financial re insurance cila india
TRANSCRIPT
8/8/2019 Financial Re Insurance CILA India
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Financial Reinsurance ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Srinivasa Rao FIAI, FIA
Head of Corporate Actuarial Services
RGA Services India Pvt. Ltd.
27 August 2009
Mumbai
www.rgare.com
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Over view
Financial Reinsurance & why it is always atopic
Capital Substitution via Reinsurance
O
r i
gin
alt
erms
reinsu
ran
ce & Def i
cit
account
f inancing
Introducing Financial Reinsurance in India
New Issues Due to Financial Reinsurance
Solutions to Some of those New Issues
Conclusion
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What is Financial Reinsurance?
³Fin Re´ is a common label for reinsurance whosepr imary motivation is to act as a capital substitute andwhere r isk transfer is a secondary dr iver.
A Fin re is only a concept and not an identifiable subset
B No country has found a good definition of fin re
C Let¶s therefore not try to define it today
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Why is Fin Re a Constant Topic?
This is a permanent topic globally, not just in India.
The basic reason is that insurance company owner s
don¶t want to endlessly contr ibute new capital.
A Insurers need capital to grow
B Capital has become more scarce & expensive
C Owners therefore look for alternatives to own capital
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Legitimate Capital Substitute
A prerequisite for any f in re discussion is acceptance that reinsurance can be alegitimate substitute for shareholder s¶ equity.
A Details of implementation can be debated
B Philosophical issues can be debated
C Make issues explicit, don¶t reject the label
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Yes, Fin Re Transfers Risk
Fin re transfer s the level of r isk implicitlycovered by the existing reserve or capitalrequirements. If that r isk mater ializes, thereinsurer pays.
A Criticism of low risk transfer may arise, though
B ³Fault´ is in existing requirements, not in fin re
C Focus should be correct accounting
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There has been bad reinsurance
Several high profile cases in last 10 years
These were not fin re, they were simply bad contracts
They had common characteristics:
Lack of disclosure to auditor s & regulator s
Non-Life reinsurance
Incorrectly accounted
³Finite reinsurance´ with explicit reinsurance limits
India can learn from these lessons
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Capital Substitution Effect
A f inancial reinsurance contract reduces an insurer ¶s need for capital via one or more of these three routes.
A Reduction in solvency margin requirement
B Reduction in reserves
C Payment of a lump sum consideration
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Insurer·s Needs f or Capital
Which of the sources of capital requirements could
be managed down in order to improve ROC?
A Infrastructure Investments
B Commissions, Sales Expenses, Staff, Operations
C Solvency Requirements
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Original Terms Reinsurance
All elements of original insurance contract are
shared
Proportion of the risk is reinsured
Reinsurance premium is in the same proportionof the office premium
Reinsurer pays Reinsurance commission
Meet the initial commission
Meet the initial expenses
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Original Terms Reinsurance
Reinsurer pays share of commissions
Possibly even higher than propor tionate
Insurer needs less own capital
Reinsurer also bears lapse risk
This could be a major r isk bor ne be insurer
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Deficit account financing
Reinsurer provides cash advance to financeNew Business
Cash advanced reflects the PV of surplus
expected to emerge from the reinsured block
Capital portion and Interest (agreed at outset ±could be variable) are first charge on the
emerging surplus
Deficit account is created by the insurer
Cash Advanced is debited
Reinsurance premium is credited
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Deficit Account Financing
Cash Advanced by reinsurer increases
the assets
Since the repayment is contingent on
surplus emerging- not provided for in
the liability
Regulatory capital increased by
amount of cash advanced
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Deficit Account Financing
Once the deficit account becomes zero
the insurer becomes the owner for
future profits
Should the cash advance be not repaid
by the reinsurance premiums, the
reinsurer makes a loss
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Deficit Account Financing
Risks shared by Reinsurer
Mor tality
Lapsation
Interest (if the interest charge is var iable)
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How to intr oduce Fin Re
Not explicitly prohibited by that name
Administrative circular from IRDA states ±
³..The terms, if coinsurance should be resor ted
to´
³«treaties involving Financial Reinsurance have
to be caref ully managed..´
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How to Intr oduce Fin Re in India
Allow/promote original terms reinsurance
Allow/promote below retentionreinsurance
Other more detailed regulation changes
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Below Retention Reinsurance
Most business is within risk retention
Most capital is for retained business
Reinsuring this business for capital = fin re
Not distinct from original terms
Just much larger scope for capital impact
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Some suggested changes
The existing reinsurance requirements state that an
insurer should retain as much premium as possible. This
may need to be revised / removed
"...reinsurance arrangement with an element of borrowing
in the form of deposit or credit of any kind from insurer¶s
reinsurers without the prior approval of the Authority shall
not be treated as credit for reinsurance for the purpose of
determination of required solvency margin³. We believe
this could be removed because this prohibits legitimate fin
re.
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Some suggested changes
The current regulations read that "Reinsurer¶s balances
outstanding for more than three months" should be
valued at zero. This would unnecessarily exclude the
proper use of Financial reinsurance.
The current regulation could be re-expressed as follows:
"Cash payments overdue from Reinsurers which are not
received within three months after their original due date"
should be valued at zero. This change will ensure that
balances which are properly owed but not settled for
longer periods of time are appropriately treated.
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New Issues with Fin Re / OT
Allowing Indian insurer s to cede more r isks and toreduce their capital more will introduces some newissues:
A Security, protection, soundness
B Cost
C Maintaining Indian Ownership
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Reinsurance Security Options
Minimum rating
Acceptable home jurisdiction/regulator
Minimum absolute capital amount Require local Indian registration
Require some collateral
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Reinsurance capital has a cost
Capital via reinsurance does have a
cost
But it might cost less than equity
owners want as their reward
This helps either or both of Indian
shareholder or Indian policyholder
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Maintaining Indian Ownership
Does this contravene 74% /26% rule?
What is ownership?
Cont
rol Residual Upside Benef iciary
Cost of reinsurance is capped and
downside is large
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Conclusion
Alternative capital is more wantedthan ever
Reinsurance can be an alternative
Implementation has challenges, butworth it
IRDA is supportive of larger
reinsurance role