RISKS AND OPPORTUNITIES OF THE EXTERNAL CONTEXT

Main long-term factors that could significantly affect the business and capacity of the Group to create value

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Risk Report
for a detailed description on the risk profile and the specific methods used to assess it, p. 92
of the Annual Integrated Report and Consolidated Financial Statements 2016

NEW CUSTOMER NEEDS

In this currently uncertain economic environment, consumer attitudes to insurance products and services are changing in light of two global trends:

  • digitalization, which has introduced new selling options and different insurance product management
  • economic uncertainty, which has changed spending on savings and other insurance products.
    Today, customers are demonstrating greater attention to service quality: they no longer rely only on an agent to acquire an insurance product; rather, they have a more independent approach to the decision-making process, which includes visiting the websites of insurance companies, reading customer reviews on social media and checking comparison websites..
  • Strategic risk 
  • Insurance risk

Our risk management

We aim to become the top choice of clients and distributors. We offer insurance solutions and services that are simple, tailored and even more innovative to meet their needs, also digital ones, and to improve their customer experience. We are analyzing and implementing a real digital transformation in our business units in order to make our global distribution networks more efficient. We are supporting them so that the interaction with clients can be increasingly based on an advisory approach. It means to interpret the clients’ needs and offer the best solutions for them.
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Sustainability Report 2016, p. 57; 63

TECHNOLOGICAL EVOLUTION

We are facing a profound change caused by the interaction and the cumulative effects of various developments in technology: the Internet of Things, the constant growth of mobile networks, the adoption of cloud services, the development of cognitive computing and machine learning are all elements that contribute to creating a renewed environment in which to operate.
The unprecedented availability of customer data, combined with the technological capabilities of processing data quickly and efficiently in terms of costs, allows the insurance business to create customized prices and identify potential fraud. However, it creates potential risks arising from the management of personal data as well as new challenges within the traditional insurance risk management model. Technology as an enabling element of the processes may also impair business continuity, representing a potential threat (malfunction of equipment and systems, etc.).

  • Strategic risk 
  • Operational risk

Our risk management

We have implemented an analytics platform on cloud in all our business units, leveraging the cutting-edge technologies for the management and analysis of data. The technology was critical to provide a superior user experience, designed to bring us closer to requests for greater digital interaction from our clients. This development is based on a hybrid architecture that offers the latest mobile technology. To protect our trustworthiness, reputation and survival from threats of natural, human and technological origin, we have also implemented a Business Management Continuity process that identifies critical processes and operational risks that may interrupt business operations, as well as risk mitigation measures and solutions to recover and resume vital business processes as soon as possible and with limited financial impact.

UNCERTAIN FINANCIAL AND MACRO-ECONOMIC LANDSCAPE

In 2016, numerous political events have impacted the global economy: the referendum on the constitutional reform in Italy, Brexit and the US presidential elections. At macroeconomic level, Italy remains in difficulty, with expected growth of 0.8%; Eurozone growth forecasts stand at 1.7% in 2016 and 1.5% in 2017. The British economy has not yet shown signs of a slowdown, and the pound has depreciated by 17% with respect to the euro. Consumption has slowed and investments are weak in the United States. US growth forecasts are 1.6% for 2016 and 2.2% for 2017; the Fed will therefore raise benchmark interest rates.
The European insurance sector was characterized by good performance in property&casualty premiums (with the exception of Italy), in line with the albeit feeble economic recovery and a certain difficulty in the performance of life premiums, influenced by low interest rates. This situation should also continue in 2017; the only exception is forecast in Italy, which is expected to record an improvement in life premiums.

  • Financial risk
  • Credit risk
  • Strategic risk

Our risk management

Macroeconomic and financial expectations, along with yield expectations of policyholders, the Solvency II rules relating to the calculation of economic capital and Group targets on profitability, are the main factors influencing the definition of our asset allocation strategy. In addition, the progressive decline of interest rates and the new regulatory environment have made asset management disciplined and focused on consistency between assets and liabilities even more important. In investment activities, factors such as geographical diversification and a selective focus on alternative investments are key to limit portfolio risks and strengthen current returns.

REGULATORY EVOLUTION

The insurance industry is characterized by a detailed regulatory system consisting of continuously evolving domestic and European rules and regulations. Some of the most significant are:

  • Solvency II, the European insurance market supervisory framework which includes three pillars in terms of capital measurements, risk management systems and risk disclosures
  • Common Framework of the International Association of Insurance Supervisors (IAIS) on the development of standard qualitative and quantitative capital requirements based on risk for insurance groups operating globally
  • European directive on insurance distribution and regulations on investment product disclosure and transparency guaranteeing an increasingly high level of consumer protection
  • European regulation on personal data protection for improved protection of citizens
  • European directive on non-financial information
  • IFRS 9 (on financial instruments) and IFRS 17 (on insurance contracts).
  • Strategic risk 
  • Operational risk

Our risk management

We run our business in compliance with the law, internal regulations and codes and professional ethics, and we closely monitor the evolution of the regulatory environment, dialoguing with legislators and institutions. We have implemented the organizational requirements laid out by Solvency II and received approval for the partial internal model for the determination of the Group solvency capital requirement from the Supervisory Authority. We are engaged in the various tests carried out by the International Association of Insurance Supervisors (IAIS) to determine the final architecture and calibrations of the supervisory requirement. We have strengthened an international and multifunctional initiative aimed at internally sharing knowledge, experience and best practices in the field of product development and distribution strategies so as to be ready to meet the necessary regulatory requirements. We have contributed to the European debate on personal data protection and we continue to monitor the definition of detailed measures to identify aspects pertaining to our business to be implemented. We also monitor developments in the new disclosures on non-financial information to ensure its implementation. Lastly, we monitor developments in international accounting standards through work groups skilled in investments and insurance contracts.

ENVIRONMENTAL CHALLENGES

The global warming caused by greenhouse gas emissions originating from human activity is triggering a rise in extreme weather events, such as higher temperatures and flooding, that become increasingly frequent and violent. These factors impact the economic and social system as well as the relative insurance needs.
Proper measures are therefore necessary to avoid higher losses and increased volatility that would impact on insurance policies’ price, also due to higher capital absorption resulting from the events being underwritten, and make the access to insurance too expensive or, in extreme cases, the offering uninsurable.

  • Underwriting risk 
  • Emerging risks
  • Operational risk

Our risk management

We constantly monitor the main perils and territories where we are exposed, using actuarial models to estimate the damage that could result from natural phenomena. We can therefore optimize our underwriting strategy. Reinsurance plays a key role: we manage our protections on a centralized basis in order to take advantage of economies of scale and pricing thanks to the size of the Group, with the aim of leveraging on business diversification. We also continue to monitor and reduce our direct impact and to favour the limitation of global warming to within 2°C through our insurance solutions as well as our investments. We develop and distribute increasingly innovative products along with a high level of services in order to meet the potential request for more and improved protection against catastrophes, in addition to products that reward virtuous and environmentally sustainable decisions and behaviour. Also in partnership with other public and private stakeholders, we work to support initiatives that help to expand access to insurance products, for example through more favourable taxation for catastrophic coverage, which would lower the impact of reconstruction on the public sector, as well as initiatives aimed at preventing and mitigating environmental risks. We invest responsibly, excluding from our investment universe those companies that are involved in causing serious harm to the environment. We support research and studies on environmental risks.READ MORE

Sustainability Report 2016, p. 78

DEMOGRAPHIC AND SOCIAL CHANGE

Modern communities are characterized by conflicting demographic and social phenomena: the continuous aging of populations, driven by increased life expectancies and lower birth rates, which is partially offset by increasing migration, boosting younger populations, whose average income capacity is however quite limited and highly conditioned by a flexible, yet precarious, job market. The risk of increasingly unbalanced societies remains, where the higher post-retirement requirements of the older population with greater willingness to save are no longer properly covered by the public system, and the economic and financial resources produced by the younger categories of the population, or from private savings, have to be directed and valued more carefully.

  • Underwriting risk 
  • Emerging risks

Our risk management

We monitor and manage the consequences of a changing society. We offer effective, flexible and modular solutions with high pension and assistance content to cover healthcare expenses and any other possible current and future, individual and family requirements. We commit to strengthening dialogue with people, providing complete and easy-to-use information on products and services, helping them to understand the main risks that may impact their earning capacity and to accurately assess their capacity for saving and the financial gap between the pension that has accrued by the age of retirement and the projected income. We therefore believe it is important to provide support to face the possible needs of old age in due time with adequate financing, within a general context characterized by little knowledge of and propensity to seek out insurance solutions.