Stress Testing internal & regulatory perspectives

Transcription

1 Stress Testing internal & regulatory perspectives Thomas C. Wilson CRO Allianz SE NAIC Financial Stability Committee Denver, April 8th, 2017

2 Own Risk and Solvency Assessment & Management Top-Down Guidance Balance sheet (solvency ratio, rating, risk capital) Financials (growth, earnings, return on capital) Risk appetite based on stress scenarios Challenged Bottomup Planning Earnings, balance sheet 3 year baseline Risk scenarios Qualitative assessment Capital budgeting Capital allocation Risk limit allocation Resource budgets ORSA-Management: A dynamic process between Risk, Finance, Treasury and Line Management Bi-weekly projections, discussion, actions Monthly ad-hoc stress testing, discussion, actions Quarterly reporting, stress testing, discussion, actions - Parametric - Historic - Reverse 2

3 is complemented by contingency plans to tackle potential systemic risk Instrument Definition Size Responsibility Recovery Plan Systemic Risk Management Plan Liquidity Risk Management Plan A contingency plan for near default situations of insurance group A manual, which outlines how insurance group manages the risks which arise from activities which have been identified by the IAIS as systemically risky A manual, which outlines how insurance group manages liquidity risk (including stress tests) ~ 600 pages ~ 200 pages Insurance Group Insurance Group Insurance Group Resolution Plan A plan which outlines how the group could be unwound without systemic disruptions tbd Supervisors, but company to provide input Different focus of Recovery, Systemic Risk and Liquidity Risk Management plans provide additional insights and support co-operation across divisions and units. 3

4 Allianz solvency capital / management ratio framework Minimum ratio after all stresses SII ratio not resilient Historic Scenarios Illustrative 2008 Financial Crisis 130% 160% 135% Too much capital 2011/12 Sovereign Debt Crisis 2014/15 Low rate scenario, no UFR 2001 Equity crash Starting Solvency Ratio Parametric Stresses Illustrative Appropriately capitalized 1:10 year modelled event 4

5 Analyst perception Illustrative Q1:2016 Deutsche Bank estimates 5

6 Allianz stress testing framework Parametric (Q) Historic (Q) Reverse Stress (Q) 1-in-10yr, 1-in-100yr Ad-hoc (~M) IR +/- 50 bps 2008 Crisis Credit with market Jan: China economic slowdown / commodity shock IR +/- 100 bps 2012 Euro Crisis Reserve with market EQ +/-30% , UFR unlocking Premium with market CS +50 bps Inflation scenario Longevity with market CS +100 bps 1997 Black Monday Cost with market FX -10% 1998 Asian Currency Event Stresses (Q) 1-in-250 yr, 1-in-500yr IR -50bps, CS +100bps, EQ -30% G-SII Crisis Management Group (A) Euro-crisis Liquidity run Combined NatCat 1998 Russian Crisis Natural Catastrophe (43) 2001 Dot.com Terror scenarios (7) Low for Long Clash scenarios (23) Feb: Istanbul EQ, fire following Feb: Nationalistic response to terror attack March: Brexit April: Bail-in of senior unsecured bank debt May: Cyber risk (payment systems, data theft, malicious damage) June: Life market conduct July: Enhanced market volatility Oct: Alternative Asset concentration Nov: End of QE in Europe Dec: Italian referendum Jan: Enhanced Euro-scenario with Frexit Feb: Tsunami with CBI 6

7 Characteristics of EIOPA Macroprudential Stress Test Market-wide stress test for (life) insurance companies in Europe (30 countries / > 230 companies representing ca. 77% of total market reserves) Goal was to assess insurers vulnerabilities and resilience to two severe market developments: Analysis of impact of one-off stress events (ie. no multi-year scenario analysis) defined as: Low for long stress: Secular stagnation assuming no growth in Europe for 60 years driving down yields at all maturities (downward stress on yields based on lowest yield curve observed so far and ultimate forward rate in year 60 assumed to be 2,0%) Double Hit stress: Downward stress to risk free rates, simultaneous increase in credit spreads and substantial losses on equities, real estate, private equity, hedge funds, REITs No pass or fail exercise due to focus on asset and liability impact (instead of solvency ratio) Supporting analysis requested on asset and liability duration, cash flow patterns etc. EIOPA s stress test focus in principle aligned with internal risk management perspective on potential major stress events (although calibrations might differ) 7

8 EIOPA stress test triggered further analysis and supervisory reaction Different impact in various markets provides insight into differences in activities Key EIOPA recommendations to local supervisors Ensure that vulnerabilities identified at solo level are recognised and dealt with at group level Review guarantee clauses and options Review and assess models regarding management and policyholder behavior Macroprudential stress test could be a meaningful and fact-based starting point for analysis of potential systemically relevant activities of insurers and mitigating regulatory responses 8

9 Effective macroprudential / systemic risk supervision requires consistent stress tests between financial sectors 1 year stress Insurance sector double-hit stress 2016 Banking sector adverse macro-financial scenario 3 year scenario Shocks to EURO-SWAP rates Maturity (bp) Extreme interest rate down shock Implied shock to credit spreads (German 10-year sovereign bond) Extreme credit spread stress (bp) Shocks to stock prices Moderate interest rate up scenario Moderate credit spread scenario (%) Shocks to residential property prices in EU (%) Source: EIOPA Stress Test 2016 Technical specifications and Adverse macro-financial scenario for the EBA 2016 EU-w ide bank stress testing exercise 9

10 Lessons learned from stress testing Common challenges Expert judgement oddly specific, always wrong in the details Difficult to converge on a scenario tree due to multiplicity of opinions Difficult to agree on scenarios which fall outside of our normal experience Analysis is challenging; taking action more so given the perceived remoteness of the scenarios Recommendations Leverage historical scenarios and reverse stress testing Focus more attention on management toolkit / contingent actions rather than scenarios Embed stress testing and scenario analysis into regular capital management processes Consider market-wide stress testing as fact-based starting point of macroprudential supervision 10

11 11 Allianz SE 2016