IAA Seminar 19 April 2007, Mexico City
Group Risk
Exposure
Solvency Management in Life Insurance The company’s perspective
Uncertainty
2
Agenda
1. Key elements of Allianz Risk Management framework
2. Drawbacks of current regulatory framework
4. Outlook
3. Industry needs and business implications of Solvency II
2. Drawbacks of current regulatory / financial reporting framework
3
Risk Management is a continuous process for Allianz
Pilot of internal risk capital model
Enhanced risk governance structure introduced
Performance measurement linked to risk capital results
Process enhancements to ensure robustness and auditability the calculation
The evolving Solvency II standards are a unique opportunity to leverage existing risk management framework
Ongoing enhancements of integrated risk management
ü 2000 ü 2002 ü 2005 ü ongoing
Introduction of complementary risk and scenario assessment
ü 2004
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Our objective: protect the capital base and enhance value creation
Key elements
§ Capital at Risk for different solvency regimes § internal modeling (economic view) § stress tests (regulator, rating agency view) § limit setting
§ Integration of risk/capital into management processes § EVA /RoRAC (key performance metric) § risk based resource allocation § Earnings at risk (volatility management)
§ Risk adequate organization § Risk policy and minimum standards § Risk Strategy § Risk Reporting
Protection of capital base
Support for value creation and decision making
Risk Governance
Onsite Risk diagnostics to ensure local implementation
Key is balancing risk/return tradeoff, “No Surprises” as a critical objective
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Ins./Banking/AM Committees
Group Risk Committee
Operating Entities (OE)
Group Risk
Groupwide risk governance is clearly defined
Allianz SE Board
§ Make decisions on new products and trans actions with Group relevance
Tasks
§ Monitor solvency and risk profile § Set risk policies and OE limits § Recommend/approve actions to mitigate risk
§ Manage risks proactively within Group policies and limits § Report risk exposures to Group Risk
§ Enhance risk dialogue between Group and OEs § Implement internal risk capital model § Reporting and communication of Group risks
§ Approve Group Risk Policy § Define risk strategy of Allianz Group § Set limit system and Group limits
The risk organization reflects structures at Group level
Group Risk
Ins./Banking/ Asset Mgt. Committees
Allianz SE Board
Group Risk Committee
Local Risk Committee
OE
Local Risk Committee
OE
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Market Consistent Embedded Value (MCEV) is the right concept to value and analyze risks of our life businesses
§ Best estimate policyholder liability: – RunOff projection of current portfolio using best estimate assumptions
– Appropriate evaluation of risk through • Riskneutral valuation, i.e. risk premiums only valued when earned
• Explicit valuation of O &G • Explicit charge for nonfinancial risk
§ Shareholder value can be split in – Future profitmargin – Net asset value component
Assets at market value
Guaranteed payments
Economic Value
Expected bonuses
O&G
Economic Balance Sheet
Policy holder
Taxes Tax
authority
Share holder
Who gets this value?
How much value do we have?
Potential deviation of MCEV represents risk we have to capitalize for
1 2
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‘Internal’ Risk Capital analysis is implemented in state oftheart Asset Liability Interaction Model (ALIM)
Market engine
Companyspecific business parameters
Management decision rules
Balance sheet Y 1 Y N P&L Y 1 Y N Cash flow Y 1 Y N Reserves Y 1 Y N …
Thousands of scenarios
Discounting Leveraging
Interdependencies between market returns, accounting rules and regulation explicitly modeled
+ Management decision rules/degrees of freedom in future years accounted for
+ Options & guarantees explicitly modeled consistent with market prices
+
Economic value
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AAA 0,01%
AA 0,03%
A 0,07%
Probability Density
Solvency standard
MCEV at valuation date
Worst Case
Required risk capital
Standalone risk capital assessment requires identification of single risk drivers
Risk Capital quantifies the adverse change of MCEV over the course of one year within a 99.97% confidence interval (Worst Case)
Markets
Credit Lapse
Mortality
Operational
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Aggregation of standalone capital requirements allows for diversification benefits
Group Risk capital
Risk capital Market / ALM risk
Risk capital Credit risk
Risk capital Actuarial risk
Risk capital Business risk
OE 1
OE2
…
OE 1
OE 2
…
OE 1
OE 2
…
OE 1
OE 2
…
Risk type & segment diversi fication
The economic view allows to identify risk diversification effects both across regions and across risk types and business segments
Geo graphical diversi fication
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Economic Value/ MCEV
Option & Guarantees
Risk Capital
ALM /Pricing
Today
Allianz applies an integrated measurement suite for our Life business
Integrated valuation and risk capital approach leverages value creation
NAV / IAS Capital
Embedded Value / EEV
Risk Capital
ALM analysis
Past
§ Enhance transparency of value drivers and their dynamics
§ Ensure consistent reporting across all applications
§ Avoid double development and raise synergies by using available best practise approaches
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Agenda
1. Key elements of Allianz Risk Management framework
2. Drawbacks of current regulatory / financial reporting framework
4. Outlook
3. Industry needs and business implications of Solvency II
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§ Segment specific regulation like Insurance Group directive
§ Regulation of Subgroups by local regulators
§ Solo regulation based on local standards
§AZ Group
Segments
§Insurance
§Asset Management
§Banking
Operating Entities
Currently Allianz faces multiple regulatory requirements on different levels based on multiple accounting standards
§ Financial conglomerates directive
§ Regulation of parent company AZ SE
§ Partly based on consolidated IFRS, partly local Gaap
Going forward global players depend on an efficient and effective regulation calling for more standardized approaches and defined responsibilities
Current regulatory framework – European Union only (selection)
Sub group treatment in 10 Countries
30 different national supervisors in 19 countries
4/17/2007 13
On Group level we have to monitor three capital regimes for different stakeholders providing mixed signals for steering
Internal model
Consistent coverage of all segments
Systematic evaluation of internal data (economic balance sheet)
Explicitly accounting for diversification effects Covers all risk categories (Market/ALM, credit, actuarial, business) incl. OpRisk
The Internal model is the relevant metrics for steering the business
Financial conglomerates
Inconsistent coverage of segments
Based on B/S, P&L & market data as well as partly on internal data
Not risk based Portfolio effects not considered Limited coverage of risk categories and risk types
S&P model
Only insurance segment
Based on B/S, P&L & market data
Portfolio effects not considered Limited coverage of risk categories and risk types (ALM, OpRisk, not covered)
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Agenda
1. Key elements of Allianz Risk Management framework
2. Drawbacks of current regulatory / financial reporting framework
3. Industry needs and business implications of Solvency II
4. Outlook
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CROForum stipulated five core principles with regard to a general framework for Solvency II
1. Solvency capital and liabilities for solvency purposes should be based on the economics of the business and accurately reflect risk mitigation
2. Solvency capital and liabilities for solvency purposes should not include excessive prudence
3. Solvency capital should accurately reflect diversification
4. Internal models, in addition to standard approaches, should be allowed
5. Solvency reporting can be different from financial reporting because of differences in the scope and objectives, although the differences must be reconcilable
Position papers of other bodies (CFOForum, IAIS) are in line with these principles
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A coherent framework for Solvency II and IFRS phase II is envisaged…
Market value
of assets Assets Backing
accounting Liabilities
Customer Intangible Asset
ASSETS TOTAL
LIABILITIES Accounting
TOTAL LIABILITIES Solvency
Available capital for solvency purposes
Accounting Liabilities
MVL (market consistent) = Current Value
Equity
Profit Margin
Best Estimate Liability to
Policyholders
Market value margin
Best Estimate Liability to
Policyholders
Risk Margin
Corresponding liability adjustment to CIA
Insolvency
Policyholder is protected as long as eligible solvency capital absorbs risks
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…which could also form the basis for a future regulatory and financial reporting framework
Commonality
Commonality
Regulators
Investors
Consumers Solvency I and current financial reporting
Financial reporting (CFO Forum / CEA)
Regulatory reporting (CRO Forum / CEA)
Improved transparency
and relevance of information for stakeholders to facilitate their
decision making
IFRS, including IFRS Insurance Contracts Phase II
Supplemental reporting (EEV)
Solvency II
Different perspectives underpinned by a common goal
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Allianz will benefit from the alignment of internal steering and regulatory rules
The company specific risk profile will be better reflected…
Allianz perspective
ü Risk capital based on internal model already embedded into performance measurement
ü Investment strategy (including hedging) based on risk bearing capacity – taking risk sharing with P/H into and risk mitigating funds into account
ü Clearly defined management rules on future crediting strategies in place
§ Capital requirements risk sensitive
§ Investment strategy based on liability structure
Market view
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Level playing field across business segments required
…leading to higher transparency concerning economic capitalization
Allianz perspective
ü Due to strong financial position and diversified portfolio high risk bearing capacity of Allianz to fund growth
ü Effect of risk mitigation activities (e.g. hedging) valued in line with financial markets
ü As Integrated Financial Service Provider peak risks can be diversified across segments
Market view
§ Book value replaced by economic valuation will force weaker undertakings to act
§ Diversification effects will have a positive impact on capital requirements for well diversified undertakings
§ Consolidation accelerated
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…and fostering the efficient usage of economic capital
Allianz perspective
§ Allocation in line with economic requirements
§ Economic excess capital might increase but significant part will be locked (e.g. rating)
ü Risk capital is single currency between entities and segments
ü RoRAC calculations per LoB to make performance transparent
Market view
Consistent approach across segments and countries important
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Product design, pricing and underwriting will be more focused on balance between risk transfer and reward
Allianz perspective
ü Valuation (MCEV) and risk assessment fully integrated
ü MCEV will form main pricing target
ü Portfolio effects are analyzed during underwriting process
ü Capital charge used for pricing reflects already diversification benefits
Market view
§ Peak risks will not be taken by weaker players anymore thus accelerating consolidation
§ Pricing impact of financial guarantees and low frequency/high severity risks
§ Incentives of sales force will reflect risk/return profile of product
§ Increased competition if market price exceeds significantly risk adequate price
Need for risk adequate pricing is getting more obvious
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Agenda
1. Key elements of Allianz Risk Management framework
2. Drawbacks of current regulatory / financial reporting framework
3. Industry needs and business implications of Solvency II
4. Outlook
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The success of Solvency II will depend on some crucial factors
Success factors Modernized regulatory framework Clearly defined lead supervisor concept with separation of roles & responsibilities; allowance for diversification
Harmonisation of supervisory standards & practise across member states
Incentives to implement full internal models (more accurate than standard model)
Supervision of sectors not covered by SII has to be upgraded (e.g. pension funds)
Starting point for public disclosure has to be future IFRS standard
Ensure that groups are supervised in line with their risk profile
Level playing field independent of group location
Foster risk management best practices
Avoid regulatory arbitrage
Ensure efficient reporting
Harmonized group supervision will ensure customer and provider access to a common EU insurance market
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Presented by:
Marco Hauck
Head of Team ‘Life Insurance’ Group Risk Tel.: +49 89 3800 19783 mail: [email protected]