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Inside magazine issue 12 | Part 03 - From a corporate perspective Changes in regulation A tightening of the regulations might be quite expensive because it implies more administrative costs in order to fulfill the regulation standards (PRIIPS, Solvency II, FATCA, CRS, SST, IDD, SFTR, NAIC Regulations in the United States, etc.). Rising costs and capital requirements are an incentive to enter into an M&A. As part of Solvency II, strong data quality management is required. Data must be appropriate, complete, accurate and secure. “Complete” and “secure” data means powerful data storage solutions are needed. This requires insurance undertakings to either augment the capacity of the data storage systems or outsource it to IT specialists in order to bring down the costs. Implementation of regulations such as Common Reporting Standards (CRS) demands strict reporting obligations that ultimately have to be outsourced. The complex elaboration of the Key Investor Information Document (KIID) for each Packaged Retail and Insurance-based Investment Products (PRIIPS) will require volume management and have an impact on the distribution process. Each regulation is very demanding in terms of compliance and reporting and this triggers high management costs. The costs arising from an increased regulation may not be sustainable by smaller or specialized insurers, and this will push them to seek economies of scope or scale. They will need to reallocate or release capital or sell portfolios that are not part of their core business or not in line with their risk appetite. What is the key to generating value in life and non-life insurance business? 2 Life insurance business For life insurance business, the indicators that measure the return on investments such as the Return on Assets (RoA) and Assets-to-Equity are suitable indicators to monitor the profitability of the business. This is due to the fact that the margin on life insurance business can be divided into the margin on the interest rate, margin on risks, and margin on expenses: •• The margin on the interest rate corresponds to the difference between the net financial interest and the guaranteed interest rate •• The margin on risks corresponds to the expected claims assumed on the pricing and the effective claims in a given period •• The margin on expenses is the difference between the estimated costs implied on the pricing of the product and the real costs incurred. 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% 2. Study based on the EIOPA Stability Report Dec 2015. Historically, the most important component of the overall margin has been the margin on the interest rate. This is due to the fact that it is difficult to enhance profit on the expenses component, while the margin on the risks depends on exogenous variables such as the effect of longevity, leaving very little scope to enhance this margin by management actions. Moreover, the fact that the life insurance industry prefers to promote unitlinked products and limit, reduce or indeed eliminate guaranteed savings products increases the correlation of the performance of life insurance business with the financial markets. This trend introduces a challenge for insurance undertakings to give added value to policyholders as an alternative to other banking and investment products. The graph below shows how the RoA median for life insurance business has remained stable but low in the past couple of years. For Q2-2015, the median was 0.4 percent. However, this result has not factored in the decrease in bond yields (due to recent stock market trends, the cashing out of bonds, and derivative positions). Figure 7: Evolution of the Return on assets (RoA) for Life insurance business Total. Median. interquartile range and 10 th and 90 th percentile 2010-Q2 2010-Q4 2011-Q2 2011-Q4 2012-Q2 2012-Q4 Source: EIOPA Financial Stability Report December 2015 (sample based on 32 large insurance group in EU and Switzerland) 2013-Q2 2013-Q4 2014-Q2 2014-Q4 2015-Q2 126
Inside magazine issue 12 | Part 03 - From a corporate perspective However, the residual bulk of the fixedrate guaranteed portfolio, combined with the low level of the ROA indicator, might encourage life insurance undertakings to reallocate their investment portfolios to riskier assets, which could make them more vulnerable to adverse market risk movements. Figure 8: Evolution of the Combined ratio for Non-Life business Non-Life. Median, interquartile range 10 th and 90 th percentile 130.0% 120.0% 110.0% 100.0% Non-life insurance business The combined ratio and the loss ratio measure the underwriting results, or more specifically, what is the revenue due to written premiums as opposed to how much has been paid and reserved in order to properly cover the underlying risk that is assumed by the insurance undertaking. The difference between the CoR and the Loss Ratio is that the CoR includes expenses, while the Loss Ratio measures the profitability of the pure underwriting risk. In order to measure the enhanced value of the underwriting result, close monitoring of the Loss Ratio and the CoR is necessary (figure 8). 90.0% 80.0% 70.0% 60.0% 2010-Q2 2010-Q4 2011-Q2 Figure 9: Evolution of the Return on Equity (RoE) Total, Median, interquertile range and 10 th and 90 th percentile 20.0% 15.0% 10.0% 2011-Q4 2012-Q2 2012-Q4 2013-Q2 2013-Q4 2014-Q2 2014-Q4 2015-Q2 The graph on the right shows the quarterly evolution of the CoR for non-life insurance business. In Q2-2015 the median of the combined ratio was 95 percent. Nevertheless, we observe in some markets that the underwriting results are not sufficient to cover the operational cost, and the global profitability is mainly due to the financial result. This is usually referred to as financial underwriting. An example of this is motor liability insurance, where the low interest rate environment has severely affected this business line: Overall insurance business The RoE and the RORAC are quite relevant for insurance business, as these indicators measure how much capital the undertaking must set aside to cover the underlying risk and how much it has gained from this capital. In Q2-2015 the RoE increased with respect to the previous quarter to 9.8 percent, but it remains within approximately the same spectrum as 2010 (figure 9). 5.0% 0.0% -5.0% -10.0% 2010-Q2 2010-Q4 2011-Q2 2011-Q4 2012-Q2 We observe in some markets that the underwriting results are not sufficient to cover the operational cost, and the global profitability is mainly due to the financial result. This is usually referred to as financial underwriting. 2012-Q4 Source: EIOPA Financial Stability Report December 2015 (sample based on 32 large insurance group in EU and Switzerland) 2013-Q2 2013-Q4 2014-Q2 2014-Q4 2015-Q2 127
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Inside Triannually insights from De
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Inside magazine issue 12 | Contents
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Inside magazine issue 12 | Foreword
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Inside magazine issue 12 | Part 01
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Page 76 and 77: Inside magazine issue 12 | Part 02
Page 144 and 145: Inside magazine issue 12 | Contacts
Page 146: Our expert authors, who are brimmin
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