accounting developments, ERM areas of focus and key topics for the upcoming year. Key topics ..... S&P uses IICRA as
Aon Benfield
Evolving Criteria Rating agency, regulatory, and financial trends September 2014
Risk. Reinsurance. Human Resources.
Table of Contents Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Industry Outlooks & Rating Activity. . . . . . . . . . . . . . . . . . . . . . . . 4 Rating Criteria Updates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 A.M. Best. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Standard & Poor’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Moody’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Fitch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Demotech. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Regulatory Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 North America. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Europe, the Middle East and Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Asia Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Latin America. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Accounting Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 International accounting standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 U.S. statutory accounting standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Development of global insurance capital standard . . . . . . . . . . . . . . . . . . 21
Financial Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Operating performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Capital adequacy remains strong. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Public company benchmarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Enterprise Risk Management Trends . . . . . . . . . . . . . . . . . . . . . . 25 Risk tolerance statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Catastrophe risk tolerance study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 A.M. Best. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Standard & Poor’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Looking Forward: Key Topics for 2014 and 2015 . . . . . . . . . . . . 30 Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Executive Summary Evolving Criteria provides a recap of key global rating agency criteria and regulatory developments over the last year. In addition, the report examines rating activity, financial and capital adequacy trends, accounting developments, ERM areas of focus and key topics for the upcoming year. Key topics addressed in this report include: § Rating agencies assign negative outlook on reinsurance sector § Ratings have stabilized and changes have slowed compared to previous years § Rating agencies continue to expand and modify rating criteria: – A .M. Best introduces national scale rating for higher risk countries – S&P releases criteria on ratings above the sovereign – Moody’s standardizes approach to stress testing – Fitch releases factor-based capital model for use on EMEA insurers – Demotech defines second event requirements for Florida companies § More rating agency criteria developments on the horizon:
§ Regulatory developments abound with a number of key themes – Globally, regulators are strengthening capital requirements – Emphasis is on more than riskbased capital models – Own Risk Solvency Assessment (ORSA) is a common framework § Industry capital adequacy is very strong; Underwriting results remain solid (for now) § ERM focus on risk tolerance and stress scenarios The pace of rating agency and regulatory developments is not expected to slow down any time soon. Strong ERM seems to be the lynch-pin for companies to address regulatory developments and manage rating agency expectations. Ironically, exposure to rating agency and regulatory changes is often an underestimated ‘event’ risk for many companies. Understanding and managing evolving
– A.M. Best developing a stochastic BCAR model
criteria plays an integral component of insurers’
– S&P potentially incorporates ERM survey
success going forward.
into rating process going forward – Fitch to release factor-based capital models for Asia Pacific and Latin America
Aon Benfield
3
Industry Outlooks & Rating Activity Rating agencies move negative on the reinsurance sector; personal and commercial remain unchanged The rating agencies’ view of the reinsurance sector has changed dramatically over the last 12 months, as Standard & Poor’s (S&P), Moody’s, and most recently A.M. Best have all revised their respective outlooks from “stable” to “negative.” S&P was the first rating agency to shift their view of the reinsurance sector, and has stated the main drivers of the revised outlook are increased competition, reduced demand, and to a certain extent various macroeconomic risks. They cite the dramatic change in the marketplace, driven by a combination of an oversupply of capital and slowing demand, as the most prominent risk that reinsurers are facing. S&P subsequently notes that about 50 percent of their reinsurance ratings are materially exposed to this specific risk, which they anticipate will weaken earnings for the next several years. Similar to S&P, Moody’s cites an oversupply of reinsurance
The personal lines outlook remains stable for all four rating agencies. This segment is projected to see an increase in premium volume, net income, and ultimately surplus through 2014, continuing the positive trend of the last two years. The favorable performance of the sector in 2013 was a combination of stable auto results and a decrease in natural catastrophes.
Exhibit 1: Current industry outlooks Sector
A.M. Best
Fitch
Moody’s
S&P
Commercial
Negative*
Stable
Stable
Stable
Personal
Stable
Stable
Stable
Stable
Reinsurance
Negative*
Stable (ratings) Negative (sector)*
Negative*
Negative*
*Italics indicate change over the last 12 months Source: Respective rating agency reports
Rating upgrades and downgrades slowing; underwriting results drive rating changes The number of rating changes by A.M. Best year to date 2014
capital, influx of alternative capital, and the low interest
has decreased by approximately 50 percent from the same time
rate environment as key drivers of their negative
last year, with upgrades outpacing downgrades for the year.
outlook. Fitch maintains a stable outlook on reinsurance ratings, due to strong capitalization and continued
It should be noted, however, that while upgrades outpaced
profitability, however they assigned a negative outlook
downgrades for the better part of 2013, the year ended
to the reinsurance sector in terms of market fundamentals
with downgrades just barely overtaking upgrades for the
based on concerns over current market conditions.
final year end count. The personal lines segment was hit the hardest as the number of downgrades was 60 percent
Rating agencies maintain a generally stable view of the
more than the number of upgrades. Conversely, commercial
U.S. non-life personal lines and commercial lines sectors
lines had the opposite result: there were 33 percent more
as evidenced by their respective outlooks. Unfortunately,
upgrades than downgrades. Interestingly, this is the second
rating agencies do not consistently publish outlooks for
consecutive year where the commercial lines segment (on
other regions. Industry outlooks for U.S. personal and
negative outlook) had more upgrades than the personal
commercial lines have remained unchanged since last year,
lines segment (on stable outlook). The actual number of
underscoring the stable rating environment. A.M. Best is still
upgrades and downgrades in the commercial segment
the lone agency that continues to view the commercial lines
can be somewhat misleading: “own merit” rating changes
segment as negative, despite noting many positive factors
resulted in more downgrades than upgrades, while the
that include both improved pricing and strong capitalization.
total count also considers companies that were upgraded
A.M. Best has stated that while they expect the majority of
due to M&A activity. According to A.M. Best, the leading
commercial lines ratings to be affirmed over the next year,
trigger of commercial lines downgrades was adverse loss
the negative outlook is driven by their view that downgrades
development followed closely by deteriorating capitalization.
will outpace upgrades in the segment. Concern over reserve levels is a main driver of downward rating pressure.
From a personal lines perspective, geographically concentrated homeowners’ writers and nonstandard auto writers have felt the most downward rating pressure. Companies primarily writing homeowners’ that have specifically improved their ERM and shown consistent favorable operating results were the primary recipients of positive rating action.
4
Evolving Criteria
Exhibit 2: Rating activity: upgrades vs. downgrades
Aon Benfield completes an annual study of A.M. Best “A-” rating activity for U.S. companies to analyze financial rating drivers
A.M. Best
and identify key benchmarks. For many companies, an “A-” Upgrades
90
Downgrades
rating is a key rating threshold, and given A.M. Best’s market
80
presence and availability of U.S. statutory financials, there is
70
credible data available to analyze the underlying trends.
60
From 2009 to June 2014, 41 companies were downgraded
50
from “A-” to “B++”. The median five-year combined ratio
40
based upon the year of downgrade was 111 percent and the
30
median BCAR was 178 percent. Poor underwriting results
20
leading to weak capitalization drove the rating downgrade.
10
Conversely, for companies upgraded from “B++” to “A-” based
0
2009
2010
2011
2012
2013
YTD 2014*
upon their own merit (i.e., no parental support), the median five-year combined ratio was 95 percent, or six percentage points better than the overall “A-” population. The BCAR score
Standard & Poor’s 20
Upgrades
Downgrades
was 272 percent, comparable to the overall population. In addition to producing favorable underwriting results, increased emphasis is placed on management’s ability to
15
execute their business and meet projections. Invariably, companies whose ratings were downgraded often consistently
10
missed projections provided to A.M. Best and credibility around the impact of future initiatives waned.
5
0
Exhibit 3: A.M. Best “A-” upgrade and downgrade characteristics 2009
2010
2011
2012
2013
YTD 2014*
Key Metrics—Median
*Data as of June 30, 2014 Source: Aon Benfield Analytics, U.S. P&C and Global Reinsurance Data & Press Releases
5yr Combined Ratio (%)
“A-” to “B++” downgrades (year of downgrade)
All “A-” ratings (as of July 2014)
“B++” to “A-” own merit upgrades
111
101
95
-3
8
17
5yr Pre-Tax ROR (%) NPW / PHS (x)
1.2
0.7
0.6
BCAR (percent)
178
278
272
Source: Aon Benfield Analytics, A.M. Best Bestlink Database
Aon Benfield
5
Rating Criteria Updates Following several very active years of criteria updates and awaiting a major update from A.M. Best by the end of 2014, there have been relatively few new developments in the past 12 months. A.M. Best released criteria on capital credit of surplus notes, defined surety company stress tests and introduced a national rating scale process. S&P updates include defining how a company may be rated above their sovereign and expansion of their Insurance Industry Country Risk Assessment (IICRA) scores. In addition, Moody’s published a standardized approach to stress testing, Fitch implemented a risk based capital (RBC) model for EMEA insurers, and Demotech disclosed revised second event requirements.
A.M. Best
In June 2014, A.M. Best issued draft criteria introducing
Over the last 12 months A.M. Best has released 12 criteria
national scale ratings. The objective is to provide a means
updates and have two additional criteria with draft status.
of distinction in countries where ratings are tightly banded
While many of the updates are clerical in nature, there
due to the inherent risks of writing business in a particular
were a few significant updates which impacted specific
country (including the economic climate, political factors,
sectors of their rated population in a meaningful way.
financial system risk and maturity of the insurance industry). The process would begin with an insurer first being assigned
The manner in which A.M. Best provides capital credit for
a global rating under the current ratings methodology. The
U.S. surplus notes within the BCAR model was refined in
global rating will then be mapped to a national scale rating
April 2014. The updated treatment is beneficial for insurers
that has been developed for a specific country and will be
as A.M. Best now allows for maximum credit until five years
referenced with a suffix, ‘.xx,’ where the “xx” is a two letter
to maturity, assuming other considerations are met. The
country code. A.M. Best included an example chart for how
maximum amount of capital credit that can be given in BCAR
it may work in Mexico, which we reproduced below.
is 90 percent for third-party (externally held) notes and 95 percent credit for notes held by affiliates. Other factors that determine how much credit is given still include duration of the note and the interest rate versus the company’s
Exhibit 4: A.M. Best’s global ICR scale vs. Mexico national scale Global ICR scale
National scale / Mexico
a
aaa.mx
a-
aa+.mx to aa.mx
bbb+
aa-.mx
bbb
a+.mx to a.mx
bbb-
a-.mx
bb+
bbb+.mx to bbb.mx
bb
bbb-.mx
little impact to the overall insurance industry, introduces
bb-
bb+.mx
and clarifies some of the additional analysis performed on
b+
bb.mx
surety writers beyond that of a typical P&C insurer. One of
b
bb-.mx to b+.mx
the key items within the paper is the proposal of Bail and
b-
b.mx
ccc+
b-.mx to ccc+.mx
ccc
ccc.mx
ccc-
ccc-.mx
cc
cc.mx
c
c.mx
projected return. While the availability and issuance of surplus notes has been limited in recent years, we have noted a recent increase in interest within the industry. In May 2014, A.M. Best updated and re-released its draft criteria titled “Rating Surety Companies”. The first draft was released in 2013 and after industry feedback A.M. Best revised its criteria and reissued a new version, which was finalized in August 2014. The methodology, while having
Surety stress tests which will be used in the BCAR calculation. The stress test uses net exposure after reinsurance which is comparable to the methodology A.M. Best currently uses for P&C insurers natural catastrophe exposures.
Source: A.M. Best
6
Evolving Criteria
While the changes on the previous page are or will be material to specific sectors, the most overall impactful change on the horizon is A.M. Best’s development of a new stochastic BCAR model. Our view of A.M. Best’s current position around the stochastic BCAR update is illustrated in the below exhibit, however we should note it is subject to change until their criteria paper is released.
Exhibit 5: Summary of stochastic BCAR status Expected Timing
Currently still building the model Parallel testing & calibration completed later this year using 2013 financials Draft criteria & “request for comment” period expected in late 2014 Stochastic BCAR only for P&C rating analysis using 2014 financials with life and health models potentially released in 2015 Model Goals
Include stochastic features for the risk of bond defaults, stock volatility, reinsurer default, pricing risk and reserving risk Diversification benefit for premium and reserve risks updated Covariance between each required capital component currently unchanged Evaluate required capital and PML charge at various confidence intervals (CI) Evaluation of BCAR score will be focused on which CI a rated entity’s BCAR score falls below 100 percent Probability levels, PML selection & continuation of stress test, BCAR guidelines by rating level, etc. still being determined Source: Aon Benfield Analytics
Standard & Poor’s On November 19, 2013, S&P released its final methodology
Within EMEA, APAC and Latin America, we analyzed 1,184
outlining the specific circumstances and by what
insurers (classified as P&C insurer, reinsurer or multi-line
magnitude an insurer’s rating can be above the sovereign
insurer) rated by S&P as of July 14, 2014 and found 41
rating. The release of the criteria resulted in over 20
companies with ratings above their sovereign rating. Thirty
insurers in EMEA, APAC and Latin America being placed
one of the 41 companies are rated two or three notches
on CreditWatch, which were mostly resolved into rating
above their sovereign rating. Six companies are five or
affirmations along with a few upgrades and downgrades.
more notches above the sovereign rating but this is due
For an insurer to be rated above the sovereign’s foreign currency rating, S&P has to be convinced that there is a
to implicit financial support, supranational status, financial guarantees or having core status to a strongly rated group.
significant possibility of the insurer not defaulting given a
S&P uses IICRA as a factor in rating insurance companies
sovereign default. For insurers where the sovereign is rated
which was designed to provide them and market participants
‘A+’ or lower, a stress test would apply where various asset
with a comparative and global view of insurance risk across
values exposed to a specific sovereign would be haircut
sectors, regions, and countries. IICRA reflects risk factors
by varying amounts and compared to available regulatory
that affect insurers and relate to the wider economic,
surplus. A liquidity test comparing the stressed asset
financial, and legal systems in a particular country, as well
values to various life and non-life liabilities would also be
as risks specific to the insurance industry. The impact of
performed. If the regulatory surplus exceeds the amount
industry and country risk on ratings varies according to the
of haircuts and the liquidity ratio is above 100 percent, the
degree of risk. S&P assesses these risks as “very low,” “low,”
company would “pass” the test and be allowed to have a
“intermediate,” “moderate,” “high,” or “very high”.
rating of up to two (life, health and composite re/insurers) or four (non-life re/insurers) notches above the sovereign.
Aon Benfield
7
§ A sia Pacific: Relatively low to moderate country
Exhibit 6: Notches above sovereign rating
risks across most of the region are supported Asia Pacific
18
Latin America
Europe, Middle East & Africa
16
# Companies
14
adequate to strong legal and financial systems. § Central and Eastern Europe, the Middle East,
12
and Africa: Country risk is higher (mostly
10
intermediate or moderate) in developing countries
8
due to high banking and financial system risk.
6
§ L atin America: IICRA scores range from very high risk
4
to intermediate risk partly due to the low income levels
2 0
by strong prospects for economic growth and
2
3
4
5
6
7
8
measured by GDP per capital across the region. On the
9
positive side, these IICRA scores are generally supported by
Notches above Sovereign Rating
fairly adequate regulatory frameworks, satisfactory industry
Source: Aon Benfield Analytics, S&P
For the first time last year, S&P assigned IICRAs to 97 insurance sectors worldwide and has extended the scope to include 99 insurance sectors covering 53 countries and four global
profitability, relatively low product risk, high barriers to entry in most markets, and good growth prospects. § North America: Relatively favorable IICRA
sectors. The most common IICRA degree of risk is “intermediate
assessments among North America largely stemming
risk” and approximately 90 percent of the assessments range
from moderate product risk, high barriers to entry
within one level (from “low risk” to “moderate risk”). In
and an effective institutional framework.
S&P’s view, six countries in EMEA are “high risk” and North
§ Western Europe: IICRA assessments for Western
America and APAC generally have more favorable IICRAs. The
European markets illustrate the divide between
following has a brief rationale for the ratings in each region:
the weaker economies on the “periphery” of the Eurozone and the stronger core economies.
Exhibit 7: Distribution of IICRA ratings by region Asia Pacific
1
High risk
1
Moderate risk
North America
6
4
18
11
Intermediate Risk
4
18
8
Low risk
16
1
3
1 1 1
Very low risk 0
Source: Aon Benfield Analytics, S&P
Evolving Criteria
Europe, Middle East & Africa
1
Very high risk
8
Latin America
5
10
15
20
25
30
35
40
Moody’s
In 2013, Fitch Ratings implemented an enhanced stochastic
In December 2013, Moody’s published revised methodologies
capital model, Prism 2.0, for US non-life insurers, after
for the Non-life and Life sectors. The updates were part
temporarily suspending the previous version in 2008. Prism
of Moody’s normal cycle of fine-tuning methodology
2.0 creates more severe stress assumptions ‘in the tail’ of
every 3 to 4 years. During Moody’s 2014 North American
the loss distribution and recognizes that certain balance
Insurance Executives Conference key updates to the
sheet items can fluctuate. The model also includes a third-
methodologies were discussed, which included:
party natural catastrophe model. Fitch states that Prism is a key capital adequacy measure in their rating opinion
§ Noted adoption of standard adjustments made to financials
along with leverage ratios and regulatory capital ratios.
§ Updated operating environment factor to increase
Prism 2.0 is a simulated projected cash flow runoff model based
weight associated with lower operating environments § For non-life, tightened rating bands associated with reserve adequacy analysis (this has already been done in the rating committee setting)
on statutory data of an insurer where the maximum number of simulations is 10,000. The model integrates six stochastic risk parameters: underwriting, natural catastrophe, reserve, reinsurance credit, investments and surplus. There are addons deterministic risk factors for asbestos, environmental,
§ For life, there was enhanced discussion of liquidity ratio
operational and runoff expense risks. The model will
§ Enhanced discussion of scenario and stress testing
but would expect a company to meet or exceed certain
For the discussion on stress testing, Moody’s indicated they were standardizing their approach to stress testing with a specific focus on the effect of shock events. Their approach is to examine insurers against a set of pre-defined stress scenarios
supplement other analysis that Fitch uses in assigning a rating Prism score threshold for a certain rating, e.g., ‘AA’ rated insurer would have to have a score of at least “very strong”.
Demotech Demotech is the rating agency which drives reinsurance
to key risks, with a focus on near to medium term shock events.
buying decisions for most Florida homeowners specialists.
Moody’s focus is more on general shock events (e.g., 1-in-250
In addition to standard annual and quarterly financial reviews,
year event) and not necessarily repeats of historical actual
Demotech conducts a specific review related to a company’s
events like the Financial Crisis or Hurricane Katrina. In Moody’s
reinsurance program through analysis of their “Exhibit A”
evaluation, if severe stress scenarios suggest a rating three or
filing, which was due June 1, 2014. This requires companies
more notches below the current rating, the current rating may
to disclose gross and net catastrophe losses at various return
be lowered to reflect potential rating transition risk post event.
periods and under three different modeling assumptions. In
Fitch After a three month public consultation in Q4 of 2013 and a beta-test through the first seven months this year, Fitch Ratings released their deterministic RBC model called “Prism Factor-Based Capital Model (Prism FBM)” for use on EMEA
2014, Demotech issued revised criteria defining their second event requirements. Demotech requires companies to purchase reinsurance protection up to at least the 100 year long-term basis including demand surge / loss amplification and expects the reinsurance program to cover a 1 in 50 year second event.
insurers. The model will be used as the primary tool to assess an insurer’s capital strength and enable the agency to compare companies despite writing different business lines in various regions and using distinct accounting standards. The model was initially intended to be released to Asia Pacific simultaneously but has now been pushed back till later in the year and will be released in Latin America as well at that time.
Aon Benfield
9
Regulatory Developments Regulatory developments are a key issue for companies in all regions. Globally, regulators are strengthening capital requirements. Some changes are directly from updated RBC models or introducing stress testing requirements, while others indirectly impact capital needs such as requiring companies to obtain a rating. Own Risk Solvency Assessment (ORSA) has become standard vocabulary, and review of ERM frameworks complement RBC models. This section reviews key regulatory development in the various regions.
North America U.S. Own Risk Solvency Assessment nears The National Association of Insurance Commissioners’ (NAIC) Risk Management and ORSA Model Act’s effective date of January 1, 2015 is rapidly approaching. ORSA filing requirements are only required for a single company with gross premiums written greater than USD 500 million or a group with gross premiums written greater than USD 1 billion. Most companies domiciled in states that passed legislation adopting the NAIC’s model act are actively conducting their ORSA in preparation for filing the required annual summary report sometime during 2016. Based on information obtained from several state insurance departments, NAIC and feedback from our clients, states with enacted ORSA law generally are taking a cooperative approach with insurers on setting the filing deadline.
Exhibit 8: Current ORSA enactment status ORSA Enacted States
MN
ME VT
WI
NH
WY NE
IA IL
TN
10
Evolving Criteria
MD KY
CA
Source: NAIC and AMERICAN FRATERNAL ALLIANCE
OH
IN
PA
VA
CT RI
While the model act is making its way through more state
Note that the guidance manual is still in draft form.
legislatures, the NAIC released draft ORSA Guidance for
The regulators and industry representatives are still
Financial Analysts to assist the lead state on reviewing ORSA
working through revisions to the manual. Companies
summary reports. The NAIC emphasized the following
should refer to the current version of the draft manual
considerations and precautions for utilizing the guidance:
for updated criteria prior to filing their reports.
§ Stated goal of the guidance is to assist the regulators
NAIC introduces catastrophe risk charge for RBC
on evaluating the robustness of the insurer’s risk
The NAIC has proposed a change to the RBC model to
management process
add catastrophe risk charges for hurricane and earthquake
§ Regulators should not use the guidance manual as a checklist for review nor dictate specifics to be included § Each ORSA Report is unique, reflecting the insurer’s business, strategic planning and approach to ERM § Regulators expect most reports to be submitted on a group level – The group’s lead state is required to perform a detailed review and prepare a thorough summary – Non-lead states’ review of ORSA is limited to a general understanding of the summary prepared by the lead state and risk identified and monitored at the group level ORSA is intended to provide a more integrated view on a company’s ERM, risk assessment including stress testing of key risk exposures, and prospective solvency assessment on the group level. Regulators should be able to utilize ORSA reports to more accurately determine the scope, depth and minimum timing of risk-focused financial analysis and examination. Due to resource constraints and a learning curve, we expect regulators to place heavy reliance upon this guidance manual on conducting their ORSA review during the initial implementation stages. Despite the manual’s emphasis on not explicitly applying the suggested review criteria to each company, it
perils. This was included on an informational basis for year-end 2013 and while the results were not public for specific companies, the NAIC did release aggregated data summarized in the table on the next page. As the proposal currently stands, the risk charge will be based on separate 1-in-100 year modeled loss for hurricane and earthquake events. The charge will be net of reinsurance and adds a 10 percent credit risk charge for the ceded losses to consider the risk of uncollectible or disputed reinsurance. The 10 percent credit risk charge is considered a placeholder as discussions are ongoing about an appropriate factor. The charge is based on the aggregate exceedance probability (AEP) although industry participants are lobbying to move to an occurrence exceedance probability (OEP). Other model choices and key modeling parameters will be determined by the companies and should be the same as the insurer uses in its own internal catastrophe management process. To avoid double counting of catastrophe losses, the premium risk factors on catastrophe exposed lines will be reduced; which is how, with the inclusion of the catastrophe charge, 696 filers reported an RBC score increase, averaging 71 points. However, of the 547 companies that reported a decrease, the average RBC score dropped by a sizeable 512 points. Filings will be informational again for the 2014 reporting year with potential implementation for the 2015 reporting year.
is likely that “checklist-style” review will be followed initially. Therefore, we think it is beneficial for companies to become familiar with the guidance manual. It provides a roadmap for what regulators will be looking for in a summary report regarding risk management processes and governance.
Aon Benfield
11
Exhibit 9: 2013 Average RBC ratio with/without catastrophic charge Number of Companies
Avg RBC without cat charge
Avg RBC with cat charge
Avg EQ Charge
Avg HU Charge
Total (2,478)
8,374 percent
8,241 percent
USD 38.8M
USD 58.9M
Increased RBC (696)
1,263 percent
1,334 percent
Decreased RBC (547)
1,465 percent
953 percent
Source: NAIC
TRIA extension still in progress Since 2002, the Terrorism Risk Insurance Act (TRIA) and the
§ Separates nuclear, biological, chemical and radiological
Terrorism Risk Insurance Program Reauthorization Act of
(NBCR) and conventional losses; the program would
2007 (TRIPRA) have stabilized the private terrorism insurance
remain unchanged as regards NBCR losses
market by providing a federal backstop. The program currently provides 85 percent of applicable recoveries from the U.S. government, above the deductible (20 percent of prior year’s direct earned premium from covered lines of business) up to USD 100 billion. This version of the bill is set to expire on December 31, 2014. The U.S. House of Representatives and Senate relevant Committees have each passed draft bills for extension of the federal backstop at January 1, 2015. In July, the full Senate passed a bill (S.2244) by a vote of 93 to 4 that would extend TRIA for seven years. The bill includes two main changes from the current version: § Co-participation increases from 15 percent to 20 percent (1 percent per year for 5 years until it reaches 20 percent) § Aggregate industry retention increases to USD 37.5 billion from USD 27.5 billion On June 20th the House Finance Services Committee (HFSC) passed a 5 year TRIA extension, but this has not been voted on by the full House at the time of this publication. This bill features a more dramatic change from the current version:
§ Proposed changes to conventional terrorism losses: – Increase the per occurrence program trigger from USD 100 million to USD 500 million over a five year period – Increase co-participation 1 percent per year for 5 years to 20 percent (similar to the Senate bill) § Allow “small insurers” to opt out of the make available mandate for terrorism cover. “Small” is not defined and is left up to state regulators to determine in their respective states § Insurers will need to file a report to the Treasury detailing terrorism premium collected, exposure location information, take-up rates, and private reinsurance cover purchased The main issue for the House bill is the increase in program trigger for conventional terrorism and the potential impact on small and mid-sized insurers. Prospects for passage of either the Senate or House versions of a TRIA extension by the full Congress are less clear and compromise discussions will most likely drag into Q4 2014. Once compromise is reached, legislation is sent to the President for signature to become law.
12
Evolving Criteria
Exhibit 10: TRIA extension comparison TRIA Per-Occurance Trigger
Original Policy Deductible
TRIA Deductible
Current and House Proposed for NBCR USD 100 billion
USD 100 million
Senate Proposed
USD 100 billion 15% TRIA CoIns
85% TRIA coverage
20% of prior year’s DEP
TRIA CoIns Exposure
TRIA Terrorism Coverage House Proposed for Conventional Only
USD 100 billion 20% TRIA CoIns by 2019
USD 100 million
30% TRIA coverage by 2019
20% TRIA CoIns by 2019
USD 500 million by 2019
80% TRIA coverage by 2019
20% of prior year’s DEP
20% of prior year’s DEP
Policy Deductible
Policy Deductible
Policy Deductible
Source: Aon Benfield Analytics
Canadian regulatory updates The Canadian federal regulator continues developing
§ Internal Capital Target: this guideline is in conjunction
its risk-based regulatory oversight and moving closer
with ORSA to ensure an institution has a prudent process
to the international regime. The focus is mostly in risk
to develop internal capital guidelines. However, the
management, managing risk to capital, stress testing,
external regulatory solvency model (Minimum Capital
capital planning, and corporate governance. Recent
Test—MCT) will continue to be the floor limit for
and near-term significant developments include:
internal capital. The internal capital target is expected
§ Corporate Governance: focusing on board of directors, senior management accountability, and enterprise wide risk
to be higher than the MCT supervisory target. § Revised Minimum Capital Test (MCT): the revised MCT
management. Foreign Owned Branches are expected to follow
model consists of updating the risk factors and enhancing
similar practices but this does not come under the Guideline.
the model to be more of an integrated model, which
§ Earthquake Sound Business Practice: the aim is to provide more detailed analytics, risk controls and governance on earthquake processes and modeling. § Own Risk and Solvency Assessment is a move towards Solvency II Framework for managing risk to capital with the emphasis on stress testing. ORSA, effective January 1, 2014, uses a gradual phase-in approach to allow institutions to catch up for the learning process. Recognizing this is an evolving process, the Regulator requested initial filing of a work plan on the progress and implementation for ORSA by March 31, 2014. In Canada, all federally regulated insurance companies are required to comply with ORSA,
includes operational risk, diversification credit, etc. The revised MCT model guideline is expected to be released in fall of 2014 with an effective date of January 1, 2015. § A s part of the ORSA and the Internal Capital Target process, institutions will be allowed to use internal/economic capital models to assist in setting their targets. However, economic capital models can be used only as an integrated part of capital modeling and MCT capital will continue to be the regulatory guideline for solvency purposes. Currently, there is no guideline for approval of internal capital models. The Regulator is in the process of developing a guideline with an expected release date in 2016.
unlike in the U.S. where size determines filing requirements. There are no prescribed rules for stress testing.
Aon Benfield
13
Europe, the Middle East and Africa
In Tunisia, a draft law was adopted establishing a regulatory
In Europe, after years of various delays, the legislation
framework for takaful. The law will address the way the
underpinning Solvency II—Omnibus II—was passed by the EU
takaful system will work, financial management of the
parliament on March 11, 2014. The passage brings Solvency
operators, data requirements for the conclusion of a takaful
II into force beginning January 1, 2016. In the Middle East
contract, and takaful reinsurance or re-takaful. The law
and North Africa, the insurance industry continued growing
is expected to be approved before the end of 2014.
rapidly and new regulations were introduced and existing ones strengthened to improve market stability, transparency and policyholder security. South Africa continues its progress on the Solvency Assessment and Management (SAM) framework, a risk-based solvency regime that is similar to, and starting at the same time, as Solvency II.
Europe The Omnibus II agreement follows November 2013 amendments introducing measures for long-term guarantee (LTG) business, and the equivalent for third countries. While the new rules lead to more generous calibrations for LTG
An interesting aspect to each of the advanced RBC measures
business, they also include enhanced requirements for risk
being implemented in the region relates to credit risk of
management and public disclosure. More importantly, it cleared
counter-party reinsurers. Risk charges for credit risk on
up a fair amount of uncertainty around the implementation
reinsurance recoverables are based on ratings from global
of a solvency regime that was years behind schedule and
rating agencies, and in large parts of the Middle East and
had already cost insurers billions of Euros, in aggregate,
Africa, relatively few insurers are rated. With increasing
for compliance via new technologies and systems.
capital requirements, companies will be more sensitive to any additional capital they will have to hold, and seek ways to minimize this. As insurance regulatory standards improve and advanced RBC models flourish, the role and importance of rating agencies in the region is expected to increase as well.
An issue of importance to many large European insurance groups was that of third country equivalence. Prior to the agreement, non-Solvency II countries had to formally engage in a process with the European Insurance and Occupational Pensions Authority (EIOPA) to have their solvency framework be reviewed, and approved, as Solvency II-equivalent. If
Bahrain and Tunisia
deemed non-equivalent, European groups’ affiliates in those
Globally, the takaful industry has grown at over 15 percent
countries would have to meet all Solvency II requirements in
annually since 2007. Takaful is the Shari’a-compliant
addition to local regulatory requirements. The rules have now
alternative to conventional insurance and is based on the
been amended such that it allows the European Commission
principles of cooperative risk sharing. Although more than
to grant provisional equivalence to third countries for 10
40 percent of the global takaful contributions come from
years, at which point it would be reviewed with the option
Saudi Arabia and Malaysia, numerous other countries have
to extend equivalence for a further 10 years or more. This
seen the introduction of takaful operators or sustained
amendment, while being seen as a response to the U.S. and
growth from existing operators. As a result, regulators
Canada formally stating that they would not enter into an
have been active in bringing in appropriate regulations to
equivalency review process, also allows EIOPA flexibility to
protect the risk sharers while spurring growth of the sector.
develop solutions for other regulatory regimes to ensure
Bahrain and Tunisia are two of the latest countries where
that European groups can remain globally competitive.
new regulation has been introduced in recent months.
Much remains to be accomplished prior to January 1, 2016,
The Central Bank of Bahrain’s proposed regulatory framework
and certain guidelines and rules will also change before then.
aims to ensure that business is underwritten, and priced,
Between now and March 2015, EIOPA aims to go through two
based on proper assessment of risk and not just competition;
sets of public consultations on the Implementing Technical
investments are diversified and not concentrated in certain
Standards (ITS) and Guidelines. The first set of ITS’ are on
sectors, and an adequate level of solvency is maintained.
the approval processes while the second will consist of the three Pillars—quantitative basis, qualitative requirements, and enhanced reporting and disclosure. The first set of Guidelines
14
Evolving Criteria
is for approval processes, including Pillar 1 and internal models. The second set of Guidelines will be for Pillars 2 and 3 and is expected to be issued in December 2014. A final version of the Guidelines is expected to be released by July 2015. Internal model approvals are not expected to be issued prior to Q2 2015, and even then some countries may ask companies to run capital requirements under both Standard Formula, as well as the approved Internal Model for at least a couple of years.
South Africa Unlike many other insurance regimes in Africa, South Africa is well advanced. A clear sign of this can be seen in the ongoing process to implement SAM. SAM is based on Europe’s Solvency II and uses many of the same risk charges in the initial drafts. Targeting a January 1, 2016 implementation, SAM has been modified through various forms of feedback from its market participants and topical experts. For example, after the first two Quantitative Impact Studies (QIS), QIS
Gulf Cooperation Council (GCC) Countries Moody’s recently reported that the insurance industry in the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) had almost tripled its premiums from USD 6.4 billion in 2006 to USD 18.4 billion in 2013. This growth has come with high volatility in underwriting results as products are priced based mainly on competitive pressure and not on the inherent risk. This has led to large variances in the level of service being provided to consumers as well as the quality of products. To combat this, regulators are implementing RBC, pricing adequacy and mandatory covers. The RBC measures are not as robust as those being implemented in Europe or South Africa, but will move beyond the simple minimum capital threshold. For example, from January 2015, insurers in Qatar will need to have a capital that is the higher of USD 10 million or the RBC requirement. Composite insurers in UAE will have to segregate life and nonlife business into separate business entities by August 2015.
3 was released in October 2013 and included various changes tailored to better suit the domestic market. For Non-Life players, the changes implemented in QIS 3 were related to making risk charges more appropriate for South Africa; i.e., reduction in underwriting risk charges for insurers with large motor and liability books and increased charges for commercial property. Lines of business were segmented further—seven in QIS 2 to 15 in QIS 3. The increased granularity may bring improved risk management and policyholder protection, but it also means changes in systems and ultimately increased costs. Submissions for QIS 3 were due on April 30, 2014 but results have yet to be released. A 2012 Pillar 2 readiness survey identified that only 16 percent of the respondents believed their ORSA was “acceptable” or better. The industry requested, and was provided with, further guidance from the regulator. A second survey was conducted earlier this year, and though the results haven’t been released yet, a significant improvement in ORSA-
Some regulators in the region, e.g., SAMA in Saudi Arabia,
readiness is expected as firms will be required to run a
have strengthened technical reserve calculations through
comprehensive parallel run and submit an ORSA report in 2015.
requiring periodic assessments from authorized actuaries and submissions of those calculations to the regulator.
Beginning June 30, 2014, firms also began a “light parallel run” wherein QIS 3 will be re-run every quarter until a
The introduction or increases of mandatory insurance covers
“comprehensive parallel run” begins in 2015. In the “light
for health, unemployment, motor third party and liability,
run”, only larger groups that have been notified are required
have led to improved market awareness and insurance
to submit bi-annual calculations. However, during the
penetration. In order for the growth of the insurance
“comprehensive run”, all insurers are expected to submit
market in the region to be sustainable, the regulators
quarterly and annual results on the SAM basis alongside their
will have to ensure adequate service levels, adequate risk
current reporting. The reports are expected two months
pricing and improved security for policyholders. Further
after the end of each relevant quarter. Feedback from the
regulations are expected to help achieve those goals.
various QIS surveys and parallel runs is expected to bring further changes to SAM before its implementation.
Aon Benfield
15
Exhibit 11: Linkages between the 3 pillars of SAM and Solvency II Pillar 1
Pillar 2
Pillar 3
Quantitative Requirements
Qualitative & Quantitative Assessment
Supervisory Reporting & Disclosure
Own Risk & Solvency Assessment (ORSA)
Public Solvency & Financial Conditions Report (SFCR)
Supervisory Review Process
Confidential Report to Supervisor (RTS)
Integration
Capital Add-On
Source: Financial Services Board of South Africa
Asia Pacific Many Asia Pacific markets are continuing to strengthen solvency regulations. For example, China, Hong Kong, and Labuan (an off-shore financial center, part of Malaysia) are moving to the RBC regime, Singapore is implementing RBC 2 and Japan aims to introduce economic value-based solvency regime soon. As economic capital model usage is still developing in most parts of Asia Pacific and not many Asia-Pacific insurers are rated by global rating agencies; regulatory requirements are the main driver behind capital requirements for most insurance companies in this region.
§ Maintain adequate resources to ensure compliance with this CPS 220; and § Notify APRA when it becomes aware of a significant breach or of material deviation from the risk management framework; or if the risk management framework does not adequately address a material risk This prudential standard commences on January 1, 2015. APRA also released an amended Prudential Standard CPS 510 “Governance” to ensure that the governance requirements
Australia In Australia, Australian Prudential Regulation Authority (APRA) issued Prudential Standard CPS 220 “Risk
China
Management” which requires the insurers to:
China’s Risk Oriented Solvency System (C-ROSS) may be the
§ Have a risk management framework that is appropriate to its size, business mix, and complexity
most important regulatory change of this region. Similar to European Solvency II, C-ROSS has three supervisory pillars— Quantitative Capital Requirements, Qualitative Supervisory
§ Maintain a board-approved risk appetite
Requirements, and Market Discipline Mechanism.
§ Maintain a board-approved risk management strategy
All three pillars form part of the solvency supervision
that describes the key elements of the risk management framework that give effect to its approach to managing risk § Have a board-approved business plan that sets out its approach for the implementation of its strategic objectives
16
related to risk management are aligned with those of CPS 220.
Evolving Criteria
process for insurance undertakings. The three pillars have different focuses on risk prevention: § Pillar 1 is intended to mitigate the solvency related risks that can be quantified through quantitative supervision
§ Pillar 2 is intended to mitigate solvency related risks that are difficult to quantify through qualitative supervision § Pillar 3 is intended to utilize the disciplinary power of markets through public disclosure in order to further strengthen the impact of Pillar 1 and Pillar 2 In this way, all types of solvency related risk in insurance undertakings can be mitigated with a broader perspective in mind. The three pillars are inter-related and complementary to each other, resulting in a comprehensive risk identification, classification and control system. In April 2014, CIRC published discussion papers of Pillar 1 and Pillar 2 for non-life insurers and then conducted the first round of industry-wide testing. In July and August 2014, CIRC updated the Pillar 1 and Pillar 2 discussion papers based on industry testing results and feedback. Compared with the expiring solvency capital requirement which only considers an insurer’s size (volume of net premium or claims paid) C-ROSS now takes into consideration comprehensive risks. The main features of non-life C-ROSS Pillar 1 are summarized as below:
CIRC commented that C-ROSS is expected to push non-life insurers to optimize their business structure, adjust their investment portfolio and reinsurance counterparties. CIRC has made it clear that C-ROSS is not meant to increase capital pressure on the insurers. Instead, it is introduced mainly to better reflect the risks insurers face. Per CIRC, the firstround industry-wide testing does not show material impact to the industry’s aggregate solvency level and the industry as a whole does not face mounted capital pressure. However, due to the significant difference between insurance risk factors of different lines, the capital impacts on individual insurers vary. Unless the risk factors specified in the July version C-ROSS change materially, large insurers with big motor books generally should be able to release substantial amounts of capital as opposed to the current level, while those who do not have big motor books and those who focus on their major institutional shareholders’ business might face increased capital pressure. The second-round industry-wide testing concluded on August 8. So far, CIRC has not announced when non-life C-ROSS will be implemented, although it is widely believed that the regulator plans to implement the new regime in 2015.
§ The available capital of an insurer is classified into different tiers, with the standards set out for each different tier of capital § The minimum capital requirements include: insurance risk, market risk, credit risk, control risk, and macro-prudential risks § Dynamic solvency requires insurers to develop projection and evaluation of their solvency position for a given period of time under a base scenario and various adverse scenarios § For insurance risk capital calculation, non-life insurers’ business is classified into eight lines; Under the expiring solvency requirements no classification exists § Catastrophe risk capital requirements are introduced, as part of insurance risk capital requirements. Risk factors are assigned at province level, and 10,000 scenarios are developed for each peril (earthquake and typhoon) § For credit risk charge, risk factors for reinsurance assets
Hong Kong In Hong Kong, the RBC framework has been discussed for a while, and now the draft version is being prepared by the Office of the Commissioner of Insurance, the current regulator, who said in 2013 that the RBC model would take at least three years to launch. After a four-year long consultation period, the Insurance Companies (Amendment) Bill 2014 is now being discussed at the Legislative Council. One of the changes envisioned in the bill is the establishment of Independent Insurance Authority (IIA). If the bill is approved, the IIA will take up regulatory responsibilities from the Office of the Commissioner of Insurance and the two broker trade bodies. The bill mentions Hong Kong’s initiative of implementing RBC framework for insurers and cites this as one of the reasons to introduce the more powerful independent new regulator.
associated with on-shore reinsurers are significantly lower than those with off-shore reinsurers
Aon Benfield
17
Japan In Japan, the regulator Financial Services Agency (FSA) has decided to conduct field tests covering all insurance companies, with the aim of introducing economic value-based solvency regime. The field tests include trial calculations of the economic value of insurance liabilities to comprehend how insurance companies are dealing with the calculation of insurance liabilities on an economic value basis. Findings obtained in the tests, including any practical issues, will be taken into consideration for the introduction of the economic value-based solvency regime. After the reports
“integrated risk management (ERM) interviews” with 25 selected Japanese insurance companies. The FSA released a report summarizing results of the interview in June 2014 with the following observations on insurance ERM in Japan: § Recognized improvements and enhancements in insurance ERM as non-life insurance and some life insurance companies are currently or starting to consider implementation of ERM frameworks based on their risk appetite § However, there are common challenges which many
are collected and put together, a summary of the tests
insurance companies have to tackle such as: using risk
(including general tendencies and any issues identified in
adjusted performance measures for business strategies and
the process) is expected to be made public in May 2015.
management plans, installing the ERM framework in each
In 2014, the Japanese insurance industry made progress
entity within a group, and evaluating/reviewing ORSA.
in the introduction of ORSA and trial ORSA report
The FSA intends to facilitate enhancements in ERM in the
submission. In response to the recent global regulatory
Japanese insurance industry as a whole by regularly reviewing
movement, the FSA revised its Comprehensive Guidelines
actual status and challenges of insurance companies’ ERM
for Supervision of Insurance Companies in February
and requesting the companies to build more advanced
2014 to fit guidelines on ERM that include ORSA.
risk management framework. Responses to the trial ORSA
The new main topics regarding ERM included in the revised guidelines are risk identification and risk profile, risk measurement, risk management policy, ORSA, group-based ERM, and reporting. Under the ORSA section of the revised guidelines, the FSA supervises insurance companies whether they: § Evaluate quality and adequacy of capital considering all significant risks which are reasonably predictable and relevant § Re-assess their risk and solvency when their risk profiles change significantly § Adequately consider mid-term (e.g., 3-5 years) business strategy, especially new business plans, when doing ORSA § Conduct overall evaluation, by internal or external people, of the effectiveness of their ORSA § Have internal audit functions independently review the effectiveness of ERM and ORSA, and provide recommendations to management where necessary
18
In addition to revising the Guidelines, the FSA conducted
Evolving Criteria
submission have been positive and negative. Many companies said the report is useful for enhancing internal risk culture and making an ERM framework widespread within the company. Smaller companies have commented that administrative workloads to make the ORSA report are burdensome. Labuan In Labuan, the current solvency capital requirement is based on retained premium, similar to what China and Hong Kong currently have. The regulator has revealed its plan to migrate to the RBC solvency regime. Consultation paper of Insurance Capital Adequacy Framework was issued in January 2014 and the regulator aims to start the parallel run implementation in 2017 and full implementation in 2018 for traditional insurers. The timeline for takaful will lag by one year. The new solvency requirement will cover multiple risks, including insurance risk, asset risk, operational risk, concentration risk, and others. The regulator has gathered opinions from market participants and will introduce updated guidelines soon.
Singapore In Singapore, where RBC framework was first introduced in 2004, the regulator Monetary Authority of Singapore (MAS) is pushing forward RBC 2. The first-round consultation of RBC 2 was unveiled in June 2012, and then in March 2014 MAS issued the second consultation paper. This new paper sets out more specific proposals for RBC 2, and also provides detailed technical specifications which allow insurers to conduct a full scope, quantitative impact study to fully understand the impact of RBC 2. This new paper proposes substantial increases of some capital charges while providing some degree of capital relief by means of matching (cashflows) adjustment, diversification benefit, etc. MAS closed the consultation period at end of June 2014 and
For insurers eager to enter and expand in the region, economic stability remains a challenge. In addition, each country has unique and specific regulatory requirements. Examples include: § Minimum rating requirements for some insurance companies § Requirements for use of local reinsurers § Minimum rating requirements for reinsurers § Investment requirements in local economy § Minimum investment liquidity § Requirement to change independent actuary and auditor on a routine basis
plans to complete the calibration factors and features of the RBC 2 framework by end of 2014 and formally implement the regulations from 2017.
Latin America According to a recent A.M. Best report, in 2013 the Latin America region represented 8.5 percent and 3.7 percent of worldwide GDP and insurance market respectively. Among the Latin America countries, the top six: Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela accounted for 92 percent of the whole region’s total premium. The Latin America market has grown in recent years
Exhibit 12: Market penetration rates 3.0% 2.5% 2.0% 1.5% 1.0%
a
la
bi
m
lo
Co
ile
Ch
ue ez
a in
o
nt
ic
transportation and services and directly transferred
ex
il
which stimulated growing needs for infrastructure,
n Ve
0.0%
the level of poverty in many Latin America countries,
ge Ar
§ Economic growth in the region significantly reduced
M
0.5%
az Br
and key factors attributable to the growth include:
Source: A.M. Best
into growing demand in insurance products § Relative low catastrophe exposures in the past several years created an ideal source of diversification both in terms of underwriting and profitability for insurers Penetration rates for insurance remains low. Among the top six insurance premium generating countries, only Argentina has a non-life insurance penetration rate above 2.0 percent (at 2.5 percent). For comparison purposes, non-life insurance penetration in the U.S. is approximately 3 percent.
Aon Benfield
19
Accounting Developments International accounting standards After several years of working together to arrive at a single
Fitch believes the benefits of the changes are much greater
global standard for insurance contracts, the International
than the costs but thinks comparability may be hampered
Accounting Standards Board (IASB) and Financial Accounting
due to different methodologies companies are allowed to
Standards Board (FASB) announced in February 2014 that
use (like in the discount rate a company can select) and
convergence was not achievable at this time. Many users
therefore, expect disclosures to be critical. S&P, AM Best, and
of the existing U.S. GAAP model did not believe that the
Fitch do not expect any rating actions as a result of the new
existing model was in need of a major overhaul and also raised
Standard but anticipate some impact in their analyses and
concerns about the potential implementation costs. In light
will likely be a discussion point in their rating meetings.
of this feedback, the FASB announced that it would only make specific targeted improvements to the U.S. GAAP standards.
The IASB also finalized the standard on Financial Instruments
The IASB has continued to work on the existing IFRS 4,
clarifying the existing principles in IFRS 9, it introduces a
Insurance Contracts standard holding numerous meetings and
new measurement category called fair value through other
deliberations on its June 2013 Exposure Draft. The feedback
comprehensive income (FVOIC) which will help eliminate
on the Exposure Draft has been generally positive with most
accounting mismatches for insurers. The standard is effective
welcoming the progress made since the 2010 Exposure Draft.
January 1, 2018 however, it is too early to gauge what the
The IASB had responded to concerns raised on the earlier Draft
effect will be to insurers as it will depend on the IFRS 4
relating to accounting mismatches and mirroring, among others,
standard. Regardless, with Solvency II, IFRS 9 and IFRS 4
that the Board has been actively discussing and addressing. The
being implemented over the next few years, insurers will go
Board plans to continue to debate on the issues for the rest of
through a notable transformation in accounting and financial
the year and hope to issue a finalized IFRS 4 standard in 2015
reporting and perhaps even in how business is conducted.
with an effective date approximately three years after that.
(IFRS 9) which replaces the previous IAS 39 standard. While
U.S. statutory accounting standards
The rating agencies have been keenly watching the
During 2014, Statement of Statutory Accounting Principles
development of the new standard as it will significantly change
No. 105—accounting for Working Capital Finance
the way the insurers will report their financial statements.
Investments (WCFI) becomes effective. This is a welcome
Though balance sheet presentation is expected to remain
regulatory enhancement for an industry that has been
the same, the income statement will be vastly changed with
seeking alternative short-term, high-yield and high-quality
short- and long- duration contracts being split and shown
investments in a prolonged low interest rate environment.
differently. A.M. Best recently stated that this will impact
For U.S. companies that are not publicly traded and not
the data they use to analyze the companies in the non-U.S.
preparing GAAP financial statements, this new accounting
insurance sector. S&P agrees with the building block approach
standard can potentially have a positive impact on their RBC
for insurance reserves and sees a reduction in net income
measurements. Under the new accounting standards, effective
volatility as a result of the changes in the 2013 Exposure Draft.
1/1/14, the NAIC is allowing insurance entities to report WCFI as admitted assets when certain requirements are met.
20
Evolving Criteria
Development of global insurance capital standard Faced with a gap between the rising significance of
Pursuant to general criteria established in
insurance groups that are actively engaging in businesses
ComFram, IAIGs are defined as groups with:
cross-borders and the considerable lack of supervision of these groups, the International Association of Insurance Supervisors (IAIS) took on the task of developing the Common Framework (ComFram) for the Supervision of Internationally Active Insurance Groups (IAIGs). The framework consists of three primary sections: Section I establishes the scope of ComFram, Section II contains the standards with which the supervisor will require an IAIG to comply and Section III describes the processes whereby supervisors assess whether IAIGs meet the requirements in Section II. The initial development phase of ComFram started in July 2010 and had a three year targeted completion date. The IAIS is currently scheduled to formally adopt ComFram at the end of 2018, with its members to begin implementing ComFram thereafter. For the quantitative measurement to be included as a component of ComFram, IAIS is in the process of developing a risk based global insurance capital standard (ICS) which is scheduled to be implemented in 2019.
§ Premiums written in not fewer than three jurisdictions, and percentage of gross premiums written outside the home jurisdiction is not less than 10 percent of the group’s total gross written premium; and § Total assets of not less than USD 50 billion, or gross written premiums of not less than USD 10 billion (based on a rolling three-year average) The anticipated application of ICS to all IAIGs will potentially have broader impact on the insurance industry. Currently, the U.S. regulators’ (represented by the NAIC) viewpoint towards ICS is that global ICS should function as a supplement to the current jurisdictional capital requirements rather than replacing such requirements. Rating agencies, industry supporting groups and other interested parties are closely monitoring the developments of the IAIS’s international capital requirement standards.
Aon Benfield
21
Financial Trends Operating performance
Capital adequacy remains strong
Underwriting results have improved in recent years as measured
Capitalization remains strong. As a benchmark, we
by the median combined ratio for public companies on U.S.
estimate U.S. Industry Aggregate capital position is
stock exchanges. The median combined ratio is expected to
redundant at the ‘AA’ level per S&P’s Capital model and
improve to 94.1 percent by year-end based upon equity analyst
supportive of ‘A++’ capital per A.M. Best’s BCAR model.
estimates. Multiple years of rate increases, especially on property
From 2012, capital adequacy improved USD 46 billion as
and workers’ compensation business, combined with relatively
measured by S&P Capital and USD 12 billion per BCAR.
low catastrophe losses so far in 2014 have contributed to strong underwriting results. In fact, the percentage of companies that reported a combined ratio above 100 has significantly dropped from 60 percent in 2011 to only 14 percent in 2013, with 2014
Exhibit 14 provides a distribution of S&P Capital levels for 50 rated companies in the U.S. and Bermuda, showing that 42 percent of companies’ capital adequacy is considered
expected to see a slight uptick to 18 percent.
‘Extremely Strong’, indicating redundant capital at the
However, a number of companies reported material
adequacy, representing redundant capital at the ‘AA’ level.
‘AAA’ level. Another 37 percent have ‘Very Strong’ capital
adverse loss development in 2013 and we have seen
Exhibit 14: Distribution of S&P capital adequacy
some further strengthening through June 2014, especially related to commercial auto and workers’ compensation business. While we expect there may be some additional
Upper Adequate
reserve development by year-end 2014, the median combined ratio from analyst estimates of public companies
Moderately Strong
indicates another solid underwriting year. Nonetheless, with half of hurricane season remaining, earthquake 2014 results are still exposed to significant volatility.
13% 37%
Very Strong
Exhibit 13: Underwriting results of public P&C insurance and reinsurance companies 2008-2013 Average
6%
Strong
risk always in-season and reserve risk more prevalent,
% w CR > 100
2%
42%
Extremely Strong
Median
0%
10%
20%
30%
40%
50%
Source: S&P Company Reports
106
80%
104.6
In addition, A.M. Best’s published BCAR scores remain strong
104
70%
102
60%
100
50%
for the industry. Median BCAR results by rating category are roughly double published minimum standards. In addition, results at the 25th percentile are on average 68 points
98
40%
97.0
96.6
96
30% 94.5
94.4 94.1
93.6
94
20%
92 90
10%
2008
2009
Source: SNL, Aon Benfield Analytics
22
Evolving Criteria
2010
2011
2012
2013
2014
0%
% w CR > 100
Combined Ratio
higher than the respective minimums, which is equivalent to four rating levels (each rating level = 15 BCAR points).
Exhibit 15: Current BCAR distribution by rating category FSR
Published Minimum
25th Percentile
Median
75th Percentile
A++
175
250
295
322
A+
160
234
323
Exhibit 16: ‘A’ rated entities: BCAR median by size Size
Median
Diff. from Total
Count
< USD 100 million
394
91
72
412
USD 100 million—USD 500 million
298
-5
104
A
145
231
303
415
USD 500 million—USD 1 billion
275
-27
32
A-
130
208
278
439
>USD 1 billion
237
-66
31
B++
115
166
216
284
All
303
239
Sources: A.M. Best, Aon Benfield Analytics. Data as of June 30, 2014
Sources: A.M. Best, Aon Benfield Analytics. Data as of June 30, 2014
There are valuable insights found when taking a deeper dive
Exhibit 17: ‘A’ rated entities: BCAR median by industry composite
into the relationship between capitalization and specific company attributes. As expected, there is a wide range of results between the various perspectives. Our analysis on the right illustrates a few key takeaways for the ‘A’ rated population by size and composite: § Insurers below USD 100 million in PHS drive up median BCAR
229
Workers' Comp (21)
277
Commercial Casualty (58)
295
Private Pass Auto (10) Priv Pass Auto & HO (42)
307
Commercial Property (18)
§ Personal Lines tend to have higher BCAR scores, most likely attributable to stress test § Medians vary considerably by composite
320 337
Other (44)
395
Medical Prof Liability (23)
429
Personal Property (23) Median BCAR = 303 Source: A.M. Best, Aon Benfield Analytics
Aon Benfield
23
Public company benchmarks The median scores of ‘A’ rated publically traded P&C companies
A.M. Best has financial leverage and interest coverage
in the U.S. is 217 percent, 86 percentage points lower than the
guidelines for an insurance holding company. Gauging FSR of
median of all ‘A’ rated U.S. P&C companies. We believe this
‘A’ rated operating companies and ICR of ‘bbb+’ or ‘bbb’ rated
is mainly driven by the publicly traded population’s typical
holding companies, our analysis below illustrates that financial
characteristics: larger size, strongly developed enterprise risk
leverage and interest coverage ratio of operating companies
management capabilities and proven financial flexibility.
are typically much more conservative than the guidelines. Median debt to capital for ‘A’ rated operating companies is 16.8 percent which is less than half of the guideline of 45 percent. Similarly, interest coverage ratio for ‘A’ rated companies is 6.5x which is more than twice the guideline of 3x.
Exhibit 18: BCAR and financial leverage metrics for ‘A’ rating publicly traded companies Guideline
25% Percentile
Median
75th Percentile
303*
199
217
239
Debt to Capital (percentage)
3x
3.6x
6.5x
11.0x
BCAR (percentage)
*Guideline for BCAR refers to 2013 Industry Median Source: A.M. Best, Aon Benfield Analytics
The above analysis involves 24 public holding companies. The holding company normally is assigned a lower ICR than the operating company due to the greater degree of risk taken by senior unsecured creditors relative to that of the operating company. FSR of the operating company is mapped to the ICR of holding company guidelines.
24
Evolving Criteria
Enterprise Risk Management Trends Enterprise Risk Management (ERM) continues to evolve for insurance companies as both regulators and rating agencies are increasingly focused on evaluating a company’s risk framework, capabilities and appetites. The growing sophistication of ERM within the industry has raised the bar for companies to build a risk framework that fits their internal culture and demonstrates that they are constantly managing and mitigating risk effectively throughout the organization. Specific areas of concern for the industry in the coming year include regulatory changes, defining and implementing risk tolerance/appetite levels, macroeconomic trends (continued low interest rate environment) and concerns over industry reserve levels.
Risk tolerance statements As the objective of ERM is to ensure that insurers are properly
software, data availability and measuring results off historical
compensated for the risks they assume, companies are
events. Reserve risk is less easily quantified as benchmarking
focusing on specifying their risk tolerances and how they
data is limited and the variability is not commonly quantified.
manage within it. In order to do this, entities must understand
Operational risk is most likely stated in qualitative terms.
their individual risks to determine adequate premiums as well as their aggregate risk to ensure their risk taking is aligned with their risk capacity. The complexity of this task
Public companies are shifting focus from disclosures related to a stated risk tolerance towards more line of business level
increases exponentially with the size of the organization.
disclosures. Companies are increasingly concerned with
A risk tolerance is defined as the amount a company is willing
peers and industry standards. Typical CRO/CFO risk tolerance
to venture in the normal course of business. Risk tolerance
questions include: What proportion of one year’s earnings can
statements can be either quantitative or qualitative, although
be lost in a single event without an adverse stock price reaction?
rating agencies prefer quantitative statements. Catastrophe
What proportion of equity?
ensuring both their risk tolerances and appetites are in line with
and Market / Credit risk are easier to quantify due to modeling
Exhibit 19: Spectrum of approaches to risk tolerance Quantitative Catastrophe Risk
Qualitative Market/Credit Risk
Reserve Risk
Operational Risk
§ Lat/Long level exposure data available
§ CUSIP level exposure information available
§ Limited exposure benchmark data
§ Limited exposure data
§ Model-centric quantitiative approach
§ Scenario based quantitative approach
§ Rate and reserve adequacy monitored
§ Rarely quantified or articulated as a limit
§ Likelihood and severity both quantified
§ Severity impact of interest rate changes or stock price drop quantified
§ Variability not commonly quantified
§ Limited monitoring of specific exposures
§ Rarely articulated in “limit” forumulation
§ Examples: —Regulatory Risk —Financial Controls —HR/Employee Turnover
§ Portfolio level tolerance linked to front line underwriting decisions
§ Portfolio level tolerance linked to asset allocation liits § Credit quality and concentration limits
§ Usually increases along with growth
Source: Aon Benfield Analytics
Aon Benfield
25
Catastrophe risk tolerance study Beginning in 2007, Aon Benfield began compiling and analyzing
Exhibit 20: Catastrophe risk tolerance diclosure analyisis
the risk tolerance statements that publicly traded insurers made in order to provide the industry an understanding of how these
1:100 after Tax Net PML as a Percent of Equity
1:250 after
companies quantified and managed their corporate wide risk.
30%
30%
25%
25%
The study evolved into the Catastrophe Risk Tolerance study as virtually all non-life insurance companies express a risk tolerance related to catastrophe exposure. The catastrophe risk tolerance statements are generally presented as the percentage of equity a company is willing to expose at a stated return period.
15%
The study includes 96 companies from the U.S., Bermuda,
10%
U.K., Japan as well as global insurers and reinsurers. In 2013, 85 percent of the companies disclosed catastrophe information in either their 10-K, annual report, investor presentations or rating agency reports. Of those reporting a catastrophe
19%
20%
5%
14%
1:100 after Tax Net PML as a Percent of Equity
their implied retention), 5 percent had some other form of
30% disclosure. The majority of companies (70 percent) reported
an occurrence PML and the remainder an aggregate PML. 25%
As shown to the right, the mean 1 in 100 PML (after-tax) 19% was 20%
17%of reinsurer’s 4 percent of insurer’s equity and 14 percent 14% operate at a higher catastrophe equity. 15% Reinsurers generally
15% 10%
4%
0%
5% Mean
significantly greater at the higher end of the spectrum. 4% 5% 0%
Mean
High
30%
28% 25%
25% 20% 16% 15% 10% 6% 5% 0%
Mean
Source: Company Reports, Aon Benfield Analytics
26
Evolving Criteria
Reinsurers
1:250 after Tax Net PML as a Percent of Equity
risk exposure relative to equity. The chart on the right shows 10% the 250 PML is only slightly higher on a mean basis but
0%
High Insurers
statement, 61 percent disclosed a net PML, 34 percent their reinsurance structure (which was used to calculate
20%
17%
High
Stress scenarios An important part of ERM is the ability to quantify the impact of adverse scenarios on a company’s capital or earnings. Many companies have scenarios they have been quantifying and disclosing to rating agencies. Under ORSA, companies are being asked to perform stress testing as part of their financial planning process. The stress testing should include sensitivity testing and scenario modeling over time. The scenarios a company selects should be conceivable and tested over the company’s forecasted financial horizon (typically 3-5 years). Aon Benfield identified some examples of stress scenarios that could be used to satisfy the ORSA stress testing requirement.
Exhibit 21: Examples of ORSA stress testing scenarios
Cat Stress Loss
Balance Sheet
Worst 1-Year Calendar Year Reserve Development Worst 3-Year Calendar Year Reserve Development Inflation Scenario Reserve Volatility
External
Underwriting Interest Rates Increase 2008 Financial Crisis Repeat
Worst AY Loss Ratio Deviation Worst 3-Year Loss Ratio
Reinsurer Default Source: Aon Benfield Analytics
Aon Benfield
27
A.M. Best A.M. Best began requesting ERM information in the
Exhibit 22: Risk profile characteristics
Supplemental Ratings Questionnaire (SRQ) in April 2011. In 2014
§ Correlation
§ Policy limits
§ Competition
§ Judicial
than ever in A.M. Best’s ratings assessments. They noted the
§ Financial Flexibility
§ Concentration
reason for removing the ERM section was that companies are
§ Growth
§ Ceded leverage
addressing ERM in their ratings meetings and the standard
§ Management philosophy
§ Liquidity
questions were no longer necessary. A.M. Best has noted the
§ Product / coverage
§ Regulatory
following ERM points are discussed with the ratings committee:
§ Investments
§ Economic
§ Data quality
§ Credit quality
this section was removed, but ERM remains more important
§ ERM discussion overview and key points
§ Impact of reinsurance
§ Risk Impact Worksheets
Assessment: High, Moderate, Low
§ Quality of ERM process at company
Source: A.M. Best
§ Relevance to company profile and rating level § Clearly identified risk tolerance
Exhibit 23: Risk management capabilities
§ Clearly identified risk management capabilities § Leverage § Liquidity and access to additional capital § Cycle management: susceptibility, preparedness, responsiveness, history of maintaining underwriting discipline and capital strength to absorb market fluctuations In prior years, A.M. Best has released a matrix of 19 risk profile
Market Risk
Credit Risk
Bonds
Bonds
Stocks
Reinsurance
Other
Other
characteristics categories and examples of how they assess each company as high, moderate or low risk in each category. They noted that the highest risk categories are currently seen
Risk Identification
as economic environment, competitive environment, line of
Risk Measurement
business and concentrations, and judicial/legislative/regulatory
Risk Tolerance
environments. The lowest risk categories are seen as reinsurance impact, credit quality and liquidity. A.M. Best then assesses each company’s risk management capabilities and wants to see the overall capabilities be stronger than the risk profile of the company. They noted that the
Underwriting Risk
Strategic Risk
Pricing
Operational Risk
Reserving
Off Balance Sheet
highest risk management capabilities were seen in credit risk— bonds, credit risk—reinsurance, market risk—bonds and capital management. The lowest risk management capabilities were
Other
seen in underwriting—event risk and risk appetite/tolerance.
Assessment: Superior, Strong, Good, Weak Source: A.M. Best
28
Evolving Criteria
Standard & Poor’s In May 2014, S&P released an ERM update describing their
Exhibit 24: S&P’s May 2014 ERM Report
process for evaluating companies’ ERM frameworks and trends
2008
in the industry. S&P continues to expect companies with stronger ERM programs to achieve more stable and predictable
2009
2010
2011
2012
2013
100%
earnings. They believe that ORSA and other regulations will improve many insurers’ ERM frameworks, but expect
75%
ERM to be an evolutionary process. S&P does not believe regulatory ERM requirements should be viewed as check the
50%
box exercises but rather as an opportunity to develop, codify and formalize processes and procedures. There was relatively
25%
little movement in the distribution of scores from last year (3 improved to strong in this year’s report). In the chart at the right, the vast majority of companies over the last 5 years have “Adequate” ERM rating. The percentage of “Strong” ERM scores have increased since 2008 while the percentage of “Weak” ERM scores have decreased since 2008. While not illustrated here, S&P notes P&C ERM ratings are generally higher than L&H due to market/interest related risks. The trend of slow upward movement is mainly attributed to the significance S&P places on strategic risk management in their ERM criteria and companies’ increased focus on developing and documenting foundational ERM frameworks to comply with ORSA.
0%
Very Strong
Strong
Adequate
Weak
Source: S&P ERM Report Card
S&P released a comprehensive ERM survey due in July of 2014. This survey asks both quantitative and qualitative questions for the following areas: risk culture, risk controls (general, P&C, and life/health), risk models, emerging risk, and strategic risk. This survey has only been sent to U.S. and Bermuda companies at this time. Upon review of the survey results, the survey could potentially be incorporated into the rating process for all companies going forward.
In 2013, S&P performed ERM level II reviews on 39 companies that S&P considers to have risk characteristics that are more complex than that of the overall group of insurance companies S&P rates. ERM level II reviews consist of 5 categories: risk culture, risk controls, emerging risk management, risk models and strategic risk management. Larger insurers and insurers with more-complicated risk profiles tend to better recognize the importance of ERM which leads to a relative absence of negative scores in ERM Level II evaluations. From these reviews, S&P noted the biggest opportunities for potential improvement are areas of Emerging Risk Management and Strategic Risk Management.
Aon Benfield
29
Looking Forward: Key Topics for 2014 and 2015 Criteria updates and rating activity have been relatively muted year to date, however companies continue to face challenges in successfully managing rating agency and regulatory expectations. As companies continue to operate within a very competitive
§ Reserve deficiencies and continued low investment
market, when looking forward into 2015 there will be a
yields: These are key areas of concern for the commercial
number of key rating agency and regulatory themes:
sector and need to be strategically managed or rating
§ Stochastic BCAR: Finalization and implementation of A.M. Best’s new BCAR model, including any changes to the catastrophe risk thresholds within the calculation. § Profitability: Ability to continue profitability in the face of the competitive market, reduced reserve redundancies and the current investment environment. Also, specifically meeting or exceeding plans disclosed to external constituents will be critical. § Further emphasis on ERM: No matter size or geography, ERM continues to grow in importance, with specific focus on a company’s risk management capabilities and stated risk tolerances.
agencies will react negatively. The industry is experiencing an increased allocation to higher risk investments which rating agencies are keeping a careful eye on. § Catastrophe trends: Year to date has seen limited insured cat losses, however given the potential instant materiality, this risk category must continue to be managed intricately. We are seeing the lowest reinsurance risk margins in a generation stimulate new growth opportunities for insurers and may allow governments to reduce their participation in catastrophe exposed regions as insurance availability and affordability improves. § Increasing regulation. Numerous regulatory developments approach planned launch including: Solvency II, China’s C-ROSS and U.S. ORSA reporting requirements. Transition to these requirements and the pace of new regulatory developments will be key industry topics to monitor.
30
Evolving Criteria
Contacts Global
EMEA
Patrick Matthews Head of Global Rating Agency Advisory Aon Benfield +1 215 751 1591
[email protected]
Ankit Desai Head of Rating Agency Advisory, EMEA Aon Benfield +44 207 522 8268
[email protected]
Americas
John Fugit Director, U.S. Rating Agency Advisory Aon Benfield +1 212 441 2729
[email protected] Kathleen Armstrong Director, U.S. Rating Agency Advisory +1 513 562 4508
[email protected]
APAC
Rade Musulin COO, Analytics, APAC Aon Benfield +61 2 9650 0428
[email protected] Sifang Zhang Director, Head of Rating Agency Advisory, APAC Aon Benfield +852 2861 6493
[email protected]
About Aon Benfield Aon Benfield, a division of Aon plc (NYSE: AON), is the world‘s
advisory. Through our professionals’ expertise and experience,
leading reinsurance intermediary and full-service capital
we advise clients in making optimal capital choices that will
advisor. We empower our clients to better understand,
empower results and improve operational effectiveness for
manage and transfer risk through innovative solutions and
their business. With more than 80 offices in 50 countries, our
personalized access to all forms of global reinsurance capital
worldwide client base has access to the broadest portfolio of
across treaty, facultative and capital markets. As a trusted
integrated capital solutions and services. To learn how Aon
advocate, we deliver local reach to the world‘s markets, an
Benfield helps empower results, please visit aonbenfield.com.
unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency © Aon Benfield Inc. 2014. All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. This analysis is based upon information from sources we consider to be reliable, however Aon Benfield Inc. does not warrant the accuracy of the data or calculations herein. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield Inc. disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Members of Aon Benfield Analytics will be pleased to consult on any specific situations and to provide further information regarding the matters.
About Aon Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/ manchesterunited to learn about Aon’s global partnership with Manchester United. © Aon plc 2014. All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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