SAS Institute ”Risk Forum”, 3. april 2014 Adm. direktør Idar Kreutzer, Finans Norge RISIKOSTYRING SOM STRATEGISK VIRKEMIDDEL I FORSIKRING

Risk management - when risks collide Global governance failure ! 2

Risk management in insurance ”Managing risks is what we do” Source: Securityreseach.at 3

Insurance – a key role in society Understand PrepareProtect 4

Key risks insurance must manage Financial risks Biometric risks Property & casualty Regulatory dynamics 5

Property & casualty Implications of a changing climate  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 “ 6

Biometric risks Longevity 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 ddddddddddddddddddddd Source: Statistics Norway 7

Financial risks Low interest rates vs. long term guarantees Asset – liability matching Asset risk and allocation Financial shocks & market value 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) Low allocation to risky asset classes with volatility (equities) for DB. Any surplus of guarantees used to build buffers in DB Reduce market risk Hold to maturity management in focus 8

Low interest rates – consequences for the industry Defined benefit (DB) – number of insuredDefined contribution (DC) – number of insured Source: Finance Norway 9

Liability driven investments Valuing liabilities – and matching the duration 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? 2 % point fall in rates Assets 100 Liabilities 100 Liabilities 130 Assets % increase in liabilities Example: duration 15 Source: Bloomberg 20 yrs swap ? 10

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 11

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”,

Systemic risk – not just banks? IAIS 10 October 2013: 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.” 13

Summary 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 14

TAKK FOR OPPMERKSOMHETEN 15