1. RISK MANAGEMENT IN INSURANCE BUSINESS
Idar Kreutzer, CEO Finance Norway
Insurance Summit 2013
Stockholm,

2. Risk management - When risks collide
Global governance failure !

3. Risk management in insurance
”Managing risks
is what we do”
Source: Securityreseach.at

4. Insurance – A key role in society
Protect
Prepare
Understand

5. Key risks insurance must manage
Financial risks
Biometric risks
Property & casualty
Regulatory dynamics

6. Property & casualty Implications of a changing climate 28.11.2018
Challenge the traditional insurance way of thinking.
Unknown risks ?
Public Private Partnership
Claims data - pilot project.
New products
Green covers
Carbon delivery wraps
Forestry & agriculture
New markets
Weather risk
Risk consulting
Cat Bonds
Promote loss prevention
Participate in Carbon markets
Microinsurance
“Society is simply too
vulnerable to weather impacts “

7. Biometric Longevity Migration Increasing length of the retirement age
Longer pay-out period for pension providers
Significant reserve requirement in the private sector
Migration
New risks in the market
Cultural differences
Living next to the North pole
Changes in the urban landscape
Diseases
Expected life age – Norwegian population
ddddddddddddddddddddd
Source: Statistics Norway

8. Financial risks Low interest rates vs. long term guarantees
Long-term contracts
Annual interest rate guarantee
Inappropriate capital buffer
Existing DB and paid-up policies
challenging
Close-down of municipal pension schemes
Need for long duration assets
Low allocation to risky asset classes with
volatility (equities) for DB
Liquidity in ALM to be prepared for transfer
from DB to DC (or hybrid) schemes
Focus to obtaining return to cover
guarantee of define benefit schemes (DB)
volatility (equities) for DB. Any surplus of
guarantees used to build buffers in DB
Reduce market risk
Hold to maturity management in focus
Low interest rates vs. long term guarantees
Asset – liability matching
Asset risk and allocation
Financial shocks & market value

9. Low interest rates – consequences for the industry
Source: Finance Norway
Defined benefit (DB) – number of insured
Defined contribution (DC) – number of insured
Source: Finance Norway

10. Main challenge: Paid-ups from DB schemes
Interest risk difficult to hedge
Ca. 20 year duration
Thin and illiquid NOK bond market
Annual interest guarantee calls for short duration, long guarantee calls for long duration
HTM bonds will reduce P/L volatility
But could be removed under IFRS 4 II
No future premiums
Interest rate levels main driver for profitability
Low interest rates gives high capital requirement and low profitability
Norwegian FSA’s stresstest: Solvency II liability discounting curve

11. Liability Driven Investments
Valuing liabilities – and matching the duration
Assets
100
Liabilities
100
2 % point fall
in rates
Source: Bloomberg 20 yrs swap
30% increase
in liabilities
Example:
duration 15 ?
Liabilities
130
Assets
100
If the liabilities' duration is 15, then a 2 percentage points fall in interest rates alters the present value of liabilities with 30% if this change is simply carried through for the purpose of liability valuation
Which assets (apart from too few long dated bonds) yield 30% with certainty over 4 months?

12. Regulatory dynamics – life & pensions
Main challenges:
Risk based capital requirements (Solvency II)
Macro economic prudential regulation
IFRS 4 phase II (Market Value)
Systemically important (IAIS global capital standards)
ORSA
Internal models
Capital requirement calculation
Solvency II:
A new risk management system

13. Key implications Regulatory asset risk will become a key driver
Asset-liability-matching strategically important
Increased focus on liquidity and rating
Affects insurers’ investment decisions
Moving away from long-term assets
Distorting effect on financial markets and the economy
Higher cost of funding for corporates and governments
Source: Oliver Wyman, ”Funding the future”, 2013

14. Systemic risk - not just banks?
IAIS 10 October: Global quantitative capital standards
Peter Braumüller, chair of the IAIS Executive Committee:
“It is undeniable that the business of insurance is global, and global issues demand global responses,” [...]“This is why the IAIS, whose Members constitute nearly all of the world’s insurance supervisors, has committed to develop and implement the first-ever risk based global insurance capital standard.”

15. Future business champions are those who develop products and services in a way that unites the global social and environmental challenges with their own profitable growth

16. Summary Understanding and managing risks – ”that’s what we do!”
The times and risks are changing
Understanding and managing risks – ”that’s what we do!”
We have to deal with a changing regulatory environment
A well functioning insurance industry is crucial to society