social unrest and the south - deloitte united states · 2020-05-15 · background • social unrest...
TRANSCRIPT
Social Unrest and the South
African Insurance Industry
Jaco van der Merwe
Deloitte & Touche
Actuarial & Insurance Solutions
Agenda
• Background
• Current occurrence and trends
• What be done?
• Sasria
• Sasria & risk management
• Summary & closing
Background
Social Unrest / Civil Disobedience
Political protests (vs government)
Non-political Protests (service delivery)
Labour strikes / protests
General strikes (public transport costs)
Terrorism
Background
Background • Social unrest – a topical issue in South Africa
– PAGAD Planet Hollywood bombing
– Xenophobic attacks
– Metropolice strikes
– Taxi strikes
– Mining strikes & unrest
• However, not limited to South Africa. Terrorist examples include:
– The Oklahoma City bombing, Oklahoma City 1995
– Mumbai attacks, India 2008
– WTC, New York 1993 & 2001
– Amerithrax, Washington 2001
• Protests, unrest elsewhere:
– Spain, China, Greece, etc…
Background
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UnitedStates2001
Maiduguri,Nigeria2009
Iraq 2007 Abadan,Iran 1978
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Air India1985
Mumbai(Bombay),India 1993
Kenya &Tanzania
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Beirut,Lebanon
1983
Ben Talha,Algeria1997
Significant terrorist attacks: Highest fatalities
Current Trends
• Wage related strikes – mines, farms, bus drivers, teachers
• Unemployment high, and rising (significant youth portion of
unemployed population)
• Service delivery becoming more prevalent
• Double digit wage demands with sub 5% economic growth
SA braces for
strike season
(Fin24 – 6
May 2013)
20 674 737
working days
lost in 2010
Longest
recorded
strike in
2011
lasted 67
days!
How is this dealt with in our market?
• By an Act! – known as the Conversion of the Sasria Act
No.134 of 1998
• Sasria SOC Ltd is state owned company, covering the
following perils (among others):
1. Any act directed to overthrow the Government (local, provincial, national or tribal authority) by
means of fear, violence or terrorism;
2. Any act directed to bring about damage in order to achieve political, social or economic change,
or in protest against any Government or for the purpose of inspiring fear in the public;
3. Any riot, strike or public disorder (includes civil commotion, labour disturbances or lockouts.
• Formed in 1979 – due to Soweto uprisings
• SA ST industry became nervous to cover special risks
• SASRIA (Special Risk Insurance Association) – the old name!!
• Later added strikes & social disturbance
• Sasria business model:
• Key business metrics:
Item R
(million)
Gross Premium 1 087
Gross Claims 231
Profit after tax 275
Item R
(million)
Total Assets 4 487
Total Liabilities 620
Equity 3 867
Capital cover IM QIS
Capital Required 28% 284%
Capital Available 500% 445%
Available / Required 17.6x 1.56x
Sasria - Background
Sasria - Background
Premiums collected
R228,5m R251,5m
R331,8m
R377, 8m
R512,6m R487,7m
R555,9m
R661,2m
R790,8m
R1, 002 bn
R1, 093 bn
R 1, 2 bn
-
200 000 000
400 000 000
600 000 000
800 000 000
1 000 000 000
1 200 000 000
1 400 000 000
Growth rate = 15%
For which classes are the most premiums recovered?
Contract Works 4%
Fire 58%
Goods in Transit
1%
Motor 18%
Standing Charges
15%
Sasria wrap 4%
Split per class 2012/'13
Sasria - Background
Its not just business volumes – severity & frequency of
losses are increasing…
Loss ratio
What is driving premiums up?
>40%
Nearly 50% of
the historic top
15 claims have
occurred in the
last 3 years.
# Date of loss Peril Claim value
1 11-Jun-11 Strike 65 926 828R
2 16-Jan-13 Strike 66 142 298R
3 23-Jun-11 Strike 65 926 829R
4 03-Oct-12 Strike 40 000 000R
5 03-Oct-12 Strike 40 000 000R
6 24-Sep-12 Strike 38 596 491R
7 12-Apr-10 Strike 37 216 295R
8 01-Jun-10 Strike 34 565 300R
9 18-Jan-08 Non Political Riot 31 719 672R
10 09-Nov-05 Non Political Riot 27 164 943R
11 22-Jun-10 Strike 24 905 306R
12 07-Jan-13 Strike 20 000 000R
13 06-Oct-05 Non Political Riot 19 061 878R
14 10-Aug-06 Strike 18 216 785R
15 01-Jun-10 Strike 18 117 649R
What is driving premiums up?
Who else can insure this risk?
• According to the Act only Sasria can, unless they
give dispensation (e.g. case of contingent business
interruption)
However, that does not mean that Sasria
cover is compulsory!
• An underlying Fire/Property policy is required to be
able to takeout Sasria cove
• Policy must contain standard SAIA exclusions (riot,
strike, war, rebellion, revolution, ect…)
Structure of Sasria cover
• Primary coupon:
– Up to R500m “one insured limit”
– Covers
• material damages
• standing charges
• and/or net profit coverage.
– Per insurance period (typically 1 year)
• Riot Wrap (Excess of Loss Coupon):
– Similar to an Excess of Loss, covering R1bn after the R500m
coverage of the primary coupon
– Does not cover net profit business interruption
– Normally priced individually
– Usually bought by the large corporates and state owned entities
(Utilities, logistics companies, financial services companies).
Basic pricing
Separate pricing
Risk management in Sasria
• Primarily a SAM focus
• Key risks:
Underwriting & Catastrophe
Credit & counterparty default
Market
Liquidity
Operational
Legal & Strategic
Regulatory
view
Economic
view
Risk management in Sasria
• Sasria’s main risk – adverse claims experience
• Reserving risk is somewhat less material
• Challenges Range of claims losses can be extreme
Lack of data: Large & Cat claims
Sometimes lack of data through agents
• Nature of risk unlike any other SA insurer
• Heavily dependant on effect of reinsurance
• Reinsurance gives rise to credit risk
• So first priority = quantification of underwriting risk
Underwriting & Catastrophe risk
Risk management in Sasria
Underwriting & Catastrophe risk
Attritional Large Catastrophe
Property/Fire Motor Etc.
Reinsurance Structures: QS, XOL, StopLoss, CatXL, etc…
Reinstatements, Commissions, Recoveries, etc…
Co
rre
lati
on
s
Risk management in Sasria
NB process & input:
• PML studies: Probable Maximum Loss
1. Regularly reviewed
2. Input from reinsurance brokers using reinsurance CAT models
3. Expert bomb studies
1. Size of explosive
2. Blast radius
3. Area of maximum damage
4. Key risk/target areas
5. Insured property in area
6. Etc..
4. Political analysts, threat assessors
Underwriting & Catastrophe risk
Risk management in Sasria
• Investments:
– Large amount of short, secure assets (cash/near, bonds etc)
– Material investment credit risk
• Reinsurance:
– Reinsurance credit risk becomes material in stressed scenario
– Probability of default increases across industry
• Blend of regulatory charges & economic view
• Rely on available credit rating info
• Working towards full economic calculation – blend in
Credit & Counterparty default
Risk management in Sasria
• Market risk
– First approach: use regulatory charges per asset type
– But move toward full economic view ultimately
– Would require ESG incorporation
– Must be done consistently with credit risk – beware correlations
• Liquidity risk:
– Short term nature of business & liabilities
– Liquidity position is key for all ST insurers
– Limited explicit calculation – not explicit under SAM IM/QIS
– Focus more on short term earnings at risk
Market & liquidity
Risk management in Sasria
• Operational
– Regulatory approach = inappropriate, does not work!
– Have perception of risk levels (e.g. systems, data, people, etc…)
– On-going risk register & matrix => develop a risk taxonomy
– Comprehensive consideration of risks
– Limited data & quantification
• Strategic & Legal
– Key risk = loss of monopoly
– Poor strategic decisions may give rise to strategic risk
e.g. go into market “x”.
Operational, Strategic & Legal
Risk management in Sasria
• Aggregation of risks
– Options; • Where possible, practical and sensible: correlated additions
• Otherwise:
– Straight Sum (no correlation/diversification)
– Heuristic rule of thumb (Square Root of Squares)
• Mostly, in line with regulatory approach
– Available capital = regulatory available capital
Ultimately
Risk management in Sasria
• Use calculated risk capital
– Regulatory solvency reporting and compliance
– Own internal/economic view of risk-capital requirements
– Articulate expressions of Risk Appetite
• Capital at Risk (VaR1, VaR2, etc…) -> longer horizon, confidence level
• Earnings at Risk (EaR1, EaR2, etc…) -> shorter term view, more practical
• How much capital are we prepared to loose?
• How much capital do we stand to loose?
• Mostly, in line with regulatory approach
– Tie into Risk Strategy
• Preference for risks to be taken in pursuit of strategic objectives
• Identify Return Measure, in line with Risk Philosophy
Ultimately
Limits & thresholds
Metr
ic 1
Metr
ic 2
Metr
ic x
…
…
Embedding this in the business:
1. Capital requirements for regulatory solvency & reporting – Proper understanding of true risk
– Can justify why so much capital must be held -> impacts dividend policy
– Shareholder considerations
2. Reinsurance assessments & selections – Choice of reinsurance heavily affects risk & hence capital
– Reinsurance is pricey! Return on capital measures equally sensitive
– Make sure capital works for us
3. Enhance investment strategy setting – Selection of investments in line with stated risk appetite
– Understand risk-reward relationship of selected strategies under SAM basis
4. Pricing & product design decisions – Develop products that are in line with our appetite for risk
– Price products to maintain RORAC
– Avoid simply following market fortunes & rates -> more informed processes & decisions
Risk management in Sasria
All 3 SAM Pillars in context
1. Pillar 1 – A major focus thus far
– Previously much too simplistic, not realistic
– Informed view of risk numbers obtained
2. Pillar 2 – Need to establish an effective system of governance and risk management
– Otherwise Pillar 1 will be useless!!
– All about running the business along the stated principles
– Takes Pillar 1 as input
3. Pillar 3 – Reporting & disclosure
Stepping back
Reserving policy
Reinsurance policy
Etc.
Pillar 2 overview – setting up a risk management system Stepping back
Risk
Appetite
Risk
Strategy Insurance
Risk
Market
Risk
Credit
Risk
Ops.
risk
Strategic
Risk
Policy Procedures Process
maps, rules
Policy Procedures Process
maps, rules
Policy Procedures Process
maps, rules
Policy Procedures Process
maps, rules
Policy Procedures Process
maps, rules
Ris
k M
an
ag
em
en
t F
ram
ew
ork
Po
licy
Structures
Functions/Roles
Committees
Charters,TORs
R&Rs
Governance
Key business
processes
ORSA (Own Risk & Solvency Assessment)
Sasria & Social Unrest – Risk Management Approach
1. Sasria covers special risks – Unique monopoly
– Insurers often not keen on this sort of risk
– Claims can be extremely volatile:
• Low frequency
• High severity
– Alarming recent trends in SA and across the world
2. Even “non-Cat” experience is very volatile – Use of informed risk management practices becomes critical
– Need a robust approach: – Pillar 1: able to quantify the risks & capital implications - LT and ST views are needed
– Pillar 2: set up proper governance and risk management systems
3. The hardest part… – The hardest part is not doing the calcs or putting policies, procedures in place…
– The hardest part is making it a day-to-day BAU reality: Implementation
In summary
Thank you
Jaco van der Merwe
Deloitte & Touche
Actuarial and Insurance Solutions Tel: +27 11 209 8163
Cell: +27 82 682 3270
Email: [email protected]
