Steve Quinn


[PDF]Steve Quinn - Rackcdn.com882fe31f29e7fd8c9ada-b447e7f1eed2117ba41e7c09f22d2c1c.r12.cf3.rackcdn.com/...

4 downloads 182 Views 991KB Size

Capital Deployment and Driving Shareholder Value Steve Quinn Chief Executive Quest Insurance Management (Gibraltar) Limited

Insurance Company Capital Requirements • For Liability insurers (Classes 1 to 15)

– Minimum Guarantee Fund (MGF) €3.5 million

• For Non-Liability Insurers (Classes 16 to 18) – MGF €2.3 million

• However, the Financial Services Commission will typically add a prudential margin of another 30% over and above the MGF • The MGF is set by the European Commission and is therefore quoted in Euro. Please be aware therefore that Exchange Rate fluctuations can impact on insurers’ solvency requirements. • For example, the rate effective from 31st December 2008 for the 2009 year was set at the end of October when the exchange rate was approximately £1:€1.27 • What will it be on 31st October 2009 for 2010 year?

FX Impact on Solvency Requirements 2008

2009

2010?

Official Exchange Rate :£1

€1.43

€1.27

€1.15?

MGF – Liability Business

€3.2 million

€3.5 million

€3.5 million?

Sterling Equivalent

£2.238 million

£2.756 million

£3.043 million?

+30% FSC Imposition

£2.909 million

£3.582 million

£3.956 million?

Corporate Structuring The presence of a holding company can allow for more flexibility in terms of the financing of insurance companies. Shareholder(s)

x% Holding Company 100% Insurance Company

Share Structures Ordinary and Redeemable Preference Shares • Ordinary shares can enjoy dividend rights but it is unlikely that the FSC will approve any payments of dividends in the early years whilst a company is maturing • Redeemable Preference Shares can carry a coupon as a rate of return, and be non-voting • They allow a means of repaying, for example, Group indebtedness in the form of loans • Any coupon payments or redemptions of shares must be approved first by the FSC

Reinsurance (1) Quota Share Reinsurance • This allows an insurer in Gibraltar to increase its capacity by using the balance sheet of another insurer (a “Reinsurer”). A Gibraltar insurer can boost its capacity by up to double the amount that it can underwrite on its own account. • An overall net margin will be ceded to the Reinsurer resulting in a cost to pay for the capital to be provided • Solvency is determined based on 100% of premium

Reinsurance (2) • • • • • •

Coinsurance This is insurance that is issued jointly by two or more underwriters For example a 50% coinsurance arrangement would see the Gibraltar Insurance Company take 50p of every £1 of premium underwritten, with the coinsurer taking the other 50p Both insurers’ names will appear on any Policy Wording and Schedule All income and most expenses are shared in proportion to the coinsurance agreement There may be commission as a contribution towards costs of managing the business Solvency is determined based on retained share of premium

Reinsurance (3) Example showing £50,000,000 book of business with 50% Quota Share Reinsurance compared to 50% Coinsurance as it affects the insurance company 50% Quota Share

50% Coinsurance

Gross Written Premium

£50,000,000

Gross Written Premium

£25,000,000

Reinsurer’s Share (50%)

(£25,000,000)

Reinsurer’s Share (0%)

£0

Net Written Premium

£25,000,000

Net Written Premium

£25,000,000

Reinsurer’s Share (50%)

(£25,000,000)

Solvency calculated on £25,000,000

Reinsurance (4) A Worked Example showing both Assumptions • Gibraltar Insurance Company has a book of business that is valued at £50 million • It has available capital of £5 million (ordinarily would allow for c£20 million of premium to be underwritten @ solvency margin) • To achieve its objective:

– It agrees to a Quota Share Reinsurance arrangement – It also agrees to a Coinsurance arrangement

Reinsurance (5) Calculation Target Gross Written Premium (e.g. current portfolio)

£50,000,000

(a) Coinsurance 20% Sub-Total (1) to be supported (b) Quota Share 50% Sub-Total (2) to be supported (c) Capital @25% Solvency £5,000,000

£10,000,000 £40,000,000 £20,000,000 £20,000,000 £20,000,000

TOTAL (a) + (b) + (c)

£50,000,000

Solvency II “Solvency 2 is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EUwide capital requirements and risk management standards that will replace the current Solvency 1 requirements.” www.fsa.gov.uk • Due to be implemented late 2012/2013 • Preparatory work should really be started now

Solvency II • The potentially adverse impact of Solvency II can best be countered through the use of an internal model (as opposed to the alternative of a standard model) to calculate solvency requirements • An internal model should ensure that a lower capital amount is required for solvency purposes than under the standard model • An internal model is therefore highly recommended as a defensive measure to protect the insurance company’s capital

Capital Deployment and Driving Shareholder Value Steve Quinn Chief Executive Quest Insurance Management (Gibraltar) Limited [email protected] www.quest.gi

G I B RALTAR INSURANCE SEMINAR 17TH June 2009

NEXT