shaping a constructive regulatory environment greg carter 9 th june 2010
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Shaping a Constructive Regulatory Environment
Greg Carter
9th June 2010
Agenda
How does Regulation impact ratings?
5 Key areas of analysis
Conclusion
Agenda
How does Regulation impact ratings?
5 Key areas of analysis
Conclusion
44
Analytical MethodologyFinancial Review Industry Review Operational
ReviewOrganisational Review
Management Review
Profitability Competitive landscape
Underwriting expertise
Parent financial strength
Strategic vision
Investments and liquidity
Pricing trends Distribution capabilities
Dividend requirements
Management quality
Loss reserve adequacy
Competitive advantage
Business mix Financial flexibility Depth & breadth of experience
Reinsurance utilisation
Barriers to entry Market share Strength of affiliates
Risk appetite
Catastrophe risk Bargaining power Operational scale Strength of subsidiaries
Successful plan execution
Capital adequacy Tail of losses Expense efficiencies
Group synergies Organisational structure
Financial flexibility Regulatory environment
Brand recognition Explicit support agreements
Corporate Governance
Peer analysis Accounting framework
IT capabilities History of support Financial projections
Source: Fitch
55
Methodology – Where does Regulation sit?Financial Review Industry Review Operational
ReviewOrganisational Review
Management Review
Profitability Competitive landscape
Underwriting expertise
Parent financial strength
Strategic vision
Investments and liquidity
Pricing trends Distribution capabilities
Dividend requirements
Management quality
Loss reserve adequacy
Competitive advantage
Business mix Financial flexibility Depth & breadth of experience
Reinsurance utilisation
Barriers to entry Market share Strength of affiliates
Risk appetite
Catastrophe risk Bargaining power Operational scale Strength of subsidiaries
Successful plan execution
Capital adequacy Tail of losses Expense efficiencies
Group synergies Organisational structure
Financial flexibility Regulatory environment
Brand recognition Explicit support agreements
Corporate Governance
Peer analysis Accounting framework
IT capabilities History of support Financial projections
Source: Fitch
66
Methodology – What does Regulation influence?Financial Review Industry Review Operational
ReviewOrganisational Review
Management Review
Profitability Competitive landscape
Underwriting expertise
Parent financial strength
Strategic vision
Investments and liquidity
Pricing trends Distribution capabilities
Dividend requirements
Management quality
Loss reserve adequacy
Competitive advantage
Business mix Financial flexibility Depth & breadth of experience
Reinsurance utilisation
Barriers to entry Market share Strength of affiliates
Risk appetite
Catastrophe risk Bargaining power Operational scale Strength of subsidiaries
Successful plan execution
Capital adequacy Tail of losses Expense efficiencies
Group synergies Organisational structure
Financial flexibility Regulatory environment
Brand recognition Explicit support agreements
Corporate Governance
Peer analysis Accounting framework
IT capabilities History of support Financial projections
Source: Fitch
Agenda
How does Regulation impact ratings?
5 Key areas of analysis
Conclusion
8
Median solvency ratio (%) Solvency 1 QIS4
Captive 331 167
Reinsurance 366 221
Non-life 277 193
Composite 267 230
Life 200 230
1) Expected Regulatory Solvency Position
Source: CEIOPS QIS4 final report
Solvency Ratios From QIS4 Compared With Solvency I
9
Number of firms that would not meet
Firms participating who would not meet (%)
MCR SCR MCR SCR
France 0 14 0 6
Germany 0 8 0 4
Italy 1 17 1 19
Netherlands 0 22 0 22
Spain 0 11 0 10
UK 5 26 4 20
2) Sources of Additional Capital
Source: CEIOPS QIS4 final report
Capital Shortfalls in QIS4, Selected Countries
10
(%) Non-life Life Composites
Market risk 41 72 69
Counterparty risk 7 4 3
Life risk 1 44 19
Health u/w risk 20 1 15
Non-life u/w risk (premium, reserve, nat cat risk)
55 0 20
Total 124 121 126
Less diversification -24 -21 -26
3) Options for Reducing Capital Requirements
Source: CEIOPS QIS4 final report
QIS4 Solvency Capital Requirement (SCR) Composition
11
3) Options for Reducing Capital Requirements (cont)
Source: CEIOPS QIS4 final report
-60
-40
-20
0
20
40
60
80
100
120
140
160
Non-life Life Composites
(%)
Interest rate risk Equity risk Property riskSpread risk Concentration risk Currency riskLess diversification
QIS4 Composition of Required Capital for Market Risk
12
4) Own Funds composition & Allowance for Hybrids
> Tier 1 or Tier 2?
> Grandfathering?
> Longer term impact on Financial Flexibility
13
5) Internal Model Use
> “Solvency II compliance”
> The Use Test
> Partial model
> Comparability and Transparency
Agenda
How does Regulation impact ratings?
5 Key areas of analysis
Conclusion
15
Conclusion
> QIS 5 brings some clarity, but the picture is still not clear
> QIS 5 results will bring the capital landscape into focus
> Regulatory capital is one part of our Capital Adequacy analysis
> Capital Adequacy is one part of our Credit Rating
The Fitch Group Fitch Ratings Algorithmics Fitch Solutions
Fitch Ratingswww.fitchratings.com
London101 Finsbury Pavement London EC2A 1RS +44 20 7417 4222
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