Title here

presented by

John Doe

Date hereSOUTH AFRICAN INSURANCE ASSOCIATION

Catastrophes and Balance Sheets

presented by

Nico EsterhuizenProgramme Manager: SAM

nico@saia.co.za

Short-term Insurance Strategic Risk ForumJune 2013

Discussion Points

• Balance sheet basics• Regulatory Capital

– Regulatory Catastrophe Capital• Economic Catastrophe Capital• Risk Mitigation options for Balance

sheets• Impact of catastrophes on the

solvency position of Insurers and Reinsurers

Balance Sheet basics

• A statement of financial position:– A picture of financial strength at a specific date– Assets– Liabilities

• Insurance Liabilities• Other Liabilities

– Capital– Accounting balance sheet– Regulatory balance sheet

Balance Sheet basics

• Accounting Balance Sheet:– South Africa: IFRS rules– Insurance Liabilities are accounted for

according to IFRS 4 and other standards (IFRS 9)

– (Past) Equalization reserves for future catastrophes and other losses. A long-term reserve that an insurance company keeps for the purpose of a significant unforeseen catastrophe.

Balance Sheet basics

• Regulatory Balance Sheet:– Solvency Assessment and

Management: • Mark-to-Market / Model valuation• Assets / Other Liabilities: Mainly IFRS• Technical Provisions: Best estimate cash flow

and risk margin

Regulatory Catastrophe Capital

• Insurer or Reinsurer must hold regulatory capital against insurance risk, including catastrophes risks:– “The risk of loss, or of adverse change in

the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events”

Regulatory Capital

• Regulatory Capital:– Current:

• FSB Board Notice 169 of 2011• Regulatory Capital Requirement includes

Insurance Risk– Solvency Assessment and

Management: • Capital requirements includes a

comprehensive Insurance Risk charge

Regulatory Catastrophe Capital

• Solvency Assessment and Management:– CAT risk will be calculated by using one

of the following methods:• Standardised Scenarios

– South African exposures• Factor Based Method

– Outside of South Africa and Miscellaneous exposures

– The CAT risk capital requirement is calibrated to a 1 in 200 year loss event

Regulatory Catastrophe Capital

• Solvency Assessment and Management:– Agriculture (Fire):

• Sum Insured of the largest concentration of exposures, across the insurer/reinsurer’s largest footprint, for crop line of business (100%)

• Sum Insured of the largest concentration of exposures across 26kha footprint, for forestry line of business (100%)

• Sum Insured of the largest concentration of exposures across the insurer/reinsurer’s largest footprint of blood and live stock (50%)

• Reinsurance included *

Regulatory Catastrophe Capital

• Solvency Assessment and Management:– Earthquake:

• Sum Insured for residential business by zone (100%) Includes business interruption

• Sum Insured for commercial business by zone (100%) Includes business interruption

• Sum Insured for Engineering property by zone (100%) Includes all risks, etc.

• Sum Insured for fire for Motor property by zone (100%)

• Apply formula• Reinsurance included

Regulatory Catastrophe Capital

• Solvency Assessment and Management:– Aviation:

• Mid-air collision of the two largest exposures including public and private liability

• Assume a 100% loss

Economic Catastrophe Capital

• Solvency Assessment and Management:– Own Risk and Solvency Assessment:

• Appropriateness of scenarios• Appropriateness of factors• Demand Surge & Liquidity• Frequency of (small) losses• Severity of losses• Exposure change• Reinsurance reinstatements

Economic Catastrophe Capital

• Solvency Assessment and Management:– Own Risk and Solvency Assessment:

• Capacity of domestic reinsurers • Foreign reinsurers’ ability to pay• Diversification of lines of business • Diversification of reinsurers• Credit rating of reinsurers• Effect of (natural) disaster on financial

markets and asset value

SA QIS 2Non-Life Underwriting Risk

Premium and reserve risk

Lapse riskCatastroph

e riskDiversificati

on

Non-life Underwriti

ng risk69% 1% 41% 12%

Premium and reserve risk Lapse risk Catastrophe risk Diversification Non-life Underwriting risk0%

20%

40%

60%

80%

100%

120%

Natural CAT as per SA QIS2

• Natural catastrophe exposures split into earthquake risk, hail and horizontal scenario risk: *

* FSB Report

Rand (R’bn)

Earth Hail Horizontal Total

Before mitigation R41, 446 R540 R42 R42, 028

After mitigation R3, 077 R36 R15 R 3, 218

% of exposure 98.3% 1.2% 0.5% 100%

# of insurers 26 3 2 31

Mitigation options for Balance Sheets

• Reinsurance• Retrocessions• Solvency Capital Capital

– For CAT event– Thereafter likely not sufficient

• Tiering of capital: Liquidity• Spreading of capital• Other Reserves (No-Claim)• National / Government arrangements• CAT bonds

Impact of disaster on insurers

• In 2012*:– Natural catastrophes and man-made

disasters claimed 14 000 lives– Economic losses: $ 186 Billion– Cost to insurers: $ 77 Billion ($71bn Nat-

Cat)– 3rd highest year since 1970– 318 events

• 168 where natural disasters

* Swiss Sigma Report

Impact of disaster on insurers

• Africa in 2012:– Claimed 2 000 lives– Economic losses: $ 1.5 Billion– Cost to insurers: $ 0.2 Billion– Hailstorm in South Africa: $100 million

• Most expensive natural catastrophe in terms of insured losses

– Account for 1.10% of total insurance market

Impact of disaster on insurers

• Most costly insurance losses in 2012:Insured loss ($’m) Event Country

$ 35 000 Hurricane Sandy US

$ 11 000 Drought in corn belt US

$ 2 500 Severe storms US (03/2012)

$ 2 500 Thunder and hail US (04/2012)

$ 2 000 Tornadoes US (06/2012)

$ 1 700 Thunder and hail US (05/2012)

$ 1 622 Earthquake Italy

$ 1 600 Hurricane Isaac US

$ 1 000 Thunder and hail US

$ 910 Thunder and hail US

$ 841 Winds Japan

Impact of disaster on insurers

• Natural catastrophes in 2012:– Storms: $ 54, 065m– Droughts, fire, heat waves: $ 11 524m– Floods: $ 2, 712m– Earthquakes: $ 1, 787m– Hail: $ 900 m– Cold, frost: $ 250m

Summary

• Insurers and Reinsures must hold capital but is it enough?

• A number of mitigation options available; is the current options sustainable?

• Is there an increase in severity and frequency of disasters?

• No noticeable increase in reinsurance cost currently.

+109592

Title here

presented by

John Doe

Date here

Thank you!