Regulatory Disclosures

Risk Management is a core competency and a focus within Allianz, being practiced throughout the organisation across all lines of defence.

The Company’s Enterprise Risk Management consists of:

• Risk Governance: which outlines the hierarchy of decision-making and responsibilities;
• Risk Frameworks: which cover the breadth and depth of our risk management scope;
• Risk Processes: which articulate specific key processes and controls that we practice.

The Company employs the three lines of defence model in risk governance:

1. First-Line: business managers in their related undertakings; who have ownership, responsibility and accountability for directly assessing, controlling and mitigating risks.
2. Second-Line: independent oversight functions including Risk, Legal & Compliance; which support the Board in defining risk and control frameworks and risk reporting frameworks upon which the business operates.
3. Third-Line: Audit; which regularly performs independent reviews of the implementation and compliance of the risk governance principles and business standards, including an independent assessment on the effectiveness of the first- and second-lines of defence.

The primary goals of the risk management framework are:

• Promotion of a strong risk management culture, supported by a robust risk governance structure;
• Consistent application of the risk capital framework to protect our capital base and support effective capital management;
• Adoption and adherence to MAS’s risk requirements and Allianz’s policies and standards.

 

The risk management process is based on the following three pillars:

1. Risk Strategy & Risk Appetite: Defines the risk appetite consistent with the Company’s business strategy, ensuring that risks and capital commitments are commensurately rewarded, and that delegated authorities are in line with its overall risk-bearing capacity and strategy.
2. Risk Identification & Underwriting: Develop and maintain a robust system of risk identification and underwriting.
3. Risk Reporting & Monitoring: Adopt Allianz Group’s comprehensive qualitative and quantitative risk monitoring and reporting framework, which provides management and shareholder with the transparency into the Company’s risk profile, and the ability to identify emerging issues and risks.

The diagram below provides an overview of the risk management process.

Asset-liability management practices are adopted to ensure the assets are managed with specific reference to the liability characteristics, and consideration to optimize the balance between the returns and risks expectations are within the risk appetite and capital resources of the Company.

For the financial year 2021, the Company’s general insurance business was primarily property & casualty (P&C) insurance, which generally has shorter-term liabilities and less exposure to interest rate risk. Our ALM approach focuses on maintaining a certain level of liquidity against liabilities to policyholders. The Company’s investment decisions take into account the liquidity needs of the claim liabilities in terms of investment duration and interest rate risk.

The Company has to meet its liabilities as and when they fall due, notably from claims arising from its general insurance contracts. There is therefore a risk that the cash and cash equivalents held will not be sufficient to meet its liabilities when they become due. The nature of the insurance business is that the requirements of funding cannot be predicted with absolute certainty as the theory of probability is applied to insurance contracts to ascertain the likely provision and the time period when such liabilities will be settled.

The Company will continue to monitor this risk going forward especially in view of investing in longer-term and higher yielding financial instruments.

The table below summarises the maturity profile of the financial liabilities of the Company based on the remaining undisclosed estimated obligations.

The Company manages the above risk by monitoring its liquidity risk and obtaining funding from ultimate holding company, where needed, to finance the Company’s operation.

Credit risk represents the exposure to the risk that any of the Company’s customers and business partners should fail to meet their contractual obligations (mainly relating to insurance and investment transactions).

The Company views the management of credit risk as a fundamental and critical part of operations and therefore adopts a very selective policy with regards to the choice of its customers and business partners. The Company has exposure to credit risk from insureds, brokers, cedants and reinsurers.

The receivables’ ageing, credit-worthiness of the business partners and security rating of its reinsurance partners where available will be reviewed regularly.

Similarly, on investment operations, the Company limits its credit risk exposure in respect of the portfolio of fixed deposits by investing only short-term deposits and with counterparties that have sound credit ratings. Cash and fixed deposits are spread across a number of banks and financial institutions which are regulated and have sound credit ratings.

Management does not expect any of its counterparties to fail to meet their obligations.

Credit rating

The Company uses the following categories of internal credit risk rating for financial assets which are subject to expected credit losses under the 3-stage general approach. These four categories reflect the respective credit risk and how the loss provision is determined for each of those categories. The maximum exposure to credit risk is normally represented by the carrying amount of each financial asset in the balance sheet, although in the case of insurance receivables, it is a fairly common practice for accounts to be settled on a net basis. In such cases, the maximum exposure to credit risk is expected to be limited to the extent of the amount of financial assets that have not been fully offset by other financial liabilities with the same counterparty.

The table below provides information regarding the credit risk exposure of the Company as at financial year-end by classifying financial assets according to credit ratings of the counterparties, which are based on Standard and Poor’s financial strength rating or its equivalent.

 

The Company’s business operations are not exposed to significant currency risk as it has no significant transactions denominated in foreign currencies. Accordingly, no sensitivity analysis is presented for currency risk.

The Company’s business operations are not exposed to significant interest rate risk as all of its investable assets are in short duration deposits and Money Market Fund, given that most of its insurance liabilities are expected to be short term in nature and no discounting is allowed.

The Company will continue to monitor this risk going forward especially in view of investing in longer duration financial instruments.

The Company is exposed to equity securities price risk arising from its investments in Money Market Fund classified as financial assets, at FVPL. To manage its price risk, the Company diversifies its portfolio in accordance with the limits set by the Company. It should be noted the money market fund invest in short-term high-quality cash or debts assets and hence there is minimal price volatility.

Insurance risk is managed primarily through sensible pricing, product design, risk selection, and reinsurance. The Company therefore monitors and reacts to changes in the general economic, legal and commercial environment in which it operates.

Underwriting risk includes the risk of incurring higher claims costs than expected owing to the random nature of claims and their frequency and severity and the risk of change in legal or economic conditions or behavioural patterns affecting insurance pricing and conditions of insurance or reinsurance cover.

The Company seeks to minimise underwriting risk with a balanced mix and spread of business between classes of business, by observing underwriting guidelines and limits, prudent estimation of the claims provisions, and high standards in selection of reinsurers.

The Company’s underwriting strategy seeks diversity to ensure a balanced portfolio. The underwriting strategy is included in the strategic business plan that sets out the classes of business to be written and the industry sectors to which the Company is prepared to expose itself. The strategy is communicated down to individual underwriters through detailed underwriting guidelines and authorities that set out the limits that any one underwriter can write by line size, class of business and industry in order to enforce appropriate risk selection within the portfolio.

The Company seeks to diversify its exposure to the different types of insurance risk by providing a wide variety of product offerings for both retail and commercial customers. 

The Company manages this risk by continuing to diversify product offering and sales channel and to use reinsurance to mitigate current concentration risk.

The Company reinsures a portion of the risks it underwrites in order to limit its exposure to losses and protect capital resources. This is done through proportional and non-proportional reinsurance outward treaties with affiliated reinsurers. The costs and benefits associated with the reinsurance programme are reviewed periodically.

The concentration of insurance risk both before and after reinsurance by classes of business are summarised below:

 

The Company continues to monitors its concentration risk closely.

To ensure objectivity as well as to comply with the requirements of the Singapore Insurance Legislation, the Company has appointed an independent actuary to assess the Company’s insurance liabilities on a quarterly basis.

The data used for determining the expected ultimate claims liabilities is collated internally relating to business underwritten by the Company. This is further supplemented by externally available information on industry statistics and trends. The actuarial estimates for outstanding claims reflect the best estimate of the likely future experience. An allowance is made for “pure IBNR” (late reported claims), “IBNER” (development of known claims and reopened claims), expected future claims inflation, and indirect claims administration expenses associated with claims runoff. An allowance for direct claims handling expenses as well as the Company’s indirect claims handling expenses incurred from the processing of the claims is included. 

A provision for adverse deviation (‘PAD’) as directed by the Monetary Authority of Singapore (‘MAS’), is included relating to the inherent uncertainty in the best estimate of claims and premium liabilities at a minimum 75% level of sufficiency at the insurance fund level.

The valuation method used in estimating the best estimate ultimate claims cost for each accident year are based on the expected loss ratio (“ELR”) method The valuation method used in estimating the best estimate ultimate claims cost for each accident year are based on the expected loss ratio (“ELR”) method and incurred Bornhuetter-Ferguson (“IBF”) method using benchmark development pattern. In estimating the best estimate ultimate claims for each accident year, large losses are separated from the incurred claims data to prevent distortion of claims and loss ratio data, particularly since the insurance portfolio are growing off a small premium base. Large loss incurred amounts were then added back to the estimated ultimate. Additional IBNER for large loss are not allowed since written business is mostly short tailed and develop relatively fast. Development of large losses as the book of business matures will be monitored continuously.

Due to the lack of historical experience, the loss experience to date has been sparse and volatile and reliance on statistical analysis based only on the Company’s own claims’ experience is not reliable. Therefore, liability estimates are largely based on future expected amounts which rely on relevant benchmark loss ratios based on expected experience of the industry in Singapore and the Company’s own pricing loss ratios.

The estimation of outstanding claims is inherently uncertain. This uncertainty can arise from the following sources:

• the range and quality of available data which any data shortcomings will increase uncertainty;
• deciding which model to use;
• involving judgement as the management is preparing advice on future events which have not yet occurred, hence, ultimately, we have to make a judgement based on the analyses and this judgement necessarily contains an element of subjectivity; and
• even if the model and parameters can be estimated with precision, it will not be possible to predict outstanding claims with the same precision because of the random component in future experience.

The Company is covered by a variety of proportional and non-proportional reinsurance programs with sufficient retentions for managing risks.

Anticipated reinsurance recoveries are disclosed separately as assets. In our analysis, the recoveries from the quota share and surplus programme has been allowed for reserving purposes and have assumed that there will be no recoveries from excess of loss programmes as the projected losses are not expected to breach the retentions.

Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the current circumstances. However, future claims experience might deviate, possibly materially from the future external events. The methods used, and the estimates made, are reviewed regularly.

No discounting has been allowed for the future settlement value of claims due to the expected short-term nature of the claim liabilities.

The assumption that has the greatest effect on the determination of the outstanding claims liabilities is the expected loss ratio. The impact of a +10% and -10% multiplicative change in the initial expected loss ratio (for Accident Year 2021 only) will result in +3.0% and -3.0% change in the Claims Liabilities respectively, or an estimated change in underwriting margin and equity by approximately -SGD 300,828 and +SGD 300,828 respectively.

As mentioned above, provision for outstanding claims also includes a provision for adverse deviation which will provide a 75% probability of adequacy for the claims provision.

The impact of a +10% and -10% multiplicative change in the PAD will result in +1.1% and -1.1% change in the Claims Liabilities respectively or an estimated change in underwriting margin and equity by approximately -SGD 106,617 and +SGD 106,617 respectively. The PAD factor differs by classes of business and is provided below:

A claims development table is disclosed in order to put the unpaid claims estimates included in the financial statements into a context allowing comparison of the claims development for provisions with those seen in previous years.

The table provides a review of current estimates of cumulative claims and demonstrates how the estimated claims have changed at subsequent reporting or accident year-ends.

While the information in the table provides a historical perspective on the adequacy of unpaid claims estimate established in previous years, users of these financial statements are cautioned against extrapolating redundancies or deficiencies of the past on current unpaid loss balances.

The Company believes that the estimates of total outstanding claims as of 31 December 2021 are adequate. However, due to the inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.

Analysis of claims development - Gross

The methodology for determining premium liabilities is as follows:
 

• The unearned premiums are determined as set out in Note 2.6 on provision for unearned premiums and unexpired risk reserves. This amount, together with an allowance for future expenses including claims handling and maintenance expense form the best estimate of the Unexpired Risk Reserve (“URR”);
• the URR is then further loaded with a PAD margin to provide a 75% probability of sufficiency; and
• this URR with PAD is then compared to the Company’s held unearned premiums reserve (net of DAC), and the higher of the two is the final provision for unearned premiums.

The assumption that has the greatest effect on the determination of the premium liabilities is the expected loss ratio. The impact of a +10% and -10% multiplicative change in the assume loss ratio will result in +8.3% and -7.2% change in the premium liabilities respectively or an estimated change in underwriting margin and equity by approximately -SGD 1,303,586 and +SGD 1,141,933 respectively.

As mentioned above, provision for premium liabilities also includes a provision for adverse deviation which will provide a 75% probability of adequacy for the provision. The impact of a +10% and -10% multiplicative change in the PAD will result in +1.4% and -1.4% change in the premium liabilities respectively, or an estimated change in underwriting margin and equity by approximately – SGD 213,624 and +SGD 213,624 respectively. The PAD factor differs by classes of business and is provided below:

The Company’s policy is to maintain a strong capital base so as to maintain customer and market confidence and to sustain future development of its business. The Company has no borrowings or contingent liabilities as at 31 December 2021 and 31 December 2020.

All insurers and reinsurers that carry on insurance business in Singapore are registered with the MAS and are subject to the prudential standards which set out the basis for calculating the fund solvency requirements (“FSR”) and capital adequacy requirement (“CAR”) which is a minimal level of capital that must be held to meet policyholders’ obligations. The FSR and CAR apply a risk-based approach to capital adequacy and are determined to be the sum of the aggregate of the total risk requirement of all insurance funds established and maintained by the reinsurer under the Insurance Act.  The Company targets to hold FSR of 200% for each fund and 200% of CAR. As at 31 December 2021, the CAR was 368%, there were no breaches of externally imposed capital requirements.

The Company’s investment objective is to achieve an adequate investment return to satisfy future liabilities, optimize the returns/risks characteristics of the investment assets, and ensuring there is adequate liquidity with the emphasis on capital preservation, whilst maintaining compliance, at all times, with the regulatory requirement of MAS and Allianz Group.

The Company’s investment policy provides the principles and sets out the scope, responsibilities and requirements in the management of investments, ensuring that the interests of policyholders and shareholders are not compromised. As a licensed insurer, the Board exercises its oversight on all investment activities of the Company, through its Investment Committee, that meets regularly to ensure that investments are prudently managed. Strategic asset allocation (SAA) for each insurance fund focuses on asset liability management, and various asset classes are assessed for their potential to create value with medium to long term horizon, while taking into consideration the Company’s risk appetite. This is reviewed periodically to ensure its relevance to evolving market conditions and new developments in the Company.

For the financial year 2021, the Company's investments comprised financial assets and cash and cash equivalents, detailed below:

Financial Assets

The effective interest rate per annum relating to cash and cash equivalents, at the reporting date for the Company is less than 0.23% (2020: 0.01%).

The fair value of a financial instrument is the amount at which the instrument could be exchanged or settled between knowledgeable willing parties in an arm’s length transaction, other than in a forced or liquidation sale.

The table below presents assets and liabilities measured and carried at fair value and classified by level of the following fair value measurement hierarchy: