Risk-based capital regimes in Asia need work – Sigurd Volk profile

The regional chief risk officer at Allianz Asia-Pacific on the twin challenges for insurers of the introduction of risk-based capital frameworks in the region, and an ongoing low interest rate environment

Sigurd Volk’s promotion to regional chief risk officer for German insurer Allianz’s Asia-Pacific business last year meant he took charge at a time of volatile markets, and led him immediately to take a close look at the risks posed by the German insurer’s portfolio.

He immediately saw counterparty risk and an environment of continued low interest rates as the key issues to an insurer that has rapidly grown its life business in the region in recent years. But while both are challenging, he is confident that conditions for insurers in Asia are more beneficial than for their peers in Europe and North America.

“The debate about the risk-free status of certain credit counterparties might ultimately have an impact on required capital in risk-based solvency calculations – not only Solvency II [the European Union’s risk-based capital framework for insurers] but potentially also the local Asian risk-based capital environments,” he says.

“The situation in Asia is a bit simpler compared with Europe, because most Asian governments retain direct control over both their fiscal and monetary policies. This gives them more leeway to address situations of financial difficulty and to prevent default of their [local currency] obligations, which in turn is beneficial for large fixed income investors such as life insurers,” adds Volk, who is responsible for Allianz’s market, credit, actuarial and operational risk management and risk-based capital (RBC) implementation in the region.

The advantage of a sustained low interest rate environment is such that it results in a review of liability portfolios, drives product innovation and further improves asset-liability management techniques. “A major challenge in this context is to find an appropriate balance between local regulatory requirements and real economic exposures, which may at times be in conflict,” Volk says.

RBC requirements have now been introduced by regulators in most Asian markets that Allianz operates in, except for China, India and Sri Lanka, but these three markets are also considering the introduction of RBC regimes over the next few years.

“Generally we welcome this development, because it has caused insurance companies to take a close look at the risks that are inherent in their portfolios. However, there is still room for improvement in the local regulatory RBC regimes, especially when it comes to the assessment of interest rate risk for life insurance companies,” says Volk.

One key issue for Allianz is that as a European insurer it faces meeting multiple RBC standards: Solvency II, and local ones. “We are focusing our Solvency II efforts only on our major Asian entities, but plan to expand the scope over the next few years. For the entities that are currently in scope, progress is underway in terms of systems development, and the challenge now lies more with the Pillar II requirements regarding the use of model results. Needless to say, it would be beneficial to somehow merge or align local regulatory approaches with Solvency II in order to reduce the complexity and duplication of efforts in this area.”

Despite this, Volk also thinks regional regulators need to address the idiosyncrasies of their domestic markets when establishing standards. “After all, each of our business entities has its own characteristics in terms of product portfolio and market environment, and we need to find ways to address them in the best possible fashion,” he says.

An issue in various Asian markets is a lack of long-dated bonds, which causes problems for insurers trying to conduct asset and liability management (ALM) – an environment that has led some in the region to sell long-dated products with high guarantees, leaving a residual ALM mismatch.

According to Volk, these insurers will run into problems under a RBC system and says that Allianz’s products tend to reflect what assets are available in a particular market. “Insurers have a choice in this situation – to invest longer term. If you can’t then you have to adjust the product portfolio.”

Biography – Sigurd Volk

2011: Regional chief risk officer,
Allianz Asia-Pacific
2008–2011: Chief risk officer, Ayudhya Allianz Life, the firm’s Thai life insurer
2006–2007: Risk management roles at
Allianz’s Munich headquarters
2004–2006: Risk management roles at
Allianz’s regional head office in Singapore
2003: Masters in international business, Maastricht University, Netherlands