Capital Management under Solvency II

User Conference | 18 November 2016

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Capital management definition

Managing the available and required capital and the interactions between these two Or: Finding the optimal balance between available and required capital This relates to the strategic allocation of capital

So NOT: Capital management is a financial strategy aimed at ensuring maximum efficiency in a company's cash flow. Its aim is for the business to have adequate means to meet its day to day expenses, as well as financial obligations in the short-term. NOR: A strategy that strives to maintain sufficient and equal levels of working capital, current assets, and

current liabilities. This is primarily related to short term financial decisions.

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Risk and return

Managing the capital of an insurance company is about optimizing return under risk constraints Managing capital consists in minimizing capital (or maximizing risks) while respecting the risk tolerances Capital optimization can create value by increasing expected returns for a given level of risk

Most common return measure : return on equity / economic capital / Solvency II capital Are there other return measures that you (would like to) use?

Risk tolerance is related to your willingness and ability to take risk for instance: how much risk can you take without running into solvency issues?

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Risk tolerance - I

One typical “risk tolerance” relates to the probability of the Available capital falling below the Required capital level Target capital = required capital + buffer, or: Target solvency ratio = 100% + buffer Buffer capital enables the company not to fall below the level of Required Capital with a probability

higher than x% However, if the risk tolerance is determined, the required buffer can / will depend on the strategy / risk

taken. The more risk you take, the higher the buffer should be.

GLASS can support you in finding the required buffer given your sensitivity for volatility in financial markets and the general economy

But: how to take into account other risks that are more difficult to quantify?

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Risk tolerance - II

Another typical “risk tolerance” relates to the impact of extreme scenarios (natural catastrophe, global pandemic, eternal life) on available capital Aubrey de Grey: In a few decades, we will no longer die from old age. Is your business prepared to insure humans up to 1000 years old? A (re)insurer would typically decide that the amount of losses for each

extreme scenario must be < X% of the total available capital

Examples of other risks that should be taken into account? And how can we take them into account?

How to set your policy such that this target capital / solvency ratio is reached (finding the right balance between RoI / RoE and capital charge)

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2015 Capital Management in Insurance Survey

Under Solvency II, insurers’ solvency capital requirements are directly impacted by their investment strategies and their balance sheet is sensitive to interest rate volatility In such an environment, effective capital management

will become increasingly important Deloitte: “Based on our observations across the market

… [capital optimization] strategies are either in their infancy in terms of implementation or firms are still in the process of considering the full suite of available options” “Optimizing capital under Solvency II will be the key

area for capital management over the next 5 years”

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Optimal capital management

Asset allocation and hedging decisions are an important policy instrument, but Optimal capital management not only relates to the

(strategic) asset allocation and hedging decisions. What are other examples? Product mix (life / P&C, diversification by region and

LOB) Reinsurance & capital market solutions (longevity swaps,

cat bonds) Use of an internal model Group restructuring (branch structure, M&A) …?

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Capital optimization strategies for the future

Top-3 capital optimization strategies considered for the future (according to survey): Risk margin solutions (hedge interest rate risk exposure, transfer longevity / long-tailed insurance risk) Group structure changes (international branches instead of subsidiaries) Introduction of less capital-intensive products (s.a. Unit-Linked), but can you sell these products? What do you find / think?

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Steering the Solvency Ratio – an example from SCOR

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Back to GLASS

How can GLASS be used to support your capital management decisions? What functionality is already available, what do you miss?

Contact

RotterdamOrtec Finance bvBoompjes 403011 XB RotterdamThe NetherlandsTel. +31 (0)10 700 50 00

AmsterdamOrtec Finance bvNaritaweg 511043 BP AmsterdamThe NetherlandsTel. +31 (0)20 700 97 00

LondonOrtec Finance LtdSuite 9.10, City Tower40 Basinghall StreetLondon,EC2V 5DEUnited KingdomTel. +44 (0)20 3770 5780

PfäffikonOrtec Finance AGPoststrasse 48808 Pfäffikon SZSwitzerlandTel. +41 (0)55 410 38 38

www.ortec-finance.com

TorontoOrtec Finance Canada Inc250 University Avenue #200Toronto, ON M5H 3E5CanadaTel. +1 (0)416 736 4955

Bert Kramer

+31 6 24822546

bert.kramer@ortec-finance.com

Boompjes 40, 3011 XB Rotterdam, The Netherlands

Senior consultant

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