Risk Margins Survey - New Zealand Society of Actuaries

www.pwc.com/nz
Risk Margins Survey
General Insurance Seminar
October 2011
Ross Simmonds &
Jonathan Nicholls

Agenda
What is the Risk Margin Survey?
What has been the impact of recent major events?
What are the key findings of the survey?
Risk Margins Survey
pwc
October 2011
Slide 2

What is the Risk Margin Survey?
Survey run by PwC since 2005
NZ General Insurers detail their risk margin methodology & numbers.
Results provide GI industry with:
• Awareness of emerging developments and trends
• Ability to benchmark
Risk Margins Survey
pwc
October 2011
Slide 3

What is the Risk Margin Survey?
Ten Participants this year
ACC, ACE, Allianz, AMI, Chartis, FMG, IAG, Lumley, Southern Cross
and Vero all submitted survey responses.
We thank all ten insurers for taking the time to participate.
Risk Margins Survey
pwc
October 2011
Slide 4

What has been the impact of major recent events?
Key Changes since the 2009 Survey
Look at the impact of recent major events on risk margins. Last couple
of years have seen:
• Insurance (Prudential Supervision) Act
• Canterbury Earthquakes
• IAA Risk Margins Taskforce paper
Risk Margins Survey
pwc
October 2011
Slide 5

What has been the impact of major recent events?
Insurance (Prudential Supervision) Act
Major regulatory reform, but has not significantly altered insurers
approach to risk margins.
Only change noted due to the new regulatory framework is around
aligning business classes to match the non-life solvency standard.
Risk Margins Survey
pwc
October 2011
Slide 6

What has been the impact of major recent events?
Canterbury Earthquakes
The earthquakes led to significant property damage. Some insurers
have separated these claims from the rest of the property portfolio.
In the results of this survey, liabilities arising from the Canterbury
earthquake have been excluded.
Catastrophe liabilities may require a different risk margin due to:
• Greater uncertainty
• Reinsurance coverage
Risk Margins Survey
pwc
October 2011
Slide 7

What has been the impact of major recent events?
IAA Risk Margins Taskforce paper
This paper was written in 2008 by Marshall, Collings, Hodson and
O’Dowd. It was mentioned by respondents last time as being a potential
reason to change risk margin methodology in the future.
As anticipated, the 2008 Taskforce paper is explicitly used to assist risk
margin calculation by four insurers in the current survey.
Risk Margins Survey
pwc
October 2011
Slide 8

What has been the impact of major recent events?
IAA Risk Margins Taskforce paper
Previous industry standard was 2001 paper by Bateup and Reed. It’s
scope was to meet “the need for a simple and practical formula-driven
approach … as an indicative guide only.”
Provided recommendations for:
• “stand alone” risk margins by line of business and OSCL Size
• Recommended multiples for determining PL risk margins
• “Rule of thumb” formula for diversification discount
Risk Margins Survey
pwc
October 2011
Slide 9

What has been the impact of major recent events?
IAA Risk Margins Taskforce paper
The 2008 paper divides uncertainty into components and assesses each
separately using a mix of quantitative and qualitative techniques:
• Independent risk – stochastic modelling and external benchmarking
• Internal systemic risk – qualitative scorecard & map to CoV by class
Risk Margins Survey
pwc
› Specification error, parameter selection error and data error
• External systemic risk – qualitative scorecard & map to CoV by class
› Economic & social risks, legislative/political and claim
inflation risks, claim management process change risk,
expense risk, event risk, latent claim risk and recovery risk.
• Allowance for correlations
• Additional analysis (e.g. sensitivity, scenarios, hindsight analysis)
October 2011
Slide 10

What are the key findings of the survey?
Probability of Sufficiency
Very little change from previous surveys, despite confirmation of 75%
POS in the new regulatory framework.
POS ranges from 75% to 90%, with an average of 81%.
However, when weighted by OSC liability the average is 84%,
suggesting that larger insurers have a higher POS.
Risk Margins Survey
pwc
October 2011
Slide 11

What are the key findings of the survey?
Risk Margin of Outstanding Claims by liability type
Risk Margins Survey
pwc
October 2011
Slide 12

Risk margin
What are the key findings of the survey?
Risk Margin of Outstanding Claims compared to Sufficiency
20%
Comparison of the risk margin to the
probability of sufficiency
15%
10%
5%
0%
70% 75% 80% 85% 90% 95%
Sufficiency level
Risk margin
Risk margin adjusted to 75% sufficiency
Risk Margins Survey
pwc
October 2011
Slide 13

Domestic
Property
Domestic
Motor
Commercial
Property
Commercial
Motor
Liability
Marine
Health &
Personal
Accident
Percentage of central estimate
What are the key findings of the survey?
Risk Margins for outstanding claims by class
Average outstanding claims risk margin by class
20%
18%
2005 2007 2009 2011
16%
14%
12%
10%
8%
6%
4%
2%
0%
Risk Margins Survey
pwc
October 2011
Slide 14

Domestic
Property
Domestic
motor
Commercial
property
Other
Health &
Personal
Accident
Commercial
motor
Liability
Marine
Risk Margin (75 th PoS)
What are the key findings of the survey?
Risk Margins for outstanding claims by class
15%
Average outstanding claims risk margin by class
10%
5%
0%
Risk Margins Survey
pwc
October 2011
Slide 15

Multiple
What are the key findings of the survey?
Premium liability risk margins
1.80
Risk margin for Premium Liabilities as a multiplre of
risk margin for Outstanding Claims Liabilities
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
A B C D E F G H I
Insurer
Risk Margins Survey
pwc
October 2011
Slide 16

What are the key findings of the survey?
Respondents comments
• No changes to approach due to the introduction of Insurance Act
• Only one respondent is anticipating a substantial change in approach
to calculating risk margins, excluding adjustment due to catastrophes
• One comment on whether risk margins should include allowance for
“model risk”, “data risk”, etc. This is effectively allowing companies
to establish “data reserves” which accounting standards do not allow.
Rather risk margins should just limit consideration to stochastic
nature of insurance risks.
Risk Margins Survey
pwc
October 2011
Slide 17

Any Questions?
Contact Details:
Ross Simmonds
(09) 355 8279
ross.w.simmonds@nz.pwc.com
Jonathan Nicholls
(04) 462 7158
jonathan.p.nicholls@nz.pwc.com
© 2011 PricewaterhouseCoopers New Zealand. All rights reserved. “PwC” refers to
PricewaterhouseCoopers New Zealand or, as the context requires, the
PricewaterhouseCoopers global network or other member firms of the network, each of which
is a separate and independent legal entity.