The overall goal of this three-day workshop is to provide a systematic approach to the credit risk and financial strength analysis of life and non-life insurance and reinsurance companies.
Participants will be equipped to:
• Understand the business and financial risks inherent in the life and non-life insurance and reinsurance industries
• Use qualitative and quantitative analysis and market indicators to distinguish strong and weak performers by sector and to detect early warning signals of deteriorating financial strength
• Analyse and stress test financial statements in the context of differing accounting standards and reporting practices
• Appreciate how economic, competitive and regulatory issues impact the risk profile, performance and financial health of an insurance company
• Apply a structured approach to identify key risks and mitigants when transacting with insurance and reinsurance companies, and to appreciate the main methods of capital-raising by insurers.
A structured approach to the credit analysis of insurance and reinsurance companies and an overview of how insurance companies are assessed by different market observers.
• Purpose / payback model: a structured approach to credit analysis and its applicability to insurance and reinsurance companies
• Insurance ratings: insurer financial strength and credit ratings, ratings of group members, derivation of various "issue ratings" from the issuer's default rating
• Use of debt and equity market indicators to highlight possible concerns.
Purpose and payback sources for a major insurance group; using capital market data to identify insurers which are in or out of favour with investors.
A review of the key macro-economic and sector trends which may impact adversely or favourably on certain insurers and business lines, and a look back at how the life, non-life and reinsurance sectors have previously been affected by stressed operating conditions.
Macro-economic and sector issues
• Investment cycles: stock, property and credit market levels and their volatility
• Causes of recent fluctuations in strength of the life, non-life and reinsurance sectors
• Underwriting cycles in various markets
• Mortality, morbidity and longevity trends
• Climate change; trends in insured losses from catastrophes
• Impact of inflation and cultural changes in litigation
• Non-life reserving issues: redundancy or deficiency; asbestosis and environmental liabilities
• Competitive factors: market fragmentation; penetration levels in emerging vs. mature markets.
Regulation and supervision
• Key methods of regulating insurance companies: minimum solvency margin, investment and business restrictions
• EU Solvency I and II; overview of US and Bermuda regulation; Solvency II equivalence
• Group supervision and group solvency: double leverage in financial conglomerates, capital requirements of non-insurance businesses, EU Insurance Groups Directive (IGD)
• Degree of comfort from quality of supervision
• Exercises: historic and prospective impact of the operating environment on life and non-life insurers and reinsurers; Double Leverage and weak group structures.
The derivation from the financial statements of key indicators for assessing financial strength and performance against appropriate benchmarks.
• Review of key items in financial statements
• Key accounting methods and their uses: regulatory returns, IFRS Phases I and II; GAAP and embedded value reporting
• Items subject to management discretion: write-downs, IFRS Fair Value hierarchy, temporary and permanent impairments, reserving for IBNR claims (non-life) and for investment guarantees (life).
• Investment risk: quality and liquidity of the investment portfolio, asset and liability matching, cost of investment guarantees, use of derivatives for hedging, concentration risks
• Investment returns: inclusion of realised and unrealised gains and losses, investment return requirements of the life and non-life insurance businesses
• Underwriting risk: assessing the quality and diversity of the underwriting portfolio, loss, expense and combined ratios
• Non-life reserve adequacy: loss reserve development triangles, calendar year vs. accident year analysis, survival ratios etc.
• Catastrophe and reinsurance risk: degree of reinsurance utilisation; adequacy of reinsurance cover, credit and dispute risk
• Life insurance risks: persistency, mortality and expenses.
Assessing investment and underwriting risk and performance for a composite insurance company.
• Diversity and stability of income: profitability measures and benchmarks
• Embedded value techniques for measuring and analysing life profitability, profit margins on new business, European Embedded Value (EEV) and Market-Consistent Embedded Value (MCEV), key assumptions.
• Liquidity: operating cash flow, liquidity of investments, liquidity shocks
• Capital adequacy: regulatory solvency coverage; stress testing; quality and fungibility of capital; tangible vs intangible capital; simple capital measures e.g. free asset ratio, operating leverage, asset and liability leverage
• Financial leverage, interest cover, use of hybrid capital, refinancing risk, debt servicing ability, total commitments including off-balance sheet
• Exercise: key financial indicators for strong and weak life companies.
Assessing leverage, solvency and liquidity for a composite insurance company.
Management and Early Warning Signals
A structured approach to assessing management; implications of the ownership structure; and early warning signals of credit deterioration.
• Framework for assessing management, strategy and governance risk
• Significance of ownership: mutuals, public, state and private companies.
Early warning signals
• Recognising financial and non-financial indicators of distress
• Accounting discrepancies: areas to check and questions to ask.
A strongly-rated insurer which failed. Quantitative and qualitative signs of weakness.
Review of the funding needs of insurance companies, how these might be met, and the potential risk mitigants for counterparties.
• Funding needs of insurance companies
• Hybrid capital securities: structure and type of capital issued; impact on credit standing and other concerns; regulatory and rating agency tolerances for hybrid capital
• Insurance-linked securities: securitisation of risks and of embedded value; use of Insurance SPVs and sidecars
• Capital structure: creditor vs. policyholder rights and the impact of ranking and structure
• Exercise: recovery prospects for different issues and issuers.
maximum hybrid issuance to obtain rating agency equity credit
29th - 1st
November - December
The workshop is designed for fixed income, banking, insurance and credit risk professionals. It is targeted at an intermediate level and assumes a basic understanding of accounting and insurance products. The one-day workshop Introduction to Insurance Financial Statements is designed as a preparation for those with limited experience of insurance accounts.