• Most costly insurance losses in 2012:
Insured loss ($’m)
Event
Country
$ 35 000
Hurricane Sandy
US
$ 11 000
Drought in corn belt
US
$ 2 500
Severe storms
US (03/2012)
$ 2 500
Thunder and hail
US (04/2012)
$ 2 000
Tornadoes
US (06/2012)
$ 1 700
Thunder and hail
US (05/2012)
$ 1 622
Earthquake
Italy
$ 1 600
Hurricane Isaac
US
$ 1 000
Thunder and hail
US
$ 910
Thunder and hail
US
$ 841
Winds
Japan
Impact of disaster on insurers
• Natural catastrophes in 2012:
– Storms: $ 54, 065m
– Droughts, fire, heat waves: $ 11 524m
– Floods: $ 2, 712m
– Earthquakes: $ 1, 787m
– Hail: $ 900 m
– Cold, frost: $ 250m
Summary
• Insurers and Reinsures must hold capital
but is it enough?
• A number of mitigation options available;
is the current options sustainable?
• Is there an increase in severity and
frequency of disasters?
• No noticeable increase in reinsurance cost
currently.
+109592
Title here
presented by
John Doe
Date here
Thank you!