nav garayal: challenges of risk based capital for (re) takaful companies
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Takaful Masterclass: AON BenfieldTRANSCRIPT
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Challenges of risk based capital for (Re) Takaful Companies Nav Garayal, Aon Global Risk Consulting
Master class - International Takaful Summit
30 June 2009, London
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Why is Capital important?
Capital and it’s Constituents
Investors: want a return on capital
Regulators: solvency capital is important to protect policyholders
Rating agencies: capital adequacy eg BCAR (AM Best) ; S&P model
IFRS / US GAAP / Local GAAP
Research analysts
Each have historically differing views which are now starting to converge ie a risk based approach
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Capital and Risk
Insurance related risks are driver of overall impairments but there is a strong correlation between insurance and operational risks
Operational risks are significant
Asset risk of secondary importance but now becoming more important due to fair value accounting, current crisis
Impairment frequency higher for smaller companies than larger companies
Approximately 650 impairments* over 38 year period 1969-2006
Source: A. M. Best Impairment Study, 2007
* A. M. Best defines impairment as restrictive regulatory action
Cause (1969-2006) Pct TotalDeficient Loss Reserves / pricing 37.6%
Rapid Growth 15.7%
Alleged Fraud 8.1%
Catastrophe Losses 7.7%
Impairment of Affiliate 7.2%
Overstated Assets 6.9%
Significant Change 4.4%
Reinsurance Failure 3.3%
Miscellaneous 9.0%
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Importance of risk based capital (RBC) approaches
Aims
• Create a harmonised system based on the assessment of risks thus protecting policyholders / shareholders
• Enhance transparency to the decision making process
• Strengthen competition within the insurance sector
Benefits
• Promotion of risk awareness across the entire organisation
• Alignment of strategy to risk and risk management
• Decision making and risk monitoring linked to capital base
• Strong risk management and brand are rewarded by investors
Framework for dealing with regulators eg Solvency 2
Aligns stakeholder interests – investor / regulator / rating agency
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RBC approaches to regulation around the World
UKICAS / S2
SwitzerlandSwiss Solvency Test
AustralaGPS 110
USARBC model (NAIC)
CanadaDCAT
NetherlandsMinimum/ solvency/ continuity test
South KoreaNew RBC approach in 2006
Denmark/ SwedenNew supervisory regimes in planning
MalaysiaRBC
Approach
ThailandNew RBC
approach 2009
MexicoSolvency II Approach
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StrategyAssessment
Design & Construction
Base Capital Requirement
Output
Risk Mitigation SolutionsOutput
Ou
tp
ut
RBC modelling overview
Strategy Risk Areas
Risk based capital model
Choose scenarios based on key performance
drivers
Scenario testing of RBC model
Insurance riskReserving riskOperational riskCredit riskLiquidity riskGroup riskMarket risk
Deterministic or stochastic model
Bespoke or off the shelf
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Challenges for RBC approaches
According to S&P : Companies are not yet benefiting from Strategic Risk Management
» Risk control: strong but in silos with no focus on correlations of risks
» Emerging risk management: weak and not addressed consistently
» Risk models: weak, but improving
» Many companies are currently investing heavily to improve their modeling capabilities in advance of Solvency II
Key factor “Use Test” – capital modelling tool is embedded into the management decision making process
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Implications of RBC for Takaful market
International Association of Insurance Supervisors (IAIS) represents 97% of GWP worldwide through 190 members seeking to improve Insurance Supervision and adopt consistent standards based on an RBC type approach.
Takaful and Re-Takaful markets likely in future to fall under RBC regulatory framework• E.G. Malaysia, Thailand
RBC helps protects policy holder interests and is consistent with sharia’h compliance e.g. reputational risks
Approach will become a permanent fixture due to the changing risk landscape
event driven risks and correlation of risk
stakeholder needs
accounting, regulatory, legislative, corporate governance initiatives
Approach can leverage the significant investment required to compete with conventional insurance
Approach important for growing companies as it minimises the need to incur massive overheads by allocating capital on a risk adjusted basis
Rating agencies may ultimately give credit to RBC models if they are robust and the underlying risk management framework is sound
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Challenges for takaful marketCurrently very few operators
allocate capital today
have an integrated capital and risk management model
pay their management based on value created
Today there is an under capitalisation of takaful operators eg where local regulation is under developed
UAE, Kuwait
Promotion of risk awareness across the entire organisation
Human capital constraints limit the development of modelling capabilities and also risk management.
Malaysia has introduced a deterministic approach to RBC
Limited understanding and utilisation of scenarios and correlation of risks or consideration of systemic risk
Embedding the capital model into decision making process.
Do Board of Directors and executive management conflict
Understanding the model output
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