Allianz Insurance Solvency II How Solvency II might affect investment strategy Stephen Wilcox, Chief...

Allianz Insurance

Solvency II

How Solvency II might affect investment strategy

Stephen Wilcox, Chief Risk Officer, Allianz UK

2Stephen Wilcox

© Copyright Allianz 20. Apr 2023

Table of contents 1 Background: Allianz

2 Solvency II status

3 Issues affecting all firms

4 Standard formula firms

5 Internal model P&C firms

6 Internal model Life firms

3Stephen Wilcox


AllianzAn Introduction

Allianz Group is one of the world’s leading insurers and financial services providers

Founded in 1890 in Berlin, Allianz companies now extend to over 70 countries with more than 155,000 employees and 75 million customers

Insurer financial strength rating of AA from S&P and A+ from A.M. Best

International network of strong brands, with first-class products in the fields of:

1. property and casualty insurance

“P&C” – non-life insurance

2. life and health insurance

3. asset management

For more information visit www.allianz.com.

4Stephen Wilcox


Allianz in the UKAn Overview

Two main operating entities in the market:

Allianz Global Corporate and Specialty

Allianz Insurance plc

AGCS: globally operating company in the corporate P&C market

Product range includes Financial lines

Allianz Insurance: focuses on UK domiciled P&C risks, including retail and mid-corporate

Allianz lines

Aviation Marine

Engineering Energy

Property Liability

Financial Lines Risk Engineering

Allianz Risk Transfer

The Chief Risk Officer is responsible for ensuring the company’s risk profile is managed within risk appetite

5Stephen Wilcox


Solvency II – current statusUncertainty

Working assumptions:

- Key European parliament vote – March 21st

- Details finalised October 2012

- Governments pass law by 1st Jan 2013

- In force 1st Jan 2014

Key parliament vote already delayed c. 1 year

- If it’s not passed in March, Solvency II will be delayed

A long history of things taking much longer than expected

There’s a good chance of further delays

The timetable for Solvency II is highly uncertain. Significant details are still not finalised.

It is a political game now.

6Stephen Wilcox


Issues affecting all firmsInvestment yields

Negative real yields – in search of higher returns from insurance and/or investments

The days of making your money from investments are long gone

http://www.bankofengland.co.uk/statistics/Pages/yieldcurve/default.aspx

UK instantaneous implied real forward curve

7Stephen Wilcox


Issues affecting all firmsSolvency II specific

Prudent person principle

- Freedom to invest as you see fit, provided

- You understand the risks

- You take account of the interests of policyholders and other beneficiaries

Requirements for documentation, e.g.

- Risk appetite

- Various policies, specifically on derivatives

Public disclosure requirements

- SFCR: Solvency and Financial Condition report

- Qualitative report on your risk exposures

- QRT: Quantitative Reporting Templates

- Including detailed asset lists

Principles-based regulation means that insurers have more discretion – but will need to reveal more

8Stephen Wilcox


Standard formula firmsConservative strategy

Firms who rely on the regulatory model for their capital requirement

- In the UK – mostly (but not wholly) small, less sophisticated firms

- Abroad – more widespread

Standard formula appears to be relatively conservative

- Across the board

- Particularly in respect of alternative investments

Regulator can direct use of internal model if standard formula inappropriate for the risk

- Guards against regulatory arbitrage – e.g. holding investments with unusual risk/reward patterns

Alternative investments likely to be relatively unattractive

9Stephen Wilcox


Internal model P&C firmsUsing spare capital

Most UK P&C firms (by number and size)

- Including probably all the biggest firms, and Lloyds

- Key risks are insurance-related

Will aim to broadly match insurance liabilities

- Using low-risk fixed income securities

- Possible opportunity for something other than Gilts

Will want to be prudent with capital required to match regulatory requirement, perhaps plus a margin

May be more speculative with any additional capital

- Investment risk diversifies well against core insurance risk

Rating agency constraint for many firms

- Rating agency models tend to be conservative

- Rating agencies consider risk in the widest sense

Opportunities for more adventurous investment strategy – if there’s spare capital and the risk appetite

10Stephen Wilcox


Internal Model life firmsIn search of risk reduction

Key risk areas are market and credit

- Value of investments and certainty of payment

Much uncertainty remains

- Solvency II rules outstanding are critical to some business models

- “What is this business worth?”

Very long-term, uncertain liabilities

- Limited ability to match those liabilities

- Bigger mismatch more volatility in balance sheet

- More volatility in balance sheet more volatility in share price

Key question: “How can I match my liabilities more closely?”

Looking for ways to match liabilities more closely

11Stephen Wilcox


Allianz Global Corporate & SpecialtyYour contact

For further information please contact:Sue Yen Leow

Head of Financial Institutions

Allianz House

60 Gracechurch Street

London, EC3V 0HR

Direct: +44 (0)20 3451 3334

Email: [email protected]

www.agcs.allianz.com

Allianz Global Corporate & Specialty (AGCS) provide class leading protection for Financial Institutions and can offer solutions to your Directors and Officers, Professional Indemnity and Crime Insurances.

AGCS has a strong, experienced underwriting team focused on client and broker service with support from a sound processing operation, claims resource, and an extensive global office network.

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