QBE European Operations plc

QBE European Operations plc Annual report 2011 30
Financial management
“QBE EO has maintained a strong capital position.
Shareholders’ funds were £1.7 billion after the payment
of a dividend totalling £600 million and we continue
to hold a significant economic capital surplus.”
Financial management encompasses capital
management and allocation of resources,
as well as those financial risks that have an
impact on the balance sheet. It is integral to
QBE EO’s overall risk management strategy
and commercial objective, which is to generate
a 15% cross-cycle return on allocated
capital from insurance operations.
It is also vital in providing confidence in our ability
to pay claims and meet debt obligations and in
ensuring that regulatory requirements are met.
Capital management
Capital management covers all QBE EO’s
business activities, including underwriting and
investment strategy decisions and measures
of increasing capital efficiency, such as debt
management and reinsurance strategy. We
ensure that all insurance entities are adequately
capitalised to enable them to achieve our target
S&P rating and to use their capital efficiently.
We use a stochastic risk-based tool to model
our capital requirements. The tool, which
incorporates the principal risks being faced
by each of our legal entities together with the
output, is tailored to our risk profile. The resulting
capital requirements are reported to the risk
and capital committee which, in turn,
recommends them to the relevant boards.
In addition to assessing capital requirements
for regulated entities, our capital model is used
to support decision-making, including allocating
capital to class of business for business planning
and performance monitoring, assessing the
effectiveness of existing reinsurance protections
and new reinsurance strategies and considering
the implications of Solvency II on the business.
QBE EO capital resources
All registered insurance companies regulated by
the FSA and Lloyd’s syndicates have to perform
an Individual Capital Assessment (ICA) each year.
The ICA defines the level of capital needed to
ensure that the entity will be able to meet the
ultimate value of liabilities arising from past
business and the expected new business
to be written in the forthcoming year. Our ICAs
have been reviewed and accepted by the FSA
and Lloyd’s.
Lloyd’s corporate members are also required to
hold capital, Funds at Lloyd’s (FAL), in a trust at
Lloyd’s. These are intended to cover circumstances
in which the syndicates’ assets are insufficient
to meet their liabilities. The level of FAL depends
on corporate members’ participations on
syndicates and on the level of the syndicate ICAs
after Lloyd’s has reviewed and accepted them.
Rating agencies review the quality of admissible
assets, the mix and risk of business and
counterparty exposures, to measure how much
capital is required for each ratings band. The
treatment of assets is broadly consistent with
the regulatory basis. QBE EO monitors its
capital position on an ongoing basis to ensure
that it continues to have a strong rating and
stable outlook. Our core (re)insurance entities
maintained their S&P ratings.
The ratings for each of our insurance carriers
are on page 9.
Solvency II
Solvency II is a fundamental review of the
prudential regulatory requirements that are
expected to change the capital and disclosure
requirements and risk management standards,
for the European insurance industry.
Implementation is expected on 1 January 2014.
We have invested significant resources to ensure
that we are prepared to meet the new regime.
We participated in all relevant submissions to
Lloyd’s and to the Association of British
Insurers. In October 2011, our syndicates were
awarded “green light” status under the Lloyd’s
traffic light system, which is currently being
used to measure Solvency II readiness. No
such benchmarking is in place for QIEL, QREL
and Secura NV, but similar progress has been
made for these entities.
We are confident that our systems and internal
processes will comply with the new regulatory
requirements and that our entities will meet
Solvency II’s minimum capital requirements.
Over the next 12 to 24 months, we will determine
the optimum level of capital to be maintained
(taking regulatory and rating agency expectations
into account).
Liquidity and cash management
During the year, QBE EO’s cash and financial
investments increased by £108.6 million, largely
as a result of surplus cash flow generated by
its operations. It is vital for us to have strong
liquidity and cash management to ensure that
we have the ability to respond quickly to events,
such as the payment of claims following a
catastrophic loss.
We aim to maintain a strong liquidity position
by holding our assets predominately in liquid
funds. We monitor our exposures and run tests
to ensure that, even in realistic disasters,
sufficient liquidity is available.
We have a low appetite for credit risk, although
we have taken on more credit risk – on a very
selective basis – since high-quality corporate
spreads widened towards the end of 2009. We
have established detailed guidelines, procedures,
limits and monitoring requirements to mitigate
credit risk, particularly in the more significant
area of reinsurance counterparty credit risk.
Liquidity risk is discussed further on page 22.