1 / 21

Session 5 Risk Mitigation and Diversification

Session 5 Risk Mitigation and Diversification. Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat. Agenda. Reinsurance Products Types Features Risks Associated with Reinsurance Credit Liquidity Operational & Legal

nyx
Download Presentation

Session 5 Risk Mitigation and Diversification

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Session 5Risk Mitigation and Diversification Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat

  2. Agenda • Reinsurance Products • Types • Features • Risks Associated with Reinsurance • Credit • Liquidity • Operational & Legal • Supervisory Viewpoints • Objectives • Strategies & Monitoring Mechanism • New Forms of Risk Transfer 1

  3. Proportional Retained or Ceded to another reinsurer Ceded Retained Retention ratio 20% Limit 1,000 Retention amount 200 Limit 1,000 2

  4. Comparison 3

  5. Non-Proportional • Protect from large loss & accumulated loss • Supplement proportional reinsurance • Excess of loss • Cover aggregate loss per risk or event beyond certain threshold • Stop loss • Cover accumulated loss for certain period beyond certain threshold 4

  6. Comparison 5

  7. Agenda • Reinsurance Products • Types • Features • Risks Associated with Reinsurance • Credit • Liquidity • Operational & Legal • Supervisory Viewpoints • Objectives • Strategies & Monitoring Mechanism • New Forms of Risk Transfer 6

  8. Risk Transformation • Reinsurance transforms risk • To mutual advantage of both parties • Parties assume different types of risk • Reinsurance contracts do not remove insurer’s underlying legal liability to policyholders • Insurer • Transfer underwriting (insurance) risk • Create other risks (e.g. credit, liquidity, operational, legal) 7

  9. Credit Risk Credit (counterparty) • Settlement by reinsurer may not be received due to failure of reinsurer, while insurer remains liable to fund all valid claims under insurance contracts • Examine financial strength & payment records of reinsurer • Establish security criteria • Set exposure limit to single reinsurer or group of related reinsurers • Diversify • Examine resilience of program under stressed situations 8

  10. Liquidity Risk Liquidity • Series of large claims may give rise to cash flow difficulties if there were delays in settlement by reinsurers or in providing proof of loss to reinsurers by insurer • Line of credit from banks • Clauses that allow for accelerated payment from reinsurers in event of large claims • Use of collateral, deposit account 9

  11. Operational & Legal Risk Operational & Legal • Administrative arrangement may create problems • Contracts may not always respond in ways insurer expects • Adequate administration & IT system capabilities • Effective tracking of aggregate claims which may give rise to recovery under reinsurance program • Timely reporting • Ensure to collect receivables • Clear contract language & commonly used contractual terms • Long standing nature of personal & corporate relationship 10

  12. Agenda • Reinsurance Products • Types • Features • Risks Associated with Reinsurance • Credit • Liquidity • Operational & Legal • Supervisory Viewpoints • Objectives • Strategies & Monitoring Mechanism • New Forms of Risk Transfer 11

  13. Supervisory Regime • Supervisors should have access to all information about reinsurance program • Regular reporting system • Upon request • Supervisory recognition • International & cross-border nature of reinsurance • Reduce duplication of efforts, compliance costs & regulatory arbitrage • Unilateral, bilateral & multilateral approaches • IAIS can be hub of information & cooperation • Reinsurance Subcommittee • Global Reinsurance Market Report (GRMR) (http://www.iaisweb.org/index.cfm?pageID=538) 12

  14. Objectives • Supervisors should understand commercial rationale behind reinsurance program as part of assessment Capacity • Provide flexibility in size, types & volumes of business insurer can reasonably undertake • Allow to enter, expand or withdraw within short period Financing • Work as alternative to increasing insurer’s capitalisation 13

  15. Objectives Stability • Limit fluctuations in underwriting results & financial performance Protection • Provide protection against potential large accumulation of losses from catastrophic events (e.g. earthquake) Expertise • Gain technical, underwriting & claims assistance 14

  16. Strategies • Insurer should have reinsurance strategies • Appropriate to scale, nature & complexity of business • Part of wider underwriting and risk & capital management strategies • Examples • Risk appetite (e.g. gross limit, net retention) • Level of diversification • Consideration of credit risk • Comparative cost of capital • Liquidity positions • Views on future market & economic trends • Underwriting forecast 15

  17. Monitoring Mechanism • Insurer should establish systems & controls to ensure implementation & compliance of strategies • Approval of reinsurance program • Regular reviews of performance • Management information • Examples • Link to capital assessment • Security criteria of reinsurers • Exposure limit to single reinsurer or group of related reinsurers • Criteria for purchasing facultative coverage • Legal issues • Timely & complete reporting due to/from reinsurer 16

  18. Agenda • Reinsurance Products • Types • Features • Risks Associated with Reinsurance • Credit • Liquidity • Operational & Legal • Supervisory Viewpoints • Objectives • Strategies & Monitoring Mechanism • New Forms of Risk Transfer 17

  19. New Forms of Risk Transfer • Example: Cat (catastrophe) bond • Use capacity of capital market (from insurer’s perspective) • Diversification due to low correlation with other asset classes (from investor’s perspective) 18 (Source) Munich Re “Insurance-linked securities (ILS) market update”

  20. Additional Viewpoints • Similar to reinsurance in many aspects but some special features • e.g. use of wide variety of arrangement, including creation of Special Purpose Vehicles (SPEs) • Fully funded • Ownership structure, ranking of payments, stress test on cash flows, use of derivatives • Bankruptcy remote • Legal opinion. disclosure (e.g. prospectus, offering circular, memorandum) • Basis risk • Trigger under SPE arrangement can be different from that for underlying liabilities • e.g. Parametric (driven by objectively measurable events) • e.g. Modelled (driven by outcome of modelled loss) 19

  21. ¡Muchas gracias! www.iaisweb.org takao.miyamoto@bis.org 20

More Related