The purpose of the Risk Report is to provide an overview of the Group’s solvency position and risk profile, as well as its risk management framework.
To this end a brief introduction on economic and regulatory environment is hereby provided.
When addressing the Group’s risk profile, it is important to consider that the insurance sector, consisting of long-term institutional investors, is mostly vulnerable to financial markets and the economic environment. Generali has proven to be resilient to both financial risks and, in particular, to persisting low interest rate environment. Nevertheless, prolonged low interest rate environment as well as financial instability represent the key challenges for the insurance sector.
At the same time, in addition to financial, underwriting risks and operational risks, emerging trends related to increased use of technologies and big data, digitalization trends as well as demographic changes and natural catastrophes represent a considerable challenge for the insurance market.
For more details on financial markets’ developments please see Risks and Opportunities of the external context at pages 24-25 of this Document.
In addition to the financial environment, regulatory developments represent a major external driver of threats and opportunities to insurance companies. These include developments in the area of prudential supervisory regimes, such as Solvency II, International Capital Standards (ICS), as well as regulations defining new principles in terms of distribution (Insurance Distribution Directive - IDD), personal data protection (General Data Protection Regulation - GDPR) and anti-money laundering (IV AML Directive).
For more details on the regulatory environment please see Risks and Opportunities of the external context at pages 24-25 of this Document.
In terms of solvency position, the Group and all its European insurance subsidiaries comply with Solvency II regulation, which requires capital to be held for all quantifiable risks.
The Group uses its Partial Internal Model (PIM), approved by the Supervisory Authority, to calculate capital requirements to better reflect its risk profile. The PIM authorization was granted for all major Business Units (Italy, Germany, France and the major Czech company) while an extension plan in progress to cover the remaining European insurance entities.
The Regulatory Solvency Ratio, estimated on the basis of preliminary data1, amounts to 208% as at 31 December 2017, confirming the strong capital position of the Group.
For the purpose of the Regulatory Solvency Ratio calculation, the Group companies for which authorization has been granted apply the Group PIM, while other insurance entities adopt the standard formula. Other than insurance financial regulated entities contribute to the Group Solvency Ratio based on local sectorial regulatory requirements (e.g. mostly banks and pension funds).
In order to better capture the Group risk profile and taking into account the PIM extension plan, the Economic Solvency Ratio (ESR) is also calculated. For the purpose of ESR calculation the Internal Model methodology is applied to all European entities, also to those using standard formula for their regulatory solvency position.
On this basis, the Economic Solvency Ratio as at 31 December 2017 stands at 230%, with an improvement of 36 p.p. in respect of previous year.
Both results in terms of Regulatory Solvency Ratio and Economic Solvency Ratio confirm the strengthening of the Group capital position, well above the Group Risk Appetite Framework2 and regulatory thresholds.
For risks not included in Solvency Capital Requirement (SCR) calculation, additional assessment techniques are used. In particular, for liquidity risk, the Group has in place procedures and limits that ensure the adequate liquidity risk management and a sound liquidity position.
Generali Group risk management system is based on a clear risk governance and structured risk management processes, defined within a set of risk policies. Within the risk management system, the Own Risk and Solvency Assessment (ORSA) represents the main risk reporting tool, with the purpose of supporting risk strategy update (Risk Appetite Framework).
Generali Group also relies on a set of tools, such as the Recovery Plan, the Liquidity Risk Management Plan and the Systemic Risk Management Plan, defined following the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS) standards3. The Risk Report is structured as follows:
- section B provides a brief description of the risk management system;
- section C presents the solvency position of the Group and the key elements of the Group’s Capital Management;
- section D provides an overview of the Group’s risk profile and main sensitivities to risk drivers.
More details on the solvency position and risk profile are then provided in the Solvency and Financial Condition Report, available on Generali Group web-site.
Finally, Group rating assessment by external rating agencies is provided on the Group web site in the section http://www.generali.com/investors/debt-ratings/ratings.
1On the basis of IVASS Provvedimento n. 53, 2016, the SCR and MCR calculations to be disclosed in the Annual Report can rely on a preliminary estimate. More detai ls on the Regulatory Solvency Ratio will be disclosed in the Solvency and Financial Condition Report.
2In defining the level of risk, it is willing to take, the Group defines its own risk strategy within the Group Risk Appetite Framework (RAF) while complementing the overall business strategy. The Group RAF defines the level of risk the Group is willing to take and ensures risk embedding into key business processes, to grant all risks are properly managed. Soft and hard limits’ thresholds set within the RAF aim to limit excessive risk taking and to maintain the solvency position at the desired level. Monitoring and escalation processes are clearly defined to adequately manage any risk tolerance breaches.
3Generali Group is not included in the list of Global Systemically Important Insurers (GSIIs), issued by FSB.