© Copyright Allianz IIS Redefining the industry: Regulation, Risk & Global Strategy July 9, 2007 Berlin Helmut Perlet, Allianz SE The Emergence of Solvency II

© Copyright Allianz 2 Key Issues and implications for Allianz 1.Risk based Solvency II calculations - incentive for integrated risk management 2.Convergence issues -to Basel II in Europe -of supervisory approaches 3.Convergence towards IAS/IFRS 4.Market consistent valuation of assets and liabilities 5.Group Supervision 6.Increased transparency concerning supervisory practice and the business model of insurance companies

© Copyright Allianz 3 Future supervisory requirements  Application of internal models for financial conglomerates  Validation of internal models has to be in time  No additional arbitrary limits are necessary within a risk based system (eg. Asset limits)  Measure same risks in the same way – but still consider the specifics  Diversification between different sectors has to be taken into account  Similar approaches for the calculation of risk capital across the sectors Risk based Solvency II calculations - incentive for integrated risk management Status Quo The Solvency II system should intensify the use of more sophisticated internal modelling  Supervision and solvency requirements are not risk based  Strong influence of national accounting standards  Know-how for internal models necessary within supervisors as well as insurers  Not all supervisors have an integrated approach

© Copyright Allianz 4 Allianz sees the opportunity that our internal risk management practices can serve for external SII requirements Pilot of internal risk capital model Enhanced risk governance structure introduced Performance measurement linked to risk capital results Process enhancements to ensure robustness and auditability the calculation Proposed SII framework needs to adequately address our integrated business model. Ongoing enhancements of integrated risk management ongoing Introduction of complementary risk and scenario assessment 2004

© Copyright Allianz 5 Future supervisory requirements  Same application of supervisory tools/approach, independent of country (eg. reporting, application of principles)  Intensified cooperation between supervisors in order to create on European supervisory culture  Alignment of supervisory powers  Convergence to Basel II as far as possible Convergence issues Status Quo A coherent supervisory approach throughout Europe will serve for a level playing field and be a better starting point for discussion with non- European insurers  National licensing  Supervisory approaches and tools are different  Competitive disadvantages through incoherent requirements  Competition between supervisory in order to influence future SII regime

© Copyright Allianz 6 Future supervisory requirements  Coherent framework of IAS/IFRS and Solvency II  Support economic approach of Solvency II  Best Estimate calculations should be in line as much as possible  Definitions of Risk Margins should be reconcilable  Application of prudential filters should be avoided as far as possible  IAS/IFRS disclosure requirements should be starting point for public disclosure requirements Convergence towards IAS/IFRS Status Quo Consistent approach between Solvency II and IAS/IFRS will lead to a more efficient system and ensures a coherent steering of the companies  Differences in valuation approaches  No market consistent view  Different valuation basis used currently for deriving risk factors  Lack of comparability

© Copyright Allianz 7 Future supervisory requirements  One market consistent valuation system  Valuation of liabilities via best estimate and risk margin (for non-hedgeable risks)  Avoid double reporting due to different accounting regimes Market consistent valuation of assets and liabilities Status Quo Market consistent valuation plays a major role – harmonisation across Europe as far as possible  Several different local accounting systems exists  Liabilities within old framework are not valued at market value  No risk based view to some extent as liabilities do not correspond to changes of markets (accounting mismatch)

© Copyright Allianz 8 Risk is uncertainty about the future development of the economic value of the business Asset volatility Market value of assets Fair value of liabilities Probability 0 Available capital Economic value Economic insolvency Available capital after one year Liability volatility The economic perspective is independent of accounting practice or regulatory requirements

© Copyright Allianz 9 Requirements on future supervisory systems  Group supervisory system is necessary („Lead Supervisor“)  pass on of supervisory authorities is important  Intensified exchange between supervisors and definition of escalation processes  Mutual recognition and intensified exchange of information in order to avoid double work  Predefined rules for crisis situation are advantageous (eg. no additional guarantees would be necessary) Group supervision is essential for international players in order to realise scale effects Status Quo  Even though groups are steered centrally, subgroup supervision is still conducted  National authorities tend to require additional guarantees which steam from their former practices  Different requirements of supervisors prohibit standardized reporting systems

© Copyright Allianz 10 Future supervisory requirements  Consistent transparency requirements throughout Europe  Enhanced transparency needed concerning the supervisory methods  Efficient and relevant stakeholder information  Comparability within Europe and other non-EEA markets Increased transparency concerning supervisory practice and the business model of insurance companies Status Quo Transparency will play a critical role in a consumer oriented insurance market  Disclosure requirements are basically based on different national requirements  Public disclosure via annual report and additional supervisory reporting  Product transparency not at a highest level

11 We believe the success of Solvency II will depend on some crucial factors Success factorsModernized regulatory framework Clearly defined lead supervisor concept with separation of roles & responsibilities; allowance for diversification Harmonisation of supervisory standards & practise across member states Incentives to implement full internal models (more accurate than standard model) Supervision of sectors not covered by SII has to be upgraded (e.g. pension funds) Starting point for public disclosure has to be future IFRS standard Ensure that groups are supervised in line with their risk profile Level playing field independent of group location Foster risk management best practices Avoid regulatory arbitrage Ensure efficient reporting Harmonized group supervision will ensure customer and provider access to a common EU insurance market.