RISK MANAGEMENT IN INSURANCE BUSINESS Idar Kreutzer, CEO Finance Norway Insurance Summit 2013 Stockholm, 15.10.2013

Risk management - When risks collide Global governance failure ! 28.11.2018

Risk management in insurance ”Managing risks is what we do” Source: Securityreseach.at 28.11.2018

Insurance – A key role in society Protect Prepare Understand 28.11.2018

Key risks insurance must manage Financial risks Biometric risks Property & casualty Regulatory dynamics 28.11.2018

Property & casualty Implications of a changing climate 28.11.2018 Challenge the traditional insurance way of thinking. Unknown risks ? Public Private Partnership Claims data - pilot project. New products Green covers Carbon delivery wraps Forestry & agriculture New markets Weather risk Risk consulting Cat Bonds Promote loss prevention Participate in Carbon markets Microinsurance “Society is simply too vulnerable to weather impacts “ 28.11.2018

Biometric Longevity Migration Increasing length of the retirement age Longer pay-out period for pension providers Significant reserve requirement in the private sector Migration New risks in the market Cultural differences Living next to the North pole Changes in the urban landscape Diseases Expected life age – Norwegian population 1846-2010 ddddddddddddddddddddd Source: Statistics Norway 28.11.2018

Financial risks Low interest rates vs. long term guarantees Long-term contracts Annual interest rate guarantee Inappropriate capital buffer Existing DB and paid-up policies challenging Close-down of municipal pension schemes Need for long duration assets Low allocation to risky asset classes with volatility (equities) for DB Liquidity in ALM to be prepared for transfer from DB to DC (or hybrid) schemes Focus to obtaining return to cover guarantee of define benefit schemes (DB) volatility (equities) for DB. Any surplus of guarantees used to build buffers in DB Reduce market risk Hold to maturity management in focus Low interest rates vs. long term guarantees Asset – liability matching Asset risk and allocation Financial shocks & market value 28.11.2018

Low interest rates – consequences for the industry Source: Finance Norway Defined benefit (DB) – number of insured Defined contribution (DC) – number of insured Source: Finance Norway

Main challenge: Paid-ups from DB schemes Interest risk difficult to hedge Ca. 20 year duration Thin and illiquid NOK bond market Annual interest guarantee calls for short duration, long guarantee calls for long duration HTM bonds will reduce P/L volatility But could be removed under IFRS 4 II No future premiums Interest rate levels main driver for profitability Low interest rates gives high capital requirement and low profitability Norwegian FSA’s stresstest: Solvency II liability discounting curve 28.11.2018

Liability Driven Investments Valuing liabilities – and matching the duration Assets 100 Liabilities 100 2 % point fall in rates Source: Bloomberg 20 yrs swap 30% increase in liabilities Example: duration 15 ? Liabilities 130 Assets 100 If the liabilities' duration is 15, then a 2 percentage points fall in interest rates alters the present value of liabilities with 30% if this change is simply carried through for the purpose of liability valuation Which assets (apart from too few long dated bonds) yield 30% with certainty over 4 months?

Regulatory dynamics – life & pensions Main challenges: Risk based capital requirements (Solvency II) Macro economic prudential regulation IFRS 4 phase II (Market Value) Systemically important (IAIS global capital standards) ORSA Internal models Capital requirement calculation Solvency II: A new risk management system 28.11.2018

Key implications Regulatory asset risk will become a key driver Asset-liability-matching strategically important Increased focus on liquidity and rating Affects insurers’ investment decisions Moving away from long-term assets Distorting effect on financial markets and the economy Higher cost of funding for corporates and governments Source: Oliver Wyman, ”Funding the future”, 2013 28.11.2018

Systemic risk - not just banks? IAIS 10 October: Global quantitative capital standards Peter Braumüller, chair of the IAIS Executive Committee: “It is undeniable that the business of insurance is global, and global issues demand global responses,” [...]“This is why the IAIS, whose Members constitute nearly all of the world’s insurance supervisors, has committed to develop and implement the first-ever risk based global insurance capital standard.” 28.11.2018

Future business champions are those who develop products and services in a way that unites the global social and environmental challenges with their own profitable growth

Summary Understanding and managing risks – ”that’s what we do!” The times and risks are changing Understanding and managing risks – ”that’s what we do!” We have to deal with a changing regulatory environment A well functioning insurance industry is crucial to society 28.11.2018