Aon Non-Executive Directors’ Christmas Seminar€¦ · governance arrangements including ......

Aon Non-Executive Directors’ Christmas Seminar Thursday, 13 December 2012

Agenda

15.30 Registration, Tea & Coffee 16.00 Welcome & Guernsey Insurance Industry update Paul Sykes Managing Director Aon, Guernsey

16.30 Global Captive Developments & Captive Self Assessment Charles Winter Chief Operating Officer & Head of Risk Finance AGRC UK

17.30 Drinks & Canapés 19.30 Close

Aon Risk Solutions | Global Risk Consulting| Captive & Insurance Management 1

Welcome & what am I going to talk about………..

Aon Risk Solutions | Global Risk Consulting | Captive & Insurance Management 2

Guernsey Market Overview

IAIS ICPs – what to expect

“Coequivalence”

GFSC Transformation – Project

Sentinel

Company Law changes

Ombudsman

UK Bribery Act

GIIA

Aon Guernsey

GFSC Licensee Statistics


1 4 5 5 5 5 3 8 80 81 76 76 78 75 7

8 8 13 17 17 13

249

255 255 256 319 330

125

63

67 64 62

68 68

14

281

287 272 265

254 250

84

0

100

200

300

400

500

600

700

800

2008 2009 2010 2011 31-May-12 30-Nov-12 AIMG 2012

ICCs Life Cells ICC Cells PCC Cells PCCs Companies

609

701 685 677

739 748

314

2008 – 2012 figures correct as at 31 May

Global Risk Consulting | Risk Finance

Guernsey’s Solvency II Position Statement

- The GFSC & the States of Guernsey Commerce and

Employment Department

No plans to seek equivalence under Solvency II

Commitment to current and developing IAIS international regulatory standards to take account of risk based solvency

Focus on amending Guernsey’s regulatory regime as appropriate

Monitor Solvency II to determine whether equivalence may be beneficial

Government, Regulator & Industry Consultation

Coequivalence


IAIS Framework for Insurance Supervision

Global Risk Consulting | Risk Finance

Financial Governance Market Conduct

ICP 14 Valuation ICP 20 Public Dislosure

ICP 15 Investment

ICP 17 Capital Adequacy

Level 2 - Regulatory Requirements

Level 3 - Supervisory Assessment and Intervention

ICP 9 Supervisory Review and Reporting

ICP 23 Group-wide supervision

Level 1 - Preconditions

ICP 16 ERM

ICP 7 Corporate Governance

ICP 8 Internal Controls

ICP 17 – Capital Adequacy


What might be different from what we have today?

Total balance sheet approach

ALL assets and liabilities – approved asset regulations appropriate capital charge for each assessment of correlation (or lack of) between risks

Calibrated standardised approach Value at Risk (VaR) based approach using Solvency II data 1 year time horizon confidence level to be agreed

Standard 17.3 Introduces solvency control levels which trigger different degrees of intervention by the supervisor

From here …………………………………………………………..to here


MSR

OSCA

MCR

PCR

Total capital

Ladder of Intervention

OSCA

Total capital

ICP 7, Corporate Governance & ICP 8, Internal Controls


Rule 14 The insurer is required to have an effective actuarial function

GFSC Proposed Corporate Governance Rules

“In issuing rules rather than a code the Commission believes that the enforceability of the requirements can be more effectively demonstrated”

Proposed effective date – 1st January 2014

Rule 15 The insurer is required to have an effective internal audit function

What we’re doing about it


Aon Solvency Working Group

GIIA Regulatory and Technical committee

Engagement with regulator

No consensus exists within GIICS (formerly OGIS)

Test case data fed into draft models

Formal QIS in 2013, Q1 required by GFSC

Intent to establish ICP compliance before the next IMF visit

Insurance Law will require amendment

Consolidated Law


Regulatory Consolidation Law

Cover the finance sector as a whole

Currently a project with GFSC

C&E Department yet to decide if it will propose to States

Earliest date – end of 2014?

Anti-Money Laundering Changes


In June the Commission released a Consultation on AML/CFT Regulations and Handbooks

Proposed changes of particular interest: - General Insurance (Commercial and Personal Lines) to be removed from definition of

financial services business in the Proceeds of Crime Law; Not required to follow the AML /CFT Handbook; Therefore, no requirements for AML Policies and Procedures; No requirement to undertake Business Risk Assessments or Client Risk Assessments; No Due Diligence requirements; No requirement to appoint a Money Laundering Reporting Officer; and No requirement to undertake regular AML Training.

The above changes does not affect Long Term Insurance Business.

There are on-going discussions with the Commission and Commerce & Employment as to

whether this will require General Insurers to appoint a Resident Agent.

GFSC – Transformation (Sentinel Programme)


E&Y Independent Evaluation Review - 30th Nov 2011

Chief Transformation Officer – Tim Loveridge Extranet Project

Chief Operating Officer – Neville Johnson

Service Level Standards

Central Authorisations Unit

Scrutiny Committee Review: "Who ‘regulates’ the financial services regulator”


30th November 2012 To consider relationship between SoG and GFSC to clarify and assess

governance arrangements including reporting lines, responsibilities and accountabilities

Also consider effectiveness of SoG in providing an appropriate policy framework for regulation

Call for evidence – 1st February 2013

Public hearings – Q1 2013

The Companies (Guernsey) Law, 2008 (the Law) – Proposed changes

28 November 2012 Billet D’État proposed changes submitted for debate

Changes of particular interest: -

– PCCs do not need to consolidate core and cells in financial statements – Introduction of a provision permitting the Protected Cell of a Protected Cell Company to

become incorporated – Five year rule on authorisation to issue shares removed – Directors’ obligations to Company (not shareholders) clarified and liabilities limited – Electronic only documents permissible

www.aon.com/guernsey - thought leadership


http://www.aon.com/guernsey

Website - http://www.aon.com/guernsey/

16 Aon Risk Solutions | Global Risk Consulting | Captive & Insurance Management

http://www.aon.com/guernsey/

http://www.aon.com/guernsey/

Ombudsman


Financial Services Ombudsman Scheme To cover: Banking Collective investments/funds Investment Business Pensions Consumer Credit

Insurance brokers and managers will be within scope of FSO Captive Insurance Companies will NOT be within scope

Complaints volume – IoM averages 320 pa, Jersey expects 400-900 Funding Model: Annual levy and/or case fees C&E Board January 2013 States Report Q2 2013

UK Bribery Act


There three Potential Offences for Individuals / Corporate Entities under the UK Bribery Act

– General offence of offering and receiving a bribe; – Specific offence of bribing a foreign public official; and – Failing to prevent bribery on the behalf of a corporate (i.e. lack of procedures)

This Act affects the following persons in Guernsey:

– Legal Entities that are subsidiaries of a UK Registered Company; – Companies which undertake business in the UK; and – Individuals who are British Passport Holders.

Non Executive Directors are required to ensure they are not involved in offering or receiving a

bribe. Furthermore, they are required to ensure that entities that have connections with the UK which they act as Directors for have adequate policies and procedures to prevent bribery.

UK Bribery Act


AIM Guernsey’s Recommendations:

– Those entities which are subsidiaries of a UK Group should adopt the Group’s Anti-Bribery Policy; and

– Undertake a Bribery and Corruption Risk Assessment to assess the risk of bribery occurring on behalf of the Captive (a template Risk Assessment will be provided to relevant Boards in 2013).

How does AIM Guernsey ensure that it is not involved in bribery?

– We have implemented Anti-Corruption Policy and Procedures to monitor Third Party Payments, Expense Claims and all Counterparty Relationships;

and – Client Event, Entertainment, Meals and Gift Policies and Procedures.

GIIA

2012 – Membership recruitment campaign

– GFSC Cell fee increase proposals withdrawn

• Expect a ‘drains up’ approach to fee setting next time

2013 – 30 year anniversary – Market Development Committee

• New markets • New Products (Innovation) • Development of Reinsurance Sector

Diary dates

– AGM: 21st February 2013 – Annual Dinner 18th April 2013


AIM Guernsey – What makes us different


PCC & ICC innovations – White Rock

Talent development – Graduates

New overseas signings in 2013

Trust & fiduciary services – ASG, Non-insurance risk transfer

Co Sec capabilities

Director presence

Seminars & annual Masterclass

Client Service Model – Aon Client Promise

Captive Console platform

Website thought leadership & newsletters

22

Thank You. Any questions?

Aon Risk Solutions | Global Risk Consulting | Captive & Insurance Management

Aon Guernsey Non-Executive Directors’ Christmas Seminar 13th December 2012

Charles Winter, COO & Head of Risk Financing Aon Global Risk Consulting UK

Agenda

Insurance Market Conditions & Forecast

Captive Trends Introducing the Captive Self Assessment

24 Aon Risk Solutions | Global Risk Consulting | Risk Finance

Insurance Market Conditions & Forecast


The Insurance & Reinsurance Market – Opening Position

Reinsurer Capital Post-2011 Catastrophes & Pre-Sandy


Observed Trends

-0.05%

2.71%

-1.02%

-3.02%

1.64%1.38%

-0.33% -0.32% -0.52%

2.25%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Business and Personal Services

Food System, Agribusiness and

Beverage

Manufacturing Pharmaceutical and Chemicals

Retail and Wholesale Trade

Q1 '12 Q2 '12Source: GRIP

GBR All Products Annual % Change in Rates on Renewal From an industry perspective, half year saw ratings generally remain static across the board (see diagram)

However, seen a reduction in rates for many specialty classes of business

But, Property Cat ratings were up double digits at half year

Also, Q3 saw property/casualty rates on the rise (Source: Council of Insurance Agents & Brokers)

Notably, survey finds majority of insurance carriers feel the market is hardening (Source: FirstBet Systems)


Market Conditions - as reported in September 2012

First half of 2012 has been a benign year to date for Nat Cat events/losses compared to 2011

Strong first half year for many Insurers, shown in H1 combined ratios (CR):

H1 2012 CR H1 2011 CR

London listed insurers 83.9% 104.4%

Allianz 96.8% 98.1%

Ace 88.9% 98.5%

Chartis 102.3% 111.1%

QBE 92.9% 95.7%

Zurich 94.9% 99.5%

Aon Risk Solutions | Global Risk Consulting | Risk Finance

Q3 European insurers entered the last quarter in strong shape

US insurers and reinsurers posted strong profits ahead of Sandy

H1

Market Conditions – on the shop floor

Aon Risk Solutions | Global Risk Consulting | Risk Finance 29

• ‘New’ capacity entering the global market arena • Continued strong focus on accurate and detailed underwriting information • Accounts being considered on individual merits • Some occupancies remain challenging • Competition remains for quality business

Significant variances in insurer responses • Geographical differences • Approach to pricing and capacity for Nat Cat

exposure • Inconsistent adherence to rating tools

• Varying appetites for occupancies and suppliers exposures

• Some opportunistic rating

Insurer actions • Re-underwriting portfolios

– XL - generally reducing line size and have come off some accounts

– Zurich - referral driven and have come off a number of accounts in 2012

• Retreat from unprofitable books – Mitsui no longer writing motor business – RSA withdrawing from motor for ‘Global’ clients

Impacts

Market Conditions - Outlook 2013 renewal


Barclays Capital: “Barring large catastrophe losses, the

pace of price increases appears to have peaked…room to push for rate increase though at a slower place”

Hannover Re: “Expect further rate moderation if no significant loss between now and y/e”

Aon Benfield: “Property catastrophe reinsurance rates

could fall between 5%-10% driven by competition from hedge funds, Cat

Bonds etc”

Swiss Re: “Prices will 'increase moderately’ as

weak interest rates and new solvency rules are 'major factors

driving re/insurance pricing.”

Munich Re: “Expects 'largely stable' reinsurance

rates at January 2013.”

This outlook was prior to Hurricane Sandy…. ….the industry is now reporting….

“Hurricane Sandy expected to lead to significant BI losses”

“Hurricane Sandy expected to evoke a hardening of reinsurance market rates” “Property/casualty insurance rates expected to firm in wake of Super storm Sandy”

“Hurricane Sandy likely to result in more than 1 million claims” “Hurricane Sandy to cause a tightening of underwriting practices especially in relation to water damage

and BI” (similar exclusions/sublimits as on Gulf coast after Katrina)

Market Conditions - Outlook 2013 renewal


– Changes in the capital and catastrophe models – Enterprise Risk Management – Strong oversight from regulatory authorities and rating agencies – Capital management – New capital entering the market – Underwriting discipline

The impact of large natural catastrophes today is less profound as the (re)insurance market grows in sophistication.

Why?

So? Sandy isn’t going to turn the market.

However, Sovereign Risk is the one to watch and a disorderly default could jeopardise the

financial stability of European insurance sector

Captive Trends


Captive Trends - Usage


27%

24% 15%

9%

6%

6% 5%

5%

2%

Reason for Captive Control on Insurance Programmes

Strategic Mgt Tool

Access to Reinsurance Market

Cost Efficiencies

Ability to establish Reserves

Tax Optimisation

Reduction of Insurance Premiums

Other

Risk Finance Expense Optimisation(Source: Aon Captive Benchmarking Oct 2012)

Category 2011/12 2009/10 Currently have an active captive or PCC 26% 37%

Plan to create a new or additional captive or PCC in the next 3 years 12% 12%

Have a captive that is dormant/run-off 6% N/A

Do you plan to close a captive in the next 3 years 8% N/A

(Source: Aon Global Risk Management Survey 2011/12)

Captive Trends – Classes of Business


Future Captive Insurance Classes Written Aon’s 2011/12 Global Risk Management Survey indicated increased interest in underwriting the following risks over the next 5 years:-

Warranty: 208% increase Cyber liability: 78% increase Trade credit: 71% increase Environmental: 56% increase EPL: 48% increase Employee Benefits: 61% increase

(Source: Aon Captive Benchmarking Oct 2012)

Captive Trends - Domiciles North America

Vermont 590 (+18) Utah 239 (+51) Hawaii 172 (+5) S. Carolina 159 (+4) District of 157 (+12) Columbia Kentucky 137 (+10) Nevada 127 (+3) Arizona 97 (+1)

Caribbean Bermuda 862 (+17) Cayman Islands 705 (+2) BVI 174 (-45) Anguilla 268 (+16) Barbados 270 (+28)

Europe Guernsey 336 (-5) Luxembourg 242 (-2) Isle of Man 133 (-8) Ireland 101 (+19) Sweden 49 (=) Switzerland 35 (=) Gibraltar 16 (-1) Malta 11 (=)

Asia-Pacific Singapore 60 (=) Labuan 34 (=) New Zealand 24 (=)


* All figures illustrate net 2011 movement as at 31 Dec 2011, except for Guernsey which shows net annual movement as at 31 Aug 2012 * Figures do not include each individual PCC/ICC cell (Source: Business Insurance – March 2012)

(Source: Aon Captive Benchmarking Oct 2012)

Developmenst In Captive Usage


A systematic approach to maximizing captive utility

• Traditional • Non-traditional

Corporate Risks

• New revenues • Brand loyalty • Supply Chain • CSR

Business Enablers

• Pensions • Legacy • Acquisition/mer

ger • Debt factoring

Financial Leverage

• Emerging Risks

• Enterprise Risks

Risk Incubation

Optimising utility

Hybrids

Captive Issues - Tax


No discussion of captives in complete without at least mentioning tax

UK – CFC changes – guidance issued by HMRC

US

– Non-Admitted & Reinsurance Reform Act / Dodd Frank – Cascading FET

Transfer pricing

Premium taxes

Captive Issues – Solvency II

“Delay” Directive now likely to become effective in 2015 or, maybe, 2016 Level II guidance awaited

“Deliberation”

Equivalence sought in Switzerland, Japan, South Africa and others Bermuda – “bifurcated equivalence” Local regulators demand different rates of progress and start to issue local guidance

(e.g. PRISM by CBoI) Will ‘softly’ regulated domiciles benefit?

“Disinformation” - mixed messages

Proportionality for captives – not prescriptive, but catered for on case by case basis Impact of a captive rating Fronting


Nor, these days, without mentioning Solvency II either....

Captive Self Assessment


Captive Self Assessment Parent Structure Y N 1. Have material changes occurred in the parent’s business profile?

√

2. Has the parent company either been subject to or the mastermind of a merger or acquisition? √

3. Are there multiple captives within the group?

√

4. Has the parent company examined its risk tolerance/appetite?

√

Insurance Market 5. Has there been a shift in capacity/appetite within the insurance market in a class of business vital to the

parent company? √

6. Have prohibitive exclusions been placed upon key coverage available or are key risks becoming ‘uninsurable’ in the insurance market?

√

Captive Programme 7. Has the captive programme remained the same for several years?

√

8. Have the level of the current retentions within the captive been tested for efficiency?

√

9. Has the insurance programme (including captive retentions) recently been independently reviewed? √

10. Has the captive recently considered underwriting risks not currently underwritten?

√

11. Has the potential to close out historical liabilities been considered?

√

12. Has the financial performance of the captive been benchmarked against Aon’s benchmark standards using appropriate financial ratios?

√

Captive operations 13. Have all internal controls been subject to suitable scrutiny, been tested and proven robust?

√

14. Has the structure, domicile and operating procedures of the company been reviewed against developments in the external environment?

√

Compliance 15. Are parent company operations, present in/or expanding into, Europe or RoW? (if not go to question 18) √

16. Has the captives programme been confirmed to offer fully compliant global cover?

√

17. Does the captive potentially require fiscal representation in certain territories?

√

18. Has the mind and management operational structure of the company confirmed to be appropriate and compliant in the event of audit?

√


Response Criteria

Urgent issues If you marked the grey boxes in questions 16, 17 or 18 then

you may have urgent issues that need reviewing.

Multiple

issues

If you marked the grey boxes in 5 or more questions then you

may have multiple issues that need reviewing.

Single issue If you marked a grey box in any of your answers it may well

be that you have a particular issue that needs reviewing.

Example Self Assessment Output 1 Energy sector Captive in the Isle of Man

Aon undertook a review of the global insurance programme and commented upon its regulatory compliance Prior to the review, the captive issued policies to all of the parent company entities on a non-admitted basis and Figure 1.1 refers

to whether this was permitted or not. It was established that the captive only collected and settled UK IPT whilst the various parent company subsidiaries collected and

settled the tax due in other territories

THE SOLUTION

Those territories in quadrants 1 & 2 could purchase insurance direct from the current captive in a compliant manner

It was recommended that those territories in quadrant 3 be fronted by a cell in a protected cell company in an EEA domicile. All policies could be issued on a basis compliant with insurance regulation in

each territory The cell could invoice all insureds and, where possible, arrange for the payment

of taxes for all policies it issued No change to status of captive which would act as reinsurer of the cell No collateral requirement

It was established that the entity in quadrant 4 should purchase insurance from a local insurer

Figure 1.1

EEA Non EEA

Non Admitted Permitted

1 2

Non Admitted Restricted

3 4


Compliance 15. Are parent company operations, present in/or expanding into, Europe or RoW? (if not go to question 18) √

16. Has the captives programme been confirmed to offer fully compliant global cover?

√

Example Self Assessment Output 2 Food & Drink Sector Captives in Guernsey & Singapore

Review of which captive most relevant for group ongoing Closure option for Singapore captive Financial analysis suggested value from using deferred tax assets

THE SOLUTION

Potential classes of business to be written

Quota share or excess of loss of conventional programmes Crop / weather insurances Buy backs of policy exclusions and sub-limits

Interface with Guernsey captive Cashflow positive for the group


Parent Structure Y N

1. Have material changes occurred in the parent’s business profile? Y

1. Has the parent company either been subject to or the mastermind of a merger or acquisition? Y

Are there multiple captives within the group?

Y

1. Has the parent company examined its risk tolerance/appetite? Y

Benefits

Opportunities / Optimisation

Expansion

Governance

Risk Management


Next Steps

Include captive self assessment checklist in next board meeting papers

Consider and complete the self assessment as a board

Review output to determine the risks and opportunities

Managers to coordinate further engagement / action as required

Plan response


Charles Winter Peter Chesman Head of Risk Finance Senior Consultant +44 (0) 20.7086.0494 +44 (0) 20 7086 4714 [email protected] [email protected]

mailto:[email protected]

mailto:[email protected]

Aon Non-Executive Directors’ Christmas Seminar Thursday, 13 December 2012

Aon Non-Executive Directors’ Christmas Seminar€¦ · governance arrangements including ......

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