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Global trends incapital management
Presentation to the Institute of Actuaries of Japan
Greg Solomon & Carl Moxley, Swiss Re
July 2010

For theAXAInstituteJapan of| JuneActuaries
2010of |Japan
Swiss| JulyRe Japan
2010 | Swiss Re

Contents


Introduction

Determining capital requirements

Demand for capital

Solvency IIConclusions

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Introduction
Focus on capitalWhat is capitalWhy is it needed

Recent capital-driven events

Solvency II – even outside Europe

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Introduction
The life office balance sheet

Liabilities
AssetsRequiredcapital

free capital

Excesscapital
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Demand for capital
Capital usageNew business strain



Published solvency

Capacity for M&A (aggressive & defensive)Withstand adverse deviations



etc.

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Determining capital requirements
Capital convergencedifficult

Approach
Fixed ratio

Risk based capital

Probabilistic

Implementation

CHJapan

UKEUUS
Australia

Brazil
China

easy

India
costInsurance regulation driven by

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economic solvency

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Determining capital requirements
Three different perspectives
Regulatory capital– measuring solvency– more conservative

Ratings capital– S&P, Moody’s, Fitch …
– attempts to be realistic

Risk capital– internally calculated– the most realistic?

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Determining capital requirements
Using all three perspectives
The importance of each to the company



Costing insurance products– maximum of (regulatory, ratings, risk)– average of (regulatory, ratings, risk)– most relevant of (regulatory, ratings, risk)

Can make big difference to competitiveness of products

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Determining capital requirements
Calculating risk-based capital

Formula-based approach– e.g. 4%(reserves) + 0.3%(sum at risk)

Risk-based capital is more meaningful–(R1  R8 )2  (R2  R3  R7 )2  R4

VAR (value-at-risk) or Tail-VAR
VaRTail VAR

Profit1:200event

Expected result

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9Demand for capital
2008/9 capital crisis

Lots of structured deals, reinsurance & banking

Less capital-intensive products / withdraw products

Close to new business

Government intervention



CP market dried upRatings triggers

Impact on CDS …

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Demand for capital
Tools for providing capital

Government bail-outsEquity / demutualisation

Sale of business / Admin Re®



Insurance-linked securities



Financial reinsurance / new business financing

Debt / sub-debt / contingent loans

Stop-loss covers (particularly for risk-based capital)

Traditional quota share reinsuranceVarious hybrid solutions



etc.

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Demand for capital
Characteristics of insurance capital

Can impact on different ‘perspectives’ of capitalGroup capital– admissibility– fungibility

Liquidity / Duration

Tier 1 -vs- Tier 2 -vs- Tier 3

Implementation– size & cost
– time required

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Demand for capital
New Business Financing – spread profits

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Demand for capital
New Business Financing – regulatory profits

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Demand for capital
New Business Financing – post-finance profits

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Solvency IIIntroductionEuropean scopeTimeline– started early 2000
– implement 1 January 2013 (maybe)– consistent calibration and feedback process

Economic principles, risk-based assessment of assets andliabilities



Full interaction of risk management and capital

Solvency II (as a concept) reaches Asia

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Solvency IIAims


Enhance policyholder protection

Better match to the true risks of an insurance company

Consistency across financial institutions

Principle-based but without undue complexity

Assessment of an insurer’s overall solvency situation

Two-level approach to capital requirements– Solvency Capital Requirement (SCR)– Minimum Capital Requirement (MCR)

Harmonise quantitative and qualitative supervisory methods

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Solvency II
The three pillars

Pillar I
Quantitative requirements

Pillar II
Qualitative requirements

 Minimum capital requirement Corporate governance Solvency capital requirement

 Internal control processes

 Standard approach Risk management function

 Internal model Asset & liability management

Pillar III
Market discipline Supervisory disclosure Public disclosure Risk dependencies

 Risk mitigation

 Technical provisions

 Supervisory review process Supervisory powers
 Safety measures Solvency control levels

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The key elements
Consideration of all risk categories

Probabilistic risk measurement

Economic balance sheet

Risk aggregation

Insurance
risk

SCR

probability
VaR

Market risk
ES

Credit risk
Operationalrisk

The Solvency I regime only considers
the insurance risk and in some extent
the market risk

Economic balance sheet

LossMarketvalue ofassets

Solvency
Capitalrequirements

Profit1 in 200
years loss

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Economicnet worth

Expectedresult(mean)

Solvency II risk measure will bebased on a Value at Risk (VaR) levelof 99.5% which is equivalent to a
0.5% target default probability, andspecifies a time horizon of one year

Economic
value ofliabilities

Introduction of market-consistentvaluation of balance sheet items



Increased volatility of balance
sheet items expected19

Solvency II
Key Elements –Draft SCR structure

SCR
BSCR

Adj

SCRmarket

Mktfx

Mktprop

Mktint

Mkteq

Mktsp

Mktconc

SCRhealth

SCRdefHealthHealthHealthSLTNonSLTCAT

HealthHealthPrem&ResCAT

HealthMort
HealthLongSCRop

SCRnon-life

SCRlife

LifeMort

NLPrem&Res

LifeCATNLLapseLifeLong

HealthNSLTLapse

Health

LifeDis/Morb

Dis/Morb

HealthLifeLapse

SLTlapse

HealthExp
HealthRev

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LifeExp

LifeRev

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SCRintang

NLCAT

Solvency II
Technical considerations


1:200 year capital coverageOne year time horizon

Diversification



Future profits as fully admissible Tier 1 capital?

Annuity business/liquidity premiumStandard model -vs- internalCapital solutions

For Institute of Actuaries of Japan | July 2010 | Swiss Re21Conclusion
Capital is important: there are many reasons why a company
manages its capitalWhich type of capital and when: their relative importance drives
companies’ decisions

Global crisis further emphasised the importance of capitalEurope is moving to a more realistic view of capital with clear
interaction with risk management: Asia and other regions areexpected to do similarly in due course

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CONFIDENTIAL | RESTRICTED DISTRIBUTION

Thank you
Greg_Solomon@swissre.com
Carl_Moxley@swissre.com

For AXA Japan | June 2010 | Swiss Re Japan

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