Transcript FNO Finance Norway

RISK MANAGEMENT IN INSURANCE
BUSINESS
Idar Kreutzer, CEO Finance Norway
Insurance Summit 2013
Stockholm, 15.10.2013
Risk management - When risks collide
Global governance failure !
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Risk management in insurance
”Managing risks
is what we do”
Source: Securityreseach.at
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Insurance – A key role in society
Protect
Prepare
Understand
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Key risks insurance must manage
Financial risks
Biometric risks
Property & casualty
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Regulatory dynamics
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Property & casualty
Implications of a changing climate

Challenge the traditional insurance way of
thinking.

Unknown risks ?

Public Private Partnership


New products

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

Claims data - pilot project.
Green covers
Carbon delivery wraps
Forestry & agriculture
New markets

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Weather risk
Risk consulting
Cat Bonds

Promote loss prevention

Participate in Carbon markets

Microinsurance

“Society is simply too
vulnerable to weather impacts “
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Biometric
Longevity
Migration
•
Increasing length of the retirement age

New risks in the market
•
Longer pay-out period for pension providers

Cultural differences
•
Significant reserve requirement in the private sector

Living next to the North pole

Changes in the urban landscape

Diseases
Expected life age – Norwegian population 1846-2010
ddddddddddddddddddddd
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Source: Statistics Norway
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Financial risks
Low interest rates vs. long term
guarantees
Asset – liability matching
Asset risk and allocation
Financial shocks & market value
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• Long-term contracts
• Annual interest rate guarantee
• Inappropriate capital buffer
• Existing DB and paid-up policies
challenging
• Close-down of municipal pension schemes
• Need for long duration assets
• Low allocation to risky asset classes with
volatility (equities) for DB
• Liquidity in ALM to be prepared for transfer
from DB to DC (or hybrid) schemes
• Focus to obtaining return to cover
guarantee of define benefit schemes (DB)
• Low allocation to risky asset classes with
volatility (equities) for DB. Any surplus of
guarantees used to build buffers in DB
• Reduce market risk
• Hold to maturity management in focus
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Low interest rates – consequences for the industry
14
Norway, Gov. Bonds, 10
Years
12
10
Sweden, Gov. Bonds, 10
Years
8
6
Denmark, Gov. Bonds, 10
Years
4
2
Average guaranteed interest
rate in Norwegian life
insurance
0
Source: Finance Norway
1,200,000
400000
350000
300000
250000
200000
150000
100000
50000
0
1,000,000
800,000
600,000
400,000
200,000
0
2005 2006 2007 2008 2009 2010 2011 2012
Defined benefit (DB) – number of insured
2005 2006 2007 2008 2009 2010 2011 2012
Defined contribution (DC) – number of insured
Source: Finance Norway
Main challenge: Paid-ups from DB schemes
 Interest risk difficult to hedge
 Ca. 20 year duration
 Thin and illiquid NOK bond market
 Annual interest guarantee calls for short
duration, long guarantee calls for long
duration
 HTM bonds will reduce P/L volatility

But could be removed under IFRS 4 II
 No future premiums


Interest rate levels main driver for profitability
Low interest rates gives high capital
requirement and low profitability
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Norwegian FSA’s stresstest: Solvency II liability discounting curve
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Liability Driven Investments
Valuing liabilities – and matching the duration
5,5
5
4,5
4
3,5
3
2,5
jan. 05
Assets
100
jan. 06
jan. 07
SEK
Liabilities
100
jan. 08
EUR
GBP
2 % point fall
in rates
Source: Bloomberg 20 yrs swap
30% increase
in liabilities
Stylistic example of liabilities
Example:
duration 15
If the liabilities' duration is 15, then a 2 percentage points fall in interest
rates alters the present value of liabilities with 30% if this change is simply
carried through for the purpose of liability valuation
?
Assets
100
Liabilities
130
Which assets (apart from too few long dated bonds) yield 30% with
certainty over 4 months?
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Regulatory dynamics – life & pensions
Main challenges:
Solvency II:
A new risk management system
 Risk based capital requirements



(Solvency II)
Macro economic prudential
regulation
IFRS 4 phase II (Market Value)
Systemically important (IAIS
global capital standards)
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ORSA
Internal
models
Capital
requirement
calculation
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Key implications
Regulatory asset risk will become a key driver
Asset-liability-matching strategically important
Increased focus on liquidity and rating
Affects insurers’ investment decisions
Moving away from long-term assets
Distorting effect on financial markets and the
economy
Higher cost of funding for corporates and
governments
Source: Oliver Wyman, ”Funding the future”, 2013
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Systemic risk - not just banks?
 IAIS 10 October: Global quantitative capital standards
Peter Braumüller, chair of the IAIS Executive Committee:
“It is undeniable that the business of insurance is global, and global issues
demand global responses,” [...]“This is why the IAIS, whose Members
constitute nearly all of the world’s insurance supervisors, has committed to
develop and implement the first-ever risk based global insurance capital
standard.”
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Future business champions are those who
develop products and services in a way
that unites the global social and
environmental challenges with their own
profitable growth
Summary
• The
times and risks are changing
• Understanding and managing risks – ”that’s what we do!”
• We have to deal with a changing regulatory environment
• A well functioning insurance industry is crucial to society
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