the concept of an insurance board of trade: basic ... · achim denkel july 20, 2012 14.038 words...
TRANSCRIPT
The Concept of an Insurance Board of Trade: Basic Structure, Market
Environment, and Feasibility Study A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Mas-ter of Law and Business (“MLB”) Degree
Achim Denkel July 20, 2012
14.038 words (excluding footnotes) Supervisor 1: Mrs. Doctor Annette Hofmann Supervisor 2: Mr. Professor Clifford Larsen
Introduction 2
Introduction
My Bachelor Thesis, written in 2011, focused on a particular type of insurance company
called Captives. These Captive Insurance Companies are per definition insurance busi-
nesses owned by companies, which have originally nothing to do with insurance. Cap-
tive Insurance Companies are usually formed as a subsidiary to insure the risks of the
parent company and thus replace the service of foreign insurance companies with their
own work. Typically, they are part of large international companies. Due to the fact that
I was very interested in these Alternative Risk Transfer during my bachelor studies, my
Professor gave me the contact to a logistics company in the Harbour of Hamburg,
whose head of accounting was thinking of founding such a company. While evaluating
the database of the company, I was surprised by the relatively high premiums that the
company was paying for few services. Presenting the final result to the Head of Insur-
ance, I was surprised again, when he said that the level of insurance premiums was jus-
tified. He was not taking any notice of the calculations, which clearly demonstrated that
he was being overcharged.
From 2006 I worked for a bank, which focused on structured securities, so-called bonds.
Those bonds had collateral invested in real estate that became the risk, because this real
estate lost their value and therefore the bonds lost their value as well.
Thinking about the contradiction between the company’s head of insurance and a ra-
tional decision, I assumed how high the return would be, if such opportunities would be
open for private investment, with regards to the fact that an insurance event would be so
unlikely to arise. Might it be possible to negotiate with a company about which part of a
risk an investor could take and what premium he could get? Could it be possible to sell
the risk on a second market as a bond?
Combining these questions and experiences, I decided to develop a business plan for an
Insurance Exchange, including the steps to a successful implementation.
Table of Contents 3
Table of Contents
Introduction ..................................................................................................................... 2
Table of Contents ............................................................................................................ 3
Register of Illustrations .................................................................................................. 5
List of Tables ................................................................................................................... 5
List of Abbreviations ...................................................................................................... 6
1 Executive Summary .................................................................................................. 7
2 Overview .................................................................................................................... 9
3 Legal Requirements ................................................................................................ 10
4 The Product ............................................................................................................. 13 4.1 Basic Product Idea ................................................................................................. 13 4.2 Construction and the Cash Flows .......................................................................... 14 4.3 Process of Structuring ............................................................................................ 15 4.4 Determination of the Interest Rate ......................................................................... 16 4.5 Target Companies .................................................................................................. 18 4.6 Issuing Process ....................................................................................................... 19 4.7 Bidding Process and Its Conditions ....................................................................... 20 4.8 Legal Structure of the Insurance Bond .................................................................. 23 4.9 Pay-Out Policy ....................................................................................................... 25
5 The Company .......................................................................................................... 28 5.1 Management And Organization ............................................................................. 28 5.2 Service Agreements ............................................................................................... 30 5.3 Procurement And Production ................................................................................ 32
6 The Markets ............................................................................................................ 35 6.1 Market of Exemplary Target Companies ............................................................... 35 6.2 Further Assumptions .............................................................................................. 39 6.3 Plausibility Check .................................................................................................. 42
7 Risk Analysis ........................................................................................................... 44
8 Financial Plan .......................................................................................................... 46
Table of Contents 4
8.1 Position and Cost Assumptions of The Financial Plan .......................................... 46 8.2 Assumptions of Acquired Companies ................................................................... 48 8.3 Profits And Losses and Cash Flows ...................................................................... 49 8.4 Net Present Value and Return On Investment ....................................................... 51 8.5 Sensitivity Analysis ............................................................................................... 52
9 Conclusion ............................................................................................................... 54
10 Appendix ................................................................................................................ 56 10.1 Financial Plan ...................................................................................................... 56 10.2 Profit And Losses and Cash Flows 2013 ............................................................. 57 10.3 Profit And Losses and Cash Flows 2014 ............................................................. 58 10.4 Profit And Losses and Cash Flows 2015 ............................................................. 59 10.5 Overview Key figures .......................................................................................... 60 10.6 Illustrations .......................................................................................................... 60 10.7 Sensitivity Analysis ............................................................................................. 62 10.8 Sensitivity Analysis: Overview Key Figures ....................................................... 63 10.9 Comparing Cash Flows Development (quarterly) ............................................... 64 10.9.1 Financial Plan ...................................................................................................... 64 10.9.2 Sensitivity Analysis ............................................................................................. 64 10.10 Comparing Net Present Values ........................................................................... 65 10.10.1 Net Present Value of the Financial Plan ......................................................... 65 10.10.2 Net Present Value of the Sensitivity Analysis ................................................ 65 10.11 Sensitivity Analysis: Illustrations ........................................................................ 65
List of Literature ........................................................................................................... 67
Register of Illustrations 5
Register of Illustrations Illustration 1, Dr. Alexander Braun, Preisfindung im Primärmarkt, 22.03.2012 ........... 13 Illustration 2, Construction of a tradable Insurance Bond .............................................. 14 Illustration 3, Structure and waterfall principles ............................................................ 15 Illustration 4, Yield calculation ...................................................................................... 17 Illustration 5, Issuing Process ......................................................................................... 20 Illustration 6, Value of Collateral Increases in 5 Years Time ........................................ 27 Illustration 7, Organization Chart ................................................................................... 30 Illustration 8, Work Flow In a Time Line ....................................................................... 32 Illustration 9, Container Throughput by Continents ....................................................... 35 Illustration 10, Statistic of Road Transport of Goods ..................................................... 40 Illustration 11, Statistic Railroad Freight Transportation Germany ............................... 41 Illustration 12, NPV assumption of the Financial Plan .................................................. 51 Illustration 13, NPV of the Sensitivity Analysis ............................................................ 53 Illustration 14, EBIT Development of the Financial Plan .............................................. 53 Illustration 15, EBIT Development of the Sensitivity Analysis ..................................... 53
List of Tables Table 4-1, Capital Structure ............................................................................................ 21 Table 6-1, Container Throughput of European Harbours in TEU .................................. 36 Table 6-2, Concrete Example for an Insurance Bond ..................................................... 39 Table 6-3, Concrete Example for the Business Model - 2 .............................................. 39 Table 8-1, Profits and Losses on a yearly basis .............................................................. 50 Table 8-2, Sensitivity Analysis of Profits and Losses .................................................... 52
List of Abbreviations 6
List of Abbreviations
BaFin Federal Financial Supervisory Authority
CAT Catastrophe Bonds
CIC Captive Insurance Company
ILS Insurance Linked Securities
FFC Freight Forwarding Company
GDV German Insurance Association
KWG Credit Service Act
NPV Net Present Value
ROL Rate On Line
SPV Special Purpose Vehicle
TEU Twenty Foot Equivalent Units
VAG Insurance Supervision Law
WpPG Securities Prospectus Act
WpHG Securities Trading Act
1 Executive Summary 7
1 Executive Summary
This business plan is written for investors that have a general interest in alternative in-
vestments and an affinity to insurance linked products. These products appear uncorre-
lated to the economy, as well as to other asset classes. As a result these products would
be of interest to retail clients or private investors, as long as the traded securities, insur-
ance bonds, which are the basic idea of a product, are in manageable sizes. They are
also of interest to institutional investors.
In order to define a market size, the market segment I will focus on is the business of
the transportation of goods, therefore harbours and their logistics and liabilities. For
instance, there are several companies settled in every harbour, whose business is to load
and discharge the cargo of the vessels. These companies are liable for damages or the
loss of goods, starting from the point of discharge until the loading of the goods on a
ship, truck or train is done. From this time on these companies are liable for the goods. I
chose this segment because it is a business, where contracts have in general a limitation
of liability and the numbers of transported goods is generally very high, which makes it
easier to deal with the necessary basis of numbers. But this doesn’t mean that other
segments of companies are not of interest, it is just a first segment of a market to focus
on.
This alternative risk transfer might be interesting for companies with very good risk
management, which means a very low damage rate. On the other hand this might be
interesting for investors that need uncorrelated asset classes for their portfolios. In cur-
rent market conditions, where interest rates of highly rated securities are decreasing and
the market of highly rated bonds decreases in general, there is an increasing necessity
for investment alternatives.
In practice this means that there will be a growing market of potential investors and risk
takers, if the opportunity to invest in such a market is given. A big advantage of this
investment opportunity will be the relative safety of the market, that such a collateral, as
I will mention, is covered congruently and that there is no market default as long as
there is no leverage included.
To create these bonds and to implement these securities in the market, there is a need to
start a business that evaluates these assets and structures these bonds. This company
1 Executive Summary 8
must have the mathematic know-how as well as of asset managers, which would be ap-
plicable in an insurance company. This thesis calculates the start up costs of this product
and discusses the possible market share and profit that such a business model might
achieve.
2 Overview 9
2 Overview
To start with an insurance business in Germany, there are defined conditions bylaw
which have to be fulfilled before receiving a start-up licence. These legal requirements
will be described precisely in the next chapter. The following step will deal with the
specification of the product’s concept which is a hybrid of insurance and a security. In
this part the product will be explained, starting with the general idea and what similari-
ties it has with other products, describing the structuring process and the definition of
potential target companies. Legal restrictions of issuing a product will be named, be-
cause these are important parts of the general structure, according to client advising.
Having mentioned that a character of exchange is implemented in this product and that
this is the unique characteristic, the bidder process will be defined and directly connect-
ed to this, it will be explained how the profit gets to the investor.
To run a proper working business it is necessary to define a schedule of responsibilities.
Therefore, the chapter ‘Company’ will describe, which parts of the management have
internal or external responsibilities, what kinds of services are done from external com-
panies and how this workflow is structured.
Before coming to a result of a possible profit, a market will first be analysed. With the
help of real figures from a logistics company in Hamburg, the European Market of lo-
gistic companies will be estimated, as an example of how its market potential could be
valued.
In a start up company risks are concomitant. In this business plan the risk will be de-
scribed in the view of potential companies, potential investors or finally risks, which are
inherent in their daily business.
Finally and before coming to a conclusion, the ‘Financial Plan’ and the ‘Sensitivity
Analysis’ will be described by reference to calculations in Excel on a three years basis.
It will be mentioned, which figures are business drivers and the result will be stress test-
ed by guessing underperformance.
The ‘Conclusion’ will contain a recommendation on what to do with the business model
and what should be done beforehand.
3 Legal Requirements 10
3 Legal Requirements
To have access to the insurance market as a risk-taker, which means to handle risk and
manage it as a company, there is a necessity to have an insurance license in almost all
countries of the world1. As this business idea is focused on starting business in Germa-
ny, there are legal articles, such as Insurance Supervision Law (VAG) §12 and §813,
which define the areas of business and point out that a written permission is required by
the Federal Authority. The German Federal Financial Supervisory Authority (BaFin)
has issued a pamphlet4, which outlines the requirements for founding an insurance com-
pany. For instance it defines the basic sum of investment and the equity, which is highly
important for investors. It also stipulates the educational requirements for the executive
and managerial positions in the company and the timeframe for the financial plan. The-
se and other predefined subjects are considered in the following chapters.
Asset management and banking, which includes trading and investing funds for inves-
tors, is regulated in the Credit Service Act (KWG) §325 that defines the permission to
1 Fläming (2007) 2 Supervision requiring businesses, and organizations that have the operation of insurance business and
are not carriers of the Social Security (Insurance Companies), 3 Law and financial supervision 4 Merkblatt - Hinweise für die Zulassung von Versicherungs- Aktiengesellschaften zum Betrieb der
Schaden- und Unfallversicherung in der Bundesrepublik Deutschland 5 (1) Any person intending to engage in domestic commercial basis or on a scale which requires a com-
mercially organized business, banking or financial services undertakings, requires written permission from the Federal Agency, § 37 paragraph 4 of the Administrative Procedure Act apply. The permit application must include, first suitable proof of funds needed for business operations; Second the names of the managers; Third the information necessary for assessing the reliability of the applicant and referred to in § 1, paragraph 2 sentence 1; 4th the information needed to assess the management of the Institute for the required professional competence of the owner and referred to in §1, paragraph 2 sentence 1;5th a viable business plan, setting out the nature of the planned business, the organizational structure and the proposed internal control procedures of the institution; 6th if kept in the institution holdings: a) the names of the holders of significant shareholdings, b) the amounts of those holdings, c) for assessing the reliability of these owners or legal representatives or the general partners the neces-sary information, d) provided that such owners have set up accounts, the accounts of the last three fis-cal years, along with test reports by independent auditors, if any, create, and e) if they belong to a group owner, an indication of the group structure and, if such accounts are set up, the consolidated fi-nancial statements for the past three fiscal years, along with test reports by independent auditors, if any, to be permitted 7th the statement of facts that indicate a close connection between the institution and other natural persons or other entities 8th to specify the members of the administrative or supervi-sory body in addition to the assessment of their reliability and expertise necessary facts. The ads are submitted in accordance with clause 2 and required documents shall be specified by regu-lation pursuant to § 24 paragraph 4. The obligations pursuant to sentence 2 No. 6, letter d and e are not for financial services institutions. (1a) Any person who wants to acquire or dispose of in addition to the conduct banking business or the provision of financial services within the meaning of § 1, para-
3 Legal Requirements 11
undertake such a business. Regarding the diversified structured holding companies, e.g.
Allianz6, Ergo7 et cetera, these companies have all required licences to start with a busi-
ness, on which their business plan focus. Other necessities like style and offerings of
securities for institutional and private clients are defined in the Securities Prospectus
Act (WpPG). This will be described later on, when the chapters focus on the product
description.
As the business rules and founding conditions are clearly defined by law and authori-
ties, and given the restriction of words and time in this master thesis, a detailed descrip-
tion of founding procedures of the company with timeframes and authority procedures
will not be included in this business plan. This business plan will focus on the product
structure, the capital investment and the financial plan which are the relevant parts of
starting a business.
This plan concentrates on founding a direct insurer and not on founding a bank even
when it deals with issuing bonds. In chapter ‘The Product’ it will be explained how a
similar product, a Catastrophe Bond (CAT bond) is issued, and that these bonds are not
debt of the insurance company, but have the character of reinsurance and therefore start-
ing a banking business is not necessary.
As a legal form, direct insurance companies in Germany are public companies, includ-
ing the European Company (SE-Societas Europaea), a mutual insurance, public bodies
graph 1, sentence 2 numbers 1 to 5 and 11 positions in financial instruments on own account or, with-out fulfilling the conditions for proprietary trading (proprietary trading) , this also requires the written permission of the Federal Agency. Paragraph 1, sentence 1, clause 2, and paragraphs 2, 4 and 5, and § § 33 to 38 are applied accordingly. (2) The Supervisory Authority may grant permission subject to conditions which must remain within the framework of the objective purpose of this Act. You can limit the authorization to individual banking or financial services. (3) Before granting permission, the federal agency has to listen to the eligible institution protection scheme. (3) The granting of the license is the institution, if it is to pay contributions pursuant to § 8 paragraph 1 of the Deposit Guarantee and Investor Compensation Act, report the compensation scheme to which the institution is assigned. (4) The Federal Agency shall make the granting of per-mission in the Federal Register. (5) The Federal Agency shall maintain on its website an institution register in which all domestic institutions to which a permit under paragraph 1, was issued in conjunc-tion with § 53 para 1 and 2, with the date of issuance and the scope of the license and, where applica-ble, the date of lapse or revocation of the license has entered. The Federal Ministry of Finance may, by ordinance not requiring the consent of the Bundesrat issue more detailed rules on the content of the register and the duty to cooperate in the conduct of the institutions of the register. (6) Where a payment institution has a license pursuant to § 8 paragraph 1 of the Payment Services Oversight Act or an electronic money institution has a license pursuant to § 8 paragraph 1 of the Pay-ment Services Oversight Act has been granted and this additional financial services as defined in § 1, paragraph 1a sentence 2 no . 9 yields, demand payment of this institution or any e-money institution license according to paragraph 1 The duty of disclosure pursuant to § 14 paragraph 1 is fulfilled and apply to § 14 para 2 to 4.
6 Allianz Bank 7 UniCredit Bank
3 Legal Requirements 12
or statutory corporations8. In this case, the legal form of a stock corporation is chosen,
so all mentioned requirements of an insurance company have to be fulfilled.
8 Reinhard, Frank (1999, S.38)
4 The Product 13
4 The Product
4.1 Basic Product Idea
This product idea is a type of financial instrument with which companies that have a
certain risk cover their losses in the case of a risk event. Today’s most famous securities
in this context are CAT bonds. “The CAT, […], is a new type of financial instrument
designed to raise money in the event of a major catastrophe, which is usually defined as
an earthquake, hurricane, or windstorm. If the issuer suffers a loss from a predefined
catastrophe, then its obligation to repay the interest or principal is either deferred or
cancelled. Some CAT bonds are indemnity-based, which means that they pay out based
on actual claims stemming from the catastrophe; these bonds are considered more risky
for bond purchasers, since a wide variety of claims may be brought.”9 These bonds are
issued by reinsurance companies and mostly bought by hedge funds or pension funds.
These bonds are generally not accessible to other investors nor are they traded on a
bond exchange. The construction of such bonds is better described with a graph.
Illustration 1, Dr. Alexander Braun, Preisfindung im Primärmarkt, 22.03.2012
One example of an asset manager that is managing CAT bonds for public funds is Sec-
quaero Advisors AG from Switzerland. Secquaero targets the German Market of private
9 Bragg (2010)
4 The Product 14
investors with public funds, which have CAT bonds as an underlying asset and addi-
tionally this company is seeking other insurance linked securities to invest in.10
The construction of the CAT bonds this company focuses on is the basis of the con-
struction of the Insurance Securities, which contains two important points. First, there
would be no Swap Party as a counterpart that might have the likelihood of default in the
case of any crises. Second, the other counterpart is the issuer of the bond.
4.2 Construction and the Cash Flows
Illustration 2, Construction of a tradable Insurance Bond
The illustration above shows the cash flows of an insurance bond and its protective con-
struction in an abstraction. The issuer offers an SPV/insurance bond, which is bought by
an investor. The investor may pay a price close to par price (face value)11 of the bond on
the day of issuance and is entitled to receive the interest payments provided by the SPV,
which is a combination of interest paid by the issuer and an interest gained from the
market. At the same time, the issuer receives its payments from the company that ac-
quires coverage for its risks. In case of an insured event occurring, the collateral covers
the loss.
This construction has different advantages for the investor and for the issuer. Firstly, the
investor invests in a company that is not linked to the business of the Issuer. This means 10 Secquaero Advisors AG, http://secquaero.com/investment-management/ 11 http://www.investopedia.com/terms/p/parvalue.asp#axzz20IeJbVbM 11.07.12 10:51
4 The Product 15
that any business risk of the issuer doesn’t have any impact on the SPV12/insurance
bond. Secondly, the Issuer doesn’t have any risk caused by the Investor in terms of
bankruptcy. Thirdly, the SPV has a collateral that is purely monetary allocated and has
no risk of valuation. Furthermore, the Investor may trade this insurance bond on a sec-
ondary market, for a certain market price. In the end, the investor is compensated in the
amount of the risk free rate and additionally for the added specific risk associated with
the bond.
Regarding these options the question of the procedural structuring arises, which is dis-
cussed hereinafter.
4.3 Process of Structuring
As mentioned before, the Issuer is the company that is responsible for the majority of
the process of issuing. The Issuer structures the bond with terms, conditions, and inter-
est.
Illustration 3, Structure and waterfall principles
12 Lakdawalla, D., Zanjani, G.(2012)
4 The Product 16
The risk that needs to be covered by a company has to be evaluated by the issuer. The
issuer must determine a reasonable risk premium or interest rate that has to be paid by
the company, which needs risk coverage (This process will be described in the next
chapter). It divides tranches with a higher probability to default and a lower probability
to default. The tranche with the highest likelihood of default is called the ‘first –to –
default’ tranche.
In the graph above I divided the risk into three tranches, but the more coverage is need-
ed, the more tranches may be created. In the illustration above there are tranches of,
‘first – to – default’, ‘second – to – default’ and ‘last – to – default’, depending on the
possible defaults of a tranche that might occur for an investor in case of an insured
event. To motivate investors also to sign for tranches with a higher likelihood to default,
the risk takers get a higher percentage of the risk premium or interest in total. In the
example they get 50% of the interest for the ‘first – to – default’ tranche, in cause of the
highest likelihood to default, whereas the other tranches are already pleased with their
payments. The ‘second – to – default’ tranche is assigned with 30% of the interest and
the ‘last – to – default’ tranche with 20%. This concept is called the Waterfall Princi-
ple13.
4.4 Determination of the Interest Rate
The rate of interest depends on the collateral levels of issuer. In the case of credit, the
interest rate is determined by the risk of default. “First, default on a loan triggers the
loss of collateral value to the borrower, where this value is stochastic at the time when
the loan is negotiated. The assignment of collateral provides incentive for the borrower
to repay the loan. Second, default implies that the property right to the collateral is
transferred to the lender. […] Interest rates charged on loans will reflect these losses-
appropriately weighted by the probability of default- and the expected interest charge
paid by the borrower will be correspondingly above the underlying, transaction –cost–
free rate of return. […]”14 In the relatively new security segment of CAT Bonds, a rela-
tively similar structure is used. The important difference for those Bonds is that the in-
terest rate depends on the likelihood that the insured event occurs. “When dividing the
13http://www.direktbroker.de/unser-service/boersenlexikon/wasserfall-prinzip-waterfall-principle--
/16333384/W 10.07.12 17:32 14 Barro, RJ (1976)
4 The Product 17
premiums by the insured limit one receives the number Rate on Line (ROL). The ROL
is paid to the investors by the SPV and determines the price of the CAT Bond. In litera-
ture the ROL, which is also called spread, is often referred to as the price of a CAT
Bond. This price is paid to investors in addition to the risk free rate.”15 The ROL (risk
premium) can be calculated with a method that is described by Kreps [1999] or Kreps
and Major [2002].
Kreps [1999]: Yield= [EL] + γ*[StdDev] =approx. [EL] + γ * [EL] 0,5
Kreps and Major [2002]: Yield= γ* [EL]^α
Illustration 4, Yield calculation
In these formulas, EL is the “Expected Loss” and “γ” the Cost of Capital times Capital
Density. α, in this context, is freely chosen. For Insurance linked securities (ILS), or
CAT Bonds, there is a very good database in general. The data is taken from market
makers, insurance brokers or from the Chicago Climate Exchange.16
To have an adequate database is one of the basic necessities for the business model,
when targeting companies which are searching for indemnity insurance. The company
that needs this risk coverage has to store the historical information. Most of the time
those companies have this information readily available in their own legal and insurance
departments. Because their liabilities to customers are relatively high, a proper regula-
tion of insurance cases is very important for the ongoing business and negotiations with
insurance companies about insurance premiums are quite normal. Therefore it is helpful
for them to know about their damage events. Without having these databases, a negotia-
tion would not be successful, because the yield could not be calculated17.
Even though this master thesis is mainly focused on indemnity insurance in the approx-
imations of the business model, there are other sectors where such coverage might be
highly interesting. Assuming that a new product of the pharmaceutical industry comes
on the market, in a sector of medicine of which insurance companies have no historical
database. The insurance premium could just be an assumption. The same situation is set
for the insurance bond.
15 Galeotti, M et al (2008) 16 Jaeger, L et al (2010) 17 Information taken from HHLA
4 The Product 18
A smaller sector, albeit an interesting one is the art world. Collectors, galleries or muse-
um could profit from art lovers, which are willing to deposit money in a collateral that is
only settled for damages. This yield would be purely negotiated.
4.5 Target Companies
As mentioned before, the target companies I have chosen are based on existing data
from my previously written bachelor thesis and I am using those here to find a concrete
solution. Although other sectors would be equally interesting, it would be too time con-
suming for this master thesis in terms of describing these sectors consequently in every
single step from this chapter to the chapter ‘Market’. So the descriptions in every fol-
lowing chapter are examples to demonstrate how to find a solution for a sector market.
To calculate the likelihood of risk for indemnity insurance, it is necessary to have a
minimum size of insured events. A solid base to calculate the mean and the variance,
must have a time period of about 10 years or a number of insured events that are at least
4 million per year in a time period of 5 years.18 The companies that qualify for this con-
cept of alternative risk transfer in case of indemnity insurance are therefore companies
that have insured events which have a similar range in size and value.
For example freight-forwarding companies (FFC) in harbours are highly interesting as a
business sector. These FFC’s are based all over the world and have similar liabilities,
because they deal with approximately identical sizes and values of containers. In addi-
tion, the shipping business in which they are contracting, is a very well regulated one
with similar contracts used all over the globe, known as a common agreements in the
‘Hague Visby Rules’19. Equally interesting are all other freight-forwarding companies,
such as DHL, UPS, and so on.
As mentioned before, this business model uses a database that I worked with previously
in a bachelor thesis, namely the database of the Hamburger Harbour and Logistic AG.
This company traded in average, in the last 5 years, about 5,500,000 Twenty Equivalent
Foot Units (TEU) per year. Its contract with its insurance company says that HHLA has
to cover damages up to EUR 1,950,00020 per year on its own. In 5 years time it has had
18 Information taken from Prof. Martin Nell in 2011 19 limited liabilty rules national and international 20 HHLA ExcelTablen
4 The Product 19
damages covered by the insurance of about EUR 200,00021 spread over 5 years and
HHLA paid EUR 1,500,00022 insurance fees. The maximum payment of the insurance
HHLA could get is about EUR 2,900,000. Let´s assume this would be an insurance
bond with an issuing size of EUR 2,900,000 for 5 years, than the EUR 1,500,000 would
be the interest of about 10.3 % the HHLA would have to pay. If the amount of money
that is paid as insurance benefit were deducted from the insurance premium, the interest
would be about EUR 1,300,000. This amount of money spread over 5 years, would be
EUR 260,000 per year with an interest rate of about 8,9 %.
4.6 Issuing Process
The Issuer is the relevant instance that analyses databases and calculates all necessary
figures. These are the EL= Expected Loss, the StdDev = Standard Deviation and the
yield. Assuming that the calculated yield is a guideline for the upcoming Issuing Pro-
cess, the risk management of a company, which should provide for occurring insured
events, will be nearly equally important for the expected losses. The risk management
of a company has consequently an impact on the yield calculation, if the restrictions of
the risk management have a replicable impact on the risk likelihood. The Issuer is there-
fore a consultant of risk management as well for the company in terms of implementing
risk procedures or risk measures. This stage of the process is called ‘Evaluation’ in the
illustrations below.
Before the issuance of the insurance bond starts, the amount of money that is needed to
cover the risk, the collateral, will be defined on amount of money invested. Then a bid-
der process will be launched to determine the different tranches of bonds with their in-
terest rates. This bidder process and the applicable conditions will be described in the
next chapter. After the bidder process is successfully finished, the issuing procedure of
the bonds is implemented. The following graph illustrates the Process.
21 ebenda 22 ebenda
4 The Product 20
Illustration 5, Issuing Process
All terms and conditions will be fixed and written in the bond prospect. After the collat-
eral is sold in different risk tranches, the bonds are separately tradable either over the
counter23 or on an exchange. To make the trade easier the Issuer could also act as an
exchange for those bonds, because it gets information of potential bidders or sellers of
bonds. Furthermore it is necessary to have complete information about the companies
that covered their risk, to apply a realistic price for the bond in case it is traded the first
time or nobody traded it for a long period of time.
4.7 Bidding Process and Its Conditions
To explain the concept we assume that a company would have a risk to cover of about
EUR 10,000,000 and pays an insurance premium for this risk of about EUR 1,000,000
per year. After 5 years the contract is finished and has to be negotiated again, if no event
has occurred. To explain it in conditions of the security market, this would mean that an
investor bought a EUR 10,000,000 bond. This bond would have had an interest rate of
10% and after 5 years this bond would have been paid back.
23 A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX,
etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as op-posed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.
http://www.investopedia.com/terms/o/otc.asp#ixzz20JTQCarh 11.07.12 13:37
4 The Product 21
The next step is to assume that the interest rate that was paid might have been a little bit
lower assuming something would have happened that might have influenced the pay-out
requirements. Accordingly to this fact the investor would still be interested to invest, but
perhaps only half as much money as before and still he would have liked to have a good
secured interest, about 6%. For the reason that the investor would not have 10%, but
6%, he gets as compensation the last to default tranche.
Two other investors would share the rest of the capital collateral that is needed. The first
one might be willing to reduce his right to interest on 7,5% and the last one might be
fine to have 11%, because his tranche is first to default. So the calculation is as follows.
Capital Structure Annual Interest
Standard Costs 10,000,000 EUR times 10 % 1,000,000 EUR
New Capital Structure
5,000,000 EUR times 6% 300,000 EUR
2,500,000 EUR times 7,5% 187,500 EUR
2,500,000 EUR times 11% 275,000 EUR
Structured Costs 10,000.000 EUR 762,500 EUR
Table 4-1, Capital Structure
Comparing the ‘Structured Costs’ with the ‘Standard Costs’ in the table above, it is ob-
vious that the costs of the structured collateral are much lower. The result would be sav-
ings of (EUR 1,000,000 – EUR 762,500) EUR 237.500 per year. To make this structure
applicable, conditions must be defined, which clarify the conditions for the bidders,
specifically the investors.
The first important figure in the bidding process is the yield, which makes the bench-
mark for the potential investors. It will be calculated, as mentioned in the case of the
indemnity insurance, or assumed, in case of insuring a risk without any historical data,
as an artwork.
The second thing is to know about the capital that is needed. The following paragraphs
might be the conditions for the investors.
Every investor needs to know the following preconditions to make his offer.
4 The Product 22
1. Every bidder has to define an amount of capital that can be used as a part of the
collateral.
2. The amount of capital should be between 10% and 50% of the capital that is
needed.
3. The bidder has to define an interest rate that he/she wants to get.
4. The bidder with the lowest offer of interest rate gets the tranche with the lowest
risk. The next bidder that is closest to the first interest rate gets the next tranche
and this system stays in place for the next tranches.
5. If two bidders offer the same interest rate, than the bidder with the bigger size of
capital gets the first tranche, the other one comes afterwards.
6. If two bidders offer the same interest rate and the same capital volume, than the
bidder who came first gets the first tranche.
7. If two bidders offer the same interest rate and the same capital volume at the
same time, the tranche will be equally divided.
“In principle, individuals or firms with cash surpluses […]”24 could be bidders. “But it
can be cheaper and more convenient to use a financial intermediary, such as a bank, to
link up the borrower and”25 the Issuer. The idea that is behind this statement is that those
financial intermediaries have more experience with investing money, but private inves-
tors could participate in the return of the risk coverage. The solution to this problem is
that financial intermediaries could be investors and acting as well as vendors to distrib-
ute such securities to their clients. The private investors should then be accompanied by
their banks during the bidding process. The financial intermediaries would behave like a
pool of investors and would have attractive products for their client with low correlation
to the stock market, similar to CAT Bonds26. That leads to the question how the insur-
ance bonds should be structured.
24 Brealey-Meyers (2003) 25 ebenda 26 Constantin, Laura-Gabriela (2011)
4 The Product 23
4.8 Legal Structure of the Insurance Bond
According to the fact that the general structure of a bond is determined by the likelihood
of default, the question, which must be answered, is for which buyers is which type of
bond structured. The definition of the tranches of ‘last – to – default’, ‘second – to –
default’ and ‘first – to – default’ is just one example of a structured bond. Depending on
the size of the collateral, there might be more tranches. Related to the potential buyers,
it is the idea of legal restrictions that private persons with a lower level of financial
knowledge need more protection and more information than institutional or experienced
clients.
The “Official Journal of the European Union” therefore determines the legal require-
ments of securities, for the group of institutional clients, who are potentially aware of
risks and of private clients that need risk protection.
The “ANNEX IX-Minimum disclosure requirements for debt and derivate securities reg-
istration document”27 determines the legal requirements for “debt and derivative securi-
ties with a denomination per unit of at least EUR 50.000”28 This ANNEX defines, which
information should be given about the responsible person, the statutory auditors, the risk
factors, the necessary information about the business overview, the organization struc-
ture, the trend information, the profit forecasts or estimates, the administrative, man-
agement and supervisory bodies, the major shareholders, the financial information con-
cerning the issuer´s assets and liabilities, material contracts, the third party information
and statement by experts and declarations of any interest and documents on display.29
A minimum size of at least EUR 50.000 is a trading amount for professional clients
whose meaning is defined in WpHG Section 31a, but also private clients may be poten-
tial buyers of those bonds, too. Those are called professional clients and defined in
WpHG Section 31a (7) and should have experienced knowledge and expertise to make
an investment decision.
These criteria for a professional clients are:
“(7) A retail client may be categorised as professional client upon request or if the in-
vestment services enterprises so determines. Prior to changing the categorisation, the
27 16.06.2004 L215/56 Official Journal of the European Union 28 ebenda 29 ebenda
4 The Product 24
investment services enterprise is required to conduct an assessment as to whether the
client possesses the experience, knowledge and expertise to make an investment deci-
sion in general or with respect to a specific type of transaction, and if he is capable of
adequately assessing the risks involved. A change in the categorisation shall only be
considered if the retail client satisfies, as a minimum, two of the following three criteria:
1. The client has carried out transactions, in significant size, on the market on which the
financial instruments are traded for which he is intended to be categorised as profes-
sional client, at an average frequency of 10 per quarter over the previous year;
2. The client’s cash deposits and financial instruments exceed EUR 500,000;
3. The client has worked in the capital market for at least one year in a professional po-
sition which requires knowledge of the transactions, investment services and ancillary
services envisaged.”30 If these preconditions are not applicable to the potential clients
than additional information are required as follows.
The “ANNEX IV-Minimum disclosure requirements for debt and derivate securities reg-
istration document”31 determines the legal requirements for “debt and derivative securi-
ties with a denomination per unit of less than EUR 50.000”32. This ANNEX clarifies,
which information should be given about, the selected financial information, about the
issuer, the board practices, the financial information concerning the issuer´s assets and
liabilities, financial position and profit and losses, additional information, material con-
tracts, the third party information and statement by experts and declarations of any in-
terest and documents on display.33
As these insurance bonds are collateralized with capital of liquid assets or cash, the
ANNEX VIII defines that those securities have to have a “minimum disclosure require-
ments for asset-backed securities additional building block.”34 The required information
relates to the security, the underlying assets, the structure and cash flow and the post
issuing reporting.35
30 WpHG Section 31a (7) 31 16.06.2004 L215/38 Official Journal of the European Union 32 ebenda 33 ebenda 34 16.06.2004 L215/53 Official Journal of the European Union 35 ebenda
4 The Product 25
Given the fact that the determined tranches of bonds have different likelihoods to de-
fault, it would be helpful for the general business to develop for the first two tranches
bonds for retail clients with a minimum size of EUR 1,000 and the tranche with the
highest likelihood to default, should only be structured for institutional clients, because
those are per legal definition more aware of risk than retail clients.
4.9 Pay-Out Policy
The motivation for potential buyers will be the safety and the liquidity of the product.
Hence, if the safety decrease, the return must increase as defined before. Equally im-
portant to the measures of how high the return will be, it is to clarify how the investors
will get it. To make the product attractive for potential clients the pay-out policy should
differ, depending on the default probability of the tranches.
So, the tranche with the lowest risk of default should be a straight bond. “A straight
bond is the most basic of debt investments. It is also known as a plain vanilla bond, be-
cause there are no additional features that other bonds might have. For example, some
bonds can be converted into shares of common stock. As with all bonds there is default
risk, which is the risk that the company could go bankrupt and no longer honour its debt
obligations.“36 Different from the risk of bankruptcy37, the insurance bond has a risk of
an insured event that occurs and there is no possibility to issue convertibles.
But those bonds have a straight pay-out policy that is understandable for any customer.
It should have a maturity of 5 years time, so that a target company needs not to renego-
tiate conditions in between these 5 years.
The tranche with the second highest default risk should be a zero coupon bond. “Some
zero-coupon bonds are issued as such, while others are bonds that have been stripped of
their coupons by a financial institution and then retranched as zero-coupon
bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to
fluctuate in price much more than coupon bonds.“38 The advantage for the buyer would 36 http://www.investopedia.com/terms/s/straight-bond.asp#ixzz1yjkMAFj6 24.06.12 20:15 37 Weinstein, Mark (1981) 38 http://www.investopedia.com/terms/z/zero-couponbond.asp#ixzz1yjm9utDj 24.06.12 20:30
4 The Product 26
be that this bond is only tax relevant when it comes to maturity. An advantage for the
insurance coverage would be that in case of an insurance event, which might be so im-
mense that this capital would also be demanded, the last-to-default bond has an addi-
tional buffer, because the interest would be still part of the zero-coupon bond’s spot
price .
The tranche with the highest risk to default should only be offered to professional or
institutional clients as a perpetual bond. “Since perpetual bond payments are similar to
stock dividend payments - as they both offer some sort of return for an indefinite period
of time - it is logical that they would be priced the same way. The price of a perpetual
bond is therefore the fixed interest payment, or coupon amount, divided by some con-
stant discount rate, which represents the speed at which money loses value over time
(partly because of inflation). The discount rate denominator reduces the real value
of the nominally fixed coupon amounts over time, eventually making this value equal to
zero. As such, perpetual bonds, even though they pay interest forever, can be assigned a
finite value, which in turn represents their price.”39 Even though this kind of bond is
quietly complex, these bonds would be issued with an additional condition, for instance
‘The interest payments would only be paid if there is a profit of this tranche due to the
fact that there has no insured event occurred. In case an insured event would occur, the
interest would not be paid, as long as the described capital of the bond would have been
recovered.’
39 http://www.investopedia.com/terms/p/perpetualbond.asp#ixzz1yjp1eOEh 24.06.12
4 The Product 27
Illustration 6, Value of Collateral Increases in 5 Years Time
The value of the total collateral would increase over time because of the zero bonds, and
therefore the coverage of the risk would increase as well. As a standardized procedure a
potential increase of the ‘Expected Loss’ would be taken into account.
After the different bonds are issued, they would be tradable. Depending on their size
and the demand on the market for those bonds, they might be traded ‘Over the Counter’.
“Instruments such as bonds do not trade on a formal exchange and are, therefore, al-
so considered OTC securities. Investment banks that make markets for specific issues
trade most debt instruments. If an investor wants to buy or sell a bond, he or she
must call the bank that makes the market in that bond and asks for quotes.”40 In Germa-
ny there is an exchange specialized bond trading, which is called “boerse-stuttgart”41,
where it might be possible to trade those bonds for private investors, if these types of
securities would be established.
40 http://www.investopedia.com/terms/o/otc.asp#ixzz1ynP0dAiT 25.06.12 11:32 41 www.boerse-stuttgart.de
5 The Company 28
5 The Company
According to the legal requirements mentioned above, which convey that the company
has to be an insurance company, this chapter focuses on the people who are part of the
working process.42 Given the fact that a general hand-out of the German Authority BaF-
in defines the people that have to be involved in the procedure of founding an insurance
company, this business model applies the same standard and uses these types of em-
ployees as a guideline. The following descriptions of personnel are the minimum re-
quirement to run this business.
5.1 Management And Organization
The board members or the heads of the department should be two people. One of these
people should be responsible for the contact to companies and also be responsible for all
external affairs. His/her responsibilities are
1. Marketing and advertisement
42 BaFin: Information Sheet - Information for the approval of insurance
Corporations to operate the property and Accident insurance in the Federal Republic of Germany - 01.Nov.2011
3.Personnel a)Board The board must consist of at least two members (§ § 156, 34 p.1 VAG, in accordance with § 7 para-graph 1 of the VAG (reliable and technically appropriate) must be qualified (§ 5 para 5 VAG No.5). The qualifications of board members has to be demonstrated to the BaFin in a personally signed CV without any gaps, that shall also include information about family relationships with members of the Supervisory Board (see in detail and further information: R 6/97, VerBAV 1997, 311 f). Furthermore, the division of responsibilities has to be documented. Unless a person is appointed as the director which is alrady boardmember of two insurance compa-nies, there has to be an authorization request. (§ 7 para 5 and 6 ISA; see leaflet from Leader to multi-ple mandates 05/02/2011). b) Responsible Actuary Where, pursuant to § § 11d and 11e VAG, one person has to be appointed as an actuary (accident in-surance with refunding of the premium, the calculation of pensions provisions in general liability in-surance, Motor vehicle liability insurance, the Motor Vehicle Accident insurance and personal acci-dent insurance refunding without the premium), which are for assessing the reliability and profession-al competence (§ 11a paragraph 1 VAG) to make the information required (§ 5 para 5 VAG No.7, see R 3/95, VerBAV 1995, 311 f). c) Other qualified personnel Other qualified personnel (internal and external service) must be available. Detailed informations are required by the BaFin (number and qualification). d) Claims Representative If the motor liability insurance (No. 10 of Appendix A to ISA) is to be used are the Claims representative in accordance. § 7b VAG notify (§ 5 para 5 VAG No.8).
5 The Company 29
2. Contacting target companies to present the business model
3. Negotiating the consulting contract and advising the client in the risk manage-
ment idea
4. Collecting information for the insurance database model
5. Informing the client about internal progress (customer oriented)
6. Presenting the results to the client
7. Hiring people for acquisition of new clients and advisors
8. Closing the yearly accounts (in case of a separately founded company)
The second board member or head of this department should be responsible for all in-
ternal issues. He/ She should be responsible for
1. Supporting the external affairs
2. Administrating the clients database
3. Stating accounts,
4. Controlling the cash flows
5. Structuring the internal workflow
6. Vetoing in case of in clients acquisitions
7. Hiring people for internal affairs
8. Preparing the closing procedure for the annual closure (in case of a separately
founded company)
It is not necessary to have an actuary from the legal side and at such an early stage of
the business model, but it is stringently required to have a person that is responsible for
all mathematic models and therefore the plausibility of the recommendation of the
bond’s yield. His/ her specific skills should be
1. A final degree in math or mathematical economics
2. Having business experience of at least 3 years
3. Personal commitment to independently working procedures
4. Leadership skills
5 The Company 30
Apart from this specialized group of people, who will be the business drivers, other
work force will be needed to fulfil the daily business. The business model needs a cus-
tomer relationship manager (CRM), who takes phone calls from customers and who
answers their questions. The CRM is also responsible for the support of the external
affairs with paperwork and responds to questions pertaining to potential contract part-
ners. This position will be multiplied along with an increasing business. A second posi-
tion should be held by an insurance broker, who focuses on details of the insurance con-
tracts with the target companies or negotiate the issuing procedure with the SPV Com-
pany. Those people should be responsible for all internal workflows, which start at the
time of a signed consulting contract and ends with the issuing of the bonds. From this
point onwards a banker will be needed, who will be responsible for all selling matters of
the bond and trading issues afterwards. The illustration below shows the hierarchy in
the company, but disregards the headcount for each position. This will be considered in
the ‘Financial Plan’.
Illustration 7, Organization Chart
5.2 Service Agreements
To prevent the company from having high fixed costs43 in the early stage of the business
model, service agreements should be arranged, especially for telecommunication hard-
43 A cost that does not change with an increase or decrease in the amount of goods or services produced.
Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost. http://www.investopedia.com/terms/f/fixedcost.asp#ixzz20UaKd41n 13.07.2012 11:15
5 The Company 31
ware, computers, servers, offices, mail handling and processing of the applications for
insurance. Of importance are also contracts with legal supervisors, auditors (in case of a
separately founded business model), and technical support for calculation systems.
Those service agreements have to be declared to the regulator/authority (BaFin).44
Contracting parties have to be informed as well about the service agreements, because
their data, according to agreements with server providers, would be stored in a different
location and handled by a third party.45 This fact might be a point especially to discuss
with large target companies, and such as, important customers. In holding companies, as
large insurance companies usually are46, those issues could be avoided early on. There-
fore it is a good alternative to start with this business model as a part of an existing in-
surance company. Legal constructions in a holding company, as with most insurance
companies, might lead to the same required information standards, but the database
would be well kept in the same company.
44BaFin: Information Sheet – Information for the approval of insurance
corporations to operate the property and accident insurance in the Federal Republic of Germany - 01.Nov.2011
5. Outsourcing and service contracts Presentation of the contracts necessary by § 5 paragraph 3 No.4 VAG for approval. The contracts must fufil the requirements of R 3/2009 Section 8th The need for a contractual agreement Information and referral rights of an external insurance company in outsourcing and Service contracts state expressly (see § 64a para 4 VAG).
45 Data protection act 46 Allianz SE (Holding), ERGO Holding, Talanx Holding
5 The Company 32
5.3 Procurement And Production
Illustration 8, Work Flow In a Time Line
Having already explained the internal part of the company, this chapter will now focus
on the external parts. As mentioned before, one sector of target companies might be
exemplary logistic companies.
The acquisition of these companies is therefore, as long as those companies have an
annual meeting with their insurance advisors, quite unsophisticated, which is based on
the fact that these meetings are about price adjustment.47 Assuming that the business
model might allocate the best price for the target company, this will be the initial argu-
ment to get an appointment. The bigger the company is, the more important is the rele-
vance of costs, because stakeholders48 of a company want to participate in the profit the
company makes in their specific ways, instead of the company paying other unneces-
sary costs with it. Such big companies are interconnected in organizations. Communi-
cating that insurance is an investment in safeness to preserve the company for unex-
pected losses and this investment should be the best alternative for the company, which
47 Taken from HHLA personal 48 Attkinson, A. A. (1997)
5 The Company 33
saves money when signing an insurance contract. Hence, using a “significant relation
between the investment-based measures of earnings quality and earnings persistence“49.
The bigger the company is, the more relevant are the costs, because stakeholders50 of a
company participate from the profit the company makes in their specific ways, instead
the company pays avoidable costs with it.
In most cities the chamber of commerce is a very good starting point to present the
business idea, because those organizations have close relationships to large companies
which this sector of the business model is focussing on. Even though chambers of
commerce are institutions focused on their domicile, they network as well with other
chambers of commerce all over the world (Außenhandelskammer).51
“Your Chamber of Commerce functions through the working committees of the organi-
zation. Money, planning, inspiration, and guidance are useless unless the members work
vigorously on the committee of their choice. The goal of the Program of Work is always
to create more dollars for more people and to improve the economic welfare of the
community. Every member has a voice in determining the policies and projects and
every member is needed to work on active committees to get the job done.”52
After having done this first step of advertisement via a contact in an institution as men-
tioned before, the second step will be direct advertisement, or direct marketing. The
advantages are obvious for a start-up and specifically applicable to this business model.
The communication to the decision makers is direct and depending on the individual
information we get, we will create personalised messages. The amount of money to in-
vest in marketing is according to the size of the company and its potential risk that
needs to be covered. The more understandable we can create the advertisement, in con-
tent and language, the better the chance to get an appointment with the customer will be.
Finally, the costs of marketing will be measurable and highly controllable.53
Supposing that we will have appointments with the responsible person of the target
companies, the steps of the conversation will be basically focussing on the distinctive
value proposition (DVP) of our customized products, but also by “stressing as a point of
49 Li, Feng 50 Attkinson, A. A. (1997) 51 http://ahk.de/ 27.06.12 12:40 52 http://www.bigspringchamber.com/chamber_whatis.php 27.06.12 12:33 53 Roberts, ML et al (1999)
5 The Company 34
parity what customers may mistakenly presume to be a point of difference favouring a
competitor's offering”54. There are three major topics, which have to be taken into ac-
count; those are distinctiveness, measurability, and sustainability.55 The distinctiveness
of the product is mainly the customization. It is tailor-made based on figures that are
influenced by the risk management of the target company. Consultancy of risk man-
agement will be as well a measurable issue as the lower costs of risk covering that is a
consequence of the product implementation. The sustainability effect is sufficiently
measurable, in risk management and in monetary value, during the period of time our
product is implemented.
By collecting and evaluating the risk databases of each client, the inherent knowledge of
the start up company increases and its direct marketing will be even more sustainable by
presenting concrete examples of implemented risk management and price advantages.
54 Anderson, J.C. et al et al 55 ebenda
6 The Markets 35
6 The Markets
This chapter shall explain how the procedure of a market analysis would be for each
single possible market. Coming from figures, which are already taken beforehand, this
market analysis is focused on the logistics market.
In an increasing market of international trade, i.e. globalization, the market for the busi-
ness model will increase from year to year while focussing on logistics companies with
worldwide contractual partners.56 Even though the logistics market is not the only one
that is adaptable to this business model, this business plan will only focus on one indus-
try to demonstrate the strategy to capture a market.
6.1 Market of Exemplary Target Companies
The HHLA increased its revenue from 2010 to 2011 about 14%.57 With a container
throughput of 7.1 million, the company is the largest logistics company in the Harbour
of Hamburg that had a throughput of container about 9 million in 2011. Globally the
throughput of container is as follows.
Illustration 9, Container Throughput by Continents
56 World Bank Group (2007) 57 HHLA 2011 Financial Statement
6 The Markets 36
The illustration shows three important points. First, the Asian market grew by more than
double. Second, the two biggest markets are Europe and Asia and third, the container
throughput in total grew more than double worldwide since 2001.58
Table 6-1, Container Throughput of European Harbours in TEU59
Regarding the fact that a direct insurer in Germany has a general passport bylaw to offer
services in the European Countries60, the elaboration of this business idea will primarily
be focused on European harbours and extend to business in Asian harbours at a later
stage of business development.
58 http://www.hafen-hamburg.de/content/containerumschlag-nach-kontinenten-2011 27.06.12 18:03 59 http://www.hafen-hamburg.de/content/containerumschlag-im-vergleich 27.06.12 60 ART. 49 et seq TFEU
6 The Markets 37
Taken from the table above, the container throughput of all European harbours in 2011
was 60,365,233 TEU. The HHLA had 2011 a container throughput of 7,100,000 TEU61.
This means the potential market is about (60,365,233 TEU/7,100,000 TEU = 8.5) 8,5
times the container throughput of HHLA, this is 2,414,609.32 TEU per Harbour in
2011. From an empirical Bachelor thesis that was written previously, all necessary fig-
ures have already been compiled and these are used those for the calculations in the
following chapters.
In average the HHLA paid an annual insurance premium of EUR 311,00062 for the in-
demnity insurance of its containers. Over 5 years this is an amount of about EUR
1,557,00063. The amount of refund in 5 years was EUR 206,00064. This is a result of the
contractual excess the HHLA has got with their insurance broker65 AON. Every amount,
which is below EUR 383,000, has to be paid by the company itself. Assuming that these
insurance brokers do not only have this type of contract with a client in Germany, as
AON66 for instance, this method of contractual excess might be assumed in the Europe-
an countries and perhaps all over the world. In order to figure out what this means for
the business model, I will adopt the methods and examples I mentioned before and ap-
ply those.
Expected Loss (in this assumption is the average of the insurance benefits that HHLA
received from the insurance company per year):
Year Insurance Benefit
2006 30,630.49 EUR
2007 24,641.76 EUR
2008 100,857.14 EUR
2009 50,124.03 EUR
61 Hamburger Hafen und Logistik Aktiengesellschaft - Annual Report 2011 62 2006 – 2010 taken from HHLA calculated in „Bachlorarbeitsberechungen XLS“ 63 ebenda 64 ebenda 65 taken from the Bachelor thesis „Wirtschaftlichkeitsprüfung zur Gründung einer Captive Insurance
Company im praktischen Bezug zur HHLA – Hamburger Hafen und Logistik AG“ 66 http://www.aon.com/site/aonworldwide.jsp 28.06.12
6 The Markets 38
2010 0.00 EUR
Average (Ex-
pected Loss) 41,250.68 EUR
Regarding this average and using it as the Expected Loss, now the standard deviation is
needed for applying the yield formula from Kreps (1999):
Kreps [1999]: Yield= [EL] + γ*[StdDev] =approx. [EL] + γ * [EL] 0,5
Standard Deviation 37.821,72 EUR
γ 0,5
Collateral
2,900,000.00
EUR
This leads to the following result:
Yield on Collateral = 41,250.68 EUR +0,5 * 37,821.72 EUR = 60,161.54 EUR
Yield on Collateral in % = 60,161.54 EUR / 2,900,000 EUR = 2,07%
Regarding the marketing effect and value proposition that I mentioned in 5.3 there is a
gap between 2,07% (60,161.54 EUR) and 10,7% (311,000 EUR), which is the current
insurance premium that is paid by HHLA. So every amount of money that is below
311,000 is a monetary value proposition. By taking the same percentages I have taken
in the example of chapter 4.7, the result is as follows.
Capital Structure Interest
Standard Costs (Insur-
ance)
2,900,000 EUR times 10,7 % 311,000 EUR
New Capital Structure
Last to default 1.450.000 EUR times 6% 87,000 EUR
6 The Markets 39
Second to default 725.000 EUR times 7,5% 54,375 EUR
First to Default 725.000 EUR times 11% 79,750 EUR
Structured Costs 2,900,000 EUR 221,125 EUR
Table 6-2, Concrete Example for an Insurance Bond
With a new capital structure the client would save an amount of EUR 89,875 (EUR
311,000 – EUR 221,125) per year.
The Structured Costs have to be influenced by the calculated bench, which is 2,07%,
and heightened by an annually paid construction fee, which I assume to be 2,0% for the
first year and 1,5% for the following years, of the collateral capital. To be more detailed
and focused on the earnings of the business model, the following table shows the re-
sults.
Capital Structure Interest
Construction Fee 2,900,000 EUR times 2,0% 58,000 EUR
First to default 1,450,000 EUR times 2,0% 29,000 EUR
Second to default 725,000 EUR times 4,0 % 29,000 EUR
First to default 725,000 EUR times 11,0 % 79,750 EUR
Total Costs 195,750 EUR
Table 6-3, Concrete Example for the Business Model - 2
The savings of the HHLA would be on average (EUR 311,000 – EUR 195,750) EUR
115,250 per year and the construction fee would be 58,000 EUR. Regarding the calcu-
lated market potential in Europe, this is 58,000 EUR times 8,5 493.000 EUR per year in
one specific market segment.
6.2 Further Assumptions
Assuming that the transportation of the containers to different destinations is done by 2
or 3 different companies, like transportation via rail, trucks for instance, the potential
market increases by every supplier that is in this chain.
6 The Markets 40
67
Illustration 10, Statistic of Road Transport of Goods
2011, 2,166,896,00068 tons had been transported in Germany. This result divided by the
average of weight of one TEU, 10.6869 tons, it equals (2,166,896,000/10.68) TEU
20,289,288 containers. This is (20,289,288/7,100,000) 2.857 times the container
throughput of the HHLA. So finally the assumption of the market for the road transpor-
tation of goods is, minimum 2 (different carrier – load and unload from rail transporta-
tion or vessels) times the 2.857 (relative figure to the HHLA container throughput to
road transportation of goods) times the construction fee (EUR 58,000) of the HHLA
assumption (table 6-3). This leads to (EUR 58,000 times 2 times 2.857) EUR
331,486.97 in Germany.
Due to the fact that those goods are delivered to households in Germany, we assume the
potential market in Europe on the basis of inhabitants. 502,489,10070 people are living
67 Statistisches Bundesamt, Wiesbaden 2012, 30.06.12 https://www.genesis.destatis.de/genesis/online/data;jsessionid=1D88A19A00E1E04C471D31C9F4E1239
D.tomcat_GO_1_1?operation=ergebnisTableDiagramm&option=diagramm&levelindex=2&levelid=1341060435954&downloadname=46231-0003
68 Statistic of road transportation of good.xls taken from Statistisches Bundesamt, Wiesbaden 2012, 30.06.12
69 http://www.rettet-die-elbe.de/hafen/containerumschlag_hafen_hamburg.html, 30.06.12 70 http://europa.eu/about-eu/facts-figures/living/index_de.htm, 30.06.12
6 The Markets 41
in 27 European countries and 81,751,00071of which are in Germany. The European
Market is 6.147 times the market of German market and this leads to (331,486.97 EUR
times 6,147) 2,037,511 EUR as a potential construction fee for road transportation of
goods in Europe.
Illustration 11, Statistic Railroad Freight Transportation Germany
In Germany in 2010 581,351,00072 tons were transported with railroad freight transpor-
tation, this segment has therefore a higher potential. Interpreting it in TEU and potential
construction fee for the business model, this leads to (581,351,000/10.68)
54,433,614.23 TEU and this is (54,433,614.23/7,100,000) 7,67 times higher than the
container throughput of HHLA and therefore a potential construction fee of 58,000
times 7,67 leads to 444,860 EUR. According to the total European Market this figure
must be multiplied by 6,147, which means a market potential of 2,734,554.42 EUR.
This results in a potential calculation fee totalling (2,734,554.42 EUR + 2,037,511
EUR) 4,772,065.42 EUR per year for transportation of goods on the street and on rail-
ways. 71 ebenda 72 VDV Statistik 2010
6 The Markets 42
In so far as this business model is a new idea of alternative risk transfer, the market
might be much bigger than it is assumed. Particularly given what the capital collateral
might be to insure houses or factories, machines or engines or for other sectors of the
insurance business, which are difficult to cover in the traditional way, such as art collec-
tions for instance. This would be analysed in the next step of market analysis, but re-
gretfully this exceeds the time limits of this master thesis.
6.3 Plausibility Check
To check whether the calculated prices are defensible and still in a range of market pric-
es, we combine the information that are available and offset. 2,166,896,00073 tons of
goods were transported on the road in 2011. 581,351,00074 tons of goods were trans-
ported on rail in the same year.
Calculating how many tons of goods were passed through in the two German harbours,
Hamburg and Bremerhaven, we divide the TEU of each harbour by 10,6875 and get
96,271,282.20 tons of goods in the harbour of Hamburg and 63,177,401.16 tons in the
harbour of Bremerhaven. In total this is 2,907,695,683.36 tons of goods, which were
transported, or throughput.
Taken from the yearbook of German Insurance Association (GDV), we calculated the
mean of the insurance income of 5 years (2006 – 2010), which is EUR 755,000,00076
for the insurance of merchandise.
By dividing this mean by the total sum of tons of goods, we get the insurance premium
that has to be paid per ton that is (EUR 755,000,000/ 96,271,282.20 tons) EUR 0.26
EUR/ton. Dividing this by 10.68, we get the insurance premium per TEU, which is
(0.26 EUR/ton/ 10.68 ton/TEU) 0.02431 EUR/TEU.
To get an insurance premium of our exemplary company HHLA, we multiply the
0.02431 EUR/TEU with the container throughput of this logistic company 7,100,000
and get an approximated insurance premium of EUR 172,617.61 per year.
73 Statistic of road transportation of good.xls taken from Statistisches Bundesamt, Wiesbaden 2012,
30.06.12 74 VDV Statistik 2010 75 http://www.rettet-die-elbe.de/hafen/containerumschlag_hafen_hamburg.html, 30.06.12 76 Taken from Plausibility Check.xlsx
6 The Markets 43
Reasonably, we have to take into consideration that the insurance premium taken from
GDV is a mixture of different ways of transportation with different risks, for instance
rail or road transportation, which have a different nature of risk. But we know now that
our estimated insurance price of EUR 195,750 is not unrealistic and we can go on with
our economic assumptions.
7 Risk Analysis 44
7 Risk Analysis
“Financial planners and longer-term investors face more kinds of investment risk than
do “traders” who make frequent trades and have shorter holding periods. The five broad
categories of risk investors face include market-related risk, momentum risk, intrinsic
value risk, residual risk, and attribution drift risk.”77
Should the insured risks of the target companies, exactly this startup’s primary focus,
increase unexpectedly in terms of amount of damage and frequency of loss, the calcula-
tion of the insurance bond’s yield would no longer be sustainable. This event is very
unlikely to happen since the database, the calculations of indemnity which the insurance
is based on, deals with a very large number of insured events. The market risk for inves-
tors in terms of interests and therefore for the business model depends on the risk free
rate that may increase, when an inflation scenario forces the government to apply this
method of monetary policy.78
For whatever reason it might happen that those insurance-linked securities are not going
to become attractive enough for potential investors, even though the return of these
bonds applies totally.79 This momentum risk is generally unpredictable, but could be
avoided before structuring risk of targeting companies, by preliminary agreements with
potential large-scale investors.
The intrinsic value risk is in comparison to other mezzanine capital investments rela-
tively low, hence this business model does not manage the risk as a typical insurance
company on its balance sheet, but sells it to investors via insurance bonds. The operat-
ing costs are assignable and apart from this, no other costs will appear that might in-
crease the risk of intrinsic value. Assuming that in a later stage of company develop-
ment the first investors may leave the company, because they want to cash out, or lever-
age it by bank loans, the intrinsic value risk then has to be determined again.80
Despite the residual risk for the investors of the insurance bonds, the investors of the
company have to consider the following business hazards: the legal requirements might 77 Chong, J.T. et al (2012) 78 Weil (1973) 79 Chong, J.T. et al (2012) 80 Mseddi, S. et al (2010)
7 Risk Analysis 45
change or even be harder than previously conceived, the restriction on entering the
business will determine the date of implementation and this may postpone this date, the
acceptance of the business model in the market could be relatively low and further
more, the usefulness of databases depend on, first, the willingness of the target compa-
nies to deliver the recorded data and second, its completeness.
Finally, the calculations could be wrong or misleading by determining the benchmark of
the insurance bonds and therefore enlarge the risk for potential investors. As a conse-
quence of the last point mentioned and as an unattached risk, investors for these insur-
ance bonds might be missing.
As a last risk to mention, a drift risk in terms of the profitability for the mezzanine in-
vestors capital may appear, while the business is started and the target companies are
already acquired, when large insurance companies decrease their insurance premiums
for the risk of our potential clients and start with a top dog strategy, which lowers meas-
urable the distinctive value proposition for prospective customers of this business mod-
el.81
81 Wang H., Yang B. (2003)
8 Financial Plan 46
8 Financial Plan
The following chapter will take the figures that where calculated beforehand as a basis
to structure the business development for the years 1 – 3 of the starting business. There-
fore that this business idea needs more formalities in advance to be done, but this master
thesis has to be written in about 5 weeks, the business starting date is the first of January
in 2013, guessing that it would take 5 month to get all regulations done that have be
fulfilled by law and authorities.
Furthermore and in addition to the pure construction fee taken from a client by structur-
ing his collateral, we added a consultancy commission in this Financial Plan and an in-
surance commission in case it is not possible to put an insurance bond in place. The
consultancy commission is taken as a charge from the client, because he will get infor-
mation about his general risk management and a clear overview over his risk database.
If the process of advising a client has got to a certain stage, it might still not be possible
to structure a collateral for him. Taking this into account, it is most likely that a pure
placement of a third party insurer will be the perfect solution for this client and this
would be satisfied by an insurance commission.
Having mentioned how the process of acquisition would proceed in chapter 5.3, it is
assumed in the financial plan that this is applicable on multipliers. Those people are
mentioned as insurance brokers, which have contacts to other clients. Due to time con-
starins and the negligibility of the issue, it is just assumed that one insurance broker has
one client. Consequently an increase of contracting insurance brokers has a linear im-
pact to a client contact, having in mind that it could be exponential.
8.1 Position and Cost Assumptions of The Financial Plan
To introduce the calculation of the spread sheet in the appendix, the different positions
and the assumptions will be explained, unless previously described.
Average productivity is focused on the business portfolio, which is basically the Con-
struction Fee and as a side benefits the Consultancy and the Insurance Brokerage.
Regarding the Construction Fee, some assumptions have to be made to have an average
collateral of coverage. The insurance sum of HHLA is taken as a measurable figure, and
8 Financial Plan 47
divided by the average throughput of TEU at HHLA in the last 5 years (2,900,000 /
7,100,000); this leads to EUR 0.408 per TEU. The Construction Fee itself and the Fol-
low Up Commission for this Construction Fee is 1,5 % of the Collateral Capital.
Assuming that every business starts with a consultancy, the Financial Plan includes a
Consultancy Fee for every customer contact with an amount of EUR 5,000 for the best-
case scenario and with EUR 2,500 for the Sensitivity Analysis.
The insurance brokerage business appears if it is impossible to place the insurance bond
concept. It will not be offered to any vendor, as an insurance broker, and therefore it is
just a very small position of the Financial Plan.
The incentive for an insurance broker to sell the product will be the commission he gets
from arbitrating the clients contacts. For his brokerage and the customer relationship
management an insurance broker will get an acquisition commission of 40% and a fol-
low up commission of 25% of the gained gross turnover per contract.
The staffing of the company is generally explained in a previous chapter, but it is here
supplemented with numbers of manpower and salary in the business plan. To be closest
to reality, I took the average income for professional insurance brokers in Hamburg82.
EUR 3,007 times 14 periods, including the monthly paid salary, Christmas Bonus and
vacation money. The customer relationship managers are getting in general a higher
salary83 as well as bankers, whose salaries are calculated with salary of EUR 3,571
times 14 periods. A headhunter84 informed me about the average salaries of board mem-
bers of smaller companies. The salary for the head of mathematics is an estimate, as-
suming that someone in such a position gets a salary between the salary of an insurance
broker and a board member, because this is a key position of the company.
There is a bonus payment added, which is guaranteed in the first year of the company
and depends on the development of the business in the following years, to incentivise
people working for the new company. With respect to the time limitations of this master
thesis, it is considered as a payment that is paid every year, but it should be adjusted in a
separate definition in each employment agreement.
82 http://www.gehaltsvergleich.com/gehalt/Versicherungskaufmann-Versicherungskauffrau.html 04.07.12
13:45 83 Information taken from Bankpower GmbH 84 ebenda
8 Financial Plan 48
Added to the given salaries of the year 2013, a salary increase of 5% per year is includ-
ed starting in 2014 and, as necessary, the Social Security Contribution85 on top of the
salaries about 20%. To resist temporarily high workloads, salaries for student assistants
are included also. In accordance with the expected growth of the company of the best-
case scenario, additional inside stuff is considered for the years 2014 and 2015 in the
Financial Plan.
The Administration Costs86 summarize IT / Computer Applications, Marketing, Travel
Costs and Expenses, Telecom / Communication, Legal Advice /Cost according to Regu-
lation, other Allocation of Cost as the rent for the office, Office Furniture and Sundries.
To have a realistic basis of calculation for the next years, the increase of costs for Mar-
keting and IT / Applications is also taken into account. Those figures are perhaps under-
estimated in the best-case scenario and therefore those are again heightened in the sensi-
tivity analysis. Regarding the fact that in times in which the business is not going as
predicted, travel expenses heightened in the sensitivity analysis, to consider that it might
be necessary to meet more people and to present the product more often.
A last thing to mention in the assumptions is the position ‘Legal Advice/ Costs accord-
ing to regulations’. Due to the fact that there is no lawyer in the company an external
one has to be paid. These are costs, which might increase from year to year, depending
on changing legal restrictions. An external company will do accounting and this is taken
into account as well. Other costs are general costs of a business, as the rent of the office,
desk, chairs, Kitchen, Computers and sundries.
8.2 Assumptions of Acquired Companies
The assumptions of acquired companies are based on two ideas, first, on the potential of
acquiring companies directly and second, on acquiring via external insurance brokers. It
is assumed that the company acquires 25 clients every quarter directly. Regarding the
insurance brokers, the number of clients increases yearly as a result of contracting com-
panies, which are pools of insurance suppliers and those have contracts with hundreds
85 Social Security Code §5 86 All Information are taken from an asset manager in Hamburg – „Nordix AG“
8 Financial Plan 49
and thousands of insurance brokers in the market.87 In average, this leads to an acquisi-
tion of 69 companies quarterly done by insurance brokers and 94 companies totally. On
the ‘Assumptions’ sheet, it is differentiated between Harbours, Carrier and Rail Carrier
as it is done in the Market Assumptions. This point is unattended in further assump-
tions, because the conversion from Tons in TEU is already done beforehand and it is
just an approximation. Every construction has a consultancy as a side effect and this is
calculated as an additional income consequently.
You will find a number of manpower in the excel sheet which is basically focused on a
working-days calculation. 5 working-days are assumed for the consultancy and 5 work-
ing-days for the construction of an insurance bond. This might be ambitious for the first
constructions, but it is also an average regarding the fact that these consultancies and
constructions are going to be the daily business for the company.
8.3 Profits And Losses and Cash Flows
The Excel sheet of Profits and Losses88 is based on quarterly expectations calculated
with the assumptions that are mentioned before. Regarding the legal requirements with
a forecast of three years, 2013 – 2015 are shown in the following table with yearly re-
sults.
87 Names of these companies are for instance, fondsnet, Netfonds, BCA 88 Financial Plan.xlsx P’n’L & Cashflow
8 Financial Plan 50
Table 8-1,Profits and Losses on a yearly basis
The highest proportion of costs in the spread sheet is the labour costs. This figure will
increase yearly in the first three years. The reason is the manpower, which is needed for
the consultancy analysis and the constructions. As more companies are acquired, as
more consultancies and constructions have to be done and this requires more manpower,
but as a result of standardized processes, workflows and brand awareness of ‘The Insur-
ance Exchange’ in the market, the Gross yield of the company is assumed to rise expo-
nentially, whereby the costs of labour are expected to increase linear. Already men-
tioned that mainly vendors do the distribution, the costs of turnover are exponentially
rising as well as the combined turnover. Earning before Interests and Taxes are starting
with a percentage of 34.3% of combined turnover in 2013 and ending up with 78.4% in
2015.
8 Financial Plan 51
8.4 Net Present Value and Return On Investment
To file an investment decision the methodology Net Present Value (NPV) is applied.
“The NPV methodology may be summarized as follows: suppose a decision maker has
the opportunity of investing X0 in a one-period project generating a payoff X1. Let i =X1
/X0 – 1 be the project’s rate of return and denote by ρ the return rate of the next-best
alternative available to the investor; the project should be undertaken if and only if
-X0 + X1 / (1+ρ) > 0.”89
The opportunity cost of capital ρ in this business model is chosen by 12%. The assump-
tion is focused on the relatively high risk of a new business, even higher than the in-
vestment in shares of blue chips, regarding the possibility of default, which is men-
tioned in the risk analysis. The minimum investment is defined by the pamphlet of the
BaFin90 and is about EUR 4,000,000. Finally the estimated outcome would be as fol-
lows.91
Illustration 12, NPV assumption of the Financial Plan
In this extract of the excel sheet the NPV is positive, although the opportunity cost of
capital ρ is chosen as a relatively high figure. Consequent is now to calculate the total
average of return the investment would have gotten after three years. Disregarding the
fact that the invested capital of the company is equity and not debt, the investor would
get 51%92 yearly average return on his investment, while the expected average return of
venture capital investment is between 13% and 31%93.
89 Magni, Carlo A. (2009) 90 Merkblatt - Hinweise für die Zulassung von Versicherung-Aktiengesellschaften zum Betrieb der Scha-
den- und Unfallversicherung in der Bundesrepublik Deutschland 91 Taken from Financial Plan.xlsx , ‘Overview Key Figures’ 92 ebenda 93 Kerins, F. et al (2004)
8 Financial Plan 52
8.5 Sensitivity Analysis
The analysis is stressing the models parameters by readjusting them to simulate a worst-
case scenario. Important parameters are the payment for Consultancy Fee’s, which is
based on a first look through of the clients documents and advising them in risk man-
agement, as well as the number of insurance brokers and coming form this point the
quantity of advising companies and constructing insurance bonds. So the Consultancy
Fee is lowered about 50% and the number of contracts is lowered from 69 to 21 in aver-
age quarterly. Other figures are increasing IT costs, marketing costs and travel expens-
es. The last two positions, which are mentioned, would increase, because the effort be-
ing put in getting new clients is costly. Applying the same method of calculation, which
is done in the ‘Financial Plan’, the following numbers are the results94.
Table 8-2, Sensitivity Analysis of Profits and Losses
Earnings before Interests and Taxes are still positive, but in a total sum only about 25%
of the Financial Plan95. According to this the NPV goes down as well but is still positive
with the same cost of capital ρ.
94 Taken from Sensitivity Analysis.xlsx, ‘Overview Key Figures’ 95 Taken from Financial Plan.xlsx, ‘Overview Key Figures’.
8 Financial Plan 53
Illustration 13, NPV of the Sensitivity Analysis
It is even more impressive in this analysis that the return on investment is still 20%. So
finally, in the worst-case scenario, which is calculating with less than the half of as-
sumed business, the business has a positive result as well. The illustrations below show
graphically the quarterly development of EBIT in the first 3 years of the business.
Illustration 14, EBIT Development of the Financial Plan
Illustration 15, EBIT Development of the Sensitivity Analysis
9 Conclusion 54
9 Conclusion
The business plan, or business model, has described an idea of constructing an insur-
ance linked security that covers risks which are normally covered by standardized in-
surances and for that reason it has a unique characteristic.
Legal restrictions have been explained and advantages of adding the business model to
an existing insurance company have been mentioned. Therefore this business plan can
be seen also, as a business model for a new branch of an insurance company.
Taking the basic idea of insurance linked securities, basically of CAT bonds, the con-
struction of the insurance bonds has been explained and improvements have been im-
plemented. By modifying the construction of these CAT bonds and using a waterfall
method to structure different tranches of bonds, it has been shown that it is possible to
achieve an attractive return for bond investors according to different types of risks those
groups of people are willing to take.
To estimate a potential market for the product, the logistics market of container
throughput has been chosen as an example, because the figures of one of such business-
es was previously known by the author form a previous scientific paper. In an approxi-
mation this base has been abstracted from and put into a relation with the container
throughput of other harbours and of other operating numbers of carrier, as well as the
potential in different European countries. It has shown, that there is an existing market,
which is just one of many other potential markets.
Naming several different positions, which are needed to run the business, has done fill-
ing the costs in the financial plan. Taking the possible fees and multiplying them with
the number of external insurance brokers, which are assumed to be the relevant people
to make the business outstandingly successful, have calculated incomes. As shown in
the Financial Plan, the value of the business model depends mainly on the Construction
Fee, the Consultancy Fee and the multipliers, assuming that the approximation of possi-
ble incomes is fitting also with real numbers. Having a capitalize both or neither Finan-
cial plan which overestimates expectations in terms of return, which normally exists for
investors of venture capital companies, it is even more impressive, that a worst case
scenario, shown in the in the sensitivity analysis, has a positive NPV as well.
9 Conclusion 55
With respect to the time restrictions, which limits a necessary research for empirical
results, the approximations leads to a business that might lower cost for companies and
increase profit for investors. The attractiveness that this business models offers for both
groups would help becoming a brand in short period of time, because investors may be
customers and vice versa. Guessing that transparency and inefficiency of the existing
insurance market in terms of prices for the target companies are inherent, an empirical
analysis would not lead to an unattractiveness of the model, it would help to find the
realistic benchmark for each customers segment, then to specify and customize them.
10 Appendix 56
10 Appendix
10.1 Financial Plan
10 Appendix 57
10.2 Profit And Losses and Cash Flows 2013
The Insurance Exchange Top-line Development 2013
Profit and Loss and Cash Flows First
Quarter Second Quarter
Third Quarter
Forth Quarter
Combined Turnover € 292.543 € 366.718 € 416.167 € 539.792
Acquisition Fee
€ 292.543 € 366.718 € 416.167 € 539.792 in % Turnover / Commission
Follow Up Commission
€ 0 € 0 € 0 € 0
in % of Turnover / Periodical Payment Costs of turnover € 0 € 29.670 € 49.450 € 98.900
Cost of Acquisition
€ 0 € 29.670 € 49.450 € 98.900
Costs of Follow Up Commission
€ 0 € 0 € 0 € 0
The Insurance Exchange Gross Yield / Gross Margin (without labour
costs and without Administration Costs) € 292.543 € 337.048 € 366.718 € 440.892
in % Turnover/ Gross Yield Margin 100,0% 91,9% 88,1% 81,7% Labour Costs € 175.080 € 175.080 € 175.080 € 175.080 in % Turnover/ Labour Costs 59,8% 47,7% 42,1% 32,4% Administration Cost € 64.333 € 39.333 € 39.333 € 39.333 in % Turnover / Administration Costs 22,0% 10,7% 9,5% 7,3% EBIT (operative result) € 53.129 € 122.634 € 152.304 € 226.479 in % Turnover / EBIT-Margin
EBIT cumulative
€ 53.129 € 175.763 € 328.068 € 554.547 Cash flow -€ 269.413 € 78.129 € 122.634 € 152.304
Cash flow cumulative -€ 269.413 -€ 191.284 -€ 68.650 € 83.654
10 Appendix 58
10.3 Profit And Losses and Cash Flows 2014
The Insurance Ex-change Top-line De-
velopment 2014
Profit and Loss and Cash Flows First
Quarter Second Quarter
Third Quarter
Forth Quarter
Combined Turnover € 969.842 €
1.399.892 €
1.810.216 €
2.279.716
Acquisition Fee
€ 910.667 € 1.281.542 € 1.652.416 € 2.023.291 in % Turnover / Commission
Follow Up Commission
€ 59.175 € 118.350 € 157.800 € 256.425
in % of Turnover / Periodical Pay-ment Costs of turnover € 247.250 € 410.393 € 568.606 € 741.612
Cost of Acquisition
€ 247.250 € 395.600 € 543.950 € 692.299
Costs of Follow Up Commission
€ 0 € 14.794 € 24.656 € 49.312 The Insurance Exchange Gross
Yield / Gross Margin (without labour costs and without Admin-
istration Costs) € 722.592 € 989.498 €
1.241.610 €
1.538.104 in % Turnover/ Gross Yield Mar-gin 74,5% 70,7% 68,6% 67,5% Labour Costs € 210.834 € 210.834 € 210.834 € 210.834 in % Turnover/ Labour Costs 21,7% 15,1% 11,6% 9,2% Administration Cost € 48.477 € 48.477 € 48.477 € 48.477 in % Turnover / Administration Costs 5,0% 3,5% 2,7% 2,1% EBIT (operative result) € 463.282 € 730.188 € 982.300 € 1.278.793 in % Turnover / EBIT-Margin
EBIT cumulative
€ 1.017.828 € 1.748.016 € 2.730.316 € 4.009.109 Cash flow € 171.582 € 463.282 € 730.188 € 982.300
Cash flow cumulative € 255.236 € 718.518 € 1.448.705 € 2.431.005
10 Appendix 59
10.4 Profit And Losses and Cash Flows 2015
The Insurance Exchange Top-line Development 2015
Profit and Loss and Cash Flows First
Quarter Second Quarter
Third Quarter
Forth Quar-ter
Combined Turnover € 3.005.640 € 3.796.014 € 4.586.388 € 5.376.763
Acquisition Fee
€ 2.394.166 € 2.888.665 € 3.383.165 € 3.877.664 in % Turnover / Commission
Follow Up Commission
€ 611.474 € 907.349 € 1.203.224 € 1.499.098
in % of Turnover / Periodical Payment Costs of turnover € 963.930 € 1.235.699 € 1.507.467 € 1.779.236
Cost of Acquisition
€ 840.649 € 1.038.449 € 1.236.249 € 1.434.049
Costs of Follow Up Commission
€ 123.281 € 197.250 € 271.218 € 345.187
The Insurance Exchange Gross Yield / Gross Margin (without labour
costs and without Administration Costs) € 2.041.710 € 2.560.315 € 3.078.921 € 3.597.527
in % Turnover/ Gross Yield Margin 67,9% 67,4% 67,1% 66,9% Labour Costs € 302.376 € 302.376 € 302.376 € 302.376 in % Turnover/ Labour Costs 10,1% 8,0% 6,6% 5,6% Administration Cost € 58.284 € 58.284 € 58.284 € 58.284 in % Turnover / Administration Costs 1,9% 1,5% 1,3% 1,1% EBIT (operative result) € 1.681.050 € 2.199.655 € 2.718.261 € 3.236.867 in % Turnover / EBIT-Margin
EBIT cumulative
€ 5.690.158 € 7.889.814 € 10.608.075 € 13.844.942 Cash flow € 1.172.444 € 1.681.050 € 2.199.655 € 2.718.261
Cash flow cumulative € 3.603.449 € 5.284.498 € 7.484.154 € 10.202.415
10 Appendix 60
10.5 Overview Key figures
The Insurance Ex-change Profit and Losses Overview 2013 2014 2015
Combined Turnover € 1.615.220 € 6.459.665 € 16.764.805
Acquisition Fee
€ 1.615.220 € 5.867.916 € 12.543.660
AF in % of Combined Turnover 100,0% 90,8% 74,8%
Follow Up Commission
€ 0 € 591.749 € 4.221.145
Costs of turnover € 178.020 € 1.967.861 € 5.486.332
Gross Yield € 1.437.200 € 4.491.805 € 11.278.473 Gross Profit Margin 89,0% 69,5% 67,3%
Labour Cost € 700.320 € 843.336 € 1.209.503 Labour Cost Margin 43,4% 13,1% 7,2%
Administration Costs € 182.333 € 193.907 € 233.137 in Percentage % 11,3% 3,0% 1,4%
EBIT € 554.547 € 3.454.562 € 9.835.833 EBIT-Margin 34,3% 58,9% 78,4%
Business Equipment
€ 30.000 € 10.000 € 5.000
10.6 Illustrations
3 5 10 25 40 55 70 85 105
125 145
165
0
200 Development of contracted Insurance Broker (Quarterly; in T€)
10 Appendix 61
€ 293 € 367 € 416 € 540 € 970 € 1400 € 1810 € 2280 € 3006 € 3796 € 4586 € 5377
€
€ 10000 Developement of Turnover
(Quarterly; in T€)
€ 293 € 337 € 367 € 441 € 723 € 989 € 1242 € 1538 € 2042
€ 2560 € 3079
€ 3598
€
€ 5000 Developement of Gross Yield
(Quarterly; in T€)
€ 175 € 175 € 175 € 175 € 211 € 211 € 211 € 211 € 302 € 302 € 302 € 302
€
€ 500 Developement of Labor Costs
(Quarterly; in T€)
€ 64
€ 39 € 39 € 39 € 48 € 48 € 48 € 48
€ 58 € 58 € 58 € 58
€
€ 100 Developement of Administration Costs
(Quarterly; in T€)
€ 53 € 123 € 152 € 226 € 463 € 730 € 982 € 1279 € 1681
€ 2200 € 2718
€ 3237
€
€ 5000 Developement of EBIT
(Quarterly; in T€)
10 Appendix 62
10.7 Sensitivity Analysis
Personal/ Confiden-tial
The Insurance Exchange
Business Plan-Sensitivity Analysis Date: Hamburg, 07/02/2012
10 Appendix 63
10.8 Sensitivity Analysis: Overview Key Figures
The Insurance Exchange Profits and Losses-Overview 2013 2014 2015 Combined Turnover € 1.186.870 € 2.460.369 € 5.407.416 Acquisition Fee € 1.186.870 € 1.986.969 € 3.987.217 AF in % of Combined Turno-ver 100,0% 80,8% 73,7% Follow Up Commission € 0 € 473.399 € 1.420.198 Costs of turnover € 106.680 € 485.895 € 1.463.518 Gross Yield € 1.080.190 € 1.974.474 € 3.943.897 Gross Profit Margin 91,0% 80,3% 72,9% Labour Cost € 707.520 € 742.896 € 780.041 Labour Cost Margin 59,6% 30,2% 14,4% Administration Cost € 206.333 € 248.480 € 308.256 Administration Cost Margin 17,4% 10,1% 5,7% EBIT € 166.337 € 983.098 € 2.855.600 EBIT-Margin 14,0% 49,5% 71,6%
10 Appendix 64
10.9 Comparing Cash Flows Development (quarterly)
10.9.1 Financial Plan
10.9.2 Sensitivity Analysis
-€ 269.413
€ 78.129 € 122.634
€ 152.304 € 171.582
€ 463.282 € 730.188
€ 982.300 € 1.172.444
€ 1.681.050
€ 2.199.655
€ 2.718.261
-€ 500.000
€ 0
€ 500.000
€ 1.000.000
€ 1.500.000
€ 2.000.000
€ 2.500.000
€ 3.000.000
-€ 277.213
€ 7.829 € 47.834
€ 61.169
€ 38.874 € 121.383
€ 205.770 € 287.238
€ 339.477
€ 485.120
€ 622.846
€ 790.160
-€ 400.000
-€ 200.000
€ 0
€ 200.000
€ 400.000
€ 600.000
€ 800.000
€ 1.000.000
10 Appendix 65
10.10 Comparing Net Present Values
10.10.1 Net Present Value of the Financial Plan 1 2 3 Invested Capital € 4.000.000 -€ 4.000.000 EBIT
€ 495.131
€ 495.131
€ 2.753.956
€ 2.753.956
€ 7.000.951 € 7.000.951
€ 2.847.121
NPV € 9.097.159
10.10.2 Net Present Value of the Sensitivity Analysis 1 2 3 Invested Capital € 4.000.000 -€ 4.000.000 EBIT
€ 148.515
€ 148.515
€ 783.720
€ 783.720
€ 2.032.560 € 2.032.560
Cash Position
€ 2.847.121
NPV € 1.811.916
10.11 Sensitivity Analysis: Illustrations
3 4 5 6 9 14 19 24 31 38 45 52
0
50
100 Development of contracted Insurance Broker
(Quarterly; in T€)
€ 230 € 297 € 319 € 341 € 423 € 548 € 679 € 810 € 1000
€ 1215 € 1469
€ 1723
€
€ 1000
€ 2000 Developement of Turnover
(Quarterly; in T€)
10 Appendix 66
€ 230 € 270 € 283 € 297 € 369 € 454 € 535 € 617 € 757 € 895 € 1062
€ 1230
€
€ 1000
€ 2000 Developement of Gross Yield (Quarterly; in T€)
€ 177 € 177 € 177 € 177
€ 186 € 186 € 186 € 186
€ 195 € 195 € 195 € 195
€ 160
€ 180
€ 200 Developement of Labor Costs
(Quarterly; in T€)
€ 70
€ 45 € 45 € 45 € 62 € 62 € 62 € 62
€ 77 € 77 € 77 € 77
€
€ 50
€ 100 Developement of Administration Costs
(Quarterly; in T€)
-€ 17
€ 48 € 61 € 75 € 121 € 206 € 287 € 369 € 485 € 623 € 790 € 957
-€ 1000
€
€ 1000
€ 2000 Developement of EBIT
(Quarterly; in T€)
List of Literature 67
List of Literature Anderson, J.C., Narus, J.A., Van Rossum, W. (2006): “Customer value propositions in
business markets”, 84(3), Harvard business review
Attkinson, Anthony A. (1997): A stakeholder approach to strategic performance, Sloan
Management Review
Barro, R.J., (1976): “The loan market, collateral, and rates of interest“, 8(4), Journal of
Money, Credit and Banking, 439 – 456
Bragg, Steven M. (2010): The New CFO Financial Leadership Manual, John Wiley &
Sons, Inc. Hoboken, New Jersey
Bragg, Steven M. (2011): Wiley GAAP 2012: Interpretation and application of general-
ly accepted accounting principles, Wiley
Brealey-Meyers (2003): Principles of Corporate Finance, Seventh Edition, The
McGraw-Hill Companies
Chen, Son-Nan, Keown, Arthur J., (1981): “An Examination of the Relationship be-
tween Pure Residual and Market Risk: A Note”, The Journal of Finance, 1203 –
1209
Chong, James T., Jennings, William P., Phillips, G. Michael (2012): “Five Types of
Risk and a Fistful of Dollars: Practical Risk Analysis for Investors”, Journal of fi-
nancial service professionals, p68 – 76
Constantin, Laura-Gabriela (2011): “Portfolio Diversification through Structured Catas-
trophe Bonds amidst the Financial Crisis”, Economic Science Series, p75-84
Fläming, Michael (2007): Alternativer Risiko Transfer – eine volkswirtschaftliche
Betrachtung, Diss., Bamberg
Galeotti, M., Gürtler, M., Rehan, C., : “Accuracy of Pricing Models for CAT Bonds“
Gesamtverband der Deutschen Versicherungswirtschaft (2011): “Die deutsche Versi-
cherungswirtschaft”, Jahrbuch
Jaeger, L., Mueller, S., and Scherling, S. (2010): “Insurance-Linked Securities: What
Drives Their Returns?”, Journal of Alternative Investments, 13(2), p9 – 34
Jorion, P. (1991): “The pricing of exchange rate risk in the stock market“, Journal of
Financial and Quantitative Analysis, 26(3), p363-376
List of Literature 68
Kerins, Frank, Smith, Janet Kiholm, Smith, Richard (2004): “Opportunity Cost of Capi-
tal for Venture Capital Investors and Entrepreneurs”, Journal of Financial & Quan-
titative Analysis, 39(2), p385 – 405
Lakdawalla, Darius, Zanjani, George (2011): “Catastrophe Bonds, Reinsurance, and the
Optimal Collateralization of Risk Transfer”, The Journal of Risk and Insurance,
79(2), p449 – 476
Li, Feng (2011): “Earnings Quality Based on Corporate Investment Decision”, Journal
of Accounting Research, 49(3), p721 – 751
Magni, Carlo Alberto (2009): “Investment decisions, net present value and bounded
rationality”, Quantitive Finance, 9(8), p967 – 979
Mseddi, Slim, Abid, Fathi, (2010): “The Impact of Operating and Financial Leverages
and Intrinsic Business Risk on Firm Value”, International Research Journal of Fi-
nance and Economics, p134 – 147
Reinhard, F. (1999): “" Fronting" für eine Captive Insurance Company: Risiken und
Sicherungsmöglichkeiten”, Verlag Versicherungswirtsch.
Roberts, M.L., Berger, P.D. (1999): “Direct marketing management“, Prentice Hall In-
ternational (UK)
Wang, X. Henry, Yang Bill Z. (2003): “Classification of 2X2 Games and Strategic
Business Behavior”, American Economist p78 – 85
Weil Roman L. (1973): Macaulay’s Duration: An Appreciation, Journal of Business,
p589 – 592
Weinstein, Mark (1981): “The Systematic Risk of Corporate Bonds”, Journal of Finan-
cial and Quantitive Analysis”, 16(3), p257 – 278
World Bank Group (2007): “Global economic prospects: managing the next wave of
globalization“, World Bank Publication
List of Literature 69