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© Copyright Allianz 3 Future supervisory requirements Application of internal models for financial conglomerates Validation of internal models has to be in time No additional arbitrary limits are necessary within a risk based system (eg. Asset limits) Measure same risks in the same way – but still consider the specifics Diversification between different sectors has to be taken into account Similar approaches for the calculation of risk capital across the sectors Risk based Solvency II calculations - incentive for integrated risk management Status Quo The Solvency II system should intensify the use of more sophisticated internal modelling Supervision and solvency requirements are not risk based Strong influence of national accounting standards Know-how for internal models necessary within supervisors as well as insurers Not all supervisors have an integrated approach
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© Copyright Allianz
IIS Redefining the industry: Regulation, Risk & Global Strategy July 9, 2007Berlin
Helmut Perlet, Allianz SE
The Emergence of Solvency II
© Copyright Allianz 2
Key Issues and implications for Allianz
1. Risk based Solvency II calculations - incentive for integrated risk management
2. Convergence issues- to Basel II in Europe- of supervisory approaches
3. Convergence towards IAS/IFRS4. Market consistent valuation of assets and liabilities5. Group Supervision6. Increased transparency concerning supervisory practice and the
business model of insurance companies
© Copyright Allianz 3
Future supervisory requirements
Application of internal models for financial conglomerates
Validation of internal models has to be in time No additional arbitrary limits are necessary within
a risk based system (eg. Asset limits) Measure same risks in the same way – but still
consider the specifics Diversification between different sectors has to be
taken into account Similar approaches for the calculation of risk
capital across the sectors
Risk based Solvency II calculations - incentive for integrated risk management
Status Quo
The Solvency II system should intensify the use of more sophisticated internal modelling
Supervision and solvency requirements are not risk based
Strong influence of national accounting standards
Know-how for internal models necessary within supervisors as well as insurers
Not all supervisors have an integrated approach
© Copyright Allianz 4
Allianz sees the opportunity that our internal risk management practices can serve for external SII requirements
Pilot ofinternal riskcapital model
Enhanced risk governancestructureintroduced
Performancemeasurementlinked to riskcapital results
Process enhancements to ensure robustness and auditability the calculation
Proposed SII framework needs to adequately address our integrated business model.
Ongoing enhancements of integrated risk management
2000 2002 2005 ongoing
Introduction of complementary risk and scenario assessment
2004
© Copyright Allianz 5
Future supervisory requirements
Same application of supervisory tools/approach, independent of country (eg. reporting, application of principles)
Intensified cooperation between supervisors in order to create on European supervisory culture
Alignment of supervisory powers Convergence to Basel II as far as possible
Convergence issues
Status Quo
A coherent supervisory approach throughout Europe will serve for a level playing field and be a better starting point for discussion with non- European insurers
National licensing Supervisory approaches and
tools are different Competitive disadvantages
through incoherent requirements Competition between
supervisory in order to influence future SII regime
© Copyright Allianz 6
Future supervisory requirements
Coherent framework of IAS/IFRS and Solvency II Support economic approach of Solvency II Best Estimate calculations should be in line as
much as possible Definitions of Risk Margins should be reconcilable Application of prudential filters should be avoided
as far as possible IAS/IFRS disclosure requirements should be
starting point for public disclosure requirements
Convergence towards IAS/IFRS
Status Quo
Consistent approach between Solvency II and IAS/IFRS will lead to a more efficient system and ensures a coherent steering of the companies
Differences in valuation approaches
No market consistent view Different valuation basis used
currently for deriving risk factors Lack of comparability
© Copyright Allianz 7
Future supervisory requirements
One market consistent valuation system Valuation of liabilities via best estimate and risk
margin (for non-hedgeable risks) Avoid double reporting due to different accounting
regimes
Market consistent valuation of assets and liabilities
Status Quo
Market consistent valuation plays a major role – harmonisation across Europe as far as possible
Several different local accounting systems exists
Liabilities within old framework are not valued at market value
No risk based view to some extent as liabilities do not correspond to changes of markets (accounting mismatch)
© Copyright Allianz 8
Risk is uncertainty about the future developmentof the economic value of the business
Asset volatility
Market value of assets
Fair value of liabilities
Probability
0
Availablecapital
Economicvalue
Economic insolvency
Available capital after one year
Liability volatility
The economic perspective is independent of accounting practice orregulatory requirements
© Copyright Allianz 9
Requirements on future supervisory systems
Group supervisory system is necessary („Lead Supervisor“)
pass on of supervisory authorities is important Intensified exchange between supervisors and definition of escalation processes Mutual recognition and intensified exchange of information in order to avoid double work
Predefined rules for crisis situation are advantageous (eg. no additional guarantees would be necessary)
Group supervision is essential for international players in order to realise scale effects
Status Quo
Even though groups are steered centrally, subgroup supervision is still conducted
National authorities tend to require additional guarantees which steam from their former practices
Different requirements of supervisors prohibit standardized reporting systems
© Copyright Allianz 10
Future supervisory requirements
Consistent transparency requirements throughout Europe
Enhanced transparency needed concerning the supervisory methods
Efficient and relevant stakeholder information Comparability within Europe and other non-EEA
markets
Increased transparency concerning supervisory practice and the business model of insurance companies
Status Quo
Transparency will play a critical role in a consumer oriented insurance market
Disclosure requirements are basically based on different national requirements
Public disclosure via annual report and additional supervisory reporting
Product transparency not at a highest level
11
We believe the success of Solvency II will depend on some crucial factors
Success factorsModernized regulatory frameworkClearly 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 accessto a common EU insurance market.