Fair valuation of liabilities for exit solutions and commutations
Fair valuation of liabilities for exit solutions and commutations
Fair valuation of liabilities for exit solutions and commutations
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Cologne Commutations Rendez-vous 2010<br />
<strong>Fair</strong> <strong>valuation</strong> <strong>of</strong> <strong>liabilities</strong> <strong>for</strong><br />
<strong>exit</strong> <strong>solutions</strong> <strong>and</strong> <strong>commutations</strong><br />
Nick Wat<strong>for</strong>d <strong>and</strong> Mark Lawson<br />
March 2010<br />
PwC
Agenda<br />
• Introduction<br />
• Why is <strong>valuation</strong> important<br />
- European run-<strong>of</strong>f plans<br />
- The run-<strong>of</strong>f toolkit<br />
• Valuation approaches<br />
- Insured level vs aggregate level<br />
- Direct vs reinsurance<br />
• Uncertainty in the <strong>valuation</strong> process<br />
PricewaterhouseCoopers LLP 2
Key messages<br />
Better<br />
in<strong>for</strong>mation<br />
+<br />
Clear<br />
run-<strong>of</strong>f<br />
strategy<br />
=<br />
Stronger<br />
negotiating<br />
position<br />
Valuation underpins the run-<strong>of</strong>f toolkit<br />
PricewaterhouseCoopers LLP 3
Key features <strong>of</strong> European run-<strong>of</strong>f plans<br />
Commutation strategy<br />
78%<br />
Exit strategies<br />
64%<br />
Resource planning<br />
28%<br />
Restructuring<br />
20%<br />
Outsourcing<br />
16%<br />
Other<br />
10%<br />
Source<br />
PricewaterhouseCoopers LLP<br />
PricewaterhouseCoopers LLP 4
The run-<strong>of</strong>f toolkit<br />
Commutation<br />
programme<br />
PricewaterhouseCoopers LLP 5
The run-<strong>of</strong>f toolkit<br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
PricewaterhouseCoopers LLP 6
The run-<strong>of</strong>f toolkit<br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
Reinsurance<br />
PricewaterhouseCoopers LLP 7
The run-<strong>of</strong>f toolkit<br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
Reinsurance<br />
Sale<br />
PricewaterhouseCoopers LLP 8
The run-<strong>of</strong>f toolkit<br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
Reinsurance<br />
Sale<br />
Business<br />
transfer<br />
PricewaterhouseCoopers LLP 9
The run-<strong>of</strong>f toolkit<br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
Reinsurance<br />
Sale<br />
Business<br />
transfer<br />
Solvent<br />
scheme<br />
PricewaterhouseCoopers LLP 10
The run-<strong>of</strong>f toolkit<br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
Reinsurance<br />
Sale<br />
Business<br />
transfer<br />
Solvent<br />
scheme<br />
PricewaterhouseCoopers LLP 11
The most valuable commodity<br />
I know <strong>of</strong> is in<strong>for</strong>mation<br />
Gordon Gekko<br />
Wall Street (1987)
Importance <strong>of</strong> data availability<br />
• Increased data volume <strong>and</strong> quality provides:<br />
- Flexibility regarding choice <strong>of</strong> methodologies<br />
- Underst<strong>and</strong>ing <strong>of</strong> sensitivities <strong>and</strong> outcomes<br />
• Methodology will depend on volume <strong>and</strong> type <strong>of</strong> data available:<br />
- Loss types with claims history<br />
- Loss types with no claims history<br />
PricewaterhouseCoopers LLP 13
vs<br />
Insured level <strong>valuation</strong><br />
Aggregate level <strong>valuation</strong><br />
PricewaterhouseCoopers LLP 14
Insured level <strong>valuation</strong>s<br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
Reinsurance<br />
Sale<br />
Business<br />
transfer<br />
Solvent<br />
scheme<br />
PricewaterhouseCoopers LLP 15
Insured level <strong>valuation</strong><br />
Insured conducts its own analysis<br />
Better support <strong>for</strong> negotiations<br />
Application to aggregate level<br />
reserving<br />
Focus on underlying in<strong>for</strong>mation<br />
Valuation <strong>of</strong> outwards reinsurance<br />
PricewaterhouseCoopers LLP 16
Insured level <strong>valuation</strong> – direct claims<br />
Insureds<br />
Insurer<br />
PricewaterhouseCoopers LLP 17
Insured level <strong>valuation</strong> – underlying approaches<br />
APH<br />
Direct<br />
• Estimate ground-up liability to<br />
insured using different approaches<br />
<strong>for</strong> different claim types<br />
• Allocate liability across coverage<br />
period<br />
• Apply to insurance programme<br />
PricewaterhouseCoopers LLP 18
Insured level <strong>valuation</strong> – underlying approaches<br />
Direct<br />
APH<br />
• Estimate ground-up liability to<br />
insured using different approaches<br />
<strong>for</strong> different claim types<br />
• Allocate liability across coverage<br />
period<br />
• Apply to insurance programme<br />
Short tail / non-APH<br />
• Frequency <strong>and</strong> severity approach<br />
applied to each year in the<br />
coverage period to estimate losses<br />
arising against insured<br />
• Apply to insurance programme<br />
PricewaterhouseCoopers LLP 19
Insured level <strong>valuation</strong> – reinsurance claims<br />
Insureds<br />
Insurer<br />
Reinsurer<br />
Insurer<br />
Insurer<br />
PricewaterhouseCoopers LLP 20
Insured level <strong>valuation</strong> – underlying approaches<br />
Direct<br />
APH<br />
• Estimate ground-up liability to<br />
insured using different approaches<br />
<strong>for</strong> different claim types<br />
• Allocate liability across coverage<br />
period<br />
• Apply to insurance programme<br />
Short tail / non-APH<br />
• Frequency <strong>and</strong> severity approach<br />
applied to each year in the<br />
coverage period to estimate losses<br />
arising against insured<br />
• Apply to insurance programme<br />
Reinsurance<br />
• Analyse underlying insured losses using a variety <strong>of</strong> approaches<br />
depending on type <strong>of</strong> inwards business <strong>and</strong> data available<br />
• Apply inwards losses to outwards reinsurance programme<br />
PricewaterhouseCoopers LLP 21
Insured level <strong>valuation</strong> – cedant experience approaches<br />
• Consider a cedant’s historical outwards claims experience with reinsurer<br />
using<br />
- Statistical projections e.g. chain ladder method, decay method<br />
- Use <strong>of</strong> available market knowledge e.g. benchmarking against paid,<br />
outst<strong>and</strong>ing <strong>and</strong> incurred claims amounts<br />
PricewaterhouseCoopers LLP 22
Aggregate level <strong>valuation</strong><br />
Commutation<br />
programme<br />
Outsource<br />
run-<strong>of</strong>f<br />
Reinsurance<br />
Sale<br />
Business<br />
transfer<br />
Solvent<br />
scheme<br />
PricewaterhouseCoopers LLP 23
Aggregate level <strong>valuation</strong> – direct claims<br />
Insureds<br />
Insurer<br />
PricewaterhouseCoopers LLP 24
Aggregate level <strong>valuation</strong> – reinsurance claims<br />
Insureds<br />
Insurer<br />
Reinsurer<br />
Insurer<br />
Insurer<br />
PricewaterhouseCoopers LLP 25
Uncertainties in the <strong>valuation</strong> process<br />
• Production <strong>of</strong> a range <strong>of</strong> results to allow <strong>for</strong> uncertainty in the <strong>valuation</strong><br />
process<br />
• Unknown vs supportable assumptions<br />
• Legal outcomes<br />
PricewaterhouseCoopers LLP 26
Key messages<br />
Better<br />
in<strong>for</strong>mation<br />
+<br />
Clear<br />
run-<strong>of</strong>f<br />
strategy<br />
=<br />
Stronger<br />
negotiating<br />
position<br />
Valuation underpins the run-<strong>of</strong>f toolkit<br />
PricewaterhouseCoopers LLP 27
This publication has been prepared <strong>for</strong> general guidance on matters <strong>of</strong> interest only, <strong>and</strong> does not constitute<br />
pr<strong>of</strong>essional advice. You should not act upon the in<strong>for</strong>mation contained in this publication without obtaining specific<br />
pr<strong>of</strong>essional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness<br />
<strong>of</strong> the in<strong>for</strong>mation contained in this publication, <strong>and</strong>, to the extent permitted by law, PricewaterhouseCoopers LLP,<br />
its members, employees <strong>and</strong> agents do not accept or assume any liability, responsibility or duty <strong>of</strong> care <strong>for</strong> any<br />
consequences <strong>of</strong> you or anyone else acting, or refraining to act, in reliance on the in<strong>for</strong>mation contained in this<br />
publication or <strong>for</strong> any decision based on it.<br />
© 2010 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to<br />
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the<br />
PricewaterhouseCoopers global network or other member firms <strong>of</strong> the network, each <strong>of</strong> which is a separate <strong>and</strong><br />
independent legal entity.<br />
PwC
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