Fundamentals of Insurance Financial Statements
The overall goal of this two-day introductory course is designed to provide a basic technical background to the insurance industry as a precursor to attending our intermediate Insurance Company Analysis workshop. Participants will learn to understand the key components of an insurance company’s financial statements to appreciate how these might vary according to the accounting standard used, and to learn to use a few key ratios to analyze financial strength.
This course gives 16 CPD hours.
Who should attend?
- Equity, fixed income and credit analysts
- Insurance company treasury officers and staff
- Insurance brokers and security analysts
- Investment managers
- Commercial and Investment bankers
- Bank risk, portfolio and relationship managers
- Insurance company public relations
- Corporate communications officers
Insurance Market Overview
Understand the basic macroeconomic drivers of insurance markets and characteristics of the various lines of business and insurance products and their inherent risks.
Types of insurance company
- Life, non-life and reinsurance
- Types of insurance company: Mutual vs. proprietary, multi-line vs. monoline, underwriters vs. brokers, captive insurers and Lloyd’s entities
- Key activities and products
- Non-life products: Short tail and long tail lines; degrees of riskiness
- Life and investment products: Whole life, annuity, endowment, term insurance and health products
- Investment bases for life products: Fixed (stable value), unit-linked (variable), with profits, interest-sensitive
- Reinsurance products: Proportional vs. non-proportional, excess of loss and catastrophe covers
- Exercises: Life and non-life insurance product risks
Understand the key financial items in insurance company financial statements and how the business model is reflected in the balance sheet.
- Relating the business to the balance sheet and income statement
- Key items of the balance sheet and income statement for life and non-life insurers
- Premium accounting: gross vs. net, written vs. earned
- Claim/loss accounting (non-life): Claims incurred vs. paid, claims incurred but not reported (IBNR)
- Claim/benefit accounting (life): Benefits and surrenders, annual and final bonuses
- Technical reserves: Loss reserves, unearned premiums, mathematical provisions
- Investment reserves – capital or liability? Fund for Future Appropriations, RfB, Unallocated Divisible Surplus, Discretionary Participation Features (DPF)
- Intangible and other assets: Deferred acquisition costs, value of business acquired
- Impact of reinsurance on assets, liabilities, premiums and claims
- Calendar year, accident year and underwriting year reporting for non-life; loss development triangles
- Cash flow statement: Operating cash flow; divergence from earnings
- Exercises: Claims accounting and non-life accounting from scratch (a simplified worked example); Non-life reserve development
Accounting and Disclosures
Understand the key areas of divergence between insurance accounting standards: differences between the approaches for shareholder (statutory) accounts and for supervision (regulatory reporting); embedded value reporting for life insurance; and accounting for Lloyd’s syndicates.
- Key differences between statutory accounts and regulatory reporting including basic overview of SII and IFRS (including IFRS 17 and IFRS 9 for insurers) and other GAAP approaches
- Investment accounting: Mark to market vs. cost accounting; treatment of unrealized gains and losses; impaired assets
- Overview of European Embedded Value (EEV) and Market-Consistent Embedded Value (MCEV) reporting and analysis
- Lloyd’s entities: Three-year accounting for syndicates vs. annual accounting
- Sources of information and quality of disclosure; potential for distortion
- Exercise: Investment accounting under IFRS
Introduction to the basic analysis of insurance companies using some key ratios from the financial statements.
- Key performance indicators for life, non-life and reinsurance companies, with benchmarks
- Underwriting risk: Claims/loss ratio, expense and combined ratio and other basic indicators of underwriting performance, reserve adequacy and reinsurance risk
- Investment risk: Market and credit risk
- Measuring life new business growth and new business profitability
- Measures of overall profitability for life and non-life insurers
- Capital adequacy: Types of capital and ratios used to measure financial leverage (gearing) and solvency
- Case studies: Basic ratio analysis for a major composite insurer – Business risk, Financial and Performance Risk
About Fitch Learning
Part of the Fitch Group, Fitch Learning partners with clients to enhance knowledge, skills and conduct. With centers in London, New York, Singapore, Dubai and Hong Kong, we are committed to questioning and understanding client needs across the globe and...
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