niche insurers’ conference optimising capital structures · 2014. 2. 7. · optimising capital...

Niche Insurers’ Conference

Optimising Capital Structures

Brett Riley8 November 2007

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Slide 2

Key points

1. The capital management process matters too2. Optimum capital depends on several factors3. The MCR & capital multiples provide a framework for

thinking about risk & capital4. Capital allocation improves risk management & pricing

Value is added by doing these well

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1. The capital management process

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Slide 4

Option Finder Q1

What is the lowest capital level you would be comfortable with (multiple of MCR)?

120%140%160%180%200%220%>220%

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Option Finder Q2

What is the highest capital level you would be comfortable with (multiple of MCR)?

<200%200%250%300%350%400%>400%

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Option Finder Q3

What capital level do you currently target (multiple of MCR)?

<150%150%175%200%250%300%>300%

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Slide 7

Elements in capital management process

Target & trigger

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Managing capital - example

100

Total Assets

MCR

Capital Trigger (175% of MCR)

Capital Target (225% of MCR)

Insolvent below here

50

Assets backing

SHF

Assets backing liabilities

55

20Impaired below here

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Elements in capital management process

Target & triggerState target & triggerExplain how chosen – risk measure?

MonitoringHow frequent? Who?

Roles & responsibilitiesProcess for corrective actionCapital needs for next three years

Is there a place for documenting this in a Capital Management Plan (CMP)?

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Option Finder Q4

How well drawn together are these elements of capital management in your firm?

Not at all – we do the minimum to complyWe have started thinking about these issuesWe consider the issues but do not document wellWe have an explicit, formal CMPDon’t know

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2. Optimum capital

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Option Finder Q5

Which scenario best describes how you have arrived at your company’s capital target?

Selected on “informed” gut feelWe follow our parent’s policyScenario analysis / sensitivity & stress testingSimulation (DFA) modelOtherWe don’t have a target

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Optimising – the capital target

Which risk measure?Factors to consider in setting target

Risk appetiteMarket practiceToo high – costly to serviceToo low – regulators intervene, security issuesEase of raising fundsInfrequent raisingsFor subsidiaries/branches – could Group use it better?Analysis

• Dynamic Financial Analysis (DFA)• Scenario analysis – protect against extreme event• Stress test your business plan

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3. MCR – a framework for risk & capital

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Breaking down the MCR

Outstanding Claims Factors

Short tail : 9%

Medium tail: 11%

Long tail: 15%

Insurance Risk Charges

Premium Liability Factors

Short tail: 13.5%

Medium tail: 16.5%

Long tail:22.5%

Investment Risk Charges

Concentration Risk Charges

Investment Risk Factors

Ranging from:0.5% for cash & low risk debt to10% for property and unlisted equities & 100% for loans to directors & employees

Concentration Risk

Non LMI: MER + 1 reinstatementLMI: Formula

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Some examples (1)

0

10

20

30

40

50

60

70

Single Line - ShortTail

Single Line - LongTail

Multi Line - 50/50Short & Long Tail

LMI Insurer

Am

ount

($m

)

OCL charge PL charge Investment charge Concentration charge

103

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Some examples (2)

0%

10%

20%

30%

40%

50%

60%

70%

Single Line - Short Tail Single Line - Long Tail Multi Line - 50/50 Short& Long Tail

LMI Insurer

Insurance margin ROE

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4. Capital allocation

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Option Finder Q6

Does your firm allocate capital in some form (e.g. to business units, products or by line of business)?

YesNo

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Capital Allocation

Why do it?Set insurance margins in premium for target ROCUnderstand future capital needs

• Expected growth and change in risk profileExplicit allocation brings discipline

Some practical issuesDo you allocate target or actual capital?Which BU or units get diversification benefitPerformance incentives – potential political issue

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Slide 21

Conclusions

1. The capital management process matters too2. Optimum capital depends on several factors3. The MCR - a framework for thinking about risk & capital4. Capital allocation improves risk management & pricing

By doing these well, this leads to:Better risk/return outcomesInformed decision making (through being proactive)And hence added value

This presentation has been prepared for the Finity Niche Insurer Conference held on 8 November 2007. Finity Consulting Pty Limited (ABN 89 111 470 270) wishes it to be understood that opinions put forward herein are not necessarily those of Finity and Finity is not responsible for those opinions. The information presented at the conference was of a general nature and a reader of this presentation must seek their own independent advice before using it for any purpose.