2016 Insurance Market Briefing - Europe - AM Best · 2016 Insurance Market Briefing - Europe . etc.venues St.Paul’s, London . 16 November 2016

2016 Insurance Market Briefing - Europe

etc.venues St.Paul’s, London

16 November 2016

2016 Insurance Market Briefing - Europe 16 November 2016 2

Nick Charteris-Black Managing Director, Market Development - EMEA

Welcome

Agenda – 2016 Insurance Market Briefing - Europe


09:10 EMEA Market Overview Greg Carter, Managing Director, Analytics – EMEA

09:30 Keynote Address Andrew Kendrick, Senior Vice President, Chubb Group & Regional President, Europe

10:15

10:40 The Value of Natural Catastrophe Schemes in Europe Carlos Wong-Fupuy, Senior Director

11:15 The Major Challenges Facing the Industry and the Potential Impact on Credit Quality Catherine Thomas, Senior Director, Analytics

Mahesh Mistry, Director, Analytics 12:00 Reinsurance Panel

Chair: Mark Geoghegan (Insurance Insider), Matt Fairfield (Exin Group), Kurt Karl (Swiss Re), Des Potter (GC Securities (EMEA)), Stefan Holzberger (A.M. Best)

12:45 Q&A: Concluding Comments

13:00

Agenda – Methodology Review Seminar


14:25 Welcome and Introduction Overview of the Structural Changes

to Best's Credit Rating Methodology Greg Carter, Managing Director, Analytics – EMEA

14:30 Update on Ongoing Restructuring and Revised Presentation of Best's Credit Rating Methodology (BCRM) for (Re)Insurance Companies

Carlos Wong-Fupuy, Senior Director & Understanding the New Universal

BCAR & its Application Mathilde Jakobsen, Associate Director, Analytics

15:30 Q&A: Interactive Discussion 16:00 Close

Disclaimer


© AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.

Disclaimer


US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating where a person involved in the sales or marketing of a product or service of the CRA also participates in determining or monitoring the credit rating, or developing or approving procedures or methodologies used for determining the credit rating.

No part of this presentation amounts to sales / marketing activity and A.M. Best’s Rating Division employees are prohibited from participating in commercial discussions.

Any queries of a commercial nature should be directed to A.M. Best’s Market Development function.


EMEA Market Overview

Greg Carter Managing Director, Analytics - EMEA

1% 1%

11% 12%

26% 22%

6% 8% 11%

2% 0% 0% 0%

aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+ bb bb- b+

Best's Issuer Credit Rating (ICR) distribution as at 30 September, 2016

MENA W Europe E Europe and CIS

EMEA


Key Market Characteristics

• Low investment yields • Challenges to meet shareholder expectations

• Abundance of reinsurance capacity • Merger and Acquisition (M&A) activity continues

1% 2%

16% 18%

34%

23%

2% 3% 1% 0% 1% 3%

10%

17%

33% 29%

4% 3% 0%

aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+

Rating Distribution as at 30 September, 2016 Rating Distribution as at 31 July, 2015

Western Europe



• Regulatory changes bedding down • Post-integration rationalisation

• Political clouds on the horizon • Slow economic growth prospects

Western Europe


Downgrade drivers

• Weakening parent 1

Upgrade drivers

• Benefits of Integration 7 • Improved distribution 3 • Improved / Enhanced ERM

and / or Governance 3 • Increased Strategic importance 2 • Improved Capital position 1 • Improved Risk profile 1

82%

6%

1%

11%

Rating Actions Affirm

Upgrade

Downgrade

Initial

77%

14%

9%

Outlook Summary Stable

Positive

Negative

12%

23%

18% 20%

25%

2% 0%

8%

28%

22% 22%

18%

0% 2%

a a- bbb+ bbb bbb- bb+ bb


Middle East & North Africa


• Fiscal budgets under pressure from low oil prices • Slowing growth from reduced gov. expenditure • Ongoing political instability and conflict

• Sound capitalisation, despite significant investment risk • Regulatory changes likely to put pressure on capital • Market leaders exhibit strong technical performance • New market entrants struggle to attract good business


Middle East & North Africa


Upgrade drivers

• Improving capital position 3 • Strong technical performance 2 • Increased strategic importance 2

Downgrade drivers

• Worsening technical performance 4 • Weakening capital position 4 • Increased indebtedness / weak affiliates 1

79%

5%

11%

5%

Rating Actions Affirm

Upgrade

Downgrade

Initial

77%

7%

16%


Positive

Negative

21%

5%

11%

26%

5%

0%

5%

11%

16%

22%

5%

11%

33%

6%

0%

11%

6% 6%

a- bbb+ bbb bbb- bb+ bb bb- b+ b


Eastern Europe and CIS



• Economic uncertainty and market volatility • Small markets with low insurance penetration • Government influence still present

• Investment opportunities generally weak • Risk management a weakness • Regulators enhancing monitoring capabilities

Eastern Europe and CIS


Review

• Motor softening as insurers seek market share

• Severe cats in 2014 hurt several (re)insurers

• Heightened M&A activity

Preview

• Unease relating to sanctions on Russia

• Motor third-party liability producing losses in several markets

• Governments under fiscal pressure may be opportunity for insurers (e.g. pension reforms)

79%

13%

8%

Rating Actions

Affirm

Downgrade

Initial

46%

4%

50%


Positive

Negative


Industry Capitalisation

16 November 2016 15

0

50

100

150

200

250

300

Western Europe MENA EasternEurope

sub-SaharanAfrica*

20112012201320142015

BCAR** (%)

Primary Insurers

* Primary Insurers & Reinsurers ** BCAR: Best’s Capital Adequacy Ratio


Industry Capitalisation

16 November 2016 16

0

50

100

150

200

250

300

Western Europe MENA Eastern Europe

20112012201320142015

Reinsurers

BCAR* (%)

* BCAR: Best’s Capital Adequacy Ratio

16 November 2016 2016 Insurance Market Briefing - Europe 17

Q&A Greg Carter

Managing Director, Analytics - EMEA


Keynote Address: Lessons from a Remarkable Year

Andrew Kendrick Senior Vice President, Chubb Group

Regional President, Europe



16 November 2016


The Value of Natural Catastrophe Schemes

in Europe Carlos Wong-Fupuy

Senior Director

Nat Cat up on the agenda


Climate change (flood and

windstorm risks)

Pressures - fiscal budgets The State - shrinking role

Increased urbanisation Exposure concentration

The Insurance Gap


Date Event Location Deaths

Economic Loss (USD bn)

Insured Loss (USD bn)

Dec. 22-31 Flooding United Kingdom N/A 2.5 1.3

Mar. 29-Apr. 1 Windstorms Mike and Niklas Western and Central Europe 9 1.4 1.0

Oct. 3-4 Flooding France 19 1.3 0.7

Jul.-Dec. Drought South Africa N/A 2.0 0.3

Jan. 9-11 Windstorms Elon and Felix Western and Northern Europe N/A 0.7 0.4

Source: Aon Benfield, 2015 Annual Global Climate and Catastrophe Report

Need for public / private partnership


Prevention Mitigation

Risk transfer Recovery

State Infrastructure

Education Assistance

Re-construction Compulsion

Subsidies Guarantees

Private Sector

Risk pricing Deductibles

Exclusion

Claims payment Technical assistance

Technical expertise Risk modelling

Operational support

Challenges that Nat Cat schemes face


Anti-selection Competition

High penetration? Bundling

State Guarantee?

Private or Public

Flat Pricing? Coverage

Compulsion?

Preparedness in Europe


Flood Earthquake • Nat Cat Schemes: NDCS/CCR (France), CCS (Spain), Flood Re (UK)

• Spain: high penetration, tempered by inclusion of motor lines (flood)

• Germany: low penetration household insurance (flood)

• Italy: low penetration in general, high exposure to earthquake 50

90

90 90

30

30 5 50

90

90 90

18

5 5

5 90

Source: European Union Commission

France – Natural Disasters Compensation Scheme / CCR


Spain – Consorcio de Compensacion de Seguros


UK – Flood Re


Germany


• Main perils flood and windstorms • Increased awareness due to flood and hailstorm losses

in 2013 • Availability vs affordability • High penetration on basic policies (excl nat cat) • 99% of nat cat risks insurable, but only 35%

penetration on flood for households • Key difference with other markets: optionality • Recent experience reliant on post-event assistance

from local governments

Overview

Italy


• Main risks: earthquake and flood • Low penetration rates in household insurance (< 40%) • Earthquake losses:

• L’Aquila (2009): EUR 10bn economic losses vs EUR 250m insurance claims

• Emilia Romagna (2012): EUR 12bn economic losses vs EUR 1bn insurance claims

• Umbria (2016): Similar economic losses / lower insurance claims. Less industrialised regions

• Discussions between ANIA and the government: • Increasing penetration rates. Compulsion (?) • Reduction or elimination of rates on premiums. • State guarantee

Overview

Conclusions


• Prevalence of flood risks in most countries (earthquake in Italy)

• Increased awareness due to climate change

• No “one size fits all” solution • Need for public / private partnership

initiatives • High penetration as a requirement, not

a consequence

• Nat cat schemes are a complement, not a substitute to the private sector

• Incentives and restrictions to limit adverse selection are key

• Need for a solid technical framework that ensures the long term financial viability of the model


Q&A Carlos Wong-Fupuy

Senior Director


The Major Challenges Facing the Industry

and the Potential Impact on Credit Quality

Catherine Thomas Senior Director, Analytics

Mahesh Mistry Director, Analytics

Looking back…


2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Lehman Brothers bankruptcy

Greek bailout

Sovereign Downgrades (USA, France, Italy, Spain…)

Recession Europe

Brexit

Sterling Depreciation

Depressed oil prices

Emerging markets slowdown (China)

Liquidity Crisis Sovereign Debt Crisis Low Interest Rate Environment

Hurricanes Gustav & Ike Floods in Australia New Zealand EQ

Japan EQ / Tsunami European and Alberta

Floods

German Hailstorms

Hurricane Sandy

Thai Floods

Fires in Southern CA

Chile EQ

European Storm Klaus

Zika Virus Tianjin Ebola

Italian Earthquakes

Canadian Wildfires European Storm Kyrill

Subprime crisis US Elections

Looking forward…


Threats and

Opportunities

Insurance Pricing

Reserving Premium growth

Nat Cat Accumulation Concentration

Pandemic Terrorism

Man-made disasters Mortality / morbidity

Competition Excess capacity Climate change

Economic Growth/slowdown

Interest rates Inflation Currency

Regulation Indirect exposures

(e.g. banking, affiliates)

Political Brexit

Elections Instability / conflict

Change in government policies

Technology Distribution

Disruptive innovation Big data

Block chain Driverless cars

Cyber Drones

Other Globalisation

Energy Medical advances

Power outages / blackouts

Looking forward…


Threats and

Opportunities

Insurance Pricing

Reserving Premium growth

Nat Cat Accumulation Concentration

Pandemic Terrorism

Man-made disasters Mortality / morbidity

Competition Excess capacity Climate change

Economic Growth/slowdown

Interest rates Inflation Currency

Regulation Indirect exposures

(e.g. banking, affiliates)

Political Brexit

Elections Instability / conflict

Change in government policies

Technology Distribution

Disruptive innovation Big data

Block chain Driverless cars

Cyber Drones

Other Globalisation

Energy Medical advances

Power outages / blackouts

Deficient Loss Reserves


• Reserves set up to meet future claims payments are insufficient

Threat

Concern

• Reserves set up to meet future claims payments are insufficient

• Results over past five years supported by substantial reserve releases

• Pressure on current year underwriting and investment earnings, so insurers increasingly reliant on reserve releases for profitability

• Terms and conditions deteriorating • Level of releases unsustainable as

confidence levels decline • Reserve strengthening required,

depleting earnings and capital

US Property / Casualty Impairment Causes (2000-2015)

Leading cause of impairments


Fraud - Adjudged or Alleged, 6.5% Affiliate Problems,

6.2%

Catastrophe Losses, 5.3%

Rapid Growth, 4.7%

Investment Losses, 3.3%

Reinsurance Failure, 0.3%

Unlicensed Insurance Product, 0.3%

General Business Failure (deficient loss reserve / inadequate

pricing), 73.4%

US P / C: Reserve Development


-15%

-10%

-5%

0%

5%

10%

15%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Y+1 Y+2 Y+3 Y+4 Y+5 Y+6 Y+7 Y+8 Y+9

10-Year Reserve Development

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Y+1 Y+2 Y+3 Y+4



10-Year Reserve Development – First Four Years



0

50

100

150

200

250

300

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Y+1 Y+2 Y+3 Y+4 Rate movement

10-Year Reserve Development – First Four Years and Rate Movements

UK – Reserve Releases


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

UK Non-Life Reserve Releases

Notes: Net reserve releases as a percentage of reserves brought forward. Outliers have been removed from years 1989, 2010, 2011 and 2015. Source: Prudential Regulation Authority returns for firms reporting on an accident-year basis, A.M. Best research

Deficient Loss Reserves


T O

• A leading cause of insurer impairments • Historical correlation between

underwriting and reserving cycles • Have recent releases eroded confidence

levels? • Reserve strengthening could affect

earnings, capital adequacy and reputation

Threat

• Actuarial departments have been strengthened

• Improvements in modelling and data analytics

• Proactive companies with robust feedback loops likely to emerge relatively unscathed

• Positioned to take advantage of any contraction in capacity and subsequent price increases

Opportunity

Growth


Excessive growth is one of the main reasons for insurance failure

Growth Profitability

Financial Stability

The Right Balance

• Is growth important for insurers? • Is it sensible to grow in the current

economic environment? • Are there any opportunities to grow?

A few questions

Growth: GDP vs. GWP


-8%

-6%

-4%

-2%

0%

2%

4%

2009 2010 2011 2012 2013 2014 2015

North America

-8%

-6%

-4%

-2%

0%

2%

4%

2009 2010 2011 2012 2013 2014 2015

Europe

-15%

-10%

-5%

0%

5%

10%

15%

20%

2009 2010 2011 2012 2013 2014 2015

Oceania

-5%

0%

5%

10%

15%

2009 2010 2011 2012 2013 2014 2015

Latin America

-2%

0%

2%

4%

6%

8%

10%

2009 2010 2011 2012 2013 2014 2015

Asia & Middle East

-2%

0%

2%

4%

6%

8%

10%

12%

2009 2010 2011 2012 2013 2014 2015

Africa

Notes: Gross Domestic Product (GDP) Gross Written Premium (GWP) (Unadjusted insurance growth) Source: A.M. Best data and research, Swiss Re sigma “World Insurance” series

Growth: Emerging Markets Present Opportunities


-

500

1,000

1,500

2,000

North America Latin America WesternEurope

Central andEastern Europe

Mature Asia Emerging Asia Middle Eastand Central

Asia

Africa Oceania

USD

mill

ions

Premium Development by Region (Adjusted for US dollars) 2010

2011

2012

2013

2014

2015

Source: A.M. Best data and research, Swiss Re sigma “World Insurance” series

-10%

-5%

0%

5%

10%

15%

2010 2011 2012 2013 2014 2015Gro

wth

(%)

Growth: Mature vs. Emerging Markets (Unadjusted) Life Emerging

Non-Life Emerging

Life Mature

Non-Life Mature

Growth: Is growth a concern?


Source: A.M. Best data and research. Growth 2014 vs. 2013, combined ratio 2015 vs. 2014. Selected leading insurers and reinsurers.

Growth controlled to maintain technical performance, with reinsurers showing marginal improvements

25%

20%

15%

10%

5%

0%

5%

10%

15%

-30% -20% -10% 0% 10% 20% 30%

Non-life: Movement in Premiums Compared to Combined Ratios

Growth Growth

Improving Combined Ratio Mainly Reinsurers

Mainly Insurers

Deteriorating Combined Ratio

Growth


• Aggressive growth in tough market conditions

• Fierce competition and pricing pressure in many segments and markets

• Low investment returns, declining ROEs • Increased pressure and focus on

underwriting • Limited benefits for further cost

reductions • Greater pressure to enhance market

profiles

Threat

• Portfolio consolidation and realignment of strategy

• Focus attention on select products and territories

• Innovate into niche / non-traditional lines

Opportunity

T O

Accumulation Risk


• Potential for significant accumulation of risk growing in an increasingly interconnected world

• Detection and management of accumulations more challenging as complexity grows

• Likelihood of balance sheet impairing losses increasing

Source: A.M. Best research and World Economic Forum “The Global Risks Report 2016”

Property vs Casualty Accumulations


• Geographically defined • Scale of loss determined relatively

quickly • Sophisticated catastrophe modelling

tools available, albeit with limitations • Use of historical loss data • Global supply chains – local events can

lead to international losses

Property

• Driven by legal and socio-economic factors

• Losses may occur over multiple years and territories

• Use of deterministic realistic disaster scenarios

• Difficult to predict future losses from past events

• Technological advances and growing global networks increase accumulation risk

Casualty

Accumulation Risk - Casualty


Managing Casualty Accumulations

Emerging risk analysis

Expert knowledge

Scenario analysis

Advancements in modelling techniques

Enhanced policy information

Application of big data

Event footprints

Identify supply and distribution

chains

Accumulation Risk


• Globalisation of production and trade • Widespread use of new technology • Give rise to:

- complex interdependencies and exposures

- large unexpected loss accumulations - potential pressure on earnings, capital

and liquidity

Threat

• Economic growth and innovation – new risks requiring insurance

• Develop superior understanding of risk drivers and interdependencies: - manage accumulations,

reduce / increase exposure - develop new insurance products - better address clients’ risk transfer

needs

Opportunity

T O

Energy: Overview


Alternative Sources

Oil and Gas

Environment Risks

Low Oil Prices

Reduced Investment

Declining Rates Supply and Demand

Geopolitical Risks

Economic Risk

Energy: Oil Prices


2030405060708090

100110120

Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16

USD

(per

Bar

rel)

Notes: Europe Brent Spot Price (US Dollars per Barrel). Data to November 07, 2016. Source: United States Energy Information Administration

Oil prices have fallen to their lowest position over the last decade

Energy: Downstream Losses


Source: Willis Towers Watson/Willis Towers Watson Energy Loss Database as of March 1 2016 (figures include both insured and uninsured losses). Energy losses excess of USD 1 million.

Downstream energy losses 2000 –2016 vs. estimated global downstream premium income

Energy: Geopolitical Risk


12.5 11.6

3.7 3.2

3.0 3.0

2.6 2.2

1.8 1.8

0.9

0 5 10 15

Saudi ArabiaRussia

UAEBrazil

MexicoKuwaitNigeria

QatarAlgeria

KazakhstanAzerbaijan

Contribution to World Oil Production (2014) (%)

93.0 105.0

51.8

97.5

57.8

95.8

67.5 60.6

82.7

0

20

40

60

80

100

120

Fisc

al B

reak

even

Pric

e (U

SD p

er b

arre

l)

Fiscal Breakeven (US Dollar per barrel)

Over 50% of oil production from emerging economies

Sources: United States Energy Information Administration, International Monetary Fund, IMF Regional Economic Outlook Middle East and Central Asia, October 2015, and A.M. Best research.

Energy: Investment Risk


20

40

60

80

100

120

140

160

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

GCC Stock Markets and Brent Crude Indexed to January 2014 = 100

Energy: Currency Risk


-

50

100

150

200

250

300

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

Oil Exporter Currencies and Brent Crude Indexed to January 2014 = 100

Brent Crude Nigerian Naira Algerian Dinar Ghana Cedi Brazilian Real

Mexico Peso Russia Ruble Kazakhstan Tenge Azerbaijan Manat

Low oil prices and currency depreciation a major concern for many insurers operating in emerging markets

Energy


• Insurers in emerging markets feel economic strain - Economic slowdown - Currency depreciations - Austerity measures - Volatility in equity and real estate

markets - Pressure on credit ratings

• Negative pressure likely to persist for energy insurers

Threats (Short term)

• Suppressed inflation for mature markets • Greater demand for insurance related to

alternative energy sources

Opportunities (Short term)

Energy


• Geopolitical risks likely to persist • Countries operating below fiscal budgets

are likely to experience further economic strain

• Uncertainty regarding supply and demand, e.g. Iran

• Risk of currencies being de-pegged • Higher energy prices may increase

inflationary pressure for oil importers

Threats (Long term)

• Higher prices should increase economic development and stability in emerging markets

Opportunities (Long term)

T O

Low Interest Rates


-1012345678

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Inte

rest

Rat

e (%

) Italy

Spain

France Germany

USA

UK

Sources: European Central Bank, OECD

• Prevailing low interest rate environment continues indefinitely

Threat

• High proportion of investments in interest rate sensitive assets (such as bonds)

• Offer interest rate sensitive products to customers (life insurers)

Concern

Impact on insurers


• Lower interest rates: - increase present value of liabilities - increase market value of fixed-

income assets • Sensitivity depends on duration • Insurance liabilities tend to have a

longer duration than assets • Direct impact on capital and solvency • Lower investment returns hit profits

ASSETS (fixed income)

LIABILITIES

SURPLUS

Life Insurers Most Affected


• Exposure depends on: - asset allocation - duration mismatch - level of guarantees in life insurance products

• Larger insurers usually better diversified by line of business, asset class and geography

• Life insurers: - typically match long-term liabilities with long-term bonds - products may contain financial guarantees to policyholders

Life insurers that have large government bond portfolios and offer high guarantees to policyholders are most vulnerable

Industry Response


• Lower guarantees on new products • Shorter duration contracts • Shift from savings products to

underwriting mortality risks • Increase in unit-linked products • Greater diversification • Sale of capital intensive books of

business

Products

• Search for yield – increase in credit risk and duration

• Alternative investments: - infrastructure - commercial real estate - direct lending - private equity

• Increased use of interest rate derivatives

Investments

Low Interest Rates


• Inadequate duration matching has a direct impact on solvency

• Downward pressure on profits: - lower investment returns - guaranteed products more expensive

• Other concerns: - competition – insurance attractive to

investors - M&A – in absence of investment

opportunities

Threat

• Take advantage of favourable pricing to issue debt

• Product innovation • Alternative investment strategies • Opportunistic acquisition of books of

business

Opportunity

T O

Pandemic: Major threat?

16 November 2016 2016 Insurance Market Briefing - Europe 66

• Rare events – reoccurrence rates between 30-50 years

• Consequences can be devastating • Substantial global financial risk

Is a pandemic a major risk?

Estimated global cost of a pandemic according to the World Bank is USD 800 billion (1-10% of global GDP). Insurance loss is difficult to predict

Disease When? Casualties

Spanish Flu 1918-20 40-50 million*

Asian Flu 1957 1-2 million

Hong Kong Flu 1968 Approx. 1 million Notes: Two of these pandemics comprised bird flu with human flu viruses. *Some estimates (World Health Organisation) suggest up to 100 million lives

Pandemic: Viruses and Diseases


Risk Year Description

Hendra Virus 1994 Virus from horses – contained to Australia

Nipah Virus 1999 Related to Hendra; cannot be transferred to humans

Cholera 1960s; 1970s Present outbreaks relate to poor sanitation. Developed a greater resistance to antibiotics

Small Pox N/A Mortality rates of 30%. Largely eradicated

HIV / AIDS 1980 to present Over 25 million deaths. Effective vaccines are difficult to develop.

Bubonic Plague 1300s Killed 30%-60% of Europe’s population

Others: MRSA, SARS, Ebola, Zika Virus, Lassa Fever, Marburg Virus

Pandemic: Risk to Companies


Understanding how the risk has changed

• Better drugs • Co-ordinated responses • Development of influenza models • Better communication methods • Healthier population • Significant investment / research

Positive Effects

• Globalisation • Global travel • Larger population size • Higher concentration in urban areas • Diseases can have greater resistance to

drugs • Unknowns: time to prepare a new

vaccine

Negative Effects

Pandemic: Affect on credit quality


• A major pandemic could have greater financial consequences than a natural or man-made disaster, which could significantly impact the balance sheet strength of life and health (re)insurers

• There may also be some indirect consequences for the non-life market

Threat

• Pandemics are likely to be underinsured with a significant difference between the economic cost and the cost to the insurance market

• Improved modelling capabilities and confidence in medical advances may provide opportunities for the market

Opportunity

T O

Conclusion


TerrorismGlobalisationCurrency risk

BrexitGeopolitics

Oil PricesClimate Change

PandemicsInflation

Cyber riskDistribution

Big dataLow interest rates

GrowthAccumulation risk

Nat CatsDeficient reserves

Threat Opportunity Impact on Credit Quality

Largest

Smallest


Q&A Catherine Thomas

Senior Director, Analytics Mahesh Mistry

Director, Analytics

Reinsurance Panel


Stefan Holzberger

Chief Rating Officer

A.M. Best

Kurt Karl Chief

Economist Swiss Re

Mark Geoghegan

Managing Director

Insurance Insider

Des Potter

Managing Director GC Securities

(EMEA)

Matt Fairfield

Chief Executive Officer

Exin Group


Reinsurance Panel


Stefan Holzberger


A.M. Best

Kurt Karl Chief

Economist Swiss Re

Mark Geoghegan

Managing Director

Insurance Insider

Des Potter


(EMEA)

Matt Fairfield


Exin Group

Global Reinsurance


77.3% 60.2% 56.5% 56.2% 56.2%

62.2%

61.3%

31.5% 31.6%

32.3% 33.5% 34.2% 33.9% 32.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013 2014 2015 2016 Q2 5yr Avg

Expense Ratio

Loss Ratio

Loss ReserveDevelopment

Source: A.M. Best data and research

Global Market Trends

Global Reinsurance


Global Market Trends Return on Equity and Five-Year Average

1.9%

12.4% 13.0%

11.6%

9.5% 9.0%

0%

2%

4%

6%

8%

10%

12%

14%

2011 2012 2013 2014 2015 2016 Q2

Source: A.M. Best data and research

Dedicated Reinsurance Capacity


Total Dedicated Reinsurance Capacity (USD billions)

Note: * Estimate by Guy Carpenter and A.M. Best Source: A.M. Best, Guy Carpenter

292 320 340 332 340

19

48 60 68 71

0

50

100

150

200

250

300

350

400

450

2012 2013 2014 2015 6M 2016E

ConvergenceCapacity

TraditionalCapacity

Capacity Utilization


Capacity Utilization Based on Aggregate Risk-Adjusted Capitalization of Rated Balance Sheets

81% 76% 73% 72%

0

25

50

75

100

2012 2013 2014 2015

%

Global Reinsurance


Negative Outlook

Change in demand

Excess capacity

Capital convergence

Benign catastrophe

losses

Questionable underwriting

discipline

Reserve development

Low yields

Reinsurance Panel


Stefan Holzberger


A.M. Best

Kurt Karl Chief

Economist Swiss Re

Mark Geoghegan

Managing Director

Insurance Insider

Des Potter


(EMEA)

Matt Fairfield


Exin Group



16 November 2016

Documents

2016 Insurance Market Briefing - Europe - AM Best · 2016 Insurance Market Briefing - Europe . etc.venues St.Paul’s, London . 16 November 2016