Comprehensive course analysis
Who should attend
The course is suitable for equity, fixed income and credit analysts, insurance company treasury offers and staff, insurance brokers and security analysts, investment managers, commercial and investment bankers, bank risk, portfolio and relationship managers, supervisors, lawyers, insurance company public relations employees, and corporate communications officers.
About the course
The overall goal of this five-day certificate program is to give participants with limited exposure to insurance company financial statements a systematic approach to analyze the credit risk and financial strength of life, non-life and reinsurance companies.
Key Learning Outcomes:
- Distinguish the risks inherent in the main products offered by life, non-life (P&C) and reinsurance companies and recognize how these are reflected in the financial statements
- Understand the key components of an insurance company’s income statement, balance sheet and cashflow statement
- Recognize the impact of differing accounting standards, reserving policies and changes in external variables (such as interest rates and asset prices) on the financial statements
- Apply a structured approach to identify key risks and mitigants when transacting with insurance and reinsurance companies, and to appreciate the main methods of capital-raising by insurers
- Appreciate how economic, competitive and regulatory issues impact the risk profile, performance and financial health of an insurance company
- Understand the business and financial risks inherent in the life and non-life insurance and reinsurance industries
- Use qualitative and quantitative analysis and market indicators to distinguish strong and weak performers by sector and to detect early warning signals of deteriorating financial strength
Following the programme participants will be given a secure link to the course assessment page. The assessment consists of a untimed multiple choice test where they will be called upon to demonstrate some of the knowledge and skills that they have learnt on the five-day programme.
Insurance Market Overview
Understand the basic macroeconomic drivers of insurance markets and characteristics of the various lines of business and insurance products and their inherent risks.
Types of insurance company
- Life, non-life and reinsurance
- Types of insurance co: mutual vs. proprietary, multi-line vs. monoline, underwriters vs. brokers, captive insurers and Lloyd’s entities
- Key activities and products
- Non-life products: short tail and long tail lines; degrees of riskiness
- Life and investment products: whole life, annuity, endowment, term insurance and health products
- Investment bases for life products: fixed (stable value), unit-linked (variable), with profits, interest-sensitive
- Reinsurance products: proportional vs. non-proportional, finite risk, excess of loss and catastrophe covers
- Life insurance product risks
- Non-life insurance product risks
Understand the key financial items in insurance company financial statements and how the business model is reflected in the balance sheet
- Relating the business to the balance sheet and income statement
- Key items of the balance sheet and income statement for life and non-life insurers
- Premium accounting: gross vs. net, written vs. earned
- Claim/loss accounting (non-life): claims incurred vs. paid, claims incurred but not reported (IBNR)
- Claim/benefit accounting (life): benefits and surrenders, annual and final bonuses
- Technical reserves: loss reserves, unearned premiums, mathematical provisions
- Investment reserves – capital or liability? Fund for Future Appropriations, RfB, Unallocated Divisible Surplus, Discretionary Participation Features (DPF)
- Intangible and other assets: deferred acquisition costs, value of business acquired
- Impact of reinsurance on assets, liabilities, premiums and claims
- Calendar year, accident year and underwriting year reporting for non-life; loss development triangles
- Cash-flow statement: operating cash flow; divergence from earnings
- Expected balance sheet structures for different types of insurer
- Claims accounting from scratch (a simplified worked example); balance sheet structures
- Non-life reserve development.
Accounting and Disclosures
Section aims: This section explains the key areas of divergence between insurance accounting standards: international differences; the differences between the approaches for shareholder accounts and for statutory supervision; embedded value reporting for life insurance; and accounting for Lloyd’s syndicates.
- Key differences between statutory (regulatory) accounts, IFRS (phases I and II) and other GAAP accounts
- Investment accounting: mark to market vs. cost accounting; treatment of unrealised gains and losses; impaired assets
- Overview of European Embedded Value (EEV) and Market-Consistent Embedded Value (MCEV) reporting and analysis
- Lloyd’s entities: 3-year accounting for syndicates vs. annual accounting
- Sources of information and quality of disclosure; potential for distortion
- Exercise: investment accounting under IFRS
Introduction to the basic analysis of insurance companies using some key ratios from the financial statements.
- Key performance indicators for life, non-life and reinsurance companies, with benchmarks
- Underwriting risk: Claims/loss ratio, expense and combined ratio and other basic indicators of underwriting performance, reserve adequacy and reinsurance risk
- Investment risk: Market and credit risk
- Measuring life new business growth and new business profitability
- Measures of overall profitability for life and non-life insurers
- Capital adequacy: Types of capital and ratios used to measure financial leverage (gearing) and solvency
- Case studies: Basic ratio analysis for a major composite insurer – Business, Financial and Performance Risk
A structured approach to the credit analysis of insurance and reinsurance companies and an overview of how insurance companies are assessed by different market observers – Supervisors, Ratings Agencies, Debt and Equity investors.
- Purpose/payback model: A structured approach to credit analysis and its applicability to insurance and reinsurance companies; why insurance companies borrow/issue debt (Purpose) and how it is repaid (Payback); double leverage
- Case study: Evaluating payback sources for a major international insurance group
- Insurance ratings: Insurer Financial Strength and credit ratings, rating of group members, derivation of various “issue ratings” from the issuer’s Insurance Financial Strength rating; PD and LGD
- Use of debt and equity market indicators to highlight possible concerns
- Exercise: Using capital market data to identify insurers which are in or out of favour with investors
A review of the key macro-economic and sector trends which may impact adversely or favourably on certain insurers and business lines, and a look back at how the life, non-life and reinsurance sectors have previously been affected by stressed operating conditions.
Macro-economic and sector issues
- Investment cycles: stock, property and credit market levels and their volatility
- Causes of recent fluctuations in strength of the life, non-life and reinsurance sectors
- Underwriting cycles in various markets
- Mortality, morbidity and longevity trends
- Climate change; trends in insured losses from catastrophes
- Impact of inflation and cultural changes in litigation
- Non-life reserving issues: redundancy or deficiency; asbestosis and environmental liabilities
- Competitive factors: market fragmentation; penetration levels in emerging vs. mature markets
Regulation and supervision
- Overview of EU Solvency II and US Risk Based Capital regulation; Solvency II, Pillar 3 Solvency and Financial Condition Reports
- Solvency II group supervision, solvency and equivalence
- Global Systemically Important Insurers (GSIIs)
The derivation from the financial statements of key indicators for assessing financial strength and performance against appropriate benchmarks.
- Review of key items in financial statements
- Key accounting methods and their uses: regulatory returns, IFRS Phases I and II; GAAP and embedded value reporting
- Items subject to management discretion: write-downs, IFRS Fair Value hierarchy, temporary and permanent impairments, reserving for IBNR claims (non-life) and for investment guarantees (life)
- Underwriting risk: Assessing the quality and diversity of the underwriting portfolio, loss, expense and combined ratios
- Non-life reserve adequacy: Loss reserve development triangles, calendar year vs. accident year analysis, survival ratios etc.
- Catastrophe and reinsurance risk: Degree of reinsurance utilization; adequacy of reinsurance cover, credit and dispute risk
- Case study: Assessing underwriting risk for an international composite insurance company
- Investment risk: Quality and liquidity of the investment portfolio, asset and liability matching, cost of investment guarantees, use of derivatives for hedging, concentration risks; Asset Liability Management stress testing disclosures
- Investment returns: Inclusion of realized and unrealized gains and losses, investment return requirements of the life and non-life insurance businesses
- Life insurance risks: Persistency, mortality and expenses
- Case study: Assessing investment risk for an international composite insurance company
- Diversity and stability of income: profitability measures and benchmarks
- Embedded value techniques for measuring and analysing life profitability, profit margins on new business, European Embedded Value (EEV) and Market-Consistent Embedded Value (MCEV), key assumptions
- Liquidity: operating cash flow, liquidity of investments, liquidity shocks
- Capital adequacy: regulatory solvency coverage; stress testing; quality and fungibility of capital; tangible vs. intangible capital; simple capital measures e.g. free asset ratio, operating leverage, asset and liability leverage
- Financial leverage, interest cover, use of hybrid capital, refinancing risk, debt servicing ability, total commitments including off-balance sheet
- Case study: Assessing Financial Risk – leverage, solvency and liquidity – for an international composite insurance company
- Exercise: Key financial indicators for strong and weak life companies
Management and Early Warning Signals
A structured approach to assessing management; implications of the ownership structure; and early warning signals of credit deterioration.
- Framework for assessing management, strategy and governance risk
- Significance of ownership: mutuals, public, state and private companies
Early warning signals
- Recognising financial and non-financial indicators of distress
- Accounting discrepancies: areas to check and questions to ask
- Illustration case study: a strongly-rated insurer which failed, quantitative and qualitative signs of weakness
Review of the funding needs of insurance companies, how these might be met, and the potential risk mitigants for counterparties.
- Funding needs of insurance companies
- Hybrid capital securities: structure and type of capital issued; impact on credit standing and other concerns; regulatory and rating agency tolerances for hybrid capital
- Insurance-linked securities: securitisation of risks and of embedded value; use of Insurance SPVs and sidecars
- Capital structure: creditor vs. policyholder rights and the impact of ranking and structure
- Illustration case study: maximum hybrid issuance to obtain rating agency equity credit
- Exercise: recovery prospects for different issues and issuers
Because of COVID-19, many providers are cancelling or postponing in-person programs or providing online participation options.
We are happy to help you find a suitable online alternative.