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 envir...
Building on 200 years of history
1807
1967
1969
1999
2002
2003
Hollandsche Societeit Nedlloyd
Delta
Nuts / OHRA
Delta Lloy...
• A strong Group: Dutch market leader in
new Life business (NAPI € 431m)
• An €4.7bn GWP/76 bln. AuM company:
• Life & Pen...
Financial services – A challenging environment....
Economic environment challenging
Uncertainty
on pensions
Real estate
crisis
Unemployment
rising
20
%
97 63 41 28
164
140
114
76
71
50
43
40
251
224
210
183
75
76
77
72
181
149
127
69
0
100
200
300
400
500
600
700
800
900
20...
Challenging Non-life market
• Sales volume follow GDP
• Limited profit on insurance
coverage
• Gradual decrease in CoR
• C...
Agenda
I. Over 200 years of reliability and trust
II. Delta Lloyd’s view on risk management
III. Changing regulatory envir...
History of Value reporting
• Dutch GAAP, using amortisation method
• Liabilities value @ historical cost price : 4% intere...
Mismatch liability valuation and assets
1. What is the value of the liability?
2. Can we invest in the same curve?
Do we w...
Corporates vs Swap
0
50
100
150
200
250
300
350
400
450
dec-07
mrt-08
jun-08
sep-08
dec-08
mrt-09
jun-09
sep-09
dec-09
mrt...
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
20...
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 equit...
Align all balance sheet elements
Duration analysis impacted by valuation concept
Balance sheet of Delta Lloyd Group (Q3 20...
Exit price vs. discounted cash flows
Exit price assets:
Transaction value assets:
• Representative similar
market instrume...
Interest rate risk: limited downside risk
Interest rates ‘Normal’ times:
•Interest rate risk is non-
rewarding
•Hedging is...
Equity hedging: downside protected, upside left open
• Derivatives on equity indices
― better liquidity and lower premium ...
Matching spread risk is vitally important
•Exposure to credit spreads is vital for
supporting long-term guarantee business...
Agenda
I. Over 200 years of reliability and trust
II. Delta Lloyd’s view on risk management
III. Changing regulatory envir...
Changing capital regimes
• Since beginning ’70’s Solvency I regime:
— legal framework, volume based required capital
— Lia...
Available
Capital
Build up of Solvency I capital
Assets Liabilities
Exit price
Best
Estimate
Liability
Best Estimate
Liabi...
Build up of Solvency II capital
Assets Liabilities
Best
Estimate
Liability
Solvency II
• Required capital
― risk based
― b...
Solvency I to Solvency II: from volume to risk based
Capital
elements
Solvency I
(current regime)
Solvency 1.5
(requiremen...
Dealing with multiple capital regimes
Insurance NL Insurance Foreign Other Bank
Local GAAPWFT: market value Basel II/IIIIF...
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 ba...
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...
Need to stay in control ourselves
• More rule leads the wrong mindset, and draws
attention away from the real risks
• In t...
Agenda
I. Over 200 years of reliability and trust
II. Delta Lloyd’s view on risk management
III. Changing regulatory envir...
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Presentatie Theo Berg - Delta Lloyd voor Zanders Risicomanagement Seminar 2014

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Presentatie Theo Berg - Delta Lloyd voor Zanders Risicomanagement Seminar 2014

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Presentatie Theo Berg - Delta Lloyd voor Zanders Risicomanagement Seminar 2014

  1. 1. Risk management in a challenging environment Zanders Risico management seminar Theo Berg ,, 27 maart 2014
  2. 2. Agenda I. Over 200 years of reliability and trust II. Delta Lloyd’s view on risk management III. Changing regulatory environment IV. Questions & answers
  3. 3. 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 IPO2009 1973 delisting
  4. 4. • 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 2013FY 2012 IGD Group solvency ratio 184%177% Net operational result (€m) 430404 FY 2013FY 2012
  5. 5. Financial services – A challenging environment....
  6. 6. Economic environment challenging Uncertainty on pensions Real estate crisis Unemployment rising 20 %
  7. 7. 97 63 41 28 164 140 114 76 71 50 43 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
  8. 8. 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
  9. 9. Agenda I. Over 200 years of reliability and trust II. Delta Lloyd’s view on risk management III. Changing regulatory environment IV. Questions & answers
  10. 10. 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
  11. 11. 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
  12. 12. Corporates vs Swap 0 50 100 150 200 250 300 350 400 450 dec-07 mrt-08 jun-08 sep-08 dec-08 mrt-09 jun-09 sep-09 dec-09 mrt-10 jun-10 sep-10 dec-10 mrt-11 jun-11 sep-11 dec-11 mrt-12 jun-12 sep-12 dec-12 mrt-13 jun-13 sep-13 dec-13 Corp AA Corp A Corp BBB Bond markets developments Credit crisis Euro crisis QE
  13. 13. 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
  14. 14. 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
  15. 15. 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)
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. Agenda I. Over 200 years of reliability and trust II. Delta Lloyd’s view on risk management III. Changing regulatory environment IV. Questions & answers
  21. 21. 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)
  22. 22. 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%)
  23. 23. 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%)
  24. 24. 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
  25. 25. Dealing with multiple capital regimes Insurance NL Insurance Foreign Other Bank Local GAAPWFT: market value Basel II/IIIIFRS: market value Insurance NL Insurance Foreign Other Bank Delta Lloyd Group Local GAAPWFT: market value Basel II/IIIIFRS: market value Insurance NL Insurance Foreign Other Bank Delta Lloyd Group Local GAAPWFT: market value Basel II/IIIIFRS: market value IGD Group solvency Regulatory solvency insurance entities Regulatory solvency Delta Lloyd Levens- verzekering Delta Lloyd Group
  26. 26. And increasing number of prudential supervisors
  27. 27. Same risk, same rules principles should be applied UWV Banks Pension funds
  28. 28. 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
  29. 29. 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%
  30. 30. 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’
  31. 31. Agenda I. Over 200 years of reliability and trust II. Delta Lloyd’s view on risk management III. Changing regulatory environment IV. Questions & answers
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