The purpose of the Risk Report is to provide an overview of the Group’s Solvency Position and risk profile, as well as its risk management framework.
To this end a brief introduction on economic and regulatory environment is hereby provided.
When addressing the Group’s risk profile it is important to consider that the insurance sector, consisting of long-term institutional investors, is mostly vulnerable to financial markets and the economic environment.
Generali has proven to be resilient to the prolonged low interest rate environment and lower growth in the Eurozone. Nevertheless, prolonged low interest rate environment as well as financial instability represent the key challenges for the sector.
For more details on financial markets’ developments please see Risks and Opportunities of the external context at page 34 of this Document.
In addition to the financial environment, regulatory developments represent a major external driver of threats and opportunities to insurance companies. These include developments in the area of prudential supervisory regimes, such as Solvency II, International Capital Standards (ICS), as well as regulations defining new principles in terms of distribution, product governance (Insurance Distribution Directive - IDD), Packaged Retail and Insurance-based Investment Products (PRIIPs Regulation), personal data protection (General Data Protection Regulation - GDPR) and anti-money laundering (IV AML Directive).
For more details on the regulatory environment please see Risks and Opportunities of the external context at page 34 of this Document.
From January 1, 2016 the Group and all of its European insurance subsidiaries have to comply with Solvency II regulation, which requires capital to be held for all quantifiable risks.
Solvency II allows the use of internal models, subject to Supervisory Authority approval, to calculate capital requirements to better reflect the risk profile. The Group applied for the use of its own Partial Internal Model1 (PIM) to calculate the Solvency Capital Requirement (SCR) under Solvency II. In March 2016, the Supervisory Authority authorization was granted for the use of the PIM to determine the SCR at Group level and for the main business units, covering Italian, German and French entities2 as well as the Czech company Ceska Pojistovna as. The PIM has become the cornerstone of the Group risk assessment framework and its use is embedded in all risk and capital management related processes. For the purpose of better capturing the Group’s risk profile, the PIM scope is planned to be extended to other European insurance entities.
The Regulatory Solvency Ratio, estimated on the basis of preliminary data, amounts to 177.2%3 as at 31 December 2016. For the purpose of the Regulatory Solvency Ratio calculation, the Group companies within the PIM scope use the PIM, while other insurance entities adopt the EIOPA Standard Formula to calculate the SCR. Other financial regulated entities contribute to the Group Solvency Ratio on the basis of local sectorial regulatory requirements (e.g. mostly banks and pension funds).
The final Regulatory Solvency Ratio and the impact of the long term guarantees used will be disclosed according to the deadlines for the publishing of the Solvency and Financial Condition Report.
Given both the PIM extension plan and the objective of better capturing the Group risk profile, the so called Economic Solvency Ratio is also presented in this Report. This takes into account the use of the broader PIM scope. On this basis, the Economic Solvency Ratio as at 31 December 2016 is 193.9%.
For the following part of this Report we refer to Economic Solvency Ratio view.
The results confirm the sound capital position of the Group, which is well positioned above the regulatory threshold and the risk tolerance levels set by the Group within its risk appetite4: the Group Economic Solvency Ratio is positioned above the tolerances set5 respectively at 130% and 160% (hard and soft limits for Economic Solvency Ratio).
For risks not included in SCR calculation, other assessment techniques deemed more appropriate for monitoring and management purposes are used. In particular, for liquidity risk, the Group has in place procedures and limits that confirm the Group’s low risk profile and a sound liquidity position.
Generali Group also relies on a sound risk management system including governance and structured risk management processes. A set of risk policies rule the risk management system and all risk related-processes. Within the risk management system, the Own Risk and Solvency Assessment (ORSA) represents the main risk reporting tool, with the purpose of supporting risk strategy update.
Group risk management also relies on a set of tools, such as the Recovery Plan, the Liquidity Risk Management Plan and the Systemic Risk Management Plan, defined following the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS) standards6.
Starting from this year the Solvency and Financial Condition Report (SFCR) will be published. This year the Risk Report has been restructured to achieve better alignment with the Solvency II risk and capital reporting structure and to pursue alignment with the SFCR structure.
- Section B provides a brief description of the risk management system;
- Section C presents the Solvency Position of the Group and the key elements of the Group’s Capital Management;
- Section D provides an overview of the Group’s risk profile.
Finally, Group rating assessment by external rating agencies is provided on the Group web site in the section http://www.generali.com/investors/debt-ratings/ratings, while sensitivity analyses of life underwriting risks results in terms of EEV (European Embedded Value) are provided in the section Details on insurance and investment contracts of the Notes.
1 The Internal Model is defined as Partial because it covers all risks except Operational risk and because the approval has been provided for the main Business Units at a first stage, with an extension plan to cover the other entities under implementation.
2 The authorization for the French life entity has been granted subsequently to the indicated date.
3 On the basis of IVASS Provvedimento n. 53, 2016, the SCR and MCR calculations to be disclosed in the Annual Report can rely on a preliminary estimate.
4 In defining the level of risk it is willing to take, the Group defines its own risk strategy within the Group Risk Appetite Framework (RAF) while complementing the overall business strategy. The Group RAF defines the level of risk the Group is willing to take and ensures risk embedding into key business processes, to grant all risks are properly managed.
5 Soft and hard limits’ thresholds set within the RAF aim to limit excessive risk taking and to maintain the Solvency Position at the desired level.
6 Generali Group prepared these Plans, although it is not included in the list of Global Systemically Important Insurers (GSIIs), issued by FSB.