niche insurers’ conference optimising capital structures · 2014. 2. 7. · optimising capital...
TRANSCRIPT
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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Slide 3
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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Slide 5
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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Slide 6
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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Slide 8
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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Slide 9
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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Slide 10
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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Slide 11
2. Optimum capital
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Slide 12
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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Slide 13
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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Slide 14
3. MCR – a framework for risk & capital
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Slide 15
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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Slide 16
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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Slide 17
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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Slide 18
4. Capital allocation
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Slide 19
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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Slide 20
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.