Association of the Luxembourg fund industry Solvency II: threats and opportunities for the Asset Management Industry Impact on Investment Industry Presented by: Robert Deed Patrick Burke Thierry Flamand : Lombard International Assurance S.A. Patrick : European Federation for Retirement Provision : Association Luxembourgeoise des Actuaires
Times are changing BANKING Target 2 Securities Bank capital rules Consumer protection MiFID II Depositaries 2012 2015 2020 Credit rating agencies Packaged retail investment products AIFMD IMD II Solvency II IFRS 4 Phase II Corporate governance & executive Remuneration UCITS V UCITS IV INSURANCE ASSET MANAGEMENT 1
Agenda Insurance markets developments Lombard International Assurance S.A. experience Overview and timeline Key Concepts & Impacts 2
Insurance markets developments EU Insurance market is the first insurance market in the world with more than 40% of the worldwide premiums Over 5 000 insurance undertakings are operating in Europe. The number has decreased over the last ten years as a result of the wave of mergers and acquisitions that took place at the end of the 1990s In the life (non-life) sector the aggregate solvency ratio is higher than 290% (341%)at the end of 2009 (Based on Solvency I) European insurers invested more than 6 800 bn (82% in Life/18% in Non Life) in the global economy in 2009 (53% of the GDP of the European Union) On the top 20, Unit-Linked products represent 30% of the representatives assets De-risking strategy in the aftermath of the crises appears to continue 3
Insurance markets developments Market Shares held by insurers / Market capitalisation Market(s) included Irish Stock Exchange 89.2% IE Wiener Börse 63.0% AT Deutsche Börse 56.2% DE Luxembourg Stock Exchange 50.0% LU London Stock Exchange 47.4% UK Euronext 32.2% BE, FR, NL, PT Malta Stock Exchange 23.6% MT NASDAQ OMX Nordic 19.8% DK,SE, IS, FI Borsa Italiana 19.4% IT Budapest Stock Exchange 14.3% HU Ljubljana Stock Exchange 11.2% SI Bratislava Stock Exchange 9.5% SK Warsaw Stock Exchange 6.2% PL SIX Swiss Exchange 5.9% CH Cyprus Stock Exchange 3.1% CY Prague Stock Exchange 3.1% CZ Athens Exchange 2.2% GR Spanish Exchanges (BME) 2.2% ES Source : CEA statistics N40 4
An atypical business Model Very little life risk carried (reinsured) No capital/return guarantees (unit-linked) No in-house asset management - open architecture model - over 400 external asset managers, managing: o over 15,000 internal insurance funds o representing over 180,000 asset lines o including over 5000 investment funds o Each investment fund may have 100-200 asset lines 5
Solvency Capital Requirement overview ELAdj SCR BSCR SCRop cred SCR: Solvency Capital Requirement BSCR: Basic SCR SCRop: SCR for operational risk requirement Adj: Adjustment for loss-absorbing capacity CAT: Catastrophe risk Market Default SCR health Health Life Non-Life Intangible Interest rate SLT Health CAT Non-SLT Health Mortality Premium Reserve Equity Property Spread Currency Concentr -ation Illiquidity Mortality Longevity Disabilty Morbidity Lapse Expense Revision Premium Reserve Lapse Longevity Disabilty Morbidity Lapse Expense Revision CAT Lapse CAT = Adjustment for the risk mitigating effect of future profit sharing and deferred tax 6
Market risk decomposition (QIS 4) Equity risk Equity risk Equity risk Interest rate risk Interest rate risk Interest rate risk Diversification Diversification Diversification Source : Principaux enseignements de la quatrième étude quantitative d impact (QIS4) - ACP Market risk represents more than 2/3 (resp. 2/5) of the Basic Solvency Capital Requirement for Life (resp. Non Life) business 7
Market risk decomposition (QIS 4) Equity risk Equity risk Equity risk Interest rate risk Interest rate risk Interest rate risk Diversification Diversification Diversification Source : Principaux enseignements de la quatrième étude quantitative d impact (QIS4) - ACP Market risk represents more than 2/3 (resp. 2/5) of the Basic Solvency Capital Requirement for Life (resp. Non Life) business 8
Solvency II: The timetable Proposal of the directive 10/07/2007 Adoption of the directive s frame by the European Parliament 22/04/2009 Adoption of the directive into national law Solvency 2 in effect January 2013 2007 2008 2009 2010 2011 2012 2013 Results of QIS 3 Mid-November 2007 QIS 4 April 2008 QIS 5 Start in August 2010 Propositions/ Adoption of level 2 and level 3 enforcements Publication of accounts in Solvency 2 in 2013 9
Solvency II: An Overview Asset Managers & Services providers = Key data owners 10
Solvency II: Key concepts & Impacts Key concepts Economic over legal and substance over form Risk based approach Look through to underlying assets Volatile investments generate higher capital charges Internal models may be applied Impacts for IM Industry The transparency of the financial instruments will be essential The market risk becomes the major risk for the life insurance industry Data requirements (Calculations/Reporting) Expected switch from equities to bonds (Lower margins) Need to engage clients 11
Solvency II: Key concepts & Impacts Key concepts Impacts for IM Industry Greater emphasis on ALM Invest only in assets in the best interest of policyholders Central role for rating Understanding Liabilities structure Reversal of the burden of the proof Fly to quality (Assets, custodians) Mark to Market / Model Lower buffers Key outsourced function New responsabilities / supervision 12
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