2016 Insurance Market Briefing - Europe - AM Best · 2016 Insurance Market Briefing - Europe ....
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2016 Insurance Market Briefing - Europe
etc.venues St.Paul’s, London
16 November 2016
2016 Insurance Market Briefing - Europe 16 November 2016 2
Nick Charteris-Black Managing Director, Market Development - EMEA
Welcome
Agenda – 2016 Insurance Market Briefing - Europe
2016 Insurance Market Briefing - Europe 16 November 2016 3
09:10 EMEA Market Overview Greg Carter, Managing Director, Analytics – EMEA
09:30 Keynote Address Andrew Kendrick, Senior Vice President, Chubb Group & Regional President, Europe
10:15
10:40 The Value of Natural Catastrophe Schemes in Europe Carlos Wong-Fupuy, Senior Director
11:15 The Major Challenges Facing the Industry and the Potential Impact on Credit Quality Catherine Thomas, Senior Director, Analytics
Mahesh Mistry, Director, Analytics 12:00 Reinsurance Panel
Chair: Mark Geoghegan (Insurance Insider), Matt Fairfield (Exin Group), Kurt Karl (Swiss Re), Des Potter (GC Securities (EMEA)), Stefan Holzberger (A.M. Best)
12:45 Q&A: Concluding Comments
13:00
Agenda – Methodology Review Seminar
2016 Insurance Market Briefing - Europe 16 November 2016 4
14:25 Welcome and Introduction Overview of the Structural Changes
to Best's Credit Rating Methodology Greg Carter, Managing Director, Analytics – EMEA
14:30 Update on Ongoing Restructuring and Revised Presentation of Best's Credit Rating Methodology (BCRM) for (Re)Insurance Companies
Carlos Wong-Fupuy, Senior Director & Understanding the New Universal
BCAR & its Application Mathilde Jakobsen, Associate Director, Analytics
15:30 Q&A: Interactive Discussion 16:00 Close
Disclaimer
2016 Insurance Market Briefing - Europe 16 November 2016 5
© AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.
Disclaimer
2016 Insurance Market Briefing - Europe 16 November 2016 6
US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating where a person involved in the sales or marketing of a product or service of the CRA also participates in determining or monitoring the credit rating, or developing or approving procedures or methodologies used for determining the credit rating.
No part of this presentation amounts to sales / marketing activity and A.M. Best’s Rating Division employees are prohibited from participating in commercial discussions.
Any queries of a commercial nature should be directed to A.M. Best’s Market Development function.
2016 Insurance Market Briefing - Europe 16 November 2016 7
EMEA Market Overview
Greg Carter Managing Director, Analytics - EMEA
1% 1%
11% 12%
26% 22%
6% 8% 11%
2% 0% 0% 0%
aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+ bb bb- b+
Best's Issuer Credit Rating (ICR) distribution as at 30 September, 2016
MENA W Europe E Europe and CIS
EMEA
2016 Insurance Market Briefing - Europe 16 November 2016 8
Key Market Characteristics
• Low investment yields • Challenges to meet shareholder expectations
• Abundance of reinsurance capacity • Merger and Acquisition (M&A) activity continues
1% 2%
16% 18%
34%
23%
2% 3% 1% 0% 1% 3%
10%
17%
33% 29%
4% 3% 0%
aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+
Rating Distribution as at 30 September, 2016 Rating Distribution as at 31 July, 2015
Western Europe
2016 Insurance Market Briefing - Europe 16 November 2016 9
Key Market Characteristics
• Regulatory changes bedding down • Post-integration rationalisation
• Political clouds on the horizon • Slow economic growth prospects
Western Europe
2016 Insurance Market Briefing - Europe 16 November 2016 10
Downgrade drivers
• Weakening parent 1
Upgrade drivers
• Benefits of Integration 7 • Improved distribution 3 • Improved / Enhanced ERM
and / or Governance 3 • Increased Strategic importance 2 • Improved Capital position 1 • Improved Risk profile 1
82%
6%
1%
11%
Rating Actions Affirm
Upgrade
Downgrade
Initial
77%
14%
9%
Outlook Summary Stable
Positive
Negative
12%
23%
18% 20%
25%
2% 0%
8%
28%
22% 22%
18%
0% 2%
a a- bbb+ bbb bbb- bb+ bb
Rating Distribution as at 30 September, 2016 Rating Distribution as at 31 July, 2015
Middle East & North Africa
2016 Insurance Market Briefing - Europe 16 November 2016 11
• Fiscal budgets under pressure from low oil prices • Slowing growth from reduced gov. expenditure • Ongoing political instability and conflict
• Sound capitalisation, despite significant investment risk • Regulatory changes likely to put pressure on capital • Market leaders exhibit strong technical performance • New market entrants struggle to attract good business
Key Market Characteristics
Middle East & North Africa
2016 Insurance Market Briefing - Europe 16 November 2016 12
Upgrade drivers
• Improving capital position 3 • Strong technical performance 2 • Increased strategic importance 2
Downgrade drivers
• Worsening technical performance 4 • Weakening capital position 4 • Increased indebtedness / weak affiliates 1
79%
5%
11%
5%
Rating Actions Affirm
Upgrade
Downgrade
Initial
77%
7%
16%
Outlook Summary Stable
Positive
Negative
21%
5%
11%
26%
5%
0%
5%
11%
16%
22%
5%
11%
33%
6%
0%
11%
6% 6%
a- bbb+ bbb bbb- bb+ bb bb- b+ b
Rating Distribution as at 30 September, 2016 Rating Distribution as at 31 July, 2015
Eastern Europe and CIS
2016 Insurance Market Briefing - Europe 16 November 2016 13
Key Market Characteristics
• Economic uncertainty and market volatility • Small markets with low insurance penetration • Government influence still present
• Investment opportunities generally weak • Risk management a weakness • Regulators enhancing monitoring capabilities
Eastern Europe and CIS
2016 Insurance Market Briefing - Europe 16 November 2016 14
Review
• Motor softening as insurers seek market share
• Severe cats in 2014 hurt several (re)insurers
• Heightened M&A activity
Preview
• Unease relating to sanctions on Russia
• Motor third-party liability producing losses in several markets
• Governments under fiscal pressure may be opportunity for insurers (e.g. pension reforms)
79%
13%
8%
Rating Actions
Affirm
Downgrade
Initial
46%
4%
50%
Outlook Summary Stable
Positive
Negative
2016 Insurance Market Briefing - Europe
Industry Capitalisation
16 November 2016 15
0
50
100
150
200
250
300
Western Europe MENA EasternEurope
sub-SaharanAfrica*
20112012201320142015
BCAR** (%)
Primary Insurers
* Primary Insurers & Reinsurers ** BCAR: Best’s Capital Adequacy Ratio
2016 Insurance Market Briefing - Europe
Industry Capitalisation
16 November 2016 16
0
50
100
150
200
250
300
Western Europe MENA Eastern Europe
20112012201320142015
Reinsurers
BCAR* (%)
* BCAR: Best’s Capital Adequacy Ratio
16 November 2016 2016 Insurance Market Briefing - Europe 17
Q&A Greg Carter
Managing Director, Analytics - EMEA
2016 Insurance Market Briefing - Europe 16 November 2016 18
Keynote Address: Lessons from a Remarkable Year
Andrew Kendrick Senior Vice President, Chubb Group
Regional President, Europe
2016 Insurance Market Briefing - Europe
etc.venues St.Paul’s, London
16 November 2016
2016 Insurance Market Briefing - Europe 16 November 2016 20
The Value of Natural Catastrophe Schemes
in Europe Carlos Wong-Fupuy
Senior Director
Nat Cat up on the agenda
2016 Insurance Market Briefing - Europe 16 November 2016 21
Climate change (flood and
windstorm risks)
Pressures - fiscal budgets The State - shrinking role
Increased urbanisation Exposure concentration
The Insurance Gap
2016 Insurance Market Briefing - Europe 16 November 2016 22
Date Event Location Deaths
Economic Loss (USD bn)
Insured Loss (USD bn)
Dec. 22-31 Flooding United Kingdom N/A 2.5 1.3
Mar. 29-Apr. 1 Windstorms Mike and Niklas Western and Central Europe 9 1.4 1.0
Oct. 3-4 Flooding France 19 1.3 0.7
Jul.-Dec. Drought South Africa N/A 2.0 0.3
Jan. 9-11 Windstorms Elon and Felix Western and Northern Europe N/A 0.7 0.4
Source: Aon Benfield, 2015 Annual Global Climate and Catastrophe Report
Need for public / private partnership
2016 Insurance Market Briefing - Europe 16 November 2016 23
Prevention Mitigation
Risk transfer Recovery
State Infrastructure
Education Assistance
Re-construction Compulsion
Subsidies Guarantees
Private Sector
Risk pricing Deductibles
Exclusion
Claims payment Technical assistance
Technical expertise Risk modelling
Operational support
Challenges that Nat Cat schemes face
2016 Insurance Market Briefing - Europe 16 November 2016 24
Anti-selection Competition
High penetration? Bundling
State Guarantee?
Private or Public
Flat Pricing? Coverage
Compulsion?
Preparedness in Europe
2016 Insurance Market Briefing - Europe 16 November 2016 25
Flood Earthquake • Nat Cat Schemes: NDCS/CCR (France), CCS (Spain), Flood Re (UK)
• Spain: high penetration, tempered by inclusion of motor lines (flood)
• Germany: low penetration household insurance (flood)
• Italy: low penetration in general, high exposure to earthquake 50
90
90 90
30
30 5 50
90
90 90
18
5 5
5 90
Source: European Union Commission
France – Natural Disasters Compensation Scheme / CCR
2016 Insurance Market Briefing - Europe 16 November 2016 26
Spain – Consorcio de Compensacion de Seguros
2016 Insurance Market Briefing - Europe 16 November 2016 27
UK – Flood Re
2016 Insurance Market Briefing - Europe 16 November 2016 28
Germany
2016 Insurance Market Briefing - Europe 16 November 2016 29
• Main perils flood and windstorms • Increased awareness due to flood and hailstorm losses
in 2013 • Availability vs affordability • High penetration on basic policies (excl nat cat) • 99% of nat cat risks insurable, but only 35%
penetration on flood for households • Key difference with other markets: optionality • Recent experience reliant on post-event assistance
from local governments
Overview
Italy
2016 Insurance Market Briefing - Europe 16 November 2016 30
• Main risks: earthquake and flood • Low penetration rates in household insurance (< 40%) • Earthquake losses:
• L’Aquila (2009): EUR 10bn economic losses vs EUR 250m insurance claims
• Emilia Romagna (2012): EUR 12bn economic losses vs EUR 1bn insurance claims
• Umbria (2016): Similar economic losses / lower insurance claims. Less industrialised regions
• Discussions between ANIA and the government: • Increasing penetration rates. Compulsion (?) • Reduction or elimination of rates on premiums. • State guarantee
Overview
Conclusions
2016 Insurance Market Briefing - Europe 16 November 2016 31
• Prevalence of flood risks in most countries (earthquake in Italy)
• Increased awareness due to climate change
• No “one size fits all” solution • Need for public / private partnership
initiatives • High penetration as a requirement, not
a consequence
• Nat cat schemes are a complement, not a substitute to the private sector
• Incentives and restrictions to limit adverse selection are key
• Need for a solid technical framework that ensures the long term financial viability of the model
2016 Insurance Market Briefing - Europe 16 November 2016 32
Q&A Carlos Wong-Fupuy
Senior Director
2016 Insurance Market Briefing - Europe 16 November 2016 33
The Major Challenges Facing the Industry
and the Potential Impact on Credit Quality
Catherine Thomas Senior Director, Analytics
Mahesh Mistry Director, Analytics
Looking back…
2016 Insurance Market Briefing - Europe 16 November 2016 34
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Lehman Brothers bankruptcy
Greek bailout
Sovereign Downgrades (USA, France, Italy, Spain…)
Recession Europe
Brexit
Sterling Depreciation
Depressed oil prices
Emerging markets slowdown (China)
Liquidity Crisis Sovereign Debt Crisis Low Interest Rate Environment
Hurricanes Gustav & Ike Floods in Australia New Zealand EQ
Japan EQ / Tsunami European and Alberta
Floods
German Hailstorms
Hurricane Sandy
Thai Floods
Fires in Southern CA
Chile EQ
European Storm Klaus
Zika Virus Tianjin Ebola
Italian Earthquakes
Canadian Wildfires European Storm Kyrill
Subprime crisis US Elections
Looking forward…
2016 Insurance Market Briefing - Europe 16 November 2016 35
Threats and
Opportunities
Insurance Pricing
Reserving Premium growth
Nat Cat Accumulation Concentration
Pandemic Terrorism
Man-made disasters Mortality / morbidity
Competition Excess capacity Climate change
Economic Growth/slowdown
Interest rates Inflation Currency
Regulation Indirect exposures
(e.g. banking, affiliates)
Political Brexit
Elections Instability / conflict
Change in government policies
Technology Distribution
Disruptive innovation Big data
Block chain Driverless cars
Cyber Drones
Other Globalisation
Energy Medical advances
Power outages / blackouts
Looking forward…
2016 Insurance Market Briefing - Europe 16 November 2016 36
Threats and
Opportunities
Insurance Pricing
Reserving Premium growth
Nat Cat Accumulation Concentration
Pandemic Terrorism
Man-made disasters Mortality / morbidity
Competition Excess capacity Climate change
Economic Growth/slowdown
Interest rates Inflation Currency
Regulation Indirect exposures
(e.g. banking, affiliates)
Political Brexit
Elections Instability / conflict
Change in government policies
Technology Distribution
Disruptive innovation Big data
Block chain Driverless cars
Cyber Drones
Other Globalisation
Energy Medical advances
Power outages / blackouts
Deficient Loss Reserves
2016 Insurance Market Briefing - Europe 16 November 2016 37
• Reserves set up to meet future claims payments are insufficient
Threat
Concern
• Reserves set up to meet future claims payments are insufficient
• Results over past five years supported by substantial reserve releases
• Pressure on current year underwriting and investment earnings, so insurers increasingly reliant on reserve releases for profitability
• Terms and conditions deteriorating • Level of releases unsustainable as
confidence levels decline • Reserve strengthening required,
depleting earnings and capital
US Property / Casualty Impairment Causes (2000-2015)
Leading cause of impairments
2016 Insurance Market Briefing - Europe 16 November 2016 38
Fraud - Adjudged or Alleged, 6.5% Affiliate Problems,
6.2%
Catastrophe Losses, 5.3%
Rapid Growth, 4.7%
Investment Losses, 3.3%
Reinsurance Failure, 0.3%
Unlicensed Insurance Product, 0.3%
General Business Failure (deficient loss reserve / inadequate
pricing), 73.4%
US P / C: Reserve Development
2016 Insurance Market Briefing - Europe 16 November 2016 39
-15%
-10%
-5%
0%
5%
10%
15%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Y+1 Y+2 Y+3 Y+4 Y+5 Y+6 Y+7 Y+8 Y+9
10-Year Reserve Development
-10%-8%-6%-4%-2%0%2%4%6%8%
10%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Y+1 Y+2 Y+3 Y+4
US P / C: Reserve Development
2016 Insurance Market Briefing - Europe 16 November 2016 40
10-Year Reserve Development – First Four Years
US P / C: Reserve Development
2016 Insurance Market Briefing - Europe 16 November 2016 41
0
50
100
150
200
250
300
-10%-8%-6%-4%-2%0%2%4%6%8%
10%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Y+1 Y+2 Y+3 Y+4 Rate movement
10-Year Reserve Development – First Four Years and Rate Movements
UK – Reserve Releases
2016 Insurance Market Briefing - Europe 16 November 2016 42
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
UK Non-Life Reserve Releases
Notes: Net reserve releases as a percentage of reserves brought forward. Outliers have been removed from years 1989, 2010, 2011 and 2015. Source: Prudential Regulation Authority returns for firms reporting on an accident-year basis, A.M. Best research
Deficient Loss Reserves
2016 Insurance Market Briefing - Europe 16 November 2016 43
T O
• A leading cause of insurer impairments • Historical correlation between
underwriting and reserving cycles • Have recent releases eroded confidence
levels? • Reserve strengthening could affect
earnings, capital adequacy and reputation
Threat
• Actuarial departments have been strengthened
• Improvements in modelling and data analytics
• Proactive companies with robust feedback loops likely to emerge relatively unscathed
• Positioned to take advantage of any contraction in capacity and subsequent price increases
Opportunity
Growth
2016 Insurance Market Briefing - Europe 16 November 2016 44
Excessive growth is one of the main reasons for insurance failure
Growth Profitability
Financial Stability
The Right Balance
• Is growth important for insurers? • Is it sensible to grow in the current
economic environment? • Are there any opportunities to grow?
A few questions
Growth: GDP vs. GWP
2016 Insurance Market Briefing - Europe 16 November 2016 45
-8%
-6%
-4%
-2%
0%
2%
4%
2009 2010 2011 2012 2013 2014 2015
North America
-8%
-6%
-4%
-2%
0%
2%
4%
2009 2010 2011 2012 2013 2014 2015
Europe
-15%
-10%
-5%
0%
5%
10%
15%
20%
2009 2010 2011 2012 2013 2014 2015
Oceania
-5%
0%
5%
10%
15%
2009 2010 2011 2012 2013 2014 2015
Latin America
-2%
0%
2%
4%
6%
8%
10%
2009 2010 2011 2012 2013 2014 2015
Asia & Middle East
-2%
0%
2%
4%
6%
8%
10%
12%
2009 2010 2011 2012 2013 2014 2015
Africa
Notes: Gross Domestic Product (GDP) Gross Written Premium (GWP) (Unadjusted insurance growth) Source: A.M. Best data and research, Swiss Re sigma “World Insurance” series
Growth: Emerging Markets Present Opportunities
2016 Insurance Market Briefing - Europe 16 November 2016 46
-
500
1,000
1,500
2,000
North America Latin America WesternEurope
Central andEastern Europe
Mature Asia Emerging Asia Middle Eastand Central
Asia
Africa Oceania
USD
mill
ions
Premium Development by Region (Adjusted for US dollars) 2010
2011
2012
2013
2014
2015
Source: A.M. Best data and research, Swiss Re sigma “World Insurance” series
-10%
-5%
0%
5%
10%
15%
2010 2011 2012 2013 2014 2015Gro
wth
(%)
Growth: Mature vs. Emerging Markets (Unadjusted) Life Emerging
Non-Life Emerging
Life Mature
Non-Life Mature
Growth: Is growth a concern?
2016 Insurance Market Briefing - Europe 16 November 2016 47
Source: A.M. Best data and research. Growth 2014 vs. 2013, combined ratio 2015 vs. 2014. Selected leading insurers and reinsurers.
Growth controlled to maintain technical performance, with reinsurers showing marginal improvements
25%
20%
15%
10%
5%
0%
5%
10%
15%
-30% -20% -10% 0% 10% 20% 30%
Non-life: Movement in Premiums Compared to Combined Ratios
Growth Growth
Improving Combined Ratio Mainly Reinsurers
Mainly Insurers
Deteriorating Combined Ratio
Growth
2016 Insurance Market Briefing - Europe 16 November 2016 48
• Aggressive growth in tough market conditions
• Fierce competition and pricing pressure in many segments and markets
• Low investment returns, declining ROEs • Increased pressure and focus on
underwriting • Limited benefits for further cost
reductions • Greater pressure to enhance market
profiles
Threat
• Portfolio consolidation and realignment of strategy
• Focus attention on select products and territories
• Innovate into niche / non-traditional lines
Opportunity
T O
Accumulation Risk
2016 Insurance Market Briefing - Europe 16 November 2016 49
• Potential for significant accumulation of risk growing in an increasingly interconnected world
• Detection and management of accumulations more challenging as complexity grows
• Likelihood of balance sheet impairing losses increasing
Source: A.M. Best research and World Economic Forum “The Global Risks Report 2016”
Property vs Casualty Accumulations
2016 Insurance Market Briefing - Europe 16 November 2016 50
• Geographically defined • Scale of loss determined relatively
quickly • Sophisticated catastrophe modelling
tools available, albeit with limitations • Use of historical loss data • Global supply chains – local events can
lead to international losses
Property
• Driven by legal and socio-economic factors
• Losses may occur over multiple years and territories
• Use of deterministic realistic disaster scenarios
• Difficult to predict future losses from past events
• Technological advances and growing global networks increase accumulation risk
Casualty
Accumulation Risk - Casualty
2016 Insurance Market Briefing - Europe 16 November 2016 51
Managing Casualty Accumulations
Emerging risk analysis
Expert knowledge
Scenario analysis
Advancements in modelling techniques
Enhanced policy information
Application of big data
Event footprints
Identify supply and distribution
chains
Accumulation Risk
2016 Insurance Market Briefing - Europe 16 November 2016 52
• Globalisation of production and trade • Widespread use of new technology • Give rise to:
- complex interdependencies and exposures
- large unexpected loss accumulations - potential pressure on earnings, capital
and liquidity
Threat
• Economic growth and innovation – new risks requiring insurance
• Develop superior understanding of risk drivers and interdependencies: - manage accumulations,
reduce / increase exposure - develop new insurance products - better address clients’ risk transfer
needs
Opportunity
T O
Energy: Overview
2016 Insurance Market Briefing - Europe 16 November 2016 53
Alternative Sources
Oil and Gas
Environment Risks
Low Oil Prices
Reduced Investment
Declining Rates Supply and Demand
Geopolitical Risks
Economic Risk
Energy: Oil Prices
2016 Insurance Market Briefing - Europe 16 November 2016 54
2030405060708090
100110120
Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16
USD
(per
Bar
rel)
Notes: Europe Brent Spot Price (US Dollars per Barrel). Data to November 07, 2016. Source: United States Energy Information Administration
Oil prices have fallen to their lowest position over the last decade
Energy: Downstream Losses
2016 Insurance Market Briefing - Europe 16 November 2016 55
Source: Willis Towers Watson/Willis Towers Watson Energy Loss Database as of March 1 2016 (figures include both insured and uninsured losses). Energy losses excess of USD 1 million.
Downstream energy losses 2000 –2016 vs. estimated global downstream premium income
Energy: Geopolitical Risk
2016 Insurance Market Briefing - Europe 16 November 2016 56
12.5 11.6
3.7 3.2
3.0 3.0
2.6 2.2
1.8 1.8
0.9
0 5 10 15
Saudi ArabiaRussia
UAEBrazil
MexicoKuwaitNigeria
QatarAlgeria
KazakhstanAzerbaijan
Contribution to World Oil Production (2014) (%)
93.0 105.0
51.8
97.5
57.8
95.8
67.5 60.6
82.7
0
20
40
60
80
100
120
Fisc
al B
reak
even
Pric
e (U
SD p
er b
arre
l)
Fiscal Breakeven (US Dollar per barrel)
Over 50% of oil production from emerging economies
Sources: United States Energy Information Administration, International Monetary Fund, IMF Regional Economic Outlook Middle East and Central Asia, October 2015, and A.M. Best research.
Energy: Investment Risk
2016 Insurance Market Briefing - Europe 16 November 2016 57
20
40
60
80
100
120
140
160
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
GCC Stock Markets and Brent Crude Indexed to January 2014 = 100
Energy: Currency Risk
2016 Insurance Market Briefing - Europe 16 November 2016 58
-
50
100
150
200
250
300
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
Oil Exporter Currencies and Brent Crude Indexed to January 2014 = 100
Brent Crude Nigerian Naira Algerian Dinar Ghana Cedi Brazilian Real
Mexico Peso Russia Ruble Kazakhstan Tenge Azerbaijan Manat
Low oil prices and currency depreciation a major concern for many insurers operating in emerging markets
Energy
2016 Insurance Market Briefing - Europe 16 November 2016 59
• Insurers in emerging markets feel economic strain - Economic slowdown - Currency depreciations - Austerity measures - Volatility in equity and real estate
markets - Pressure on credit ratings
• Negative pressure likely to persist for energy insurers
Threats (Short term)
• Suppressed inflation for mature markets • Greater demand for insurance related to
alternative energy sources
Opportunities (Short term)
Energy
2016 Insurance Market Briefing - Europe 16 November 2016 60
• Geopolitical risks likely to persist • Countries operating below fiscal budgets
are likely to experience further economic strain
• Uncertainty regarding supply and demand, e.g. Iran
• Risk of currencies being de-pegged • Higher energy prices may increase
inflationary pressure for oil importers
Threats (Long term)
• Higher prices should increase economic development and stability in emerging markets
Opportunities (Long term)
T O
Low Interest Rates
2016 Insurance Market Briefing - Europe 16 November 2016 61
-1012345678
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Inte
rest
Rat
e (%
) Italy
Spain
France Germany
USA
UK
Sources: European Central Bank, OECD
• Prevailing low interest rate environment continues indefinitely
Threat
• High proportion of investments in interest rate sensitive assets (such as bonds)
• Offer interest rate sensitive products to customers (life insurers)
Concern
Impact on insurers
2016 Insurance Market Briefing - Europe 16 November 2016 62
• Lower interest rates: - increase present value of liabilities - increase market value of fixed-
income assets • Sensitivity depends on duration • Insurance liabilities tend to have a
longer duration than assets • Direct impact on capital and solvency • Lower investment returns hit profits
ASSETS (fixed income)
LIABILITIES
SURPLUS
Life Insurers Most Affected
2016 Insurance Market Briefing - Europe 16 November 2016 63
• Exposure depends on: - asset allocation - duration mismatch - level of guarantees in life insurance products
• Larger insurers usually better diversified by line of business, asset class and geography
• Life insurers: - typically match long-term liabilities with long-term bonds - products may contain financial guarantees to policyholders
Life insurers that have large government bond portfolios and offer high guarantees to policyholders are most vulnerable
Industry Response
2016 Insurance Market Briefing - Europe 16 November 2016 64
• Lower guarantees on new products • Shorter duration contracts • Shift from savings products to
underwriting mortality risks • Increase in unit-linked products • Greater diversification • Sale of capital intensive books of
business
Products
• Search for yield – increase in credit risk and duration
• Alternative investments: - infrastructure - commercial real estate - direct lending - private equity
• Increased use of interest rate derivatives
Investments
Low Interest Rates
2016 Insurance Market Briefing - Europe 16 November 2016 65
• Inadequate duration matching has a direct impact on solvency
• Downward pressure on profits: - lower investment returns - guaranteed products more expensive
• Other concerns: - competition – insurance attractive to
investors - M&A – in absence of investment
opportunities
Threat
• Take advantage of favourable pricing to issue debt
• Product innovation • Alternative investment strategies • Opportunistic acquisition of books of
business
Opportunity
T O
Pandemic: Major threat?
16 November 2016 2016 Insurance Market Briefing - Europe 66
• Rare events – reoccurrence rates between 30-50 years
• Consequences can be devastating • Substantial global financial risk
Is a pandemic a major risk?
Estimated global cost of a pandemic according to the World Bank is USD 800 billion (1-10% of global GDP). Insurance loss is difficult to predict
Disease When? Casualties
Spanish Flu 1918-20 40-50 million*
Asian Flu 1957 1-2 million
Hong Kong Flu 1968 Approx. 1 million Notes: Two of these pandemics comprised bird flu with human flu viruses. *Some estimates (World Health Organisation) suggest up to 100 million lives
Pandemic: Viruses and Diseases
2016 Insurance Market Briefing - Europe 16 November 2016 67
Risk Year Description
Hendra Virus 1994 Virus from horses – contained to Australia
Nipah Virus 1999 Related to Hendra; cannot be transferred to humans
Cholera 1960s; 1970s Present outbreaks relate to poor sanitation. Developed a greater resistance to antibiotics
Small Pox N/A Mortality rates of 30%. Largely eradicated
HIV / AIDS 1980 to present Over 25 million deaths. Effective vaccines are difficult to develop.
Bubonic Plague 1300s Killed 30%-60% of Europe’s population
Others: MRSA, SARS, Ebola, Zika Virus, Lassa Fever, Marburg Virus
Pandemic: Risk to Companies
2016 Insurance Market Briefing - Europe 16 November 2016 68
Understanding how the risk has changed
• Better drugs • Co-ordinated responses • Development of influenza models • Better communication methods • Healthier population • Significant investment / research
Positive Effects
• Globalisation • Global travel • Larger population size • Higher concentration in urban areas • Diseases can have greater resistance to
drugs • Unknowns: time to prepare a new
vaccine
Negative Effects
Pandemic: Affect on credit quality
2016 Insurance Market Briefing - Europe 16 November 2016 69
• A major pandemic could have greater financial consequences than a natural or man-made disaster, which could significantly impact the balance sheet strength of life and health (re)insurers
• There may also be some indirect consequences for the non-life market
Threat
• Pandemics are likely to be underinsured with a significant difference between the economic cost and the cost to the insurance market
• Improved modelling capabilities and confidence in medical advances may provide opportunities for the market
Opportunity
T O
Conclusion
2016 Insurance Market Briefing - Europe 16 November 2016 70
TerrorismGlobalisationCurrency risk
BrexitGeopolitics
Oil PricesClimate Change
PandemicsInflation
Cyber riskDistribution
Big dataLow interest rates
GrowthAccumulation risk
Nat CatsDeficient reserves
Threat Opportunity Impact on Credit Quality
Largest
Smallest
2016 Insurance Market Briefing - Europe 16 November 2016 71
Q&A Catherine Thomas
Senior Director, Analytics Mahesh Mistry
Director, Analytics
Reinsurance Panel
2016 Insurance Market Briefing - Europe 16 November 2016 72
Stefan Holzberger
Chief Rating Officer
A.M. Best
Kurt Karl Chief
Economist Swiss Re
Mark Geoghegan
Managing Director
Insurance Insider
Des Potter
Managing Director GC Securities
(EMEA)
Matt Fairfield
Chief Executive Officer
Exin Group
2016 Insurance Market Briefing - Europe 16 November 2016 73
Reinsurance Panel
2016 Insurance Market Briefing - Europe 16 November 2016 74
Stefan Holzberger
Chief Rating Officer
A.M. Best
Kurt Karl Chief
Economist Swiss Re
Mark Geoghegan
Managing Director
Insurance Insider
Des Potter
Managing Director GC Securities
(EMEA)
Matt Fairfield
Chief Executive Officer
Exin Group
Global Reinsurance
2016 Insurance Market Briefing - Europe 16 November 2016 75
77.3% 60.2% 56.5% 56.2% 56.2%
62.2%
61.3%
31.5% 31.6%
32.3% 33.5% 34.2% 33.9% 32.6%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0%
20%
40%
60%
80%
100%
120%
2011 2012 2013 2014 2015 2016 Q2 5yr Avg
Expense Ratio
Loss Ratio
Loss ReserveDevelopment
Source: A.M. Best data and research
Global Market Trends
Global Reinsurance
2016 Insurance Market Briefing - Europe 16 November 2016 76
Global Market Trends Return on Equity and Five-Year Average
1.9%
12.4% 13.0%
11.6%
9.5% 9.0%
0%
2%
4%
6%
8%
10%
12%
14%
2011 2012 2013 2014 2015 2016 Q2
Source: A.M. Best data and research
Dedicated Reinsurance Capacity
2016 Insurance Market Briefing - Europe 16 November 2016 77
Total Dedicated Reinsurance Capacity (USD billions)
Note: * Estimate by Guy Carpenter and A.M. Best Source: A.M. Best, Guy Carpenter
292 320 340 332 340
19
48 60 68 71
0
50
100
150
200
250
300
350
400
450
2012 2013 2014 2015 6M 2016E
ConvergenceCapacity
TraditionalCapacity
Capacity Utilization
2016 Insurance Market Briefing - Europe 16 November 2016 78
Capacity Utilization Based on Aggregate Risk-Adjusted Capitalization of Rated Balance Sheets
81% 76% 73% 72%
0
25
50
75
100
2012 2013 2014 2015
%
Global Reinsurance
2016 Insurance Market Briefing - Europe 16 November 2016 79
Negative Outlook
Change in demand
Excess capacity
Capital convergence
Benign catastrophe
losses
Questionable underwriting
discipline
Reserve development
Low yields
Reinsurance Panel
2016 Insurance Market Briefing - Europe 16 November 2016 80
Stefan Holzberger
Chief Rating Officer
A.M. Best
Kurt Karl Chief
Economist Swiss Re
Mark Geoghegan
Managing Director
Insurance Insider
Des Potter
Managing Director GC Securities
(EMEA)
Matt Fairfield
Chief Executive Officer
Exin Group
2016 Insurance Market Briefing - Europe
etc.venues St.Paul’s, London
16 November 2016