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SA Insurance Association: Trade Credit and Surety Non-Life Underwriting Risk Parameters for SA QIS 3

This presentation by John Doe from the South African Insurance Association (SAIA) discusses the NLUR parameters for SA QIS 3, with a focus on trade credit and surety non-life underwriting risk. It covers the history and current developments of the SCR NLUR, as well as the impact of cat recessionary charge and 1 in 200 year loss ratios. The presentation also explores options for calculating the loss ratio and outlines the next steps for NLUR. References to relevant studies and documents are provided.

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SA Insurance Association: Trade Credit and Surety Non-Life Underwriting Risk Parameters for SA QIS 3

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  1. Titel hier presented by John Doe Date here SOUTH AFRICAN INSURANCE ASSOCIATION

  2. Trade Credit and Surety Non-Life Underwriting Risk (NLUR) parameters for SA QIS 3 13 June 2013

  3. WG Structure ICISA S2 Expert Group SAIA TCS Forum

  4. SCR NLUR overview (TCS)

  5. History and current developments * EIOPA = EIOPA Solvency 2 Cat Task Force

  6. Reasonability?CAT RecessionaryV prem * 75% • How do you separate out cat frequency event? (Same issue applies to other classes eg Prop Commercial and crop) • CAT Recessionary charge must be considered together with σprem and σres! • Else will double count! (ICISA would prefer combined charge) • Look at 1 in 200 year loss ratio implied by proposed charges and then compare to industry experience So the key question is: What is the 1 in 200 year Loss ratio?

  7. CAT RecessionaryWhat is the 1 in 200 year Loss ratio? Implied by SA QIS 2 parameters – using ICISA spreadsheet

  8. CAT RecessionaryWhat is the 1 in 200 year Loss ratio? - ICISA ICISA study Feb 2012 1 in 200 high (215%) 1 in 200 low (165%)

  9. CAT RecessionaryWhat is the 1 in 200 year Loss ratio? - ICISA • ICISA study Feb 2012 • Financial crisis 2008/9 was the worst crisis in the last 75 years (at least a 1 in 75 year event) • Average loss ratios doubled from 40% to 80%, • But recovered very quickly by 2010 (faster than overall economy) • Ability to manage credit limits by reducing or cancelling exposures at short notice (“dynamic exposure management”) • SA has further flexibility because policy terms also allow (trade credit) premium rates to be changed with 30 days notice (European terms generally annual)

  10. CAT RecessionaryWhat is the 1 in 200 year Loss ratio? – SA industry • Distribution fitted to loss ratios past 20 years • Internal models • Management views • Need to take cogniscence of ability to manage down exposures and increase premiums 1 in 200 loss ratio? Considered Trade Credit and Surety separately

  11. Cat recessionaryWhat is the 1 in 200 year Loss ratio? – SA industry • Option 1: • 55% V prem credit + 75% V prem surety • Better reflection of underlying risk • Suggest do not split premium and reserve risk at this stage, as this reduces credibility of data pool, which is already small. Maybe consider later • Could modify to allow for diversification / correlation • Option 2 • 60% V prem • Simpler

  12. Cat recessionaryWhat is the 1 in 200 year Loss ratio? – SA industry • Option 3 • Shock should be applied to actual loss ratio, not break-even loss ratio (similar to mortality shock) • May be tested as part of SA QIS 3 • Eg 75% * Actual loss ratio / assumed break-even loss ratio • Use at least 10 years loss ratio data (due to TCS underwriting cycle) • Better reflection of underlying risk • But may be distorted by inclusion of IBNR

  13. Next steps for NLUR • Premium and reserve risk calibration • Allow for cat? Outliers? Credibility? • Man-made catastrophe • Discussion document has been drafted by NLUR, incorporating SAIA TCS research, update for new feedback • Impact studies • Economic impact • Consider equivalent banking products (market penetration and solvency)

  14. References • FSB SA QIS 1 and 2 technical specifications • FSB NLUR Data Request 2012 • ICISA CAT Scenarios for Credit and Suretyship May 2011 (draft) • ICISA Impact Study SCR non-life Nov 2011 • ICISA NLUR for Trade Credit Insurance • ICISA LGD study May 2012 (draft) • Draft Discussion Document - SAM man-made catastrophe sub-working group Credit and Surety module May 2013 • EIOPA Calibration of Premium and reserve risk factors in Standard Formula of S2, 12 Dec 2011

  15. Titel hier presented by John Doe Date here Thank you!

  16. Additional slides

  17. Trade credit vs surety/bond?

  18. Claims ratios: Trade credit vs surety

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