Turning volume into profit

Dr Reto Brosi, Head Casualty Desk of Swiss Re China discusses how Swiss Re can partner with clients in order to solve some of the Motor-related challenges.

Fuelled by what was record economic growth, most Asian insurance companies moved to significantly grow their Motor portfolios in the earlier part of this decade.  Many did not anticipate the significant challenges that recent years of regulatory change, economic cycles, unsatisfactory underwriting results, and rapidly evolving risk landscape have posed to all stakeholders.  On top of all this, we continue to face that well-known bane of all Motor underwriters: highly price-sensitive and disloyal customers who take advantage of the great variety of distribution channels many of which lie outside the underwriter’s sphere of influence.

This article focuses on two aspects of a solution, namely solvency-related challenges and the benefits of portfolio management, citing two specific cases where Swiss Re has successfully collaborated with clients to develop ways to meet those challenges.

About solvency

Many regulatory authorities in Asia are either already considering the introduction of solvency regimes of the risk based capital (‘RBC’) type, or have recently amended solvency ratio hurdles for insurers. These changes are aimed at ensuring that insurers have sufficient capital available to not only absorb losses from their current portfolios but also equip them with the necessary cushions for further growth and expansion.

Often, insurers subjected to new regulatory regimes find themselves faced with a difficult choice:  either reduce the amount of risk taken on their books (a step few insurers willingly take), or find new sources of capital to support corporate growth strategies.

Of the options available to strengthen the capital base, reinsurance is among the most efficient.  For one thing, quota share reinsurance is recognized as a direct substitute for risk capital in almost all regulatory environments across Asia. In fact, a traditional reinsurance solution  poses relatively few execution hurdles and involves a few selected partners only, which make it a very efficient and flexible answer to an insurer’s need for increased capital. Additionally, treaty capacity and cession modes can be varied flexibly over time to match the evolving needs of the reinsured over an extended time period.

The following example illustrates how a traditional quota share reinsurance arrangement can support a Motor  insurer who is subject to a premium-based solvency supervision regime. The following assumptions are made:

  1. the regulation stipulates a volume-based solvency ratio of at least 150%
  2. minimum capital is required to be 15% of gross premium                             
  3. the insurer plans to grow its business by 20% in 2010


From this simplified example it is clearly evident that without the benefits of traditional reinsurance this Motor Insurer would have to either reduce its production in 2010 or raise additional capital.

Portfolio management

With the rapid growth of Motor insurance in Asian markets, many insurers have developed very large portfolios that provide ample opportunities to apply advanced portfolio management techniques. However, old tariff structures and the lack of data mining capabilities often prevent the use of advanced portfolio management techniques that would allow insurers to analyze and segment their portfolios and develop more risk-focused underwriting and portfolio steering techniques. 

To top that off, underwriters often have to rely on rating tables that reflect only a historic risk landscape. This often leads to equal discounts for customers with different risk profiles and loss histories.

Through discussions with our clients and the deployment of systematic portfolio analysis techniques, Swiss Re has observed that certain segments of Motor business consistently deliver better results than the ‘average’ portfolio. While it’s true that often, an experienced motor underwriter will instinctively know that certain policies in his book perform better than others, only comprehensive portfolio analysis done over a prolonged period of time can reveal the reasons, wider issues and opportunities, and allow both underwriters and management to adapt their sales and underwriting approaches to try and secure more of the high-performance types of business.

Similarly experienced underwriters have a feel for which policies in their portfolio under-perform on an individual basis. Here also, a focused and in-depth portfolio analysis conducted in collaboration with Swiss Re will reveal the issue at a more comprehensive level.  Corrective measurers can then be deployed to improve the respective segment(s).

Swiss Re is successfully collaborating with a number of clients across Asia in these areas to jointly steer portfolios further towards profitability. Tailor-made reinsurance arrangements are integral part of these joint efforts.

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