Allianz Insurance Solvency II How Solvency II might affect investment strategy Stephen Wilcox, Chief Risk Officer, Allianz UK

1 2 Table of contents 3 4 5 6 Background: Allianz Solvency II status Issues affecting all firms 4 Standard formula firms 5 Internal model P&C firms 6 Internal model Life firms © Copyright Allianz 17-04-23

Allianz An Introduction Allianz Group is one of the world’s leading insurers and financial services providers Founded in 1890 in Berlin, Allianz companies now extend to over 70 countries with more than 155,000 employees and 75 million customers Insurer financial strength rating of AA from S&P and A+ from A.M. Best International network of strong brands, with first-class products in the fields of: property and casualty insurance “P&C” – non-life insurance life and health insurance asset management For more information visit www.allianz.com. © Copyright Allianz 17-04-23

Allianz in the UK An Overview Two main operating entities in the market: Allianz Global Corporate and Specialty Allianz Insurance plc The Chief Risk Officer is responsible for ensuring the company’s risk profile is managed within risk appetite AGCS: globally operating company in the corporate P&C market Product range includes Financial lines Allianz Insurance: focuses on UK domiciled P&C risks, including retail and mid-corporate Allianz lines Aviation Marine Engineering Energy Property Liability Financial Lines Risk Engineering Allianz Risk Transfer © Copyright Allianz 17-04-23

Solvency II – current status Uncertainty Working assumptions: Key European parliament vote – March 21st Details finalised October 2012 Governments pass law by 1st Jan 2013 In force 1st Jan 2014 Key parliament vote already delayed c. 1 year If it’s not passed in March, Solvency II will be delayed A long history of things taking much longer than expected There’s a good chance of further delays The timetable for Solvency II is highly uncertain. Significant details are still not finalised. It is a political game now. © Copyright Allianz 17-04-23

Issues affecting all firms Investment yields Negative real yields – in search of higher returns from insurance and/or investments http://www.bankofengland.co.uk/statistics/Pages/yieldcurve/default.aspx UK instantaneous implied real forward curve The days of making your money from investments are long gone © Copyright Allianz 17-04-23

Issues affecting all firms Solvency II specific Prudent person principle Freedom to invest as you see fit, provided You understand the risks You take account of the interests of policyholders and other beneficiaries Requirements for documentation, e.g. Risk appetite Various policies, specifically on derivatives Public disclosure requirements SFCR: Solvency and Financial Condition report Qualitative report on your risk exposures QRT: Quantitative Reporting Templates Including detailed asset lists Principles-based regulation means that insurers have more discretion – but will need to reveal more © Copyright Allianz 17-04-23

Standard formula firms Conservative strategy Firms who rely on the regulatory model for their capital requirement In the UK – mostly (but not wholly) small, less sophisticated firms Abroad – more widespread Standard formula appears to be relatively conservative Across the board Particularly in respect of alternative investments Regulator can direct use of internal model if standard formula inappropriate for the risk Guards against regulatory arbitrage – e.g. holding investments with unusual risk/reward patterns Alternative investments likely to be relatively unattractive © Copyright Allianz 17-04-23

Internal model P&C firms Using spare capital Most UK P&C firms (by number and size) Including probably all the biggest firms, and Lloyds Key risks are insurance-related Will aim to broadly match insurance liabilities Using low-risk fixed income securities Possible opportunity for something other than Gilts Will want to be prudent with capital required to match regulatory requirement, perhaps plus a margin May be more speculative with any additional capital Investment risk diversifies well against core insurance risk Rating agency constraint for many firms Rating agency models tend to be conservative Rating agencies consider risk in the widest sense Opportunities for more adventurous investment strategy – if there’s spare capital and the risk appetite © Copyright Allianz 17-04-23

Internal Model life firms In search of risk reduction Key risk areas are market and credit Value of investments and certainty of payment Much uncertainty remains Solvency II rules outstanding are critical to some business models “What is this business worth?” Very long-term, uncertain liabilities Limited ability to match those liabilities Bigger mismatch  more volatility in balance sheet More volatility in balance sheet  more volatility in share price Key question: “How can I match my liabilities more closely?” Looking for ways to match liabilities more closely © Copyright Allianz 17-04-23

Allianz Global Corporate & Specialty Your contact For further information please contact: Sue Yen Leow Head of Financial Institutions Allianz House 60 Gracechurch Street London, EC3V 0HR Direct: +44 (0)20 3451 3334 Email: SueYen.Leow@allianz.com Allianz Global Corporate & Specialty (AGCS) provide class leading protection for Financial Institutions and can offer solutions to your Directors and Officers, Professional Indemnity and Crime Insurances. AGCS has a strong, experienced underwriting team focused on client and broker service with support from a sound processing operation, claims resource, and an extensive global office network. www.agcs.allianz.com © Copyright Allianz 17-04-23