In August this year Dieter Wemmer, chief financial officer of Allianz, announced a Solvency II solvency coverage ratio for the German business of 300% – even without applying the directive’s transitional measures.
It is the largest solvency ratio publicly disclosed by any German insurer so far and is matched by a strong group-wide solvency ratio of 200%. You might think Allianz had targeted a high solvency ratio at any cost. But, in fact, the firm has been more conservative than most in the assumptions underpinning its internal model.
Far from pushing supervisors to accede to optimistic expectations, Allianz has incorporated negative regulatory scenarios into its internal model, some of which proved necessary this year as last-minute tweaks and clarifications to Solvency II worked against many in the industry’s favour.
An example is the insurer’s modelling of sovereign credit risk – which it was already doing before the European Insurance and Occupational Pensions Authority (Eiopa) announced in May that sovereign risk should be accounted for in internal models.
Similarly, Allianz is prepared for a change to the Solvency II ultimate forward rate (UFR) used to discount insurers’ liabilities. In October, Eiopa announced plans to review the UFR in 2017. But this came as no surprise to Allianz’s chief risk officer, Tom Wilson, who says the rate was never set in stone. The insurer had already accounted for a change from 4.2% to 3.2%, using the lower number in calculations for assessing the adequacy of its solvency ratio.
We did not want to rely on the UFR for long-dated transactions that could not be hedged
“We have set target ranges and thresholds for action based on post-stress levels. These include the 2008 financial crisis, the 2010 sovereign bond crisis and the 2014–15 low rates environment including an unlocking of UFR and a relocking to 3.2%,” says Wilson. “In addition, we use the 3.2% in our RoRC [return on risk-adjusted capital] assessment of new business profitability.”
“In 2014 we saw a 128-basis point decline in the 20-year euro swap rate and another 40bp drop in 2015. Because we have factored this in alongside a potential UFR reduction, we feel comfortable that our solvency ratio is resilient, both to markets and to potential regulatory changes. We did not want to rely on the UFR for long-dated transactions that could not be hedged,” he adds.
These kinds of actions are calming for analysts and investors who were recently shocked by changing solvency expectations from some insurers, Dutch firms in particular. This led to concerns insurers would be restricted in their ability to pay dividends to shareholders. In contrast to some others, Allianz has made an explicit link between dividend policy and Solvency II capital, ensuring the company’s high solvency ratio translates into higher dividends.
Allianz has also led the way this year in the introduction of capital-lite products, taking some of the industry’s first actions to ween the German market off its addiction to long-term guarantees.
KomfortDynamik, launched by Allianz this year, is a unit-linked pension product that shares investment risk with policyholders, allowing various levels of investment in equities. This is less sensitive to low interest rates or lower-than-expected returns on assets. In its third-quarter results Allianz showed that since last year new business from unit-linked products had increased from 6% to 34%, while also in that time single-premium traditional and similar guaranteed business had been reduced by 43%.
Wilson says volatility under Solvency II will come from the back-book of guaranteed business in the short term, but will be reduced over time as new products eventually come to dominate liabilities. That means Allianz’s solvency ratio is only likely to be more resilient in the long term, to the benefit of shareholders and dividends.