[Framework] Guide to Industry 4.0

1. Industry 1.0 was based on the introduction of mechanical production equipment driven by water and steam power. Industry 2.0 was based on mass production achieved by division of labor and the use of electrical energy. Industry 3.0 was based on the use of electronics and IT to further automate production. Industry 4.0 was based on the use of cyber-physical systems. 

2. The Smart Factory is quickly becoming a real place, where the technology and capabilities developed under Industry 4.0 will be put to work. Connecting real machines with information technologies and the Internet will increase productivity, add unprecedented levels of flexibility to manufacturing, and leverage the benefits of new business models and value creation networks.

Chinese Companies Expanding Abroad and the Challenges

1. China has the world’s largest supply of foreign currency reserve and Beijing’s easing restrictions on outbound cash has helped facilitate overseas investment. The government has also eliminated the need for companies to have their out bound investments approved by the State Administration of Foreign Exchange (SAFE).

2. The Chinese government monitors the outflow of foreign reserves and closes the gates if they see too much money leaving the country. However, the government has chosen to leave the gates open despite a massive outflow of foreign reserves making it easier for companies to go abroad.

3. The beginning of Q1 2016 recorded Chinese companies raking up acquisitions approximately $68 billion and $100bn of announced M&A transactions worldwide.

4. This was accelerated by the Government's initiatives such as China’s One Belt One Road (OBOR) inspired by the Silk Road trade path from China to Europe and is expected to build a huge economic corridor taking in almost two-thirds of the world’s population and accounts for one-third of the world’s wealth.


5. This initiative in China’s ‘going global’ objective was forseen when domestic growth slows down and is a major plank for many Chinese companies taking to the international stage.

Top Chinese Companies Going Global and PR in a Foreign Country

1. China’s outbound M&A activity for the first nine months of 2016 totaled $174 billion, (From Dealogic data) surpassing that of the United States for the first time.

[Framework] 10 Recommendations for Risk Management Improvements and 6 Useful KRIs

1. 10 actions to help firms better manage their risks.

2. 6 KRIs serving as a good tool for firms to summarise issues for management, the board, the non-executive Directors, the clients and the regulators.

[Framework] Consultation Paper on Regulation of UAE's Life Insurance Industry

1. In November, a consultation paper concerning regulations for the UAE's life insurance industry, Circular No. (33) of 2016 (Life Regulations), was released by the UAE Insurance Authority (IA).

2. The objective is mainly toregulate the manner in which life insurance investment contracts have been sold and marketed in the UAE.

[Misconduct] FCA's Asset Management Review Uncovers 'Market Failure'

1. In November 2016, the Financial Conduct Authority (FCA) released a report and labeled the asset management sector as ‘a market failure in the economic sense’.

2.  Notably in the performance of actively managed funds and the charging structure used for such funds.

China's Debt Bubble - Part 2 - The Actual Situation

This post continues from part 1 discussing where the credit risks lies and how China's banks circumvent the system.

China's Debt Bubble - Part 1 - Debunking the Beliefs

SUMMARY OF CHINA'S DEBT BUBBLE
1. In November 2016, Fitch Ratings warned that China’s bad loans in the banking system might be 10 times the official estimates of 1.8% of total assets. 

2. The predictions of a Chinese banking crisis have been proven wrong multiple times and  the concerns should lie somewhere else in the system rather than in a systemic blow-up.

[Misconduct] Wells Fargo Employees Creating Fictitious Accounts

1. Imagine paying fees on a ghost account you didn't sign up for.

2. In September,  federal regulators reported that Wells Fargo  employees secretly created millions of unauthorised bank and credit card accounts without their customers knowing it since 2011. 

Will China Become The Next Japan?

While some draw parallels between China's slowed economic growth today and Japan in the late 1980, there are some differences.

Rebalancing China Explained in 6 Charts

1.  In september 2016, IMF published a working  paper titled "Rebalancing in China - Progress and Prospects" explaining  China's economic transition utilizing the "rebalancing" approach.

2. China is transitioning to a greener, more inclusive, more consumer and service based, and less credit-driven economy.  

3. Below are 6 charts explaining the key areas involved.

Overview and Thoughts on China's Economic Rebalancing

DEFINING  A REBALANCED CHINESE ECONOMY

1. China is rapidly reaching the point of diminishing economic and political returns from its investment-driven model, which is headed for change one way or another: either through a proactive rebalancing, with reforms and policy adjustments, or a forced rebalancing precipitated by rising stresses in and beyond the financial system. 

2. Rather than depending on the old growth engines of property development and exports, the emergence of new growth engines will lead the country through an extended period of rebalancing and ensure that growth is maintained. The structural transformation involves increased private consumption and a lower trade surplus.

3. China’s economic rebalancing can be viewed in terms of global trade balances and domestic dynamics. From a US-China rebalancing standpoint, China is intending to save less and spend more on consumption, while the US is spending less and saving more.

Eight Priority & Potential Markets Identified In the Insurance Industry

1. The Association of British Insurers (ABI) identified China and India as the top two priority markets for the UK insurance industry after leaving the EU.

2.In addition to China and India, Hong Kong (SAR), Indonesia, Japan, Malaysia, Singapore and South Korea have been identified as the eight markets with the highest potential for progress and growth.

Long-Term Growth in Asset Management Industry - Part 3 - Challenges, Strategies, Issues and Conclusion

Part 3 discuss challenges, strategies, issues and conclusions for long term investing.

Long-Term Growth in Asset Management Industry - Part 2 - Money Markets & retirement Plans

Part 2 discuss the fall in money market funds and retirement provisions.

Long-Term Growth in Asset Management Industry - Part 1 - The Industry and Distribution Network

Part 1 discusses development in the asset management industry, the European industry and the distribution network.

China's Economy & Financial Markets - Part 4 - RMB and Special Drawing Rights

Part 4 discuss the RMB's global role and the inclusion of RMB into the Special Drawing Rights (SDR) basket.

China's Economy & Financial Markets - Part 3 - Banking System, Shadow Banking, Stock Market Swings, and Policy Instability

Part 3 discuss risks in  Banking System, Shadow Banking, Stock Market Swings, and Policy Instability.

China's Economy & Financial Markets - Part 2 - Capital and Debt

ECONOMIC AND FINANCIAL RISKS
1. Capital account liberalization and the possibility of a surge of capital outflows, which could destabilize the financial system as well as the overall economy. 

2. There are concerns on China’s financial system, including the stability of the banking system, wild swings in the stock market, and a large shadow banking system.

3. China’s policy making are too in doubts concerning  the possibility of policy missteps in the process of the difficult and risky transition from a largely command-driven economy to a market-oriented.

China's Economy & Financial Markets - Part 1 - Overview

Pertinent points from U.S.-China Economic & Security Review Commission's Hearing on“China's 13th Five-Year Plan” - April 27, 2016 by Eswar S. Prasad

[Misconduct] FCA's Review on Management and Monitoring of Appointed Representatives

1. In July 2016, the Financial Conduct Authority (FCA) published a thematic review titled "Principals and their appointed representatives in the general insurance sector" and has voiced concerns over ways in which non-life firms and intermediaries manage and monitor appointed representatives (ARs). 

[Framework] Stress Testing and Capital - Part 2 - Stress Testing Process and Integrating with Capital Model

CAPITAL MODELS
1. Internally developed risk capital models can serve many useful purposes and are increasingly becoming a core part of many insurers’ risk and capital management processes.

2. Capital models can vary considerably in their structure, calibration and application.

[Framework] Stress Testing and Capital - Part 1 - Overview, Process, & Management Action

OVERVIEW
1. What is a stress? What are the regulatory history and roles? What is a Stress test process?

2. Including stress scenario and stochastic models and overlay the scenario in the model.

3. Limitations and thoughts.

Alternative Capital and Risk Transfer Trends

TYPES OF ALTERNATIVE CAPITAL MARKETS
1. Catastrophe Bonds - A risk-linked debt security that transfers a specified form of catastrophe risk from a company to investors.

2. Collateralized Reinsurance - A reinsurance agreement that is fully collateralized, typically by unrated third party capital

3. Side Cars - A limited purpose company created to assume a pre-defined portion of insurance policies from an issuing insurance carrier

4. Collateralized Industry Loss Warranty - A contract that pays out for events greater than a pre-defined loss threshold.

[Framework] Solvency Assessment of Insurance Companies - Part 3 - Solvency Capital

REGULATORS
1. the 'solvency capital' is required for various reasons from the regulatory point of view.

2. To reduce the likelihood of the insurer not meeting liabilities when they fall due

3. To provide a cushion to limit the losses, in the event of insolvency

4. To provide an early warning system for regulatory intervention and early corrective action

5. To promote the confidence of the general public 

[Framework] Solvency Assessment of Insurance Companies - Part 2 - Analyse and Quantify

Covering market risks, operational risks, liquidity risks and analyzing risks and quantifying financial impacts.

[Framework] Solvency Assessment of Insurance Companies - Part 1 - Common Risks

1.  In some countries, the supervisory authorities have an integrated risk classification system for the insurance and banking industries. Each Authority has identified their own set of risks. refer table at bottom of posts.

Reserving - Part 2 - Expected Loss Ratio

EXPECTED LOSS RATIO METHOD
1. Uses expected ultimate loss ratios to project ultimate losses.

2. Expected ULR is based on trends of past data, underwriter's view, industry loss ratio, pricing targeted loss ratio.

3. Insurers often use the expected loss ratio on the amount and quality of data that is available and does not take into account actual paid losses.

4, The lack of sensitivity to changes in reported and paid losses makes it less accurate and less useful.

Reserving - Part 1 - Incurred vs Paid Claims Chain Ladder

PURPOSE OF RESERVING
1. Delay between claim event and claim settlement date.

2. The ultimate claim cost will only be known after some time.

3. Must set up reserves in respects of those claims to be settled.

Operational Risk Management Assumptions & Judgement

1.Many insurers today adopt Basel definitions (e.g. controls, IT, fraud etc.) but they might not be applied in the same way across industry.

2. Operational risk data restrictions and limitations hinder its known true loss distribution.

Rate Making - Part 3 - Multivariate, Bailey's Minimum, Curve Fitting

MULTIVARIATE TECHNIQUES
1. Many rating variables are correlated.

2. Using a multivariate approach removes potential double-counting and can account for interaction effects.

Rate Making - Part 2 - Deductible Credits and Loss Elimination Ratio

DEDUCTIBLE CREDITS
1. Insurance policy pays for losses left to be paid over a fixed deductible

2. the losses remaining is a deductible credit 

Rate Making - Part 1 - Anti Selection, Rate Relativity, and Credibility

WHY IS THERE A NEED FOR RATE RELATIVES?
1. Individual Insureds differ in potential risk and amount of insurance coverage.

2. We can ensure each group pays its share of losses and avoid anti-selection while ensuring fair discrimination.

Thoughts on Business Intelligence For General Insurance Detariff

This post discusses the common types of underwriting levels, impact from competition during detariff and some thoughts and expectations on the detariff market.

[Framework] Insurer's Financial Rating - Part 2 - ERM

ERM

1.  ERM should become a natural extension of an insurer’s fundamental risk management practices, with the foundation still rooted in sound traditional controls and policies encompassing the five key categories of risk: credit, market, underwriting, operational and strategic.

2.  ERM encompasses three key areas - Culture, Identification and Management, and Measurement.

[Framework] Insurer's Financial Rating - Part 1 - Risk Management

RISK MANAGEMENT
1. Risk management is the process by which companies systematically identify, measure
and manage the various types of risk inherent within their operations.

2 Important to note that the objective of risk management is not to eliminate
risk and volatility, but to understand it and manage it.

3. Below are the key risk management trends in the insurance industry and describes how risk management impacts the overall rating process and the development of capital requirements. 

Re/insurers Risk Accumulation - Part 2 - Measuring Risks Accumulation

1. This post will cover a brief summary of the capabilities of loss severity models (LSM)

2. We will look at how technology assists in identification and management of risk accumulations.

3. And to highlight the crucial validations and steps in the underwriting process.

Re/insurers Risk Accumulation - Part 1 - How Risks Accumulates

1. In previous post I have covered business nature of reinsurers, RI's diversification, asset-liability management, & capital management.

2. Link as follow <http://levelnineatwork.blogspot.my/2014/12/products-3-in-1-liablity-product-bundle.html>

3. The rapid increase of insurable assets in areas prone to natural catastrophes creates accumulation risks which offers both challenges and opportunities for re/insurers in the region.

4. Re/insurers must find ways to manage risks accumulation.

[Misconduct] Transitions Management Failings

"State Street UK has been fined £22,885,000 by the Financial Conduct Authority (FCA). State Street UK’s Transitions Management (TM) business had developed and executed a deliberate strategy to charge clients substantial mark-ups on certain transitions, in addition to the agreed management fee or commission."
Published:  31/01/2014
Source: fca.org.uk

Understanding A Detariff Market - Part 3

Continuation from Understanding A Detariff Market - Part 2

Understanding A Detariff Market - Part 2

Continuation from Understanding A Detariff Market - Part 1

Understanding A Detariff Market - Part 1

MARKETS ARE CHANGING
1. Global trends are increasing competition and creating customers who demand more.

2. Trends such as rate deregulation, distribution changes, IT, consumer awareness and claims inflation are leading towards higher costs.

3. This brings data-driven strategy into our discussion on market detariffication.

4.In a de-tariffed market, there is a penalty for bad pricing and it increases with competition.

Insurance Rate Monitoring - Part 2

YEARLY VARIATIONS

1. If we consider a base underwriting year where nothing major happened, then a policy renewing in January the following year on ‘as before’ terms can be treated in the same way as if it renewed ‘as before’ in August (base year). 

2. However, if the base underwriting year had a large systemic event in July, then a policy renewing ‘as before’ in January would be on considerably weaker terms than if it renewed ‘as before’ in August. This is allowed by tracking the IELR at a policy level.

3. Below is an example to explain the importance of tracking the IELR between a policy and class level.

Insurance Rate Monitoring - Part 1

1. Rate monitoring has become one of the hot topics in general insurance. 

2.Underwriters are starting to see the importance of managing the underwriting cycle in a softening market. 

3. It is important to monitor the rate movements on business quickly and accurately in order to shorten the period before any disruption to the business plan assumptions are detected and acted upon.

4. Many people focus solely on the rate movements on renewal business while neglecting the absolute profitability of the renewing business (not just its relative profitability as compared to last year) and the profitability of lapsed and new business.

[Misconduct] Fined For Investment Advice Failings

"Santander UK Plc has been fined £12,377,800 by the Financial Conduct Authority (FCA) after the regulator uncovered serious failings in the way it offered financial advice from its bank." Published:- 26/03/2014
Source: fca.org.uk

[Misconduct] AXA Fined For Advice Failings In Investment Sales

"The Financial Conduct Authority (FCA) has fined AXA Wealth Services Ltd (AXA) £1,802,200 for failing to ensure it gave suitable investment advice to its customers." Published:- 13/09/2013
Source: fca.org.uk

Guide to Commercial Insurance Pricing - Part 3 - Adding Value & Modelling

EFFECTS OF RELYING ON NON-ANALYTICAL AND HISTORICAL DATA ON RISK SELECTION AND PRICING OF COMMERCIAL INS.

1. The pricing and profitability of the overall segment has historically been very cyclical, starting from super-profits by early players followed by entry capital into the market driving the price down to unprofitable levels.

2. Insurers tend to focus selecting policies with lower risk exposure regardless of the market price which may be unprofitable in the long run.

3. Insurers may focus on writing high hazard risks for the high premium charged. Due to the typical low frequency and high severity claims for a typical Corporate portfolio, the high hazard risks can make super profits for a number of years but are susceptible to large losses which can result in a significant loss larger than all of the achieved profits over the period.

Guide to Commercial Insurance Pricing - Part 2 - Corporate Portfolio & Pricing Methods

CORPORATE SEGMENT
1. Key differences with SME segments are as follow:

2. Higher level of case underwriting with more exclusions or higher deductibles due to different insurance risk.

3. Poor quality of data due to business complexity and uniqueness.

4. With more capital and able to retain more insurance risk, majority of claim costs are from infrequent large claims.

5. Higher gross written premium & level of reinsurance.