The Financial Crisis and its implications for the insurance industry & the actuarial profession

The Financial Crisis and its implications for the insurance industry & the actuarial profession

XIX. Altenburger Gyula Szimpózium

Balatonvilágos, 22nd of May 2009

Generali Deutschland Holding AG

László HrabovszkiNora Gürtler

2The Financial Crisis and its implications / 22.05.2009 / Generali

The financial crisis and its implications on insuranceAgenda

• Phases of the Financial Crisis

• Implications on products and sales activities

• Implications on value based management in the context of

Solvency II

• Position of the actuaries – today and in the future


In 2008, the capital markets only went down…

Source: Frankfurter Allgemeine Zeitung, 05.10.2008


Economic crisis

The financial crisis has affected the insurance industry step by step: the four phases of the crisis

Dax 30.12.08

Subprime crisis Phase of uncertainty Banking crisis

Dax 30.06.07

• US real estate crisis

• Default of subprime credits

• Strong losses at the stock markets in January 2008

• High volatility at the markets

• Explosion of commodity prices

• Huge and omni-present uncertainty

• Default of finan-cial institutions

• Brakdown of interbank trading

• Loss of confidence

• Plunging of stock prices

• Rescue packages issued by the states

• Further stock market losses

• Impacts on the real economy

• Economic stimulus packages

• End of the crisis not yet in sight


Subprime crisis & pase of uncertainty: The German insurance industry was only affected indirectly by the development of capital market indices

Subprimecrisis

Phase ofuncertainty

• German insurance industry was only marginally affected – hardly any direct investments in subprime papers

• Excellent year 2007, in spite of the high volatility at the capital markets in the second half year 2007

• Even at the beginning of 2008, the German insurance companies were only touched indirectly by the negative development of equity indices

• First writedown of shares in 1Q 2008• Operational insurance business not yet touched by the

developments at the capital markets

• Insurers still expected a „common“ investment result for 2008

• 1 HY result 2008 already burdened by impairments due to regulations for the writedown of shares


Since liquidity is not an issue for insurers, the situation of the German insurance sector is not comparable to that of the banking industry

Bankingcrisis

• Even during the aggravation of the crisis, the German insurance sector is still only affected indirectly by the developments at the capital market

• Insurers limit their risk by a conservative asset allocation allowing only for an average equity backing ratio of approcimately 10%

• Single defaults of banks lead to writedowns also for insurers, but still of limited relevance compared to the market-wide portfolio

• Due to recurrent premiums leading to a steady flow of premium income, liquidity is not an issue for insurers

• No solvency problems in the insurance sector

• None of the German insurers needed benefits from the rescue packages issued by the state – on the contrary: the sector participated in the rescue package for the bank „Hypo Real Estate“

• Policyholder funds are safe – feeble signs of customer uncertainty visible, but in general no collapse of new business in sight

• Q3 2008 results burdened by heavy impairments – almost all insurance companies refrain from forecasts for forthcoming results due to the volatilities at the capital markets


The financial crisis heavily affected the market capitalization of banks - ranking of banks by market capitalization

*

Source: Frankfurter Allgemeine Zeitung, 06.02.2009


Economiccrisis

• Broadening of the crisis to the real economy yields negative impacts on private consumption and investments

• New political and economic risks from high public debt

• Increasing guarantees issued by the state

• Consolidation of the banking sector & revision of the business model

• Current forecasts and possible scenarios

• Insurance sector affected in 1Q 2009 by a noticeable decline in new business

• 2Q 2009 shows the first signs that the decline slows down, but it is too early to draw any conclusions

Extension of the financial market crisis to the real economy leads to an economic crisis in 2009 and difficult business conditions






Solvency II



Consequences of the financial crisis

Implications of the financial crisis on distribution and product strategy

Dax 30.12.08

Dax 30.06.07

• Which parts of the population are affected most?

• Are the needs of different customer segments changed by the crisis?

• Will the demand for insurance products change between segments?

• What is the expected development of the available income?

• Will there be an increase in „moral hazard“ problems in the recession?


In a difficult environment, insurers have the key competences to respond to current and future challenges

Core competences of insurers:

1. Guarantee

2. Safety

3. Realistic return

4. Calculation of biometric risks

5. Financial advice

Difficult situation at the capital market

Challenging legal and

regulatory framework

Demographic development

„War for sales forces“ and continuous

need to optimally

support them

Limited resources and caution from

customers due to the economic

crisis

Pressure on prices and

profit margins

Solvency II process and

risk management requirements

Competition with the

banking sector and fund industry


Factors of success for 2009: Detecting the needs of clients and approaching them with the right concept

Respond to the client‘s wish for comfort and convenience by multi-segment solutions & assistance

Increased need for building up retirement provisions and covering biometric risk

In today‘s complex & ever-changing financial environment, most clients need guidance & support

Increased price consciousness of clients and wish for tax optimization

Holistic approach – advise the client with all his needs

Take into account both the client‘s need for safety and his desire to participate in the returns

Clients &distribution


Factors of success for 2009: Innovative products show the core competence of insurers

Multi segment solutions: Annuities, healthcare &assistance

Unit linked productswith guaranteesremain interesting

Increase in flexibility: Single premiums and varying premiums gain importance

Covers against biometric risks and annuity products become interesting

Increase in the transparency of products and differentiation by customer segments

New types of products offer safety and oppor-tunities: Further differen-tiation of guarantee concepts

Productdevelopment


Factors of success for 2009: Facing the competition in the market by strategy and operational excellence

Global players have advantages in an environment becoming more and more global

Use tax advantages for insurance products

Cultivate and use the insurers‘ image of financial advisors with a solid background

Identify customer segments and offer them tailored products

Continued pressure on prices and profit margins requires cost efficiency

Respond to the competition with the banking sector by product innovation

Competitionin the market






Solvency II



0

1

2

3

4

5

6

7

8

9

10

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Increasing importance of financial options & guarantees in the German market - these are not reflected in „traditional“ deterministic calculations

The difference is an indicator for the insurer‘s

interest rate risk

Disregarded risks have gained importance: e.g. financial guarantees (Germany)

in %

10 year government bond ø Total crediting rate German market

Guaranteed crediting rate new business

ø Guarenteed crediting rate German market ø Net interest return German market


Hence, for risk based management (RBM) & value based management (VBM), a stochastic model framework is necessary

Economic scenario generatorarbitrage free, market consistent scenarios

liability model asset model• LI products• Explicit RfB• Options/guarantees

• Asset classes• SAA

S/H P/H

Risk assessment

Declaration of profit sharing

dynamic adjustment of the SAA

Set of management

rules

profit sharing


New concepts require a common stochastic platform

Solvency II

Value Based Management

Market consistent EV (McEV)

Stochastic Model

IFRS 4 Phase II

ALM

Pricing/Product Design

Risk transferInternal Risk Management

CorporatePlanning


The financial market crisis results in huge differences in the average returnof European government bonds

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

5,0%

5,5%

6,0%

6,5%

01.01.2007

01.01.2008

01.01.2009

Germany

Italy

Greece

15.09.2008bankruptcyof Lehman Brothers

Germany

Italy

Greece


Factors of success for 2009: Capital management & performance management as a response to Solvency II

Asset liability manage-ment (duration matching, assessment of profit sharing options) adds to the measures

Value based management (VBM) and risk based management (RBM)

Financial management becomes more com-plex, due to Local Gaap, IFRS & market valuation requirements

In view of IFRS 4 phase II, market valuation of liabilities is approaching

Efficient and successful asset management as the key factor of success

With Solvency II on its way, internal models are more important than ever

Management of capital & return


2.4% 1.8%NBV/PVpremiums

NBV/APE

2.2% 2.2%

NewBusinessValue(NBV) 1

17.5% 14.6%18.7% 17.6%

1501,114

8857,035

APE PV premiums

2081,751

8857,035

before CoC after CoC

Corporatepensions

Unit-linked 2

Total NBVbefore CoC

Total NBVafter CoC

Dec. 2006, Life new business and performance ratios

12926

39 156CoC

€ 27 m

Riester

29

Term/ disability

43

Annuities

136

Endowment

1.9% 1.6%1.4% 3.6%

14.7% 11.5%13.0% 31.7%

39296

2551,794

97880

1361,200

€ m

1 NBV in representative rounded figures2 incl. net fund management fees

New Business Value (NBV) and profitability of different product groups- analyses form the basis for the implementation of VBM in practice


Identify value drivers (e.g. by sensitivity analyses)

• Costs• Strategic asset allocation• Lapse rates• Options and guarantees within products

Push of profitable products• Push profitable existing products• Push product innovation• Implement systematic profit tests in the product

development process

Focus on profitable customers• Identify profitable customer segments• Push cross selling there

Maximize the

risk return profile

of your business

Application of profit tests and NBV in value based management






Solvency II



Solvency II directive has just been agreed by the European Parliament and Council

Time frame: Level 2 advice: until the end of 2009

(3 waves of CEIOPS consultation papers)

QIS5: in April 2010 Target implementation date:

October 2012

Major changes compared to 2007: Omission of group support, but

recognition of diversification effects at group level

„Equity dampener“ as an option Allowance for one year of new

business MCR based on a linear combination

with floor and cap

Main contents of the Solvency II directive

26. Best estimate liability

27. Segmentation of technical provisions

28. Counterparty default risk

29. Ancillary own funds

30. Future premiums

31. Financial risk mitigation

32. Future management actions

33. System of governance

34. Transparency and accountability of supervisors

35. Valuaion of assets and other liabilities

36. Special purpose vehicles

37. Internal model approval process

Recent CEIOPS consultation papers

The Solvency II directive has just been agreed


Implications of the financial crisis and of the Solvency II process on the role and responsibilities of actuaries

Solvency II framework directive has been approved

Solvency II requires internal models at least for the big groups, usually based on stochastic simulations

Enterprise Risk Management (ERM) process set on its way

Financial crisis

Solvency II process

Current role of actuaries Position of the Appointed Actuary in life

insurance

Actuaries gain importance - future profile of the actuarial profession:

Actuaries are experts for internal models (most of them with a stochastic approach): Theory Implementation Analysis Reporting

Actuaries act as risk managers ALM analyses conducted jointly with asst

managers Responsibility for financial reporting

(MCEV, market value of liabilities)

Solvency II increasingly requires independence and objectivity of actuaries & risk managers

Current and future role of actuaries

Re-establish confidence in models by a better understanding

Integrate ALM analyses into decision making Demand for understandable and manageable

products - and for the people who build them

Market valuation of liabilities Economic balance sheet

IFRS 4 Phase II

Documents

The Financial Crisis and its implications for the insurance industry & the actuarial profession