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OPERATING AND FINANCIAL REVIEW / THE COMPANY / DELIVERING VALUE /
With the amount of reinsurance debt which
Amlin carries, particularly following major
catastrophe events, the potential for
reinsurance failure is always a major risk. That
said, in the last three years, Amlin has only
written off £5.3 million of reinsurance debt,
and it places emphasis on maintaining
relations with reinsurers with high quality
security, which it keeps under regular review.
Over recent years, there have been fewer
companies with the security which Amlin
regards as acceptable, and therefore a greater
concentration of risk among reinsurers. This
also makes our business model more reliant
on fewer reinsurance partners.
In common with many companies with defined
benefit pension schemes, Amlin is exposed to
the risk that future liabilities are underfunded.
As detailed in note 9 to the accounts, Amlin
provides final salary pensions to certain
members of staff and former employees,
principally through the Lloyd’s Superannuation
Fund (“LSF”). This is a multi-employer
scheme, with employers mutualising liabilities
within the scheme. Over time the number of
employers who are part of the scheme has
diminished and Amlin is the largest ongoing
employer within the scheme. Consequently
Amlin has the responsibility for meeting the
funding requirements of the Amlin members
of the scheme and ‘orphan’ members i.e.
members whose employer no longer exists.
Over the past three years Amlin has made
additional contributions totalling £16.5 million
to help fund an actuarial deficit in the LSF.
Amlin’s combined deficit as at 31 March
2004 for active and orphan members, net of
contributions made in 2004, is approximately
£14 million and we expect this to be largely
funded over the next three years. While
pension scheme funding assessment involves
a number of assumptions, we believe that the
LSF valuation is conservatively struck which
reduces the risk of an increase in the deficit
in the future.
Certain risks are presently not easily
quantifiable. For example, at a strategic level,
the risk of Lloyd’s becoming an unattractive
market in the short term is considered to be
low. With the existing levels of market
profitability and surplus cash flow, the risk
of financial strain which would cause either
market insolvency or a decline in Lloyd’s
security rating below an acceptable level is
remote. However, as market conditions soften
this risk may increase. To counter this risk,
Lloyd’s has been taking a number of steps, as
described in the Market Overview section, to
improve its long term attractiveness to both
insureds and companies such as Amlin.
Following the investigation of broker practices
and possible conflicts of interest instigated by
the New York Attorney General, brokers’ means
of charging commissions to insureds and
insurers is under review and likely to change.
This may result in changes to the distribution
of business, particularly between the United
States and the UK. It is currently too early to
assess whether this will impact Amlin either
positively or negatively. However we are in
close touch with our major brokers so that
we can position Amlin appropriately.
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| RISK MEASUREMENT AND ECONOMIC CAPITAL |
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Our risk measurement has historically taken a
fairly crude form with a focus at underwriting
level on the value at risk from potential major
catastrophes. In 2002 Amlin initiated the
build of a Dynamic Financial Analysis model
(see 'Underwriting') which has now been developed
to a stage where it forms a useful tool to assess
the robustness of our five year business plans.
This in turn enables us to assess the optimal
capital structure for the business as well as
the amount of capital needed to support the
business from both economic and regulatory
points of view.
Going forward it is the Company’s intention to
further develop its DFA modelling so that it
can better assess and report on the Company’s
risk appetite, and use the tool in both
performance assessment and risk management
decision making. Amlin intends to adopt an
economic capital approach whereby it can
compute and assign economic capital to all
areas of the business, thereby enabling it to
apply a common and consistent metric to help
ensure that returns across the Group are
commensurate with the associated risks.
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