Title Slide

JUN 8 – 10, 2015

www.bermudacaptive.bm

Global Fronting

Renée M. Lewis

Head of Global Trade and Receivables Finance

HSBC Bank Bermuda Limited

• EU’s Solvency II Directive will be in effect 1 January 2016

• Introduction of a common European approach to regulation based on economic principles for the measurement of assets and liabilities.

• Although it is an EU regulatory framework, it will have direct and indirect implications to the U.S. insurance industry.

• Pillar 1 outlines quantitative requirements, which include–rules to value assets and liabilities (in particular, technical provisions), –Calculation of capital requirements and– the identification identify eligible own funds to cover those requirements.

Global Fronting EU Lens and Solvency II

• Pillar 2 – Outlines the requirements for risk management, and governance,– Details the supervisory process,– This will ensure that the regulatory framework is combined with each

undertaking's own risk-management system and informs business decisions.

• Pillar 3 – addresses transparency, reporting to supervisory

authorities and disclosure to the public and embedding market discipline.

Global Fronting EU Lens and Solvency II

• Capital requirements under Solvency II will be forward-looking and economic, i.e. they will be tailored to the specific risks borne by each insurer, allowing an optimal allocation of capital across the EU.

•They will be defined along a two-step ladder, including the solvency capital requirements (SCR) and the minimum capital requirements (MCR), in order to trigger proportionate and timely supervisory intervention.

Global Fronting EU Lens and Solvency II

• Portfolio Review and Decisions – Critical need for review by insurers to identify those classes

and products that consume large amounts of risk capital which under the new regime will not in the long run be value add to the company

• e.g. non-life products with high exposure to catastrophe, with particularly volatile claims experience or with long run-off periods.

• Options will include discontinuance, amendments or specific restrictions embedded in products and or the creation of new ones for expansion and diversification of choice

Global Fronting EU Lens

• The higher demand for customized solutions will change the way cedants, reinsurers and brokers interact

• Collaborative cooperation of all stakeholders will be the driver in the delivery of new products to the market

• The new world of solutions will be designed to cover the 3 pillars of capital requirements, risk management and reporting

• Diversification and long term sustainable products will be critical for profitability and shareholder value

• As a result, standard reinsurance programs will make way for solutions finely tailored to risk profiles and balance sheets

Global Fronting EU Lens

Global Fronting EU Lens

1 E.g. asset-gathering business.

• A fronting insurer protects its own credit position by acceptable collateral such as letters of credit or trusts– Any risk written and ceded attracts capital– For a captive program , the risk is from the reserves:

unearned premium reserves, outstanding loss reserves and incurred but not reported claims.

– In calculating fronting fees, the fronting company must be certain to cover its own cost of capital and the residual credit risk after allowing for any qualifying collateral.

– This is a key component of the fee especially as fronting companies have become more aware of the capital implications of ceding to unrated reinsurers.

Global Fronting EU Lens :Collateral

• Solvency II and the financial crisis have focused minds in the area of capital management. This may result in the fronting fees for certain accounts increasing to reflect the capital consumption

Global Fronting EU Lens: Collateral

This example was based on a real case of a European primary insurer with approx. €1.5bn total investments.

2 Risk capital charge for equities (39% / 49% ± adjustment), real estate (25%), charge < 20% for investment grade corporate bonds with a duration < 10 years

Global Fronting EU Lens: Collateral

This presentation is issued by HSBC Bank Bermuda Limited who is licensed to conduct banking and investment business by The Bermuda Monetary Authority. The contents of this presentation are confidential and may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non authorized reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this presentation is for information only and does not constitute any advice or a recommendation to any reader of this material to purchase products or to take advantage of services offered by HSBC. Consequently, HSBC Bank Bermuda Limited cannot be held responsible for any decision taken on the basis of the commentary and/or analysis in this document. HSBC Bank Bermuda Limited has based this presentation on information obtained from sources it believes to be reliable but which it has not independently verified. Care has been taken to ensure the accuracy and completeness of this presentation but HSBC Bank Bermuda Limited and HSBC Group accepts no responsibility for any errors or omissions contained therein.

The information contained in this document is subject to change without notice. It is intended for discussion only and shall not be capable of creating any contractual or other legal obligations on the part of HSBC Bank Bermuda Limited or any other HSBC Group company. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Bank Bermuda Limited accepts no liability for any failure to meet such forecast, projection or target. The value of investments and any income from them can go down as well as up. Where overseas investments are held the rate of exchange may cause the value of such investments to go down as well as up. Investors should consider their investment objectives, whether they can assume these risk and should undertake their own professional advice. It is important to note that where charges are taken from capital, although this will enhance the income distributed, it may constrain the capital growth of your investment. If charges are taken from income, and there is insufficient income to meet such charges, any deficit will be taken from the capital. This could result in an erosion of the capital value of your investment.

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