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African Insurance Organisation

African Insurance Organisation. Credit Assessment Programme Progress Report. Agenda:. Objectives of programme Summary of CAC and terms of reference Assessment scales and nomenclature Assessment findings and observations Communication of AIO ranking assessments Extension of programme

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African Insurance Organisation

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  1. African Insurance Organisation Credit Assessment Programme Progress Report

  2. Agenda: • Objectives of programme • Summary of CAC and terms of reference • Assessment scales and nomenclature • Assessment findings and observations • Communication of AIO ranking assessments • Extension of programme • Next meeting

  3. AIO credit assessment objectives: • Develop explicit and unique AIO credit assessment rankings for its members • Increase the financial strength and security of the African insurance industry • Facilitate the exchange of insurance business within Africa • Further the understanding of credit assessment and allied financial and regulatory disciplines

  4. AIO credit assessment summary: • The scheme is totally voluntary – withdrawal or deferment is wholly acceptable at any time. • 15 companies have published their AIO credit assessments to date. • Stage I participants - 9 companies • Stage II participants - 4 companies • Stage III participants -2 companies

  5. Description Description AIO Scale Very strong -A+ Très bien Strong -B+ Bien Adequate -C+ Assez bien Marginal D Passable Weak E Faible Non-rated NR Non-note AIO credit ranking scale:

  6. AIO insurer assessments:

  7. Successful insurers and “value added”: Shareholders Growth Profitability Policyholders Value for money Security AIO Assessments Regulators Security Efficiency Reinsurers Counter-parties Markets

  8. Feed back from participants: External benefits: • Independent statement of security • Consistent benchmarks against pan-African norms • Consistent with international rating principles Internal benefits: • Full “diagnostic” facility & priority setting • Structured risk analysis – risk based capital • Explicit internal management tool Concerns: • African market comparability & local advantage

  9. Basic analytical processes: • Standardisation of accounting conventions • Adjustment of asset/liability values eg market values, treatment of general reserves • Consider “group” issues if applicable eg Life operations, parental structures • Application of “haircuts” eg charges for trade debt over 90 days • Calculation of standard ratios eg o/s claims to NEP, solvency ratio etc • Evaluation of ratios against model values • Calculation of final “weighted” score

  10. Advantage of “model” approach: • Consistent set of benchmarks and calculations • Based on wide observation of European c 650 insurers over 10+ years • Assists development of unique model for African application comparable with European equivalent • Explicit logic base – clear assessment rationales • Clear link with diagnostics for management and priorities • Facilitates comparability – fairness of assessment • Assists with market and sector “portfolio” reviews

  11. CAC portfolio observations: Underwriting: • Rate of GWP growth 1% pa – range (15)% - 90% • R/I usage 23% & declining use of reinsurance • Relatively strong solvency – c 104% NWP/Sh Funds • Predominantly short tail classes of business • Strong u/w results – average combined ratio 94% • Good liquidity – average o/s claims to liquid assets 81% but a wide range of individual ratios • Strong profitability - average return on Sh Funds 22% but a wide range of individual ratios • Asset “hair cuts” equivalent to c 30% of Sh Funds

  12. CAC portfolio observations: Balance sheet & investments: • Sh Funds US$ 250 m • diverse size range US$ 2-77 m • Annual cash flow – US$ +54 m • Total value investments – US$ 710 m Bonds 60% Cash 20% Property 10% Affiliates 8% Equities 2%

  13. Developing the methodology: • Completion of first portfolio review • Changes in model to reduce judgemental “over-rides” • Consideration and testing of new issues eg net retained single risk limits • Managing and communicating criteria changes • Developing default and migration studies

  14. Methodological issues: • All expenses to be charged against underwriting • Inclusion of full gross underwriting information • Availability of cash-flow information • Examination of run-off claims statistics • Consider “capping” single assets to 25% of total investments – limit likely to decrease in future • Consider additional hair-cuts of Sh Funds for “connected” parties

  15. Equity holdings Insurance Company Banking Company Deposits AIO “C” AIO “B” Insurance & banking groups – “connected” entities: Loans • Credit issues:- • Limits on asset admissibility • Excessive concentration risk • Determination of “connected” parties • Credit dependency • Capital being used twice • Equalised assessments

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