Comprehensive course analysis
Who should attend
The workshop is designed for fixed income, banking, insurance and credit risk professionals. It is targeted at an intermediate level and assumes a basic understanding of accounting and insurance products. The two-day workshop Understanding Insurance Financial Statements is designed as a preparation for those with limited experience of insurance accounts.
About the course
The overall goal of this three-day workshop is to provide a systematic approach to the credit risk and financial strength analysis of life and non-life insurance and reinsurance companies.
Key Learning Outcomes:
- 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
- Analyse and stress test financial statements in the context of differing accounting standards and reporting practices
- Appreciate how economic, competitive and regulatory issues impact the risk profile, performance and financial health of an insurance company
- 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.
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.
- Purpose / payback model: a structured approach to credit analysis and its applicability to insurance and reinsurance companies
- Insurance ratings: insurer financial strength and credit ratings, ratings of group members, derivation of various "issue ratings" from the issuer's default rating
- Use of debt and equity market indicators to highlight possible concerns.
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
- Key methods of regulating insurance companies: minimum solvency margin, investment and business restrictions
- EU Solvency I and II; overview of US and Bermuda regulation; Solvency II equivalence
- Group supervision and group solvency: double leverage in financial conglomerates, capital requirements of non-insurance businesses, EU Insurance Groups Directive (IGD)
- Degree of comfort from quality of supervision
- Exercises: historic and prospective impact of the operating environment on life and non-life insurers and reinsurers; Double Leverage and weak group structures.
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).
- Investment risk: quality and liquidity of the investment portfolio, asset and liability matching, cost of investment guarantees, use of derivatives for hedging, concentration risks
- Investment returns: inclusion of realised and unrealised gains and losses, investment return requirements of the life and non-life insurance businesses
- 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 utilisation; adequacy of reinsurance cover, credit and dispute risk
- Life insurance risks: persistency, mortality and expenses.
Assessing investment and underwriting risk and performance for a 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
- Exercise: key financial indicators for strong and weak life companies.
Assessing leverage, solvency and liquidity for a composite insurance company.
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.
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
- 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.