The London Market Student Group typically organises events for senior figures in the general insurance industry to present directly to the next generation of actuaries to improve their knowledge of the London Market and give them the opportunity to hear from and challenge the senior figures in a relaxed environment.
Events normally take the form of a guest speaker followed by the opportunity to socialise and network with actuarial students (and newly-qualified actuaries) working in general insurance. The location is usually a bar in the City where complimentary drinks are commonly provided by the firm of the speaker.
London Market Student Group - 21st August 2013
Over the last couple of years the attendance at the LMSG events has been growing and unfortunately we've outgrown our favoured venue of The Counting House. This was our first talk held in our new larger venue, the Minster Exchange. The topic was 'Actuaries and Rating Agencies' and the talk was presented by Cameron Heath of Barnett Waddingham. Cameron has 15 years insurance experience and before joining Barnett Waddingham Cameron worked at S&P for seven years where he was the Global Head of Non-Life Reserving & the European Head of Insurance Linked Securities.
In essence, rating agencies express their opinion on the likelihood that an issuer will or will not pay its debts. In doing this they use a consistent set of grades (ratings) that reflect their opinion. These ratings are important for the insurance industry as they impact the cost of capital, the capital charge for credit risk and also the price you can charge for reinsurance.
Contrary to what many believe, the rating assigned depends on more than the capital position of the company. It takes into account operating performance, management and governance and the risk position of the company amongst other factors.
Knowing if the reserves are prudent or not is central to many of these factors, not just capital, and therefore they carry out a review of the reserves. In particular they look for any surplus or deficits. The review is not intended to be onerous on the company, so S&P will typically ask for the kind of data that consultants use. They may focus on certain classes and/or companies. Rating agencies do not have the resources of many consultancies, so they may need to tailor their review and focus on the key areas, e.g. US Casualty (which historically has seen a deficit) or German Property/Liability (which historically has seen a surplus).
Every company will not be reviewed every year. Typically there is a 3-5 year cycle but it will depend on the importance of the review to that company. In most cases the standard projection methods are used, typically Chain Ladder, Bornhuetter-Ferguson or even the Expected Loss Ratio method (based on S&P's wide knowledge of the market) but on occasion other methods are also used too. In deciding on the appropriate tail patterns to apply, they will use their knowledge of the underwriting cycle and premium rate changes.
Cameron finished off by giving a brief overview of cat bonds. These are financial instruments used to transfer peak insurance risk to the capital markets. The first cat bond was sold in 1997 and there was a steady growth in the market up until the collapse of Lehman Brothers in 2008 after which the ILS market came to a complete stand still and didn't restart for six months! Recently there has been increasing investor demand for cat bonds due to the low correlation with other investments and the positive returns they have brought (despite the Lehmans crash!).
If you would like to learn more about upcoming events (the next event will take place in November), be added to the mailing list or are interested in speaking at or sponsoring an LMSG event, please contact our chairperson at [email protected].