1. On the way to Solvency II in Allianz SpA
Risk Management - Allianz SpA Group Italy
Torino 27 Maggio 2010

2. The three pillars of Solvency II
Quantitative
Assessment P I L A R II
Qualitative
Assessment P I L A R
III
Reporting &
Disclosure
Market valuation of assets and liabilities;
Capital calculation for Minimum Capital Requirements and for Solvency Capital Requirements;
Solvency Capital Requirements based on internal or standard model
Supervisory Review Process (SRP);
Own Risk & Solvency Assessment (ORSA);
Use Test: Economic Capital
Linked to strategic planning;
Used in EVA performance measurement, incentive compensation;
Linked to MCEV and reserve setting processes;
Calibration, validation, documentation and model change policies.
Reporting requirements;
Public disclosures – “Market Discipline”;
Regulatory reporting;
Common European reporting framework;
Same requirements across Europe;
No double reporting – Group versus Standalone;
Convergence to other sectors.

3. Solvency II – Pillar 1 Three Pillars Approach PILLAR I: PILLAR II:
PILLAR III:
Supervisory reporting
&
Public disclosure
PILLAR II:
Qualitative requirements
Supervision
PILLAR I:
Quantitative requirements
Three Pillars Approach
Requires disclosure of additional information that supervisors feel they need in order to perform their regulatory functions and information that the market may need
Focuses on supervisory activities, aiming to identify firms with a higher risk profile, which may be required to hold capital at a higher level and/or to take steps to reduce identified risks
Focuses on covering quantitative capital requirements including internal models and a standardized approach

4. Coordinated Interaction user- interface
Allianz is planning to ask approval of an internal model
Market data: valuation rates, volatilities and correlations as well as scenario generators: real world, risk neutral
Monte-Carlo based risk aggregation of risk types
On-line reporting and ad hoc scenario analysis allowing local and central use
Efficient contribution and as-if analysis, re-grouping of portfolios
Transformation of Insurance Liabilities in financial instruments replicating liability characteristics
Risk Aggregation & Reporting Infrastructure
P&C actuarial risk
Frequency / severity / stochastic reserving for modelling reserve / premium risk
Local calibration to loss and reserve distributions
Individual Feeder Systems
Coordinated Interaction user- interface
Credit Risk
Covering Investment and Reinsurance Credit Risk
Local analysis, leverage on global information basis
Life insurance risk
Operational Risk
Ensuring loss data collection Strong qualitative basis in internal control system
Capital charge initially based on standard approach
Market Risk
Stochastic cash flow models required; detailed liability cash-flows underlying
Capturing all types of financial risk features
Risk Types
Systems
RAI
MKMV
PRISM
tbd
ALIM

5. Financial Risk: Quality, Frequency and Granularity is the key
Risk Aggregation
Market Risk
Credit Risk
P&C actuarial Risk
Life insurance Risk
Operational Risk
From aggregation of individual shocks to full loss distribution
Integrated Monte-Carlo simulation based on replicating portfolio technique, including credit risk and volatility risk;
Replicating portfolios to model liabilities in Life
Find optimal portfolio of basis instruments which comes “closest” to matching the cash-flows of the target liability based on common financial scenarios;
New risk factors (e.g. Volatility, Credit Spread ..)
Volatility effects market values of derivatives and the value of O&G in Life business. Spread Risk (change in credit spread within rating class) considered as well as Credit Risk (migration and default risk)
Aggregation with non financial risks
Fully integration of financial and non financial risks: all risk drivers are simulated together under a pre-defined correlation structure +

6. Modelling Portfolio Credit Risk based on Central group wide calibration of the model
is the risk of changes in the market value of the portfolio over a given time horizon, resulting from changes in credit quality of exposures in the portfolio
includes both default risk and migration risk – the risk of loss of economic value for credit exposures because of deterioration in credit quality
Main Drivers of Portfolio Credit Risk
Exposure Amount
Instrument Credit Risk
Credit quality
Correlation & Concentration
Asset Correlation
Sector Concentration
Loss Given Default
Obligor Group Concentration
Rating, Default Probability
Credit Quality Migration
Concentration / diversification effects at the portfolio level are calculated by the model. Results are allocated top-down to single counterparties.

7. Data-management systems as a key success driver…
Risk Aggregation
Credit Risk
Market Risk
Life insurance risk
P&C actuarial risk
Data Management systems stable DB solution, history tracking, lock-in feature...
Input
output
Operational risk
Get rid of Excel to manage inputs and outputs !!!

8. … but the Standard Formula is still the main reference point
We plan internally parallel reporting of Internal Model and Standard Formula on a quarterly basis – we have to monitor and understand differences over time

9. Solvency II - Pillar 2 Three Pillars Approach PILLAR I: PILLAR II:
PILLAR III:
Supervisor reporting
&
Public disclosure
PILLAR II:
Qualitative requirements
Supervision
PILLAR I:
Quantitative requirements
Three Pillars Approach
Requires disclosure of additional information that supervisors feel they need in order to perform their regulatory functions and information that the market may need
Focuses on supervisory activities, aiming to identify firms with a higher risk profile, which may be required to hold capital at a higher level and/or to take steps to reduce identified risks
Focuses on covering quantitative capital requirements including internal models and a standardized approach

10. ISVAP Regolamento 20 – main features
Management responsibility
The CdA has the ultimate responsibility for an adequate Risk Management framework
The Top Management has the obligation of consistent execution of the framework
Independent control units
Internal Audit
Risk Management
Compliance
Monitoring of effective execution of internal control framework
Identification, valuation and monitoring of risk situation
Monitoring of conformity with legal / regulatory requirements
Regulatory reporting
The internal control framework has to be documented and regularly reported to the regulator
ISVAP Reg. 20 is a first but very important step towards Solvency 2, Pillar 2

11. CEIOPS – International standards for Risk Management - the 5 core elements1
Risk Management
Top Management Responsibility
1. Management concept 2
2. Control process 3
3. Organisational framework 4
Organisational structure
Identification
Assessment
Risk
Strategy
Organisational procedure
Governance and
Communication
Risk Bearing
Capacity
Internal Control
Monitoring
Management
Limits and Thresholds
4. Internal Audit (and Compliance) 5
CEIOPS Standards takes a lot from the ISVAP Reg but goes beyond

12. Proportionality & Materiality Potential Risk Coverage & Risk Capital
Management Concept
RISK STRATEGY
RISK BEARING CAPACITY
Describes the relation between overall available potential risk coverage and used capital for the coverage of material risks
Must be connected with the risk strategy
Describes the management of risks
Must be consistent and operatively connected with business strategy
Must be correlated with risk type, risk source and risk time horizon
Proportionality & Materiality
Potential Risk Coverage & Risk Capital
Requirements should be consider:
risk type;
size of the company.
Material risks are all risks, that can affect with negative effects economic, financial and profitability of a company.
The potential risk coverage is the basis to determine an economic assessment.
The risk bearing capital (risk capital budget) is determined by Company’s risk appetite. It defines which amount of the economic capital is reserved to cover/bear risks and it forms an upper limit for taking risks.
Regulators’ requirements on capital resources establish the lower limit of risk bearing capacity
LIMIT SYSTEM
Limits must be adequate and manageable for the operational units
Limits are documented ex-ante and it must exist a set for all levels and for risk type.
The respect of limits must be monitored. The breach of set threshold must be reported and appropriately escalated.
The Risk Strategy must be assessed and documented by Management.
This responsibility cannot be delegated.
The risk bearing capacity must be considered for all risk relevant management decision.

13. GOVERNANCE AND COMMUNICATION
Control Process
IDENTIFICATION
The risk identification starts with the strategic planning process. With the changes in the business strategy the results of the risk identification must be checked and eventually modified.
Risks are to be defined consistently and as much as possible without overlapping, because the risk situation of the whole company has to be considered.
ASSESSMENT
The risk assessment establishes the results of risk identification and leads to quantitative/qualitative evaluation.
Risk must be categorized and give them a priority by their own materiality
Risk key figures are to be defined, to know in advance changes in the overall company's risk profile
MONITORING
The risk monitoring must be regularly performed and must be aligned to the existing company’s overall risk profile, risk bearing capacity and limits.
The monitoring is regularly performed by the risk controlling function, without results responsibility.
MANAGEMENT
The active risk management is performed by the business areas within the defined frameworks
This active management is performed along KPIs (key performance indicators) which exist for all levels, KPIs must be monitored against the defined thresholds.
GOVERNANCE AND COMMUNICATION
The management has the assignment to establish a appropriate risk culture in the whole company and to ensure an adequate internal communication on all material risk (risk reporting)

14. Organizational Framework
ORGANISATIONAL STRUCTURE
Business and risk strategy must be reflected in the compensation system
Incentive systems cannot be manipulated, must be oriented to the long term success of the overall company; negative compensations are to be avoided.
Top Management
Target of the business and risk strategy
Compliance of risk bearing capacity and risk attitude
Continuous monitoring of risk profile
Link of risk management elements
Definition of Roles and Responsibilities
Delegation of task to the dedicated Risk Management Unit
Risk Management
Operative business areas
Coordination of risk management processes
Monitoring limits’ compliance
Separation of risk taking and risk controlling function
Accomplishment of risk control process for all operative business areas
Documentations of assignments, responsibilities, delegation rules and competencies
Outsourced functions and services
Starting from a risk analysis, the company must determine which activities and processes can be outsourced, and the associated responsibilities must be clearly defined
Monitoring of activities and regular assessment of performances
Consideration of the outsourced functions in the risk management
The allocation of tasks between Risk Management and Actuarial Function is not the key issue – the right skills within the company are important

15. Organizational Framework
ORGANISATIONAL PROCEDURE
Underwriting guidelines for daily management of the business
Tariffs calculations based on an adequate risk information
Usage of relevant ratio to manage operational workflow
Investment management must comply with all kinds of limits, regulations and laws accordingly to relevant principles
Proof of potential improvement of risk management through:
risk adequate data collection and improved evaluation method
where necessary migration of market consistent actuarial valuation
Definition of responsibilities for process steps and quality assurance
Determination of an acceptable retention per business segment
Considering multiple possible events and exclusions in reinsurance contracts
In case assessment of alternative risk transfer instruments
Pricing and U/W
Investments
Reserves
Passive
Reinsurance
Together with material risks, also business procedure and process responsibilities must be determined and documented

16. Internal Audit Internal audit reports only to the Board
Internal audit’s tasks are risk oriented and independent
Internal Audit
An illimited access to information must be granted to Internal Audit
Audit employees must focus only to pure audit tasks
Each Company needs an internal audit function
All material activities (also risk management) must be audited
The specified mitigations of determined deficiencies within agreed time plan must be monitored
The internal audit can be outsourced. In this case, a regular quality check must be performed by internal audit commissaries
Audit reports must be written and immediately provided to the management

17. ORSA Report
ORSA Process
Governance description for report submission
Company Context
Legal and management organization, core business,..
Risk Philosophy
Business managed via risk based metrics (profitability, product approval, SAA based on risk bearing capacity,..)
Risk Governance
Processes, controls, procedures and policies,…
Risk Assessment
Processes and procedures for identifying and assessing key risks
Risk Appetite
Risk management process within certain parameters (risk limits setting)
Capital & Solvency Position (Including Plan Period)
Regulatory and economic approach
Stress test & Contingency Plan
Capital evaluation under risk scenarios including contingency proposal
Use Test
Risk & Capital management activities are fully integrated into management decisions
High level ORSA Report is in place as of the end of the 2009 … start doing it, you will learn a lot

18. Thank you for your attention.