Advanced Insurance Company Analysis - Warning Signals

This course will identify indicators of stress and early warning signals in relation to both the business and financial risks insurance companies are exposed to. Also, look at the key role management plays in a stress scenario and review legal options for resolution and recovery of failing insurers.

Key Learning Outcomes:

• Apply a structured analytic approach, incorporating qualitative, quantitative and market indicators, to identify vulnerable exposures
• Highlight the key vulnerabilities of the different types of company, and different business lines within the life, P&C (non-life), and reinsurance sectors
• Insurance company solvency and earnings for investment or underwriting losses, over-valuation of assets and under-reserving of liabilities
• Recognize the key challenges of credit exposures to vulnerable insurance companies and the triggers that might lead to downgrades or refinancing problems
• Review real case studies of failed and deteriorating insurers to identify key recurring themes

COURSE CONTENT

Day One

Analytic Overview

Identify key recurring themes of stress and credit exposures of failing insurance companies, and overview of recovery and resolution alternatives.

• Recurring themes for insurers getting into distress
• Exercise: Symptoms and causes of distress
• External environment; internal weaknesses and contagion risk
• Exercise: Risks in the insurance business model
• Balance of business risk and financial risk
• Threats to likely sources of payback
• Implications of distress for different stakeholders: Policyholder priority, diverging recovery prospects in distressed insurers and holding companies
• Overview of legal resolution and recovery processes for failed insurers in EU

Business Risk

Focuses on challenged business models and insurance companies with significant exposure to risks from their scope of operations.

• Underwriting risk: Pricing and data challenges
• Exercise: Identifying non-life insurers at risk of insolvency
• Underwriting risk: Correlations and concentration risk
• Exercise: Identifying correlation in non-life lines of business
• Reserve adequacy for non-life lines of business: Loss reserve triangles, long tail and short tail reserve adequacy
• Reinsurance risk: Credit and dispute risk; over-reliance on reinsurance; gaps in cover
• The significance of size and age of a firm, good vs. bad growth
• Exercise: Non-life insurers with underwriting risk challenges
• Business models – exposure to higher-risk sectors: Variable annuities, D&O, financial and mortgage guaranty; catastrophe reinsurance, longevity and mortality risks
• Life insurers: Short-term and long-term impact of poor policy persistency
• Investment risk: Stress testing write-downs, key asset/liability management (ALM) challenges; asset valuation challenges; effectiveness of hedges, concentration risks; aggregation of exposures across asset and liability classes
• Exercise: Insurers with investment risk challenges
• Reserving for investment guarantees
• Regulatory risk: Relative vulnerability of sectors
• Performance risk measures

Day Two

Management

Focus on management, shareholders, strategy and risk management challenges in troubled markets.

• Significance of ownership structure: Mutuals, conglomerates, etc.
• The importance of franchise
• Risky or inappropriate strategies, signs of desperation
• How to recognize weak management and lack of integrity
• When performance seems too good
• Advantages and disadvantages of diversification
• Case study: Multi-national insurer failure form combination of investment and contagion risk
• Disclosure and corporate governance concerns

Financial Risk

Focus on the adequacy and quality of capital, liquidity and financial flexibility.

• Purpose and required features of capital vs. technical provisions
• Capital adequacy: Risk based and non-risk-based measures of life and non-life solvency
• Leverage: Limits to an insurance company’s ability to leverage including contingent exposures
• Quality of capital – tangible vs. intangible net worth; capital with restricted use; mix of debt, equity and hybrid capital
• Double leverage: Challenges of a leveraged holding company
• Importance of financial flexibility
• Liquidity: Potential cash flow shocks; liquidity of investments
• Case study: A large non-life failure due to risky strategy, reserving and liquidity risk and weak governance

Operating Environment

Focus on key macro-economic and insurance sector trends which are likely to erode creditworthiness.

• Case study: A major reinsurer over-exposed to adverse investment and weak underwriting conditions
• Investment and economic cycles – impact of recession, inflation and financial crisis on main sectors
• Underwriting cycles; trends in catastrophe losses, litigation, mortality/longevity
• Differing vulnerabilities to adverse scenarios by business line
• Exercise: Vulnerable lines of business in certain adverse scenarios
• Changes in regulation, tax or accounting
• Case study: Insurer which suffered in the Eurozone crisis