Transcript Insurance Companies Management Course II

Lecture for Nottingham University
Business School
Current trends and challenges in the
global insurance industry
Kurt Karl
Swiss Re
Economic Research & Consulting
New York, February 11, 2002
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
Agenda

• Long-term trends
• Profitability and the cycle
• Liberalization / Consolidation /
Convergence
• Reinsurance markets
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
2
Global premium volume growth is
accelerating, after years of slow growth
Real growth
rates
in %
25
20
15
Life
Non-life
Total
10
5
0
-5
-10
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
3
The average premium growth in emerging markets is nearly
twice as high as in the industrialised countries
Real growth rates in %20
18
16
Average: 8.6%
14
12
10
Industrialised
countries
8
Average:
4.7%
6
4
Emerging
Markets
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
2
0
1980
82
84
86
Lecture, Nottingham, February 2002
88
90
92
94
96
98
2000
4
Global premium income 2000: the
industrialised countries dominate
North America
0.4%
5.4%
Latin America
1.0%
1.6%
Western Europe
37.3%
20.6%
Central and Eastern Europe
Japan
South and East Asia
0.7%
Middle East
1.7%
Africa
Oceania
31.2%
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
5
Motor has the highest share in the European Non-Life
market
Others
17%
Western Europe
2000
Motor
33%
Credit
4%
Transport
5%
Liability
7%
Accident
15%
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
Property
19%
6
Non-life insurance: Premium growth is
recovering from the soft market
15
Real growth rate in %
10
5
0
-5
World
North
America
Western
Europe
Japan
Growth in 2000
Oceania
Latin
America
Eastern
Europe
South &
East Asia
Middle
East
/ Central
Asia
Africa
Average growth 1990-1999
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
7
Life premium growth: another boom year
40
Real growth rate in %
35
30
25
20
15
10
5
0
World
North Western
America Europe
Japan
Oceania
Growth in 2000
Latin
America
Eastern South & Middle
Europe East Asia
East
/ Central
Asia
Average growth 1990-1999
Africa
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
8
The twelve most important countries of
the global market by business share
2000
in %
Non-Life
er
la
nd
s
Au
st
ra
l ia
Sw
it z
er
la
nd
N
et
h
Sp
ai
n
It a
So
ly
ut
h
Ko
re
a
Ca
na
da
Ki
ng
do
m
G
er
m
an
y
Fr
an
ce
Ja
pa
n
U
ni
te
d
U
ni
te
d
St
at
es
35
30
25
20
15
10
5
0
Life
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
9
Non-life insurance penetration: higher income levels boost
insurance demand
5%
Premiums in % of GDP
4%
3%
2%
1%
0%
100
1000
Industrialised countries
10000
Emerging markets
GDP per capita in
USD
100000
Trend
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
10
Life insurance penetration: income, taxes and social
security systems make the difference
14%
Premiums in % of GDP
12%
10%
8%
6%
4%
GDP per
2%
capita in USD
0%
100
1000
Industrialised countries
10000
Emerging markets
100000
Trend
Source: sigma No. 6/2001
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
11
Conclusions
• Growth in insurance premiums has begun to accelerate after a long
soft market.
• Life premiums are increasing more rapidly than non-life premiums.
• Premiums in emerging markets generally rising more rapidly than in
industrialized countries.
• Insurance premiums rise more rapidly than income. Hence,
premiums as % of GDP rises as per capita income grows.
• Life is more income elastic than non-life insurance, particularly
above USD 10,000 per capita.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
12
Agenda
• Long-term trends

• Profitability and the cycle
• Liberalization / Consolidation /
Convergence
• Reinsurance markets
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
13
The main questions
• What are the main drivers of profitability in non-life insurance?
• How important is investment activity as a driver of profit,
capital funds (leverage), and volatility?
• What patterns are there to the insurance cycle, in length and
between countries?
• What underwriting result is necessary to achieve an average
economy-wide ROE?
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
14
Profitability
• Insurance companies generally lose money on underwriting
 Combined ratio = 100 x (losses + expenses)/ net
premiums, 100 x (UWL + UWE)/NP
 Combined ratio is typically > 100
 Negative underwriting results (= NPE - UWE - UWL)
 Particularly true for “long-tailed” lines (e.g. liability)
 Insurance companies make virtually all profits from
investing premiums before making actual loss payments
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
15
Profitability
• Insurance pricing cycle is determined by flow of capital into
and out of the industry
 “Surplus” (assets less accounting liabilities for unearned
premiums and unpaid claims) rises and falls for variety of
reasons
 Large losses  Capital flows out
 Prices rise in the insurance industry  Capital flows in
 Bull stock market, asset values rise, surplus rises
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
16
Investment results have grown
increasingly important for profitability.
Net investment result 25%
in % of net premiums
20%
US
Canada
France
Italy
Germany
15%
10%
5%
0%
1975
1980
1985
1990
1995
2000
Source: Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
17
Rising reserve ratios...
in % of net
premiums
225%
200%
US
Canada
UK
Germany
France
Italy
Japan
175%
150%
125%
100%
75%
50%
25%
0%
1975
1980
1985
1990
1995
2000
Source: Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
18
... have increased asset leverage.
in % of net
premiums
300%
250%
US
Canada
UK
Germany
Italy
200%
150%
100%
50%
0%
1975
1980
1985
1990
1995
2000
Source: Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
19
Stable inflation outlook after a decade
of decline...
Consumer price
25%
inflation, %
US
20%
Canada
UK
15%
Germany
10%
France
Italy
5%
Japan
forecasts
0%
-5%
1975
1980
1985
1990
1995
2000
2005
Source: DRI-WEFA
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
20
... drives down long-term interest rates.
Long-term
interest rates, %
25%
forecasts
Canada
France
20%
Germany
15%
Italy
Japan
10%
UK
US
5%
0%
Source: DRI-WEFA
1975
Swiss Re, Economic Research & Consulting
1980
1985
Lecture, Nottingham, February 2002
1990
1995
2000
2005
21
Expenses
in % of net
premiums
USA
Canada
UK
France
No general trend towards lower
expense ratios
45
40
35
30
Germany 25
Italy
20
Japan
1975
1980
1985
1990
1995
2000
Source: Swiss Re Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
22
US: Underwriting results show a strong
cyclical pattern.
Underwriting
result in % of
15
net premiums
10
5
0
-5
-10
-15
-20
'0
0
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
19
15
-25
Source: A.M.Best
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
23
“Capital Constraints” Cycle in the U.S.
Asset-induced changes in surplus: US 1968-2000
in %
40%
30%
20%
change
in
surplus
change
in S&P
500
10%
0%
-10%
-20%
-30%
-40%
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98 00P
Sources: A.M.Best, Swiss Re Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
24
9/11 losses compared to global cat losses
in USD billion,
at 2000 prices
?
40
35
30
High
estimate?
9/ 11
estimates
25
20
15
10
man-made
catastrophes
natural
catastrophes
5
0
1970
1975
1980
1985
1990
1995
2000
Source: Swiss Re Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
25
Figure 2
Fresh paid-in capital comes into the
market after major catastrophes
hard market
hard market
reinsurance
Fresh capital 12%
in % of surplus10%
8%
6%
4%
2%
0%
1980
1985
1990
1995
2000
Sources: A.M.Best, Swiss Re Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
26
Underwriting cycles correlated across
major markets.
Operating result
in % of net 20%
premiums 15%
USA
Canada
10%
5%
0%
Italy
-5%
Germany-10%
France
-15%
-20%
UK
-25%
75
77
79
81
83
85
87
89
91
93
95
97
99
Source: Swiss Re Economic Research & Consulting
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
27
Conclusions
• High investment returns of the 90’s lead to a soft market and more
asset leverage. The future investment outlook is uncertain.
• Underwriting results follow a cyclical pattern with an average length
of about six years. These cycles are increasingly synchronized
across countries and to some extent across lines of business.
• Insurance prices are improving, but more needs to be done.
Combined ratios need to improve by at least 7-14% to return to
average profitability.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
28
Agenda
• Long-term trends
• Profitability and the cycle
 • Liberalization / Consolidation /
Convergence
• Reinsurance markets
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
29
Liberalization is a worldwide trend: recent major changes
that affect insurance markets
Deregulation
Convergence
and opening up
Capital market
environment
of borders
US
Abolition of
the Glass
Steagall Act
Europe
Japan
Asia
Swiss Re, Economic Research & Consulting
Third Directive
Introduction of
1994
the Euro 1999
Big bang
Big bang
Big bang
1996-2001
1996-2001
1996-2001
WTO
Lecture, Nottingham, February 2002
30
Deregulation and liberalization: A competitive mapping of the global
insurance markets
Market access (de facto)
easy
European
Union
Hong Kong
Poland Singapore
Argentina
Taiwan
USA
Czech Rep.
Philippines
Japan
Mexico
Malaysia
Thailand
difficult
India
Russia
China
price & form
Swiss Re, Economic Research & Consulting
Insurance
regulation
(de facto)
solvency
Lecture, Nottingham, February 2002
31
Types of mergers and acquisitions
Between insurers
Within one
country
Across
Countries
•CNA - Continental
(95)
•Travelers - Aetna
(96)
•Axa-UAP
(96)
•Commercial Union General Accident
(98)
•CGU - Norwich Union (00)
•Allianz - AGF
(98)
•Zurich - BAT
(98)
•Aegon - Transamerica (99)
•ING - Aetna
(00)
•Swiss Re - Lincoln Re (01)
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
Across Sectors
•Credit Suisse - Winterthur (97)
•Travelers - Citicorp
(98)
•Lloyds TSB - Scottish Widows
(99)
•Allianz - Dresdner
(01)
•Munich Re-HypoVereinsbank (01)
•ING - Barings
•Zurich - Scudder
•AXA - Sanford Bernstein
•Allianz - Pimco
(95)
(97)
(00)
(00)
32
Value proposition and potential rationalizations for the four
types of M&As: Within one country
Between insurers
Across sectors
Domestic insurance M&As
•Economies of scale linked to
costs are the main motive.
•Cutting distribution
networks
and administrative
functions
(rationalization), including
information technology and
risk management areas.
Swiss Re, Economic Research & Consulting
Domestic conglomeration
•Economies of scope through
cross-selling are key motives.
•Risk and revenue
diversification.
•Optimum use of complementary
distribution networks.
•Rationalizations with
administrative functions may
offer economies of scale.
Lecture, Nottingham, February 2002
33
Value proposition and potential rationalizations for the four
types of M&As: Across countries
Between insurers
•
•
•
•
•
•
Across sectors
International insurance M&As
International conglomeration
•Economies of scope through
Size is the main motive.
cross-selling together with size are
Diversification
the two main motives.
Matching the size of clients
•Risk and revenue diversification.
and following clients.
•M&A offers few rationalizations
Possible rationalization within
because institutions are in different
administrative functions.
countries and subject to different
Higher growth potential in
regulations and practices.
foreign markets.
Saturation of brand name in
home market.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
34
Risks associated with the four types M&As: Within one
country
Between insurers
Across sectors
Domestic insurance M&As
• Integrating technology may
prove to be more expensive
than expected
• Managers may become overly
focused on internal issues and
lose market share
Swiss Re, Economic Research & Consulting
Domestic conglomeration
• Managers may be unable to focus on
or understand integration issues
• Possible personnel friction due to
differing staff rules and pay scales.
• Problems with integrating fiscal and
accounting systems due to differing
reporting requirements.
• Reputation risks for separate core
target markets, in the medium
and long term.
Lecture, Nottingham, February 2002
35
Risks associated with the four types M&As: Across
countries
Between insurers
Across sectors
International insurance M&As
International conglomeration
• Maximum risk. All risks
• Integrating technology may
relating to domestic
prove to be more expensive
conglomeration
than expected
and international insurance
• Managers may become
M&As.
overly focused on internal
• Reputation risks in the medium
issues and lose market share
and long term.
• Foreign exchange risks.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
36
Differences and similarities of financial intermediaries
Value propositions / comparative advantages
Insurers
 Risk management and underwriting
 Structured finance (offers insurance
as capital supplement to equity and debt)
 Capital and asset management
Commercial/
retail banks
 Liquidity
 Credit monitoring
 Payment services
 Distribution
 Strong capital base
 Retail network
Investment banks/
securities firms
 Wholesale business
 Financial innovation
 Strong distribution
 Research and analysis
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
37
Differences and similarities of financial intermediaries
Risk appetite
Insurers
Commercial/
retail banks
 Risk retention capacity (event risks and
natural catastrophe)
 Comparative advantage in risk diversification
 Increasing appetite for capital market risks
(financial, credit, etc)
 Risk financing on the rise
 Address previously uninsurable risks
 Takes on credit, market and interest rate risks
 Risk transformation – e.g. securitization
Investment banks/  Accustomed to financial market risks
securities firms
 Risk transformation – e.g. securitization
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
38
Comparison of banks and insurers
Banks
Insurers
 Provide liquidity
 Protect against
hazard risk
 Liquidity shortage =
bank runs
 Catastrophic loss
occurrence
Asset risks
 Credit risk
 Equity risk
 Credit risk via
bond portfolio and ART
Main concern
 Liquidity
 Solvency
Main
value for
clients
Liability risks
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
39
Asset shares, US
The share of US financial intermediary assets held by depository
institutions has slid dramatically over the past two decades.
Pension
Funds
18%
Mutual
Funds
4%
Mutual
Funds
23%
Depository
institutions
32%
Securities
1%
Insurers
17%
Depository
institutions
60%
Pension
Funds
25%
Securities
5%
1980 total assets = USD 8.3 trillion
Insurers
15%
2001/Q1 total assets = USD 26.9 trillion
Note: 1980 asset total is adjusted for inflation.
Source: US Federal Reserve Flow of Funds Accounts
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
40
Asset shares, UK and Japan
Relative shares of financial intermediary assets in UK and
Japan, 1989-2000, in percent
UK
1989
64.7
Depository institutions
Insurance and pension funds 25.3
10.0
Other institutions
Japan
2000
55.0
27.1
17.9
1989 2000
55.2 47.9
16.4 20.6
28.5 31.5
Source: Bank of Japan Flows of Funds Account, UK National Statistics.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
41
Protect margins by extending insurability
margins
Liquid markets for
traditional insurance
risks and financial
risks
Currently not or
inadequately covered
insurance and financial
risks (illiquid markets)
Currently not
covered other risks
Credit risks, various
commodity price
risks
Interest rate,
exchange rate
risks
Auto insurance
Fire insurance
Transport insurance
Product liability
Swiss Re, Economic Research & Consulting
Political and
regulatory risks
Business risks
Negative publicity
Warranties
etc.
Terrorism
Product recall
Loss of data
Prototype failures
Lecture, Nottingham, February 2002
42
ART gallery
Alternative risk transfer
ART
Alternative
solutions
• Finite risk
• Multi-year/multiline
• Multi-trigger
Swiss Re, Economic Research & Consulting
Alternative
risk carriers
• Insurance linked
securities
• Committed capital
• Risk exchanges
Lecture, Nottingham, February 2002
Alternative
channels
• Captives
• Banks/Investment
banks
43
Conclusion
Is the traditional insurance company an endangered
species?
Traditional players face unprecedented challenges. But they
will stay afloat if they:
• leverage technology to improve customer service, increase
business process efficiency and utilize on-line sales
channels,
• remain open-minded about new product innovations,
• consider outsourcing strategy for non-core activities, and
• maintain and further strengthen their brand recognition.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
44
Agenda
• Long-term trends
• Profitability and the cycle
• Liberalization / Consolidation /
Convergence

Swiss Re, Economic Research & Consulting
• Reinsurance markets
Lecture, Nottingham, February 2002
45
Global reinsurance business: An industry fact-sheet
• Reinsurance clients not only comprise non-life and life
insurers but also large corporations, major pension funds and
capital markets. Reinsurance is a wholesale business.
• The leading global reinsurers provide their clients with (1) risk
underwriting capacity and pricing/reinsurance structuring
expertise, (2) protection against large complex risks and
natural catastrophe volatility and loss and (3) risk
management/risk mitigation services, as well as financial and
asset management (e.g. through integrated solutions and
products tailored to captives).
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
46
Global reinsurance business: An industry fact-sheet
• Reinsurance is a global business because it relies on global
risk diversification.
• Global reinsurance premiums amount to $127 billion ($98
billion in non-life, $29 billion in life) with North America and
Western Europe accounting for the lion’s share (80%). Total
insurance industry was $2.4 trillion in 2000, ($0.9 trillion nonlife, $1.5 trillion life)
• In 2000, for every $100 in premium income, the top 10 global
reinsurers incurred losses and expenses of more than $110.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
47
Global reinsurers’ value proposition
Risk
capital
before
R/I
Risk
capita
l after
R/I
Direct insurer
before
after
R/I
R/I
Reinsurer
An insurer buying reinsurance can release a certain amount of risk capital which is larger than
the additional capital the reinsurer needs in order to absorb the buyer’s risks. This overall
improvement in capital productivity is the economic value added of reinsurance. It is based on
global reinsurers’ superior geographical and lines-of-business diversification.
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
Reinsurance in the 21st century: Managing clients’ capital and
Risk
risk
Und
erwr
iting
serv
ices
• Based on
global risk
expertise
Risk
tran
sfer
• Based on
•
geographically &
product-wise
•
balanced risk
portfolio
•
Swiss Re, Economic Research & Consulting
Ri
sk
fin
an
ci
ng
Finite
reinsurance
Multi-year
solutions
Diversification
over time
trans
Fina
fer
nce
via
&
redis
advis
tribut
Asset
ory/
ion
mana
equit
(to
geme
y
capit
nt
inves
al
tmen
mark
ts
et
inves
• IPOs
• Combining
• Derivatives
tors) • Capital raising reinsurance with
• Securitization
of insurance
risks (e.g.
earthquake)
Lecture, Nottingham, February 2002
• M&A
• Merchant
banking
• Run-off
management
asset-liability
expertise and
worldwide asset
management
capabilities
Reinsurance value for the customer: A wide spectrum of
services
Risk assessment
and risk
management
• Risk awareness
enhancement
• Risk portfolio
analysis
• Risk dialogue
(e.g. on
insurability)
• Policy design and
wording
• Risk management
• Loss prevention
• Advice on pricing
Swiss Re, Economic Research & Consulting
Risk transfer,
absorption or
financing
Claims containment/
claims management
• Optimizing risk carrying
economics
• Containing claims
cost
– Reducing results
volatility
(diversification)
– Minimize cost of risk-adjusted
capital
– Contractual/legal
aspects
– Claims adjustment
support
• Supporting business and • Feedback to
financial strategy
underwriting
– Risk underwriting capacity
– Balance-sheet management
– Bottom-line optimization
– Regulatory, accounting, tax
• Structuring reinsurance
programs
Lecture, Nottingham, February 2002
50
Value proposition of reinsurance
• Global diversification  reduces cost of capital of
primary insurers
• Insurers of last resort  provide liquidity to insurance
industry
• Provide services, including underwriting support
• Globally regulated by rating agencies  maintaining a
AAA rating is essential for a global reinsurer
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
51
risk
Development trends in risk transfer & finance
globally
diversifiable risks
capital markets
reinsurance
traditional
insurance
retention,
self-insurance
1950
Swiss Re, Economic Research & Consulting
1995
globally
reinsurable risks
locally
insurable risks
individually
diversifiable risks
time
Lecture, Nottingham, February 2002
52
The future of reinsurance
Complex risk
analysis
Advisory services
Rapid change of
risk and financial
markets
Value added achieved through
technology and knowledge management
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
53
Traditional reinsurance is efficient…and here to stay
Cat bond
Traditional reinsurance
deal:
contract:
2000 pages
30 pages
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
54
Conclusion
• The global reinsurance companies can provide risk transfer and risk
financing in a “win-win” transaction
• Global re-insurers will play a pioneering role in extending the
boundaries of (re-)insurance
• Reinsurance companies are providing increasingly sophisticated
solutions with financial features
• Global re-insurers will continue to demonstrate the value of their risk
management skills
• Traditional reinsurance is not expected to disappear
Swiss Re, Economic Research & Consulting
Lecture, Nottingham, February 2002
55