NATURAL CATASTROPHES IN AUSTRALIA: ISSUES OF FUNDING AND INSURANCE
Authors: Chris Latham, Peter McCourt
Key words: Natural catastrophes, funding, insurance, national scheme
Purpose of your paper:
To revisit the need for a national disaster insurance scheme
Synopsis:
There is a view that the incidence of natural catastrophes in Australia is increasing, possibly due to the
effects of global warming and consequential climate change.
After Cyclone Tracy in 1974 the Federal Government decided in principle to introduce a national
disaster insurance scheme. However for a number of reasons it failed to eventuate.
This paper revisits the question of a national scheme, under the following headings:
• History of past catastrophes- is the incidence really increasing?
• The current situation for funding the financial cost of a natural disaster
• Who should fund the costs?
• What should be the respective roles of government and insurers?
• The problem of underinsurance
• What might a national scheme look like?
• The funding mechanism
Consideration of these questions raises social and general economic issues as well as actuarial
issues of funding and insurance.
REINSURANCE OF EFFICENCY AND ECONOMIC VALUE
David Maneval
Key words: Reinsurance, Price, Optimisation, Efficiency, Optimisation, Return, Economic Value
Added, Market Value Added, Capital, Cost of Capital, Return on Capital, Return on Equity
Purpose of your paper: Economic Value Added, Market Value Added and Return on Capital are
widely recognised tools to measure the efficiency with which a company has used its resources. The
intention of this paper is to demystify the use of such metrics for reinsurance.
Synopsis: Analysts have been increasingly asked to report on the return of individual classes, run-off
portfolios or any other segmentation of an insurer portfolio. Compared with financial targets, this can
lead to divestiture, price adjustment or selective growth (to name a few). Reinsurance purchase
decisions should be seen as another attempt to segment the portfolio for which each part can be
analysed with financial or valuation metrics.
Economic Value Added, Market Value Added and Return on Capital are widely recognised tools to
measure the efficiency with which a company has used its resources. The intention of this paper is to
demystify the use of such metrics for reinsurance. In addition, this paper briefly relates to the broader
reinsurance efficiency context and the importance of understanding modelling limitations.
WHAT CAN WE LEARN FROM CAPITAL TRENDS IN THE NOUGHTIES?
Brett Gould, David Whittle, Victoria Tidmas
Key words
Capital management, risk management, industry trends
Purpose of your paper:
Analysing capital and related trends, we reflect on the difficulties faced and lessons learned from the
last decade. Looking to the future, we discuss impending challenges and the increasing need for
sound, integrated capital and risk management.
Synopsis:
The last decade has been an interesting time in Australia - starting off with underpricing in some lines,
the market effects of the collapse of HIH, the resultant regulatory changes and ending off the decade
with a GFC. This paper seeks to review these periods and the trends emerging, particularly in the
light of an international survey conducted at the close of the decade that seeks companies’ views on
growth prospects and priorities to 2012, and the increased interdependency between risk and capital
management against a backdrop of growing regulatory changes for the industry. Getting the balance
right between these elements has become even more challenging post financial crisis and will remain
a key focus for the industry.
Survey responses indicated:
 greater focus on the integration of finance, risk and capital management
 the drive to improve business in the long term and not just react to regulatory change
 information about risk may be reaching the right people but recipients may lack knowledge of how
to respond appropriately
 investment in risk expertise is inevitable, especially to enhance understanding of data and models
 heightened regulatory requirements and reporting may expose shortcomings
No doubt the coming years will hold new challenges and opportunities for actuaries and we will
discuss some of these in this paper.
AUSTRALIAN INSURANCE TRADING RESULTS – HISTORICAL AND INTERNATIONAL
COMPARISONS
Adrian Gould and Sharanjit Paddam
Key words:
Insurance Trading Result, Insurance profit, insurance, reinsurance, underlying profitability, historical
comparison, international comparison
Purpose of your paper:
Insurance trading result (“ITR”) has become the preferred measure of financial performance of general
insurance companies by investment analysts. This paper will provide an analysis of past and recent
levels of ITR, for Australia and other markets.
Synopsis:
ITR is typically defined as the ratio of underwriting profit plus investment earnings on investments
supporting technical provisions to premium revenue. In recent years, ITR has become the measure of
financial performance of general insurance companies preferred by investment analysts in Australia.
The authors regard ITR as a superior measure of profitability of insurance operations to the traditional
measure of underwriting profit. However, there appears to be a dearth of published historical
information on levels of ITR. The objective of the paper will be to:
- survey and collate published information which is available on past ITR, both in Australia and
in selected overseas jurisdictions;
- if appropriate, derive our own estimates of aggregate ITR in each selected jurisdiction from
other published information, and
- make comparisons of historic, estimated current and prospective future levels of insurance
profit.
The discussion will consider whether current levels of ITR can be maintained in the long run in the
face of growing international entrants into the Australian market.
Implications from the annual JP Morgan Deloitte GI Industry Surveys
Elaine Collins and Catherine Dube
Key words:
Industry, underwriters, brokers, reinsurers, profitability, premium rate trends, claims trends, key issues
Purpose of your paper: (To assist delegates / readers searching for your paper on the Institute’s
website after the event, enter a sentence or two briefly describing the purpose of your paper.
Maximum: 220 characters)
The purpose of this presentation is to provide commentary on industry trends appearing in the General
Insurance Industry Survey conducted by JP Morgan and Deloitte.
Synopsis:
The JP Morgan Deloitte General Insurance Industry Survey, now in its 17th year, provides annually to
participants a detailed overview of the current state of the Australian general insurance industry and
the industry’s expectations. The survey brings together a comprehensive set of responses from direct
underwriters, brokers and reinsurers on key elements of the industry, including:
 Detailed product information for the current period and industry expectations for the next two
years covering topics such as premium rate trends, capacity changes, claim inflation, claim
frequency, loss and expense ratios
 Perception of product profitability
 Views on distribution trends
 Key issues affecting the industry and particular classes
We will examine the trend of industry forecasts provided by participants over the years, commenting in
particular on comparison to actual results provided the following year. We will also discuss the outlook
for the Australian general insurance industry.
A Statistical Basis for Claims Experience Monitoring
Greg Taylor
Synopsis
By claims experience monitoring is meant the systematic comparison of valuation forecasts with
claims experience as it emerges subsequently. In the event that the stochastic properties of the
forecasts are known, the comparison can be represented as a collection of probabilistic statements.
This is stochastic monitoring.
The paper defines this process rigorously in terms of statistical hypothesis testing. If the valuation
model is a regression model (which is the case for most stochastic valuation models), then the natural
form of hypothesis test is a number of likelihood ratio tests, one for each parameter in the valuation
model. Such testing is shown to be very easily implemented by means of GLM software.
This tests the formal structure of the claims model and is referred to as micro-testing. There may be
other quantities (e.g. amount of claim payments in a defined interval) that require testing for practical
reasons. This sort of testing is referred to as macro-testing, and its formulation is also discussed.
Premiums, Claims and Profit – A Class by Class Analysis of the Australian General Insurance
Market
Estelle Pearson
Key words: Profitability, market trends
Purpose of your paper: To examine recent trends in premium rates and claims for each major class
of business and look at the implications of this for the prospective profitability of the Australian general
insurance market.
Synopsis:
Premium and claim trends by class of business and the implications for underlying prospective
profitability for the general insurance industry
The paper will examine premium and claim trends by class of business over the last few years using
analysis of information from a wide variety of sources. The historic premium and claim indices are
used to explain trends in past loss ratios and to form a view about the underlying profitability for each
class of business both currently and prospectively. Challenges to profitability and opportunities to
outperform will be discussed for each class of business. Classes of business covered will include
Motor, Home, CTP, Commercial Motor, Fire, Liability, Professional Indemnity and Workers
Compensation.
The paper will update and extend analysis and research that has been carried out for a number of
years. The following charts provide an indication of the results summary that will be presented for
each class of business.
Premium Index - Motor
120
115
110
105
100
Exposure Quarter
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
95
Claim Index – Motor
120
115
110
105
100
Accident Quarter
Total - R12 months
Collision - R12 months
Loss Ratios - Motor
80%
60%
40%
20%
Financial Year
June-09
(Est)
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
0%
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
95
SOLVENCY II - HOW INSURANCE COMPANIES ARE CHANGING IN EUROPE
Matt Hodson, Maiyuran Arumugam
Key words: Solvency II, Internal Models, Use Test, Actuary, APRA
Purpose of your session:
This will be a presentation at one of the concurrent workshops.
The emphasis of the session will be to give practical insights into how insurance companies are gearing up and
evolving for Solvency II in Europe, with particular focus on the pivotal role of the actuary in this process.
Synopsis:
The emphasis of the session will be to give practical insights into how insurance companies are gearing up and
evolving for Solvency II in Europe, with particular focus on the pivotal role of the
actuary in this process.
Matt recently returned to Australia after a period of time in the UK. During his time in the UK, Matt was heavily
involved in Solvency II projects , including developing a worldwide Solvency II implementation plan with a large
global insurer. Matt was also a member of the UK's Internal Models Expert Group and led a workgroup that
reviewed the (then) emerging 'Use Test' guidance - the Use test being the 'Acid Test' of internal model approval
under Solvency II. During the session , Matt will:
-
Give a brief overview of the Solvency II framework
Provide an update on Solvency II developments in Europe
Discuss the impact of Solvency II globally and the reasons that many non-European companies are
following Solvency II closely
Provide a point of view of how APRA regime differs to Solvency II
Provide insights into changing roles of the key functions within an insurance company under Solvency II
IMTERNATIONAL UPDATE
Lisa Simpson
Key words:
Solvency II, International Accounting Standards, Insurance Accounting, Phase II, IASB, IAIS,
Synopsis:
An update on International developments in the areas of solvency capital and accounting standards.
The exposure draft for phase II of the insurance contracts standard is due in May 2009, but possibly
later. This paper will explain the key impacts of the exposure draft for general insurance accounting.
APRA’s exposure draft for the LAGIC project is also due in April 2009. It is anticipated that APRA will
be moving closer to alignment with elements of Solvency II for European insurers. Australian insurers
with European parents will have capital reporting requirements under both Solvency II and APRA’s
regulations. This paper will explain the requirements and trends towards harmonisation.
Lastly, the paper will draw together the components of insurance accounting and capital reporting.
APRA and the IAIS have both indicated a desire to ensure that capital standards build from general
purpose financial standards, rather than requiring a separate set of rules. The paper will look at the
cost of capital risk margin approach as an example of this move towards consistency.
IASB Exposure Draft on Insurance Contracts
Summary of Draft Submissions
Bob Buchanan
In late July, 2010, following a process starting in 1997, the International Accounting Standards Board
(IASB) issued its Exposure Draft for an Insurance Contracts International Financial Reporting
Standard (the ED). Submissions on the ED are due at the IASB by 30 November 2010. The IASB
timetable is for a final Standard to be promulgated in the second quarter of 2011, with an effective
date to be confirmed.
Both the Institute of Actuaries of Australia (IAAust) and the International Actuarial Association (IAA)
are currently preparing submissions. The IAAust submission is currently under preparation by the
International Accounting Standards Committee (IASC) of IAAust.
The preceding session, International Updates (see above), summarises the ED, particularly as it
affects general insurers. This presentation summarises the IAAust Submission in its current draft
form, again concentrating on general issues. It will also comment on any major differences in the IAA
Submission.
In addition to this presentation, which is general insurance oriented and intended to complement the
preceding presentation, Bob has prepared a longer Presentation that summarises the full submission,
with notes to each slide quoting the relevant paragraphs of the draft IAAust submission, with
occasional references to IAA views, drawn from an early draft of the IAA submission.
This longer presentation is commended to all those who wish to take a serious interest in what IAAust
will say. In order to conform to IAAust due process, the IASC must present its recommendations to
IAAust by 15 November, so time for comments is short.
INSURANCE RISK STUDY
David Maneval
Key words: Volatility, correlation, loss ratio, industry curve, benchmark, systemic, diversification,
Capital model, ERM
Purpose of your paper: The Insurance Risk Study models the global market and provides analysts
with an objective and data-driven set of underwriting volatility benchmarks, such as the systemic risk
of each line of business, and loss ratio correlations between lines of business and between countries.
The Study quantifies these benchmarks for 26 countries (incl. Australia) which together comprise more
than 85 percent of global premium.
Synopsis: The Insurance Risk Study models the global market and provides analysts with an
objective and data-driven set of underwriting volatility benchmarks, such as the systemic risk of each
line of business, and loss ratio correlations between lines of business and between countries. The
Study quantifies these benchmarks for 26 countries (incl. Australia) which together comprise more
than 85 percent of global premium.