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1. Title here presented by John Doe Date here SOUTH AFRICAN INSURANCE ASSOCIATION

2. Catastrophes and Balance Sheets presented by Nico Esterhuizen Programme Manager: SAM nico@saia.co.za Short-term Insurance Strategic Risk Forum June 2013

3. Discussion Points • Balance sheet basics • Regulatory Capital • Regulatory Catastrophe Capital • Economic Catastrophe Capital • Risk Mitigation options for Balance sheets • Impact of catastrophes on the solvency position of Insurers and Reinsurers

4. Balance Sheet basics • A statement of financial position: • A picture of financial strength at a specific date • Assets • Liabilities • Insurance Liabilities • Other Liabilities • Capital • Accounting balance sheet • Regulatory balance sheet

5. Balance Sheet basics • Accounting Balance Sheet: • South Africa: IFRS rules • Insurance Liabilities are accounted for according to IFRS 4 and other standards (IFRS 9) • (Past) Equalization reserves for future catastrophes and other losses. A long-term reserve that an insurance company keeps for the purpose of a significant unforeseen catastrophe.

6. Balance Sheet basics • Regulatory Balance Sheet: • Solvency Assessment and Management: • Mark-to-Market / Model valuation • Assets / Other Liabilities: Mainly IFRS • Technical Provisions: Best estimate cash flow and risk margin

7. Regulatory Catastrophe Capital • Insurer or Reinsurer must hold regulatory capital against insurance risk, including catastrophes risks: • “The risk of loss, or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events”

8. Regulatory Capital • Regulatory Capital: • Current: • FSB Board Notice 169 of 2011 • Regulatory Capital Requirement includes Insurance Risk • Solvency Assessment and Management: • Capital requirements includes a comprehensive Insurance Risk charge

9. Regulatory Catastrophe Capital • Solvency Assessment and Management: • CAT risk will be calculated by using one of the following methods: • Standardised Scenarios • South African exposures • Factor Based Method • Outside of South Africa and Miscellaneous exposures • The CAT risk capital requirement is calibrated to a 1 in 200 year loss event

10. Regulatory Catastrophe Capital • Solvency Assessment and Management: • Agriculture (Fire): • Sum Insured of the largest concentration of exposures, across the insurer/reinsurer’s largest footprint, for crop line of business (100%) • Sum Insured of the largest concentration of exposures across 26kha footprint, for forestry line of business (100%) • Sum Insured of the largest concentration of exposures across the insurer/reinsurer’s largest footprint of blood and live stock (50%) • Reinsurance included *

11. Regulatory Catastrophe Capital • Solvency Assessment and Management: • Earthquake: • Sum Insured for residential business by zone(100%) Includes business interruption • Sum Insured for commercial business by zone (100%) Includes business interruption • Sum Insured for Engineering property by zone (100%) Includes all risks, etc. • Sum Insured for fire for Motor property by zone (100%) • Apply formula • Reinsurance included

12. Regulatory Catastrophe Capital • Solvency Assessment and Management: • Aviation: • Mid-air collision of the two largest exposures including public and private liability • Assume a 100% loss

13. Economic Catastrophe Capital • Solvency Assessment and Management: • Own Risk and Solvency Assessment: • Appropriateness of scenarios • Appropriateness of factors • Demand Surge & Liquidity • Frequency of (small) losses • Severity of losses • Exposure change • Reinsurance reinstatements

14. Economic Catastrophe Capital • Solvency Assessment and Management: • Own Risk and Solvency Assessment: • Capacity of domestic reinsurers • Foreign reinsurers’ ability to pay • Diversification of lines of business • Diversification of reinsurers • Credit rating of reinsurers • Effect of (natural) disaster on financial markets and asset value

15. SA QIS 2Non-Life Underwriting Risk

16. Natural CAT as per SA QIS2 • Natural catastrophe exposures split into earthquake risk, hail and horizontal scenario risk: * * FSB Report

17. Mitigation options for Balance Sheets • Reinsurance • Retrocessions • Solvency Capital Capital • For CAT event • Thereafter likely not sufficient • Tieringof capital: Liquidity • Spreading of capital • Other Reserves (No-Claim) • National / Government arrangements • CAT bonds

18. Impact of disaster on insurers • In 2012*: • Natural catastrophes and man-made disasters claimed 14 000 lives • Economic losses: $ 186 Billion • Cost to insurers: $ 77 Billion ($71bn Nat-Cat) • 3rd highest year since 1970 • 318 events • 168 where natural disasters * Swiss Sigma Report

19. Impact of disaster on insurers • Africa in 2012: • Claimed 2 000 lives • Economic losses: $ 1.5 Billion • Cost to insurers: $ 0.2 Billion • Hailstorm in South Africa: $100 million • Most expensive natural catastrophe in terms of insured losses • Account for 1.10% of total insurance market

20. Impact of disaster on insurers • Most costly insurance losses in 2012:

21. Impact of disaster on insurers • Natural catastrophes in 2012: • Storms: $ 54, 065m • Droughts, fire, heat waves: $ 11 524m • Floods: $ 2, 712m • Earthquakes: $ 1, 787m • Hail: $ 900 m • Cold, frost: $ 250m

22. Summary • Insurers and Reinsures must hold capital but is it enough? • A number of mitigation options available; is the current options sustainable? • Is there an increase in severity and frequency of disasters? • No noticeable increase in reinsurance cost currently. +109592

23. Title here presented by John Doe Date here Thank you!