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| Friday, 13 February 2004 |
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Invaluable source book on insurance Understanding and Analysis of Insurance Accounts Author: Hydery A. Rehmanjee Understanding and Analysis of Insurance Accounts is an invaluable contribution that fills an important void in insurance literature. Its advent has been timely as recent events such as the failures of several internationally known insurers and reinsurers, the impact of natural and man-made disasters have eroded confidence in insurers and caused upheavals in the international insurance markets. The effects of these inevitably filter down to markets such as Sri Lanka's in the form of higher reinsurance costs and reduced reinsurance capacity. Hydery A. Rehmanjee is a leading professional in the insurance field, with over four decades of wide and varied experience, in Sri Lanka and aborad including many years as a CEO. In this book he draws from his wealth of knowledge to guide and where necessary caution readers as he takes them through the intricacies of analyzing insurance accounts after appropriately preparing the reader for this exercise. This work is indeed an indispensable and rewarding walk through a hitherto almost untraversed path and could potentially save stakeholders in an insurance company who read this book from the dire consequences of an insurer's insolvency. The book though titled 'Understanding and Analysis of Insurance Accounts' is much wider in scope, than its title implies because it also gives the reader an understanding of insurance and reinsurance which is sine qua non for the proper understanding and evaluation of insurance accounts. It is a rare though necessary departure from other books that deal exclusively with the preparation of insurance accounts. Insurance operations and its accounting aspects are inextricably interwoven and complete picture emerges only if they are considered in relation to each other. The introductory first chapter explains in easily understandable terms the basic principles and practices of insurance. The second chapter "Introduction to Reinsurance" covers the essential aspects of reinsurance. Both insurers and reinsurers are dependant on reinsurance in order to enable them to accept risks beyond their individual financial capacity. However, in doing this the security of their reinsurers as well as the adequacy of their own reinsurance programs become vital factors. To those whose interest may go beyond that of a policyholder, reinsurance methods, plans, and programs are clearly explained. Definitions Chapter three: Insurance Accounts - General Considerations' and that which succeeds it "Insurance Accounting Terms, General Insurance and Long-Term Insurance," provide the reader with the necessary background knowledge required to understand insurance accounts and financial statements. Definitions and technical terms usually found in insurance accounts and financial statements as well as certain factors special to the business are well explained. These two chapters prepare the reader to understand chapter 5 in which typical accounts and financial statements both for General insurance and Long-term insurance have been shown and explained. Chapter 6 deals with "General Insurance Profitability". This Chapter is important because it shows how profit emerges in General insurance and the various factors impacting on General insurance profitability. The author explains in terms understandable even to a layman, the use of financial ratios and their significance and how they assist in the financial analysis of the operations of an insurer. The author provides a very good overview of how an insurer operates which makes possible a more realistic assessment of an insurer's financial position. Illustrations such as the one quoted below cautions the reader not to take things at their face value. "For instance, in General Insurance business, a reduction in the premium income relative to the immediately preceding financial year, may result in the Unearned Premium Reserve brought forward from the preceding year being actually more than the Unearned Premium Reserve to be provided for the current year, thereby resulting in a release of reserves into the Revenue or Underwriting Account. The current year's result may therefore show an improvement in underwriting profits, which certainly cannot be attributed to an improvement in operational performance, infact the opposite may be the case." Long-Term Insurance Profitability is discussed in the Chapter that follows. The important aspects of this business such as assessing profitability, methods of valuation, the distinction between profit and surplus and how surplus emerges are clearly explained. The importance of evaluation the financial performance and strength of a Long-term insurer is important because such an insurer must remain continuously solvent for quite a long period which may extent to 30 years or more to enable the insurer to meet all the liabilities on its Long-term insurance policies. The Chapter titled "Solvency Margin and Embedded Value" deals with one of the most important aspects of an insurer's financial strength namely its ability to meet the liabilities on the policies issued by it. It is the solvency margin that serves to cushion the fluctuation of the overall results, and hence the probability of bankruptcy. The determination of the Solvency Margin for General Insurance and the shortcomings of the premium based solvency rules are all, well dealt with. The different criteria and the meaning and method of calculating the Solvency Margin for Long-term insurance are also discussed. The concept of "Embedded Value", which is now being increasingly used in assessing the underlying fundamental strength of a Long-term insurer, is well explained by the author. Chapter 9 is devoted to "Insurance Ratings and Summary of Factors - Insurance Accounts Analysis. Rating In this chapter the author deals broadly with how rating is done with particular reference to the three most accepted Rating Agencies. Greater elaboration of the weaknesses of rating systems would not have been out of context. Although Sri Lankan insurance companies have not been rated so far, they do depend heavily on reinsurance and hence ratings of reinsurers with whom such reinsurance is affected are of utmost relevance. Ratings, however are not an infallible guide. The events of 'September 11th showed how dramatically positions could change literally overnight. Poor underwriting and management can as much as a catastrophe, contribute to an insurers or reinsures failure. Many a small insurer or reinsurer not considered by rating agencies working within their capital and other limitations have survived when some of the giants have succumbed. At the end of chapter 9 the author has included a summary of factors to be considered when analyzing insurance accounts and financial statements. This, together with the checklist of the financial factors to be considered when examining insurance accounts and financial statements, given at the end of chapter 6 will no doubt assist in focusing attention on the key areas that need examination. The concept of "Risk Based Capital" is dealt with in a separate chapter in the book. The Risk Based Capital approach is a possible alternative to the solvency Margin Methods practised in many countries. In the USA the Risk Based Capital Methods has been in use since the 1990s arising from pressure from the Federal Government to have a more realistic methods of ensuring capital adequacy, following the failure of some major US Insurers. Consideration of this concept is important at a time when our Regulators are examining Solvency Margin standards of the insurance industry in Sri Lanka. The penultimate Chapter is devoted to Insurance Broker Accounts and Broker Productivity. The inclusion of the role of the intermediary and basis for evaluating a Brokers' performance serves to complete the picture. The basis provided is useful and the concept would be new to many in the market. Most important from the public standpoint is the service provided by a Broker for which there is no statistical measure. The last Chapter with the heading "Accounts and Accountability provides much food for thought for Regulators, Directors and the Management of insurers. The dependence of the policyholder on the regulator to ensure that an insurer is able to meet its liabilities is brought into focus when Mr. Rehmanjee recapitulates a conversation he had as CEO of his company, with the Chairman of one of the largest Group of companies in Sri Lanka, who showed his reluctance to look into the credentials and security of any insurer. Selection It is unbelievable but true that less study goes into buying insurance than buying an automobile or washing machine. When choosing an insurer, individuals and companies may stake their entire assets or life saving with an insurer, whose credentials and security they may not have checked. In the selection of an insurer, the continuing ability to meet its obligations as well as its willingness to do so are important. Market reputation, could serve as a guide, however, such information could be subjective. An examination of the accounts and financial statements of an insurer will have to be the most important basis for deciding on the financial position of an insurer. This together with the quality of its Directors and Management should form a sound basis. Mr. Rehmanjee's book has indeed dealt with all these aspects. Understanding and Analysis of Insurance Account by Hydery A. Rehmanjee is an invaluable source of information and should be on the table of everyone in the financial sector who has any stake or interest in an insurance company. This will include corporates and individual policyholders, investors, bankers, financial analysts, stock brokers, professionals, academics and employees. Mr. Rehmanjee's commitment to the insurance industry is truly demonstrated not only in his ability and willingness to share his vast experience and knowledge of the insurance business with others but also in his decision to donate the proceeds from the sale of his book to the Sri Lanka Insurance Institute, for the promotion of insurance education and professionalism in the insurance industry. - M. S. Wijenaike, |
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