Report of E. Stanchenko ‘Transparency of a reinsurance company’

Report of E. Stanchenko ‘ Transparency of a reinsurance company’

What are the criteria the insurer uses when selecting a reinsurer? - Stability and reliability are the key guarantees of partners’ fulfillment of their commitments. This is the basis for building of long-term business relationship.

How to define whether the company offering us any services is reliable or not? How to determine how stable the company is. The questions seems simple, but in practice there are many biased factors that baffle the right choice.

We can obtain information at meetings with the company’s staff, from the site of the company, examine records, read publications and press releases, explore analyst reports and talk to colleagues - in short, spend time on collecting and analyzing the information. As a result, we have to work on accounts for past periods, often more than a year old. We also have to assess colleagues’ opinion based on personal experience. I think that the  estimation of a partner made on the basis of such information may not reflect the current state of the company  especially in case of world crisis.

Information openness or ‘transparency’ becomes a key factor in business efficiency. So current up-to-date information is mostly significant. Because today it is very important to know what happens with  acting business partners.

After analyzing the results of studies conducted by specialists of our company (respondents are specialists of Russian reinsurance companies), we concluded that one of the main factors influencing the choice of a reinsurer is the information availability as well as  responsiveness,  correct underwriting and tariff policies.

We all understand that ‘availability of information’ is a rather limited term. And everyone understands it in his own way.

Being the head of the company and a partner  I am interested not only in the financial statements but also in the transparency of business processes, responsiveness in reviewing of treaties, openness of quotations, clear tariff policy. All the factors mentioned in the table serve to a varying degree as an indication of the partner’s activity. We can say that the information openness means the transparency of all major business processes and not just the availability of information about the company.

Today all players of not only insurance but of financial market in general whether they are a big potential Russian or foreign partner, auditor, underwriter, bank, investor or the state will seek to work with open and stable companies. Information openness also affects the capitalization of the company actively doing its business.

It is very difficult to develop long-term civilized strategic relations with partners  without complete information, working  as the saying goes ‘in the dark’ risking not only the finance of the company but company’s reputation in the eyes of the clients.

I believe the introduction of the principle of transparency is a great and important step forward made by our company in early 2008. Adherence  to this principle rests in fulfillment of  our strategic objectives and long-term goals.

The partner has the right for access to the information:

• On financial situation of a partner (accounting data, including information on liquid assets) .

Main idea incorporated in the concept of transparency is providing the partners with maximum information, its availability and constant data updating.

We pay great attention to the structure of the assets. The assets of a company is one of the key indicators, which determines the financial solvency of a reinsurance company. At that not only indicators of the total volume and structure of assets are important, special attention should be paid to the most liquid assets such as deposits and balances with banks, investments in liquid securities and other similar investments. For example  if a loss is declared to the reinsurance company, then the ability to rapidly accumulate funds and make payments should be defined depending on the value of these highly liquid assets.

Besides it is not  the absolute size of the assets that matters. It is important to see the momentum. Monitoring positive change in the amount of liquid assets of the reinsurer, the cedent gets confident that he has enough means to fulfill the obligations, and thus positioning of risks with him is reliable. The increase in reinsurer’s assets  is a more informative indicator than information about growing of reinsurance company’s fees. It illustrates the quality of the company's activity, development of its business, growth of its reserves and actual financial capacity.

The structure of assets portfolio in terms of investment objectives is also important: in which banks deposit accounts are openned and money is placed, how much and in what tools money is invested, what risks it may provoke. To which extent the expected revenue on investment corespond to the risk of losses in case of investment?

We give our partners a possibility to analyze the dynamics and structure of our assets. Therefore  we publish current data on the status of our assets at the corporate site.

For sure  monitoring of reinsurer’s assets    in such a way provides a higher degree of reliability than the use of annual accounts data with big delay. There are very tough requirements in the regulations on reserves and assets, but they deal only with information on accounting date. Such information is prepared quarterly but it is very difficult to verify what happens with assets in between. Therefore it is preferable for reinsurer’s partners to take into account information on assets, published more frequently. And if the company is ready to provide such information that describes the real situation in the company, its strong points and prospects.

In theory many companies are ready to talk about openness and transparency. Now it's time to move on to the practical phase of realization of the declared principles of transparency i.e. disclose the specific information on how many and what types of assets contributions the reinsurer has to meet its obligations to the cedent. I think our example will be followed by other companies, and then users of reinsurance services will be able to compare the companies for themselves and choose their partner taking into account the information on assets in this aspect.

Of course, each company can be transparent to the extent required by law. But more ‘closed’ is the company, the less it shows its ‘strategic vision’.

It is known fact that the consequencies of the global crisis affected Russia as well. There exist coercive measures regarding the disclosure of information. According to Kommersant of  October 2, 2008 Federal Service for Insurance Supervision  (FSSN) got interested in the consequences of the financial crisis. It sent queries to 16 insurance companies concerning the structure of their assets.

Banks suffer and as concequence insurers suffer as well.

Bank KIT Finance: the total amount of insurers’  claims to the bank exceeds half a billion rubles (According to press reports datedOctober  7, 2008). And the main creditors (the list of whom is constantly growing) are large, respected companies: Reso-Garantiya, Ingosstrakh, MAKS. The bank does not come out to creditors with proposals for debt restructuring. ‘There exists a problem of non-transparency of procedures for rescuing the bank’ (quoting RBK).

Not so long ago we all witnessed the bankruptcy of the Leman Brothers bank which acted as ‘a catalyst’ for a long chain of bankruptcies. The first insurer that suffered due to the crisis was AIG. How will the crisis affect the biggest reinsurers in the near future? Now we can talk about high risk. Here are short articles from various media.

End of 2007: The media reported first retirements  and made forecasts.

In November 2007 Swiss Re  wrote off assets of 1.2 billion Swiss francs because of the crisis. In July 2008 reinsurer losses exceeded 2.2 billion francs.

Net profit of the company in the I quarter of 2008 fell by 53% to 624 million francs.

Munich Re, February, 2008:  Net profit of the company in the IV quarter of 2007 declined by 12%  up to 589 million euros due to a significant reduction in investment income. In 2008 Munich Re expects that its net profit will amount to  3-3,4 billion euros.

July, 2008: Munich Re declares the reduction of revenue by 48% in the second quarter and lowered the forecast for the year.

Next message: Insurer's profit at the year-end will be ‘well above 2 billion euros’. " Net profit of Munich Re  (according to preliminary data)  in the II quarter  amounted to 600 million euros compared to 1.16 billion euros for the same period last year.

Well, the reinsurance market will become more tough. The cost of protection in the West will grow perhaps in 1,5-2 times. September 23 Reuters  came up with the news: ‘Munich Re sees opportunities to push through double-digit price increases ... The world's biggest reinsurer is targeting price increases that were" clearly in the double-digit percentages "for the risk cover it provided to insurers in 2009. "From now on it'sa hard market. The soft market is behind us’. For a long time cedents preferred to reinsure contracts with major western reinsurers  believing that the quality of their defense and stability were unwavering.

As a result  many insurance and reinsurance companies are facing serious choice while assessing the cost of coverage and selecting types of protection and reinsurers. Russian reinsurance market may be considered as an alternative market. We are open to cooperation and you can get the benefits of working with us.

Let’s go back to  the results of the  study conducted by our company. What are the requirements of the cedent  to the reinsurer? The main requirement is responsiveness: quote responsiveness , responsiveness in decision-making, responsiveness in payments. In accordance with this requirement Profile Re uses standards of the company’s activity: quotation in an hour, the acceptance to a day, the payment the next day.

Many may come out with the the question: whether you are able to work so quickly? Yes. And it does not mean that we decide whether take the risk or not ‘blindly’. The task of underwriter consists in correctly assessment of the risk and calculation of all variants before responding. Therefore we often have to ask additional questions in order to obtain necessary and sufficient information for quick  processing of the data.

Often the question of how one should act in a situation when the cedent could not provide the necessary statistics arises. I think it’s not a secret for you that the lack of statistical information is a peculiarity of Russian reinsurance market.

We use the method of ‘average solitary risks’ (ASR) developed by our company. ASR  method has been used in practice for more than 5 years and allows high level of responsiveness. At the same time, we do not keep this method secret and  if necessary we can explain to our partner what and in which way affects the amount of the final bids and provide him with cost estimate. Contact us and  you will be able to check this and compare us with your other partners by a real example, by actual quote.
 

 ‘Average solitary risks’ method is developed to assess the obligatory reinsurance treaty on the excess of loss (XL) basis  in Russian conditions. The method comes from the reinsurance cost calculation on the basis of structured methodology  adapted for the analysis of the company’s portfolio with statistics for a short period of time.

Now I wil briefly tell you about this method: any company can use the method in its practice. The main advantage of the method is that assessment of the portfolio requires minimum of statistical information:
 

-         Risk profile for the minimal period of 1 year for Russia and of 3 years for partners from other countries;

-         -Net written premium forecast.

-         We request brief information about the company;

-         As well as underwriting policy of the ceding company   reflecting the approaches to risk acceptance for insurance and the settlement of damages.

The calculation consists of several points. We can view it for the real examples of your company.

Summarizing the presentation, I want to point out that we are for transparent and mutually beneficial cooperation. All of us are partners and players on the reinsurance market. We can build a civilized market, increase turnover and use different methods for promoting of our companies. Today's level of information and communication technologies allows us to share knowledge, experience and projects, improve the productivity of existing business processes.

You always can find the best solution!

By openning partners can protect their companies and those who trust them ...