The Plan
Specialty insurance is a complex-risk, high-return market characterized by underwriting profitability. The underwriting cycles for specialty insurance products are currently in an advantageous market phase, resulting in higher underwriting profits for insurers. The success of specialty carriers depends on the pool of underwriting and actuarial talent. High risk levels and the complex nature of specialty products require expert knowledge for profitable underwriting.
In essence, the plan is to start a specialist insurance company in Switzerland and augment this with various other businesses that offer insurance premium, investment and other revenue opportunities. The Insurer will write mainly residual value insurance risks. This will create other insurance revenue opportunities such as insuring the physical damage or liability exposures of the assets or owners. These insurance risks may be assumed by a specialist insurance company or passed to other insurers generating fee income. Revenue from the insurance company will be invested both in traditional securities, as required by regulators, and the surplus in businesses that offer the prospect of sound investment returns and also further insurance opportunities.
Whilst the Company will employ traditional channels to distribute its products, through insurance brokers, it will also seek relationships with other intermediaries and directly with financial institutions, investors and directly with clients. The Management Team believes it is vital to differentiate the company to maximize revenue. They are deliberately targeting business that is not easily commoditized, where they will be able to display their expertise and establish a strong brand identity.
It has been the Management Team’s experience that the culture of a company dictates the type of business it attracts, the people it can employ and its financial performance. We are clear in our vision so that day to day working practice will be focused upon delivering excellent service to customers, treating them fairly to ensure they receive an excellent outcome. The personnel employed will be characterized by their experience and disciplined approach to underwriting and managing the business. The ability to select good producers and then the selection of good risks from those producers is built up through years of repetitive work. The capacity to analyse the statistics and surrounding data and to design a disciplined strategy, which our staff will then execute, will be a key element of the success that the Management Team will deliver. The Company will require that everyone in its team embraces the internal audit and compliance process (IAC) as a method of continuously improving the Business’s performance. It is important that the Business adopts a fully integrated approach to enterprise risk management, taking a holistic view of risks across the whole business including correlations and interdependencies.
APEX Reserve Holdings Limited is the management ownership vehicle, it will be owned by the current Partners and managers of SIGI. Its revenue will be from profits paid by RVI and investment income. This company will receive all inwards investments and deploy capital to the various companies.
Residual Value Insurance Co AG (RVI) is the core of the planned business and will be based in Switzerland; it is intended to be capitalized at CHF 1,000,000,000 (One billion Swiss Francs). Its revenue will be derived from its activities as an insurer. The current economic and regulatory environment offers an excellent opportunity to construct a sustainable business insuring asset values. Low interest rates mean that it is attractive to borrow for long periods to buy assets, make interest payments and clear the debt with a “balloon payment” after five, ten or even twenty years. The lender requires some form of security as collateral in addition to the purchased asset and that is provided by the RVI Company. Currently banks are unwilling to have assets on their balance sheets and are keen to shed those they do have.
As an insurer offering RVI one of the key attractions to this business is that the premium for the risk is paid at inception and there can be no claim for the entire duration of the policy. So the average policy will receive premium at inception and that money will be retained, invested for say ten years before any claim can be made.
Crucial for the success of the RVI Company will be that the lenders don’t just accept the RVI policy as security for the future value of the assets but build it into their proposals to investors, thus acting as a distribution channel for the product.
A functioning RVI market doesn’t really exist at the moment. There are some insurers in the aviation assets business and there are still traditional automotive asset insurers, catering for vehicle rental and leasing companies, although this market was much impaired during the financial crises of 2008. For the decades prior to the financial crises the main sources of finance, the commercial banks regarded RVI as merely a useful tool to leverage their transactions. Essentially, if the RVI insurer didn’t take a substantially more optimistic view of the future value of an asset than the Lender itself, they were not deemed to be useful. Simply put, if they weren’t innocent capacity to enhance the bankers’ profit, almost certain to lose, they weren’t part of the deal.
The post-financial crises environment sees the bankers in a balance sheet reduction program; Central Bankers have introduced tools to inhibit lenders from issuing too many high debt to equity loans. The current economic and regulatory environment offers the opportunity to construct a profitable business insuring asset values, which are dislocated and relatively cheap, offering disproportionately high returns. It is intended to employ quantitative actuarial techniques, to forecast future value distributions of assets. The RVI Company will write insurance policies to asset holders, or parties with insurable interest such as lenders, that protect against adverse movement in future value of the asset at a specific time.
There is a strong demand for RVI amongst the lenders and investors in many types of assets. The single prevailing broker in this area has confirmed huge interest with no markets to satisfy the demand.
It should be noted that this product has an extremely narrow focus in terms of coverage. If the asset is sold prior to the trigger date or damaged, totally or partially there is no coverage under the policy.
Current market and economic conditions offer the opportunity to make excellent profits for an efficient RVI Company. The RVI policies are essentially catalysts in completing transactions and should achieve extremely low loss ratios. It is unlikely that the financial institutions will be able to change their appetites within the next five years and although undoubtedly competitors will enter the market, the first mover advantage will allow the RVI Company a favourable position in its first five to ten years of operations.
One of the attractions of the proposed plan is that the capital will mainly sit as “Regulatory” capital. That “Regulatory” capital of the RVI Company will not be impaired for the first five or ten years of the Business’s existence, because as explained above the policies will not pay any claims until their expiry date. This capital will be invested along with premium income as RVI offers a pool of premium to be invested for a long period of time, as no claim can be paid until the end of the policy term. The Insurer’s capital is subject to various regulatory requirements regarding liquidity and volatility but is nonetheless available for investment. By reinvesting dividends or profits the value of the business will grow exponentially.
