Wednesday, 8 May 2013
S&P publishes criteria for rating insurers
Standard & Poor's Ratings Services today published its criteria for rating insurance companies.
The company comments "The criteria are intended to enhance the transparency of our ratings on insurers worldwide by creating an integrated, globally consistent framework that builds on our existing criteria. The ratings framework includes business risk and financial risk profiles, as well as new rating factors and subfactors to assess the impact of industry and country risks, prospective capital adequacy, and risk position.
Our aim is to transparently disclose rating factors and clearly specify how we use them to evaluate the creditworthiness of insurance companies and arrive at ratings outcomes. Consistent application of these criteria is intended to enhance the forward-looking nature and comparability of our ratings across industry sectors and geographies.
The criteria documents published today are:
Thursday, 2 May 2013
Deal or No Deal – Has the claims industry lost the art of negotiation?
An insurance policy is a contract like any other
The purchase of an insurance policy is a commercial transaction. Businesses buy insurance to protect themselves from unwanted events which would otherwise have a damaging effect on their profitability. Insurers sell each policy hoping to make a profit from the sale and myriad others like it. It’s about the success of each party’s enterprise, a success measured on the profit and loss account. In that respect it’s no different from the many contracts that businesses enter into, be they vehicle leases, IT purchases, consultant contracts, or staff hires.
Much thought goes into these contracts. Each side of the transaction measures the costs and the likely benefits, negotiations are conducted, prices and terms agreed and hands shaken. That, too, is how insurance contracts are sold and bought, with the broker as an intermediary; in that three-cornered relationship deals are done and each party is satisfied with them. Of course, no contract has any value until the time comes for it to be performed. Staff must work diligently and conscientiously to their job specifications, cars must run properly and be well serviced, IT shouldn’t crash. When those things don’t happen, the buyer of the goods or services has to address the problem with the seller.
Businesses want to reach solutions not disputes
Very few businesses believe in litigation as the first step in any such resolution. Any formal dispute procedure is damaging to the continuity and comfort of the parties, it carries an element of uncertainty and costs time and money. Businesses want to get on with making their profits, they want to get rid of any disputes as quickly and amicably as possible and they generally want to maintain their commercial relationships. That is the very essence of entrepreneurialism, its central reliance on cooperation and working together. Problems are solved by discussion and negotiation leading to the eventual handshake. Deals are done pragmatically, relationships are preserved and the financial welfare of each party is assured. With most contracts performance can be readily measured in the normal day-to-day workings of the business but insurance is different: it’s only when a claim arises that what the seller has to do becomes apparent. It’s at that point that the buyer of the policy has a chance to assess what has been bought and to do so against the everyday standards of commerce.
Insurers have every good reason to make proper evaluation of claims: they have underwriting books and profit and loss accounts to protect; they are guardians of their shareholders’ and policyholders’ interests in the prevention and detection of fraud; they may themselves want to make the settlement of the claim the subject of subrogation, and none of what follows dismisses the importance of these objectives. It is the methods adopted in pursuit of these aims that could lead business policyholders to believe that insurers don’t understand business and don’t know how to deal with the commercial community. Almost by definition entrepreneurialism is the art of deal-making. But business owners and managers may not perceive insurers as interested in making deals, or in flexible negotiation or in pragmatic and quick closure of a claim. Instead, the perception can be of unnecessary precision, more akin to an audit trail than to an opportunity to strike a deal advantageous to each party. It’s not difficult to assess the approximate value of a transaction to each party and to negotiate around that in broad terms: it’s what businesses do all the time.
Commercial policyholders want a commercial approach to their claim
Insurers are required by the FSA to treat their customers fairly yet the experience of some business claimants is that settlement of claims is bureaucratic, prolonged and, adversarial. If the requirements of the Policyholder are not met Insurers risk Claimants believing that insurers do not
have full awareness of the manners and practices of the commercial environment. So Claimants could think insurers see little evidence of the advantages that can accrue to each side of the transaction by doing the deal. Any such deal carries risk, and carries it for each side. Businesses are adept at measuring risk and benefit and running their enterprises accordingly. Insurers, the specialists in risk at the time of issuing the policy, seem to some to be more risk-averse when it comes to claims. Essentially, any business that has a claim has but one imperative, and that is to maintain its financial stability by getting cash in for its profitability and its cash flow. To do that it will generally assess the risks of discounting its claim for such as early settlement, a reduction of management and staff time in meeting insurers’ demands, and restoring the continuity of smooth operation, but they often find no reciprocal appetite.
Responding to the requirements of the Policyholder is the art of good claims handling and Insurers should guard against an unnecessarily complicated and forensic claims process. This will help Claimant businesses to feel that their needs are being met and they are being treated fairly in the claims process.
Source: Claims Focus published by Chartered Institute of Loss Adjusters (CILA)
The purchase of an insurance policy is a commercial transaction. Businesses buy insurance to protect themselves from unwanted events which would otherwise have a damaging effect on their profitability. Insurers sell each policy hoping to make a profit from the sale and myriad others like it. It’s about the success of each party’s enterprise, a success measured on the profit and loss account. In that respect it’s no different from the many contracts that businesses enter into, be they vehicle leases, IT purchases, consultant contracts, or staff hires.
Much thought goes into these contracts. Each side of the transaction measures the costs and the likely benefits, negotiations are conducted, prices and terms agreed and hands shaken. That, too, is how insurance contracts are sold and bought, with the broker as an intermediary; in that three-cornered relationship deals are done and each party is satisfied with them. Of course, no contract has any value until the time comes for it to be performed. Staff must work diligently and conscientiously to their job specifications, cars must run properly and be well serviced, IT shouldn’t crash. When those things don’t happen, the buyer of the goods or services has to address the problem with the seller.
Businesses want to reach solutions not disputes
Very few businesses believe in litigation as the first step in any such resolution. Any formal dispute procedure is damaging to the continuity and comfort of the parties, it carries an element of uncertainty and costs time and money. Businesses want to get on with making their profits, they want to get rid of any disputes as quickly and amicably as possible and they generally want to maintain their commercial relationships. That is the very essence of entrepreneurialism, its central reliance on cooperation and working together. Problems are solved by discussion and negotiation leading to the eventual handshake. Deals are done pragmatically, relationships are preserved and the financial welfare of each party is assured. With most contracts performance can be readily measured in the normal day-to-day workings of the business but insurance is different: it’s only when a claim arises that what the seller has to do becomes apparent. It’s at that point that the buyer of the policy has a chance to assess what has been bought and to do so against the everyday standards of commerce.
Insurers have every good reason to make proper evaluation of claims: they have underwriting books and profit and loss accounts to protect; they are guardians of their shareholders’ and policyholders’ interests in the prevention and detection of fraud; they may themselves want to make the settlement of the claim the subject of subrogation, and none of what follows dismisses the importance of these objectives. It is the methods adopted in pursuit of these aims that could lead business policyholders to believe that insurers don’t understand business and don’t know how to deal with the commercial community. Almost by definition entrepreneurialism is the art of deal-making. But business owners and managers may not perceive insurers as interested in making deals, or in flexible negotiation or in pragmatic and quick closure of a claim. Instead, the perception can be of unnecessary precision, more akin to an audit trail than to an opportunity to strike a deal advantageous to each party. It’s not difficult to assess the approximate value of a transaction to each party and to negotiate around that in broad terms: it’s what businesses do all the time.
Commercial policyholders want a commercial approach to their claim
Insurers are required by the FSA to treat their customers fairly yet the experience of some business claimants is that settlement of claims is bureaucratic, prolonged and, adversarial. If the requirements of the Policyholder are not met Insurers risk Claimants believing that insurers do not
have full awareness of the manners and practices of the commercial environment. So Claimants could think insurers see little evidence of the advantages that can accrue to each side of the transaction by doing the deal. Any such deal carries risk, and carries it for each side. Businesses are adept at measuring risk and benefit and running their enterprises accordingly. Insurers, the specialists in risk at the time of issuing the policy, seem to some to be more risk-averse when it comes to claims. Essentially, any business that has a claim has but one imperative, and that is to maintain its financial stability by getting cash in for its profitability and its cash flow. To do that it will generally assess the risks of discounting its claim for such as early settlement, a reduction of management and staff time in meeting insurers’ demands, and restoring the continuity of smooth operation, but they often find no reciprocal appetite.
Responding to the requirements of the Policyholder is the art of good claims handling and Insurers should guard against an unnecessarily complicated and forensic claims process. This will help Claimant businesses to feel that their needs are being met and they are being treated fairly in the claims process.
Source: Claims Focus published by Chartered Institute of Loss Adjusters (CILA)
Common investment myths debunked by Linda Eedes
When it comes to investing, a number of myths continue to endure that have the potential to negatively affect the decisions of ordinary South Africans.
A recent study, which analyses 83 countries over a period of the 30 years, confirms that areas of highest growth do not necessarily generate the best investment returns. Rather, the report reveals that the best investment returns were generated from the countries that experienced lowest economic growth.
It is therefore not really about what happens in markets, it is about what happens relative to expectations. Stocks are often priced cheaply in regions where low economic growth is expected, and these low prices however often lead to good investment outcomes.
Investors also tend to think that poor economic returns lead to poor investments, which is certainly not the case. An example of this is RE:CM’s investment in Carrefour, the second largest retailer in the world after WalMart. We started investing in the company during 2012, at the heart of the Macro-economic recession in Europe. Carrefour is a high quality business and when we invested, it was trading at less than its property book alone. Since the initial investment in early 2012, the share price has increased by 35% in US Dollar terms.
Because of the uncertainty and negativity surrounding Greece, RE:CM were able to invest in high quality businesses trading at exceptionally undervalued levels to invest in. RE:CM purchased high quality businesses such as Coca Cola Hellenic and Hellenic Exchanges at exceptionally low prices around the start of 2012. Both have performed exceptionally well and produced returns in excess of 40% in US dollars since then.
This confirms that sometimes, uncertainty brings about an opportunity to invest in high quality businesses at substantially reduced prices where the proverbial baby has been chucked out with the bath water.
Myth 3: A good company is always a good investment
A common myth amongst investors is that a good company is always a good investment. There is a mindset amongst most investors that if they purchase a good, solid company’s shares, it will without a doubt be a good investment over time. This is however not always the case.
A key example of this is the performance of the Microsoft share price. Microsoft has always been a good, high quality business. During the lead up to the technology boom, Microsoft was very popular with investors given the soaring share price.
However, when the tech bubble burst, the share however fell 63% from its peak. This is not because it was a bad company – in fact it was still delivering good fundamental results. But, at the top of the market, its popularity translated into impossibly high expectations and a price to earnings ratio that peaked at 84 times. Despite being a good company, it was a poor investment at that point simply because the price was too high.
Today, Microsoft is trading at a normalised price to earnings ratio of around 10, which is below the world average. Microsoft remains a good company but is now also a good investment at these levels.
It is therefore very important to place significance on the price relative to the value of the investment. By carefully selecting stocks of high quality at reduced prices, we believe that positive investment returns can be generated over time. Unfortunately, high quality businesses don’t become cheap when everything is going well.
Myth 1: Positive economic growth equals positive investment returns
Often, investors link positive economic growth to positive investment returns, which is not always the case. Investors should be wary of basing investment decisions too heavily on the plethora of economic data they are exposed to on a daily basis, such as GDP growth rates, inflation data, manufacturing and production numbers, various confidence indexes and rating agency and economist outlooks.A recent study, which analyses 83 countries over a period of the 30 years, confirms that areas of highest growth do not necessarily generate the best investment returns. Rather, the report reveals that the best investment returns were generated from the countries that experienced lowest economic growth.
It is therefore not really about what happens in markets, it is about what happens relative to expectations. Stocks are often priced cheaply in regions where low economic growth is expected, and these low prices however often lead to good investment outcomes.
Investors also tend to think that poor economic returns lead to poor investments, which is certainly not the case. An example of this is RE:CM’s investment in Carrefour, the second largest retailer in the world after WalMart. We started investing in the company during 2012, at the heart of the Macro-economic recession in Europe. Carrefour is a high quality business and when we invested, it was trading at less than its property book alone. Since the initial investment in early 2012, the share price has increased by 35% in US Dollar terms.
Myth 2: Uncertainty should be avoided at all costs
Investors also often tend to avoid areas of near term uncertainty at all costs, which is not always best when making long-term investment decisions. A good example of this is Greece. A year ago, Greece faced a lot of uncertainty and everyone was unsure as to what would happen in the region. This led to investors shying away from the region as they were concerned about the impact of this uncertainty on short-term prices.Because of the uncertainty and negativity surrounding Greece, RE:CM were able to invest in high quality businesses trading at exceptionally undervalued levels to invest in. RE:CM purchased high quality businesses such as Coca Cola Hellenic and Hellenic Exchanges at exceptionally low prices around the start of 2012. Both have performed exceptionally well and produced returns in excess of 40% in US dollars since then.
This confirms that sometimes, uncertainty brings about an opportunity to invest in high quality businesses at substantially reduced prices where the proverbial baby has been chucked out with the bath water.
Myth 3: A good company is always a good investment
A common myth amongst investors is that a good company is always a good investment. There is a mindset amongst most investors that if they purchase a good, solid company’s shares, it will without a doubt be a good investment over time. This is however not always the case.
A key example of this is the performance of the Microsoft share price. Microsoft has always been a good, high quality business. During the lead up to the technology boom, Microsoft was very popular with investors given the soaring share price.
However, when the tech bubble burst, the share however fell 63% from its peak. This is not because it was a bad company – in fact it was still delivering good fundamental results. But, at the top of the market, its popularity translated into impossibly high expectations and a price to earnings ratio that peaked at 84 times. Despite being a good company, it was a poor investment at that point simply because the price was too high.
Today, Microsoft is trading at a normalised price to earnings ratio of around 10, which is below the world average. Microsoft remains a good company but is now also a good investment at these levels.
It is therefore very important to place significance on the price relative to the value of the investment. By carefully selecting stocks of high quality at reduced prices, we believe that positive investment returns can be generated over time. Unfortunately, high quality businesses don’t become cheap when everything is going well.
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