presentatie theo berg - delta lloyd voor zanders risicomanagement seminar 2014
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Presentatie Theo Berg - Delta Lloyd voor Zanders Risicomanagement Seminar 2014TRANSCRIPT
Risk management in a challenging environment
Zanders Risico management seminar
Theo Berg ,, 27 maart 2014
Agenda
I. Over 200 years of reliability and trust
II. Delta Lloyd’s view on risk management
III. Changing regulatory environment
IV. Questions & answers
Building on 200 years of history
1807
1967
1969
1999
2002
2003
Hollandsche Societeit Nedlloyd
Delta
Nuts / OHRA
Delta Lloyd
Delta Lloyd Nuts OHRA
Amstleven
Delta Lloyd NV
ABN AMRO Insurance
IPO 2009
1973 delisting
• A strong Group: Dutch market leader in
new Life business (NAPI € 431m)
• An €4.7bn GWP/76 bln. AuM company:
• Life & Pension
• General Insurance
• Asset Management
• Banking
• Brands: Delta Lloyd, OHRA and ABN AMRO
• Approx. 5,200 permanent staff, focus on
the Netherlands and Belgium
• Listed in Amsterdam and Brussels
Delta Lloyd Group: reliable partner since 1807
FY 2013 FY 2012
IGD Group solvency ratio
184% 177%
Net operational result (€m)
430404
FY 2013 FY 2012
Financial services – A challenging environment....
Economic environment challenging
Uncertainty
on pensions
Real estate
crisis
Unemployment
rising
20 %
97 63 41 28
164140
11476
71
5043
40
251
224
210
183
75
76
77
72
181
149
127
69
0
100
200
300
400
500
600
700
800
900
2009 2010 2011 2012
Mortgages
Term
Annuities
Funeral
Pension
Saving
• Unit-linked misseling, total compensation exceeds € 2 billion, 95% drop in sales • Market CAGR -/- 18% a year!, New production halved in 4 years • Bank savings increased with 39% in 2011 and exceeds individual life market • Only in 2009 positive technical result
New Business (APE) in €m
Individual life market fastly contracting, Group life market moving from DB to DC
839
702
612
468
Challenging Non-life market
• Sales volume follow GDP
• Limited profit on insurance coverage
• Gradual decrease in CoR
• Crisis effects claims culture
• “In de brand, uit de brand”
• WGA-ER (disability) coverage misperceived by insurers, effecting capital ratio’s
Results of Non-life insurers, Combined operating Ratio
95
96
97
98
99
100
101
102
2006 2007 2008 2009 2010 2011 2012 2013
Investment result important part of surplus generation insurance
Agenda
I. Over 200 years of reliability and trust
II. Delta Lloyd’s view on risk management
III. Changing regulatory environment
IV. Questions & answers
History of Value reporting
• Dutch GAAP, using amortisation method • Liabilities value @ historical cost price : 4% interest • Embedded Value concept started in early ’90s
19/20th Century
2002/2005 • Introduction IFRS and regulatory reporting on market values • Delta Lloyd decided to use market interest for valuing liabilities • Assets at marked value
2010+
• New mortgages valued @ amortised cost • Minimum replicating cost introduced for market interest • Valuation difference with regulatory reporting
2008/2009
• Alignment with Solvency II • Back to EEV/Cash flow reporting • Introduction of UFR, IFRS and regulatory
Mismatch liability valuation and assets
1. What is the value of the liability?
2. Can we invest in the same curve? Do we want to?
SWAP ECB – AAA Collateralised –
AAA
Swap + liquidity premium
3. What is our actual investment strategy?
Mix of debt, credit, equity and real estate
Difficult Possible Difficult Possible, but
no exact match
Mismatch volatility; required capital
Corporates vs Swap
0
50
100
150
200
250
300
350
400
450
dec-0
7
mrt
-08
jun-0
8
sep-0
8
dec-0
8
mrt
-09
jun-0
9
sep-0
9
dec-0
9
mrt
-10
jun-1
0
sep-1
0
dec-1
0
mrt
-11
jun-1
1
sep-1
1
dec-1
1
mrt
-12
jun-1
2
sep-1
2
dec-1
2
mrt
-13
jun-1
3
sep-1
3
dec-1
3
Corp AA Corp A Corp BBB
Bond markets developments
Credit crisis
Euro crisis
QE
Volatile valuation curve developments
0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
6,00%
2007
2008
2008
2008
2009
2009
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
COLL-AAA ECB AAA Swap
Credit crisis
Spanish downgrades QE
Euro crisis
Effect of curve development
0
1.000
2.000
3.000
4.000
5.000
6.000
2007 2008 2009 2010 2011 2012 2013
IFRS equity IGD equity
Positive effect A/L mismatch
Negative effect A/L mismatch
IFRS profit 745 -153 -81 671 -153 -1.465 168
Align all balance sheet elements Duration analysis impacted by valuation concept
Balance sheet of Delta Lloyd Group (Q3 2012 in bn)
Life Liabilities
Bank, GI, Germany, AM, and Other
Shareholders’ Funds
UL Liabilities
Life Equity
Life UL
Life FI €29
€13
€3
€34
€23
€13
€3
€34
Life mortgages, property
€6
ASSETS LIABILITIES
• Duration
13 • Duration
15
• Duration
0
Bank, GI, Germany, AM, and Other)
Exit price vs. discounted cash flows
Exit price assets:
Transaction value assets:
• Representative similar market instruments
• Sales value house, based on similar transactions
• Sales value mortgages, based on funding spreads
Exit value liabilities:
Value of liabilities for a willing buyer:
• Expected value
• Option price
• Margin for uncertainty
Discounted cash flows, or matching adjustment:
• Matching cash flows of assets and liabilities per duration
• In case cash flows emerge in same time frame similar valuation
• Buffer needed for defaults and fluctuations in cash flows
Latest Solvency II proposals allow this mechanic, but not for rental income
Interest rate risk: limited downside risk
Interest rates ‘Normal’ times:
•Interest rate risk is non-rewarding
•Hedging is cheap
In extremely low interest rate environment: higher probability of significant increases than decreases
Current models already reflect non-negativity of interest rates
Equity hedging: downside protected, upside left open
• Derivatives on equity indices ― better liquidity and lower premium than
on individual stocks ― hedge against market risk, confident
about portfolio
• Preference for listed derivatives and long puts, other instruments if needed in case of high volatility
• Sensible spread ― different exercise dates (roof tile
construction) ― different exercise prices
• Hedge reduced after underlying equity portfolio decreased
Equity derivatives - value scenarios
Matching spread risk is vitally important
•Exposure to credit spreads is vital for
supporting long-term guarantee business
•Investments by insurers are also important
for the Dutch and European economy,
especially with banks lending less
•As long as defaults are negligible, spread
risk should not ‘hurt’
•We strongly support the Volatility and
Matching Adjustment concepts
Agenda
I. Over 200 years of reliability and trust
II. Delta Lloyd’s view on risk management
III. Changing regulatory environment
IV. Questions & answers
Changing capital regimes
• Since beginning ’70’s Solvency I regime: — legal framework, volume based required capital — Liability Adequacy Test (“LAT”) in The Netherlands — Europe: cost-price +
Solvency I
(current regime)
Solvency II
(regime as from
1-1-2016)
• End ’90’s decision to move to new European framework — market value based, risk weighted capitals — governance, risk management and information are
other key elements of this system
• 2013: DNB interim measures (Solvency 1.5) — Theoretical Solvency Criterion (“TSC”) for dividend
payments of Dutch life insurance entities — Dutch ORSA (“ERB”) included in regulatory returns
Solvency 1.5
(requirement for 2014-2015)
Available Capital
Build up of Solvency I capital
Assets Liabilities
Exit price
Best Estimate Liability
Best Estimate Liability
Risk Margin2
Surrender Floor1
Market Value
Buffer
Solvency I
• Required capital ― volume based ― 4% of life reserves; 18% of general
insurance premiums
• Available capital: Market value of assets (based on exit price) -/- Best Estimate Liability -/- Risk Margin -/- Surrender Floor
• Available capital ≠ embedded value
• Solvency ratio =
1. Safety margin against policyholders liquidating their assets 2. Margin for uncertainty around Best Estimate Liability
Available capital
Required capital
Required Capital (100%)
Build up of Solvency II capital
Assets Liabilities
Best Estimate Liability
Solvency II • Required capital
― risk based ― based on 99.5% confidence interval ― based on BBB level (100%) ― buffer provides insight in credit standing
above BBB level
• Available capital: Market value of assets (based on exit price) -/- Best Estimate Liability -/- Risk Margin
• Surrender Floor included as available capital
• Available capital ≠ embedded value
• Solvency ratio = Available capital
Required capital
Available Capital
Marktwaarde
Exit price
Best Estimate Liability
Best Estimate Liability
Market Value
Buffer
Risk margin
Required Capital (100%)
Solvency I to Solvency II: from volume to risk based
Capital elements
Solvency I (current regime)
Solvency 1.5
(requirement for 2014-2015;
dutch life entities only)
Solvency II (regime as from 1-1-2016)
Available Capital Excludes future value of UL
business (Surrender Floor)
Excludes future value of UL
business
Includes future value of UL
business
Liability
valuation
ECB AAA/Swap Curve ECB AAA/Swap Curve Swap + Volatility Adjustment,
or Matching Adjustment
Assets Market value Market value Market value
÷ ÷ ÷ ÷ Required Capital
(SCR)
Volume based, 4% of life
reserves, 18% of non-life
premiums
Risk based, using Solvency II,
with risk changes to
mortgages and loans
Risk based, but possibility to
use internal model to better
reflect risks
=
Solvency Ratio (%) Available / Required capital Available / Required capital
* scaling factor (0.90)
Available / Required capital
Dealing with multiple capital regimes
Insurance NL Insurance Foreign Other Bank
Local GAAP WFT: market value Basel II/III IFRS: market value
Insurance NL Insurance Foreign Other Bank
Delta Lloyd Group
Local GAAP WFT: market value Basel II/III IFRS: market value
Insurance NL Insurance Foreign Other Bank
Delta Lloyd Group
Local GAAP WFT: market value Basel II/III IFRS: market value
IGD Group solvency
Regulatory solvency insurance entities
Regulatory solvency
Delta Lloyd Levens-
verzekering
Delta Lloyd Group
And increasing number of prudential supervisors
Same risk, same rules principles should be applied
UWV
Banks
Pension funds
Effects of differences in prudential supervision
• OFS Q1 2013 : “Insurers provide high guarantees”
• Banking annuities based on funding (mainly mortgages)
• Insurance annuity based on risk free curve (exit value)
• Revenues move from insurance to banking sector
Capital regimes determines consumer price
t=0 t=10 premium
payment
S-II
S-I
S-II*
ECB AAA
Swap
Swap + VB of MA
110
104
100
2,0% 1,8%
1,6%
Bank Mortgages 90
2,8%
Need to stay in control ourselves
• More rule leads the wrong mindset, and draws attention away from the real risks
• In the end, it is not about models and systems, but about people taking the right decisions at the right time
• In practice, it’s a small group of people taking the ‘real’ decisions, requiring:
Risk-intelligent’ people (Dylan Evans): experience and knowlegde to balance risk and return
• Transparency (market valuation) • Act swiftly between Board, investment and risk specialists
Risk / Return tradeoff very important:
‘It is not so much about what you know, but about your sense of reality what you don’t know’
Agenda
I. Over 200 years of reliability and trust
II. Delta Lloyd’s view on risk management
III. Changing regulatory environment
IV. Questions & answers