regulatory solvency ii capital position

Risk and capital management are closely integrated processes aimed at managing the Group’s Regulatory Solvency Position and risk profile. The Regulatory Solvency Position is defined as the ratio between Eligible Own Funds (EOF) and SCR.
In compliance with IVASS Provvedimento n. 53, issued in December 2016, the SCR and Minimum Consolidated Group SCR (MCR) data hereby reported are based on a preliminary estimate.

Preliminary Regulatory SCR Coverage

(€ million)31/12/2016
SCR  Coverage
EOF to cover SCR  41,159.4
SCR  23,226.3
Solvency Ratio  177.2%

Following the Regulation, EOF are calculated as described hereafter:

  • Starting from the difference between assets and liabilities at fair value, foreseeable dividends are deducted and subordinated liabilities with adequate features prescribed by the Regulation as well as Ancillary Own Funds, already approved by the Authority, are added;
  • Availability constraints at Group level and limitations to transferability are taken into consideration and afterwards classification into Tiers, representing different level of quality of OF, is performed;
  • Within this process, entities belonging to other financial sectors, contribute with their sectoral available capital determined according to relevant sectoral regime (i.e. banks and pension business).

The following template provides the reconciliation between IFRS Net Equity and EOF to cover SCR. The following are the main adjustments applied:

  • Investments such as loans and real estate are revaluated at fair value;
  • Technical Provisions (TPs) are accounted based on Solvency II rules, as a sum of best estimate of liabilities and risk margin1;
  • Intangible assets (i.e. Goodwill) are eliminated;
  • Net deferred taxes on the above evaluations are applied;
  • Subordinated debt (with specific features in terms of availability, sufficient duration and absence of incentives to redeem or encumbrances) is included and the amount of foreseeable dividend is afterwards deducted;
  • Finally, eligibility and transferability filters so as the impact of other regulated financial entities are considered.

Reconciliation of IFRS Shareholders’ Equity to Group Eligible Own Funds

(€ million)31/12/2016
IFRS Shareholders’ Equity (Gross of Minorities) 25,667.6
Change to fair value of Assets 10,469.6
Technical Liabilities Adjustment 16,726.7
Change to Fair value of other liabilities -1,063.2
Elimination of Intangibles -10,801.2
Impact Net deferred Taxes -5,422.4
Excess of Assets over Liabilities 35,577.1
Subordinated Debt 9,142.3
Forseeable dividend -1,249.4
Other Adjustments (incl. other sectoral regimes and transferability filters) -2,310.6
EOF to cover SCR 41,159.4

Own Funds (OF) are then classified into tiers, representing different levels of quality with respect to lossabsorbing capacity2 criteria.

Total EOF to meet the SCR

(€ million)31/12/2016
TotalTier 1(*)Tier 1 (restricted)Tier 2Tier 3
EOF 41,159.4 31,848.7 3,735.8 5,406.5 168.3

(*)lTier 1 includes also available capital of sectoral entities and the unrealised gains and losses on French Institutions for Occupational Retirement Provision (IORP) business as agreed with the Group Supervisory Authority.

Tier 2 OF refer to subordinated debt, while Tier 3 OF refer to deferred taxes.

Under Solvency II, the SCR is calculated as the Value at Risk (VaR) of the OF subject to a confidence level of 99.5% over a one-year period (in other words the SCR is calculated to ensure 1 in 200 years events coverage).

In addition to SCR coverage, the Group calculates the MCR. Under Solvency II, the MCR calculation is required to determine the minimum level of capital, under which the Group would be exposed to an unacceptable level of risk when allowed to continue its operations. The MCR is defined following simple rules and remains within the corridor between 25% and 45% of the SCR. The deriving coverage ratio is presented below.

Preliminary Regulatory MCR Coverage

 (€ million) 31/12/2016
 MCR Coverage 
 EOF to cover MCR    39,153.8 
 MCR    17,846.4  
 Solvency Ratio   219.4%

To define MCR coverage, stricter OF eligibility rules are applied(3). EOF are determined as follows:

Total EOF to meet the MCR

(€ million)31/12/2016
TotalTier 1(*)Tier 1 (restricted)Tier 2Tier 3
EOF 39,153.8 31,848.8 3,735.8 3,569.3 0

(*) Tier 1 includes also available capital of sectoral entities and the unrealised gains and losses on French Institutions for Occupational Retirement Provision (IORP) business as agreed with the Group Supervisory Authority.

In addition to the preliminary Solvency Ratio data reported above, the Group calculates the Economic Solvency Ratio (ESR). For the ESR calculation the Internal Model framework is applied to all Group insurance companies(4). Within this Report, the risk profile section is based on the Economic Solvency Ratio as hereby reported.

Economic SCR Coverage

 (€ million) 31/12/2016
 SCR Coverage 
 EOF    41,657.7
 SCR    21,480.4  
 Solvency Ratio   193.9%

The SCR covers underwriting, financial, credit and operational risks as follows:

Economic SCR split by risk

(€ million)31/12/2016
TotalImpact (%)
SCR before Diversification 32,2533 100.0%
Financial risk 11,3274 35.1%
Credit risk (1) 12,7913 39.7%
Life underwriting risk 2,2046 6.8%
Non-life underwriting risk 3,7635 11.7%
Operational risk 2,1665 6.7%
Diversification benefit -5,9917
Tax absorption -5,9039
SCR excl. Other regimes 20,3577
Other regime (2) 1,1227
Total Economic SCR 21,4804

(1) Credit risk includes default risk, spread widening risk and rating migration risk
(2) Within this category other regulated financial entities are included (e.g. IORP, Banking, Asset Management)

The above SCR breakdown highlights that:

  • Financial and credit risks, account for the 74.8% of the total SCR, due to the predominance of traditional life business;
  • Life/health and non-life underwriting risks, accounting for respectively 6.8% and 11.7% of the total SCR;
  • CAT risks remain limited thanks to a comprehensive reinsurance program;
  • Operational risks contribute to the Group SCR for 6.7%. This contribution is calculated using the EIOPA Standard Formula.

Each risk category is further detailed in section Risk Profile.

Group Partial Internal Model (Group PIM)

Generali deems the PIM to be the most appropriate way of assessing the Group SCR. It represents the best way of capturing the risk profile of the entire Group and of the companies in scope in terms of granularity, calibration and correlation of the various risk factors.

The Group PIM is structured around a specific Risk Map, which contains all quantifiable risks that Generali has identified as relevant to its business, allowing for the calculation of the SCR at single risk level and at higher aggregation levels.

In implementing the model, the Group has adopted the so called Monte-Carlo approach with “proxy functions” to determine the full probability distribution (PDF) of the change in the Basic Own Funds over a 1-year horizon.
The Own Funds probability distribution allows to determine the potential losses at any percentile for risks in scope and, in particular, the SCR corresponding to the 99.5th percentile. Monte-Carlo methods are used in the industry to obtain sound numerical results using the embedded characteristics of repeated random sampling to simulate the more complex real world events. Proxy functions are mathematical functions that mimic the interaction between risk drivers and insurance portfolios to obtain the most reliable results.
The aggregation process uses advanced mathematical techniques following market best practices and the calibration procedure involves quantitative and qualitative aspects.
Governance and processes regarding the Internal Model are defined in the Internal Model Governance Policy to ensure:
  • Models and components are appropriate for their purpose;
  • Procedures are in place to design, implement, use and validate new models and model changes;
  • The appropriateness of models on an ongoing basis is confirmed.
To rule the activities related to the Internal Model developments necessary to ensure its appropriateness over time, and more in general to support the Internal Model change process, the Internal Model Change Policy has been also defined with the aim to specify roles and responsibilities in the implementation of major and minor changes.

A dedicated committee, the Internal Model Committee, has been established to approve PIM calibrations, to support decision making on PIM developments or model changes and to control the full model lifecycle, assuring proper compliance with the Group Internal Model Governance Policy. This Committee is chaired by the Model Design Authority, which is responsible for ensuring the overall consistency and reliability of the Group PIM.

The Group CRO defines the processes and controls to ensure the ongoing appropriateness of the design and operations of the Group PIM, so that it continues to appropriately reflect the Group risk profile. The Group CRO is also responsible for defining the methodology of each model component, on the basis of the Group Internal Model Committee’s proposals, as well as for the results production.
The Group CEO, within the Balance Sheet Committee, is kept informed on key steps and results of the Internal Model Process. The BoD, assisted by the Risk and Control Committee, ensures the ongoing appropriateness of the design and operations, the ongoing compliance of the Group PIM and also that the Internal Model continues to appropriately reflect the risk profile of the Group.
These roles are generally mirrored within the organizational structure of each company within PIM scope.
The Group PIM is subject to regular independent Validation on an ongoing basis, which aims to gain independent assurance of the completeness, robustness and reliability of the processes and results of the Internal Model as well as their compliance with the Solvency II regulatory requirements. In particular, the Validation output is designed to support Senior Management and BoD in understanding the appropriateness of the Internal Model, including areas of weaknesses and limitations, especially with regards to its use.
To ensure an adequate level of independence, the resources performing the Validation activities are not involved in the development and operation of the Internal Model.

Furthermore, the regular Validation procedures also serve as an incentive mechanism to ensure timely and accurate incorporation of modelling refinements.

In order to warrant the appropriateness of the array of elements contained within the Internal Model, the Validation covers both the quantitative and qualitative aspects of the Model, and is therefore not limited to the calculation engine and methodology. Other important items such as Data Quality, documentation and uses of the Model are validated accordingly.

(1)Solvency II Technical Provision reliability and adequacy are evaluated by the Actuarial Function.
(2)To grant a high quality of capital available, the amounts of Tier 2 and Tier 3 items eligible to cover the SCR are subject to the following limits. The eligible amount of Tier 1 items shall be at least one half of the SCR; in case of admissible subordinated liabilities and preference shares, exceeding 20% of total Tier 1, it is downgraded towards Tier 2. The eligible amount of Tier 3 items shall be less than 15 % of the SCR. The sum of the eligible amounts of Tier 2 and Tier 3 items shall not exceed 50 % of the SCR

(3)The amounts of Tier 2 and Tier 3 items eligible to cover the MCR are subject to stricter quantitative limits. The eligible amount of Tier 1 items shall be at least 80 % of the MCR; the same limitation on subordinated liabilities and preference shares is set. The eligible amounts of Tier 2 items shall not exceed 20 % of the MCR. No Tier 3 items are allowed to cover the Minimum Capital Requirements.
(4)When determining the ESR, only a residual set of entities calculate the SCR based on the Standard Formula.