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IIS Redefining the industry: Regulation, Risk & Global Strategy July 9, 2007Berlin

Helmut Perlet, Allianz SE

The Emergence of Solvency II

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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

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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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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

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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

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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

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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)

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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

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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

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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

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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.