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On the way to Solvency II
in Allianz SpA
Risk Management - Allianz SpA Group Italy
Torino 27 Maggio 2010
The three pillars of Solvency II
Quantitative
Assessment
P
I
L
L
A
R
I
 Market valuation of assets
and liabilities;
 Capital calculation for
Minimum Capital
Requirements and for
Solvency Capital
Requirements;
 Solvency Capital
Requirements based on
internal or standard model
Reporting &
Disclosure
Qualitative
Assessment
P
I
L
L
A
R
II
 Supervisory Review
Process (SRP);
 Own Risk & Solvency
Assessment (ORSA);
 Use Test: Economic Capital
- Linked to strategic
planning;
- Used in EVA
performance
measurement, incentive
compensation;
- Linked to MCEV and
reserve setting
processes;
 Calibration, validation,
documentation and model
change policies.
P
I
L
L
A
R
III
 Reporting requirements;
- Public disclosures –
“Market Discipline”;
- Regulatory reporting;
 Common European
reporting framework;
- Same requirements
across Europe;
- No double reporting –
Group versus
Standalone;
- Convergence to other
sectors.
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Solvency II – Pillar 1
Three Pillars Approach
PILLAR I:
PILLAR II:
PILLAR III:
Quantitative
requirements
Qualitative
requirements
Supervisory
reporting
&
&
Supervision
Public
disclosure
Focuses on covering
quantitative capital
requirements including internal
models and a standardized
approach
Focuses on supervisory
activities, aiming to identify
firms with a higher risk profile,
which may be required to hold
capital at a higher level and/or
to take steps to reduce
identified risks
Requires disclosure of
additional information that
supervisors feel they need in
order to perform their
regulatory functions and
information that the market may
need
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Allianz is planning to ask approval of an internal model
Risk Aggregation & Reporting Infrastructure
Market data: valuation rates, volatilities and correlations as well as scenario generators: real world, risk neutral
Monte-Carlo based risk aggregation of risk types
On-line reporting and ad hoc scenario analysis allowing local and central use
RAI
Efficient contribution and as-if analysis, re-grouping of portfolios
Transformation of Insurance Liabilities in financial instruments replicating liability characteristics
Coordinated
Interaction userinterface
Risk Types
Market Risk
Credit Risk
P&C actuarial risk
Operational Risk
Life insurance risk
Stochastic cash flow models required; detailed liability cash-flows underlying
Capturing all types of financial risk features
Covering Investment and Reinsurance Credit Risk
Local analysis, leverage on global information basis
Frequency / severity / stochastic reserving for modelling reserve / premium risk
Local calibration to loss and reserve distributions
Ensuring loss data collection Strong qualitative basis in internal control system
Capital charge initially based on standard approach
RAI
Systems
Individual Feeder Systems
MKMV
PRISM
tbd
ALIM
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Financial Risk:
Quality, Frequency and Granularity is the key
Risk Aggregation
 From aggregation of individual shocks
to full loss distribution
Integrated Monte-Carlo simulation based on replicating portfolio
technique, including credit risk and volatility risk;
 Replicating portfolios to model liabilities
in Life
Find optimal portfolio of basis instruments which
comes “closest” to matching the cash-flows of the
liability based on common financial scenarios;
+
Market Risk
Credit Risk
P&C actuarial Risk
Life insurance Risk
Operational Risk
target
 New risk factors (e.g. Volatility, Credit
Spread ..)
Volatility effects market values of derivatives and the value of
O&G in Life business.
Spread Risk (change in credit spread within rating class)
considered as well as Credit Risk (migration and default risk)
 Aggregation with non financial risks
Fully integration of financial and non financial risks: all risk drivers
are simulated together under a pre-defined correlation structure
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Modelling Portfolio Credit Risk based on
Central group wide calibration of the model
 is the risk of changes in the market value of the portfolio over a given time horizon,
resulting from changes in credit quality of exposures in the portfolio
 includes both default risk and migration risk – the risk of loss of economic value
for credit exposures because of deterioration in credit quality
Main Drivers of Portfolio
Credit Risk
Instrument Credit Risk
Credit quality
Correlation & Concentration
Exposure Amount
Rating, Default Probability
Asset Correlation
Loss Given Default
Credit Quality Migration
Sector Concentration
Obligor Group Concentration
Concentration / diversification effects at the portfolio level are calculated
by the model. Results are allocated top-down to single counterparties.
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Data-management systems as a key success driver…
Data Management systems
stable DB solution, history tracking, lock-in feature...
Market Risk
Credit Risk
output
Input
Risk Aggregation
P&C actuarial risk
Life insurance risk
Operational risk
Get rid of Excel to manage inputs and outputs !!!
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… but the Standard Formula is still the main reference point
We plan internally parallel reporting of Internal Model and Standard Formula
on a quarterly basis – we have to monitor and understand differences over time
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Solvency II - Pillar 2
Three Pillars Approach
PILLAR I:
PILLAR II:
PILLAR III:
Quantitative
requirements
Qualitative
requirements
Supervisor
reporting
&
&
Supervision
Public
disclosure
Focuses on covering
quantitative capital
requirements including internal
models and a standardized
approach
Focuses on supervisory
activities, aiming to identify
firms with a higher risk profile,
which may be required to hold
capital at a higher level and/or
to take steps to reduce
identified risks
Requires disclosure of
additional information that
supervisors feel they need in
order to perform their
regulatory functions and
information that the market may
need
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ISVAP Regolamento 20 – main features
Management responsibility
• The CdA has the ultimate responsibility for an adequate Risk Management framework
• The Top Management has the obligation of consistent execution of the framework
Independent control units
Internal Audit
• Monitoring of effective
execution of internal control
framework
Risk Management
• Identification, valuation and
monitoring of risk situation
Compliance
• Monitoring of conformity
with legal / regulatory
requirements
Regulatory reporting
• The internal control framework has to be documented and regularly reported to the regulator
ISVAP Reg. 20 is a first but very important step towards Solvency 2, Pillar 2
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CEIOPS – International standards for Risk Management
- the 5 core elements
Risk Management
1
Top Management Responsibility
21. Management concept
32. Control process
43. Organisational
framework
Risk
Strategy
Risk Bearing
Capacity
Identification
Assessment
Governance and
Communication
Organisational structure
Organisational procedure
Internal Control
Monitoring
Management
Limits and Thresholds
54. Internal Audit (and Compliance)
CEIOPS Standards takes a lot from the ISVAP Reg. 20 - but goes beyond
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Management Concept
RISK STRATEGY
RISK BEARING CAPACITY
• Describes the management of risks
• Must be consistent and operatively connected
with business strategy
• Must be correlated with risk type, risk source and
risk time horizon
Proportionality & Materiality
• Describes the relation between overall
available potential risk coverage and used
capital for the coverage of material risks
• Must be connected with the risk strategy
Potential Risk Coverage & Risk Capital
Requirements should be consider:
• risk type;
• size of the company.
Material risks are all risks, that can affect with
negative effects economic, financial and
profitability of a company.
• The potential risk coverage is the basis to
determine an economic assessment.
• The risk bearing capital (risk capital budget) is
determined by Company’s risk appetite.
It defines which amount of the economic capital
is reserved to cover/bear risks and it forms an
upper limit for taking risks.
• Regulators’ requirements on capital resources
establish the lower limit of risk bearing capacity
LIMIT SYSTEM
• Limits must be adequate and manageable for the operational units
• Limits are documented ex-ante and it must exist a set for all levels and for risk type.
• The respect of limits must be monitored. The breach of set threshold must be reported and
appropriately escalated.
The Risk Strategy must be assessed and documented by Management.
This responsibility cannot be delegated.
The risk bearing capacity must be considered for all risk relevant management decision.
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Control Process
IDENTIFICATION
• The risk identification starts with the strategic planning process. With the changes in the business
strategy the results of the risk identification must be checked and eventually modified.
• Risks are to be defined consistently and as much as possible without overlapping, because the risk
situation of the whole company has to be considered.
ASSESSMENT
• The risk assessment establishes the results of risk identification and leads to quantitative/qualitative
evaluation.
• Risk must be categorized and give them a priority by their own materiality
• Risk key figures are to be defined, to know in advance changes in the overall company's risk profile
MONITORING
• The risk monitoring must be regularly performed and must be aligned to the existing company’s overall
risk profile, risk bearing capacity and limits.
• The monitoring is regularly performed by the risk controlling function, without results responsibility.
MANAGEMENT
• The active risk management is performed by the business areas within the defined frameworks
• This active management is performed along KPIs (key performance indicators) which exist for all
levels, KPIs must be monitored against the defined thresholds.
GOVERNANCE AND COMMUNICATION
• The management has the assignment to establish a appropriate risk culture in the whole company and
to ensure an adequate internal communication on all material risk (risk reporting)
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Organizational Framework
ORGANISATIONAL STRUCTURE
• Business and risk strategy must be reflected in the compensation system
• Incentive systems cannot be manipulated, must be oriented to the long term success of the overall
company; negative compensations are to be avoided.
Top Management
• Target of the business and risk strategy
• Compliance of risk bearing capacity and risk attitude
• Continuous monitoring of risk profile
Risk Management
• Coordination of risk management processes
• Monitoring limits’ compliance
• Separation of risk taking and risk controlling function
• Link of risk management elements
 Definition of Roles and Responsibilities
 Delegation of task to the dedicated Risk Management Unit
Operative business areas
• Accomplishment of risk control process for all
operative business areas
• Documentations of assignments, responsibilities,
delegation rules and competencies
Outsourced functions and services
• Starting from a risk analysis, the company must determine which activities and processes can be outsourced, and the
associated responsibilities must be clearly defined
• Monitoring of activities and regular assessment of performances
• Consideration of the outsourced functions in the risk management
The allocation of tasks between Risk Management and Actuarial Function is not
the key issue – the right skills within the company are important
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Organizational Framework
ORGANISATIONAL PROCEDURE
Pricing and U/W
Investments
• Underwriting guidelines
for daily management of
the business
• Tariffs calculations
based on an adequate • Investment
risk information
management must
• Usage of relevant ratio
comply with all kinds of
to manage operational
limits, regulations and
workflow
laws accordingly to
relevant principles
Reserves
• Proof of potential
Passive
improvement of risk
Reinsurance
management through:
• risk adequate data
collection and improved • Determination of an
evaluation method
acceptable retention
 where necessary
migration of market
consistent actuarial
valuation
• Definition of
responsibilities for
process steps and
quality assurance
per business segment
• Considering multiple
possible events and
exclusions in
reinsurance contracts
• In case assessment of
alternative risk transfer
instruments
Together with material risks, also business procedure and process
responsibilities must be determined and documented
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Internal Audit
Internal audit reports only to the Board
Internal audit’s tasks are risk oriented
and independent
Internal Audit
An illimited access to information must
be granted to Internal Audit
•
•
•
•
Audit employees must focus only to
pure audit tasks
Each Company needs an internal audit function
All material activities (also risk management) must be audited
The specified mitigations of determined deficiencies within agreed time plan must be monitored
The internal audit can be outsourced. In this case, a regular quality check must be performed by
internal audit commissaries
Audit reports must be written and immediately provided to the management
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ORSA Report
ORSA Process
Governance description
for report submission
Company Context
Legal and management
organization, core
business,..
Risk Governance
Processes, controls,
procedures and policies,…
Risk Assessment
Processes and procedures
for identifying and
assessing key risks
Capital & Solvency
Position (Including Plan
Period)
Regulatory and economic
approach
Stress test &
Contingency Plan
Capital evaluation under
risk scenarios including
contingency proposal
Risk Philosophy
Business managed via risk
based metrics (profitability,
product approval, SAA
based on risk bearing
capacity,..)
Risk Appetite
Risk management process
within certain parameters
(risk limits setting)
Use Test
Risk & Capital
management activities are
fully integrated into
management decisions
High level ORSA Report is in place as of the end of the 2009
… start doing it, you will learn a lot
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Thank you
for your attention.