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Solvency II and Risk Management

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Title: Solvency II and Risk Management


1
Solvency II and Risk Management
MIB Solvibilità 2 Trieste, 4 marzo 2005
Assicurazioni Generali Sergio Balbinot - CEO
2
Table of contents
  • Macroeconomic Context Recent Evolution
  • Solvency II Opportunities and Matters for
    Concern
  • Generali Mission and Capital Allocation Model
  • ALM Model and Group Risk Financial Management
  • Risk Management in Non-Life
  • Life Insurance Risks
  • Life
  • ALM Model

3
Macroeconomic Context Recent Evolution 1
  • The European insurance industry has faced
    dramatic change
  • During 1990s prices fell, asset liability
    mismatches widened and costs grew
  • Economic results were obscured by high investment
    income and poor accounting
  • Financial guarantees - backed by equities,
    credit and short duration bonds
  • Interests not aligned - management compensation
    not tied to return on capital - distribution
    incentives reward volume not value creation
  • Consequence was need to raise over 50 billion in
    2001 to 2003
  • Failure to manage these mis-matches has
    contributed to investors loss of confidence

Price to Embedded Value European Insurance Sector
Embedded Value (euro mld) European Insurance
Sector
4
Solvency II Opportunities 2
Ist pillar
  • Risk-based single capital measure
  • Risk translated into capital whenever possible
  • MC at single entity EC at Group level
  • Recognition of IM diversification effects

IInd pillar
  • Forward-looking and preventative
  • Dialogue between Authorities and Management
  • Convergence of contents towards internationally
    established best practices
  • Supervisory intervention intensifying with
    degrading finanacial strength

IIIrd pillar
  • Simplified reporting

Matters for concern (challenges for the
legislator)
  • Risk of excessive capital requirements
  • Risk of de facto zero failure regime

5
Mission and Capital Allocation Model 3
  • MISSION
  • We aim to be a leading Insurance Group
  • measured by profitability
  • focused on continental Europe
  • and selected international growth markets
  • serving retail customers and SMEs
  • reached through multi-channel distribution
  • EC is the measure of required capital EC to
  • cover unexpected losses (expected losses
  • included in pricing and valutation decisions)
  • EC looks at integrated balance sheet risk
  • Model calibrated at 99,75 probability over 1
    year (VAR)
  • Value creation defined as RoC gt CoC
  • Capital Allocation is a Management tool
    (steering de-risking)
  • Our 3-year plan objective is a 12 RoEC in 2005
  • RoEC normalized measures the performance of our
    insurance management
  • Those variables beyond their control, investment
    returns and taxation, are normalized


6
Risk drivers 4
GENERALI GROUP ECONOMIC CAPITAL
Insurance risk
Operational risk
Financial risk
EQUITY
PC PRICING
FRAUD
INTEREST RATES - ALM
PC RESERVING
LITIGATION
IT FAILURE
REAL ESTATE
BIOMETRIC
Risk governance Internal controls
Lapse rates Business mix Reinsurance
COUNTERPART CREDIT Investments Reinsurance
Concentrations Duration mis-matches Options
Guarantees Derivatives Profit sharing Buffer
capital
7
Granularity Diversification between
companies 5
GENERALI GROUP ECONOMIC CAPITAL
Property Casualty
Asset Management
Life Health
ITALY
FRANCE
GERMANY
ITALY
FRANCE
GERMANY
RoWORLD
RoWORLD
AUSTRIA SPAIN SWITZ. ISRAEL Others
INA VITA ALLEANZA INTESA VITA GEN. VITA GENERALI
TRIESTE Others
AML TGL VDL COSMOS CENTRALE Others
GENERALI ASSITALIA Others
AMV TGV VDS Others
GFA EQUITE GPA Others
FED CONT GEN ASS GPA HEALTH Others
AUSTRIA SPAIN SWITZ ISRAEL Others
DIVERSIFICATION POINT
8
Capital Adequacy at 1 H 2004 6
Capital Allocation total Euro 22.5 bln
Economic Capital Property casualty 44 net
earned premiums Life health 3.5 life
technical reserves plus value of in
force Asset management 0.5 assets under
management plus value of in force
Asset management Euro 0.9 bln (4)
Property casualty Euro 6.2 bln (27)
Excess capital Euro 1.3 bln (6)
Life health Euro 14.1 bln (63)
  • 400
  • mln
  • due
  • to
  • CAPITAL
  • ABSORPTION
  • financing of rising business volumes
  • Increase of equity exposure
  • CAPITAL RELEASE
  • reduction of life duration mismatch
  • Reduction of exposure to PC commercial business

we are in the sound position of being able to
finance profitable production, well in excess of
our targets, without the need for fresh capital
9
PC - Life Health RoEC by Country after
minorities 7
Group RoEC
Life Health
2003
PC
2003
14
30
13
Spain
RoW
RoW
20
12
Spain
Italy
France
11
Italy
Germany
Germany
Return on economic capital ()
10
Return on economic capital ()
10
Austria
Austria
France
9
0
8
0
-10
0
2
4
6
8
10
1
2
3
4
Economic Capital (Euro bln)
Economic Capital (Euro bln)
10
ALM Model
8
Macroeconomic scenario
Top down targets
Feed back
Asset classes expected return/risk
Finance
Asset Management
Capital Allocation
Guidelines
  • Asset Liability Management
  • Strategic Asset Allocation
  • Risk Management

Control
Asset/liability current data
11
Risk Management in Non-Life Some Examples
9
  • Generali uses an internal model to assess the
    efficiency of its reinsurance programs.
  • Main Aspects of the Model
  • Estimation of Risk Capital

The graph shows the typical output of the model,
a probability distribution, which allows to
estimate the Risk Adjusted Capital Requirement.
It may be clearly seen how the Capital
Requirement decreases thanks to reinsurance.
12
Risk Management in Non-Life Some Examples
10
  • Diversification
  • Assessment of the Efficiency of a Reinsurance
    Structure

The combination of several non perfectly
correlated portfolios requires a Total Capital
Requirement that is lower than the sum of the
Capitals calculated on each portfolio
individually. Within a group, the diversification
effect comes into play at different stages
The comparison between Cost of Reinsurance and
Benefits from Reinsurance makes it possible to
determine the Value Creation deriving from the
reinsurance structure being examined.
13
Risk Management in Non-Life Some Examples
11


2. Catastrophe Exposure Evaluation and Analysis
  • Catastrophe exposure data (e.g. on earthquake,
    storm, flood, etc.) is collected from Group
    Companies.
  • The data is analysed with the aid of stochastic
    models (e.g. RMS, EQECAT, AIR).
  • A Probability Distribution is obtained,
    representing the relation between Loss Amounts
    and their associated Return Period.
  • The amount of reinsurance to be purchased and the
    adequacy of the market price of the covers is
    benchmarked against the outcomes of the models.

3. Reinsurer Credit Risk Analysis
Reinsurer Credit Risk is continuously monitored
both quantitatively and qualitatively
  • QUANTITATIVE Monitoring
  • - adjustment of Net Asset Value - continuous
    monitoring of counterpart rating
  • - specific Financial Report analysis

b. QUALITATIVE Monitoring of - level of
offered services - underwriting policy -
management of the reinsurer.
This allows the production of a list of Accepted
Reinsurers at a Group Level.Overall exposure
amounts are limited in accordance to- a
percentage of Adjusted Net Asset Value- the
nature of the business, i.e. differentiating
between short- and long-tail classes- the rating
level- overall accumulation of exposure per
individual reinsurer.
14
Life insurance risks
12
R I S K S
CONTROL INSTRUMENTS
  • Premiums and/or reserves
  • Insufficiency
  • Volatility of interest rates
  • and equity
  • Peak liabilities and
  • Concentration
  • (catastrophic exposures)

Profit testing, Value in Force and Embedded
Value Best estimate and stochastic Evaluation
of the cost of guarantees Reinsurance cover
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