IAA Seminar 19 April 2007, Mexico City

Group Risk

Exposure

Solvency Management in Life Insurance The company’s perspective

Uncertainty

2

Agenda

1. Key elements of Allianz Risk Management framework

2. Drawbacks of current regulatory framework

4. Outlook

3. Industry needs and business implications of Solvency II

2. Drawbacks of current regulatory / financial reporting framework

3

Risk Management is a continuous process for Allianz

Pilot of internal risk capital model

Enhanced risk governance structure introduced

Performance measurement linked to risk capital results

Process enhancements to ensure robustness and auditability the calculation

The evolving Solvency II standards are a unique opportunity to leverage existing risk management framework

Ongoing enhancements of integrated risk management

ü 2000 ü 2002 ü 2005 ü ongoing

Introduction of complementary risk and scenario assessment

ü 2004

4

Our objective: protect the capital base and enhance value creation

Key elements

§ Capital at Risk for different solvency regimes § internal modeling (economic view) § stress tests (regulator, rating agency view) § limit setting

§ Integration of risk/capital into management processes § EVA /RoRAC (key performance metric) § risk based resource allocation § Earnings at risk (volatility management)

§ Risk adequate organization § Risk policy and minimum standards § Risk Strategy § Risk Reporting

Protection of capital base

Support for value creation and decision making

Risk Governance

On­site Risk diagnostics to ensure local implementation

Key is balancing risk/return trade­off, “No Surprises” as a critical objective

5

Ins./Banking/AM Committees

Group Risk Committee

Operating Entities (OE)

Group Risk

Group­wide risk governance is clearly defined

Allianz SE Board

§ Make decisions on new products and trans­ actions with Group relevance

Tasks

§ Monitor solvency and risk profile § Set risk policies and OE limits § Recommend/approve actions to mitigate risk

§ Manage risks proactively within Group policies and limits § Report risk exposures to Group Risk

§ Enhance risk dialogue between Group and OEs § Implement internal risk capital model § Reporting and communication of Group risks

§ Approve Group Risk Policy § Define risk strategy of Allianz Group § Set limit system and Group limits

The risk organization reflects structures at Group level

Group Risk

Ins./Banking/ Asset Mgt. Committees

Allianz SE Board

Group Risk Committee

Local Risk Committee

OE

Local Risk Committee

OE

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Market Consistent Embedded Value (MCEV) is the right concept to value and analyze risks of our life businesses

§ Best estimate policyholder liability: – Run­Off projection of current portfolio using best estimate assumptions

– Appropriate evaluation of risk through • Risk­neutral valuation, i.e. risk premiums only valued when earned

• Explicit valuation of O &G • Explicit charge for non­financial risk

§ Shareholder value can be split in – Future profit­margin – Net asset value component

Assets at market value

Guaranteed payments

Economic Value

Expected bonuses

O&G

Economic Balance Sheet

Policy holder

Taxes Tax

authority

Share holder

Who gets this value?

How much value do we have?

Potential deviation of MCEV represents risk we have to capitalize for

1 2

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‘Internal’ Risk Capital analysis is implemented in state­ of­the­art Asset Liability Interaction Model (ALIM)

Market engine

Company­specific business parameters

Management decision rules

­ Balance sheet Y 1 ­ Y N ­ P&L Y 1 ­ Y N ­ Cash flow Y 1 ­ Y N ­ Reserves Y 1 ­ Y N ­ …

Thousands of scenarios

Discounting Leveraging

Interdependencies between market returns, accounting rules and regulation explicitly modeled

+ Management decision rules/degrees of freedom in future years accounted for

+ Options & guarantees explicitly modeled consistent with market prices

+

Economic value

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AAA 0,01%

AA 0,03%

A 0,07%

Probability Density

Solvency standard

MCEV at valuation date

Worst Case

Required risk capital

Stand­alone risk capital assessment requires identification of single risk drivers

Risk Capital quantifies the adverse change of MCEV over the course of one year within a 99.97% confidence interval (Worst Case)

Markets

Credit Lapse

Mortality

Operational

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Aggregation of stand­alone capital requirements allows for diversification benefits

Group Risk capital

Risk capital Market / ALM risk

Risk capital Credit risk

Risk capital Actuarial risk

Risk capital Business risk

OE 1

OE2

…

OE 1

OE 2

…

OE 1

OE 2

…

OE 1

OE 2

…

Risk type & segment diversi­ fication

The economic view allows to identify risk diversification effects both across regions and across risk types and business segments

Geo­ graphical diversi­ fication

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Economic Value/ MCEV

Option & Guarantees

Risk Capital

ALM /Pricing

Today

Allianz applies an integrated measurement suite for our Life business

Integrated valuation and risk capital approach leverages value creation

NAV / IAS Capital

Embedded Value / EEV

Risk Capital

ALM analysis

Past

§ Enhance transparency of value drivers and their dynamics

§ Ensure consistent reporting across all applications

§ Avoid double development and raise synergies by using available best practise approaches

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Agenda

1. Key elements of Allianz Risk Management framework

2. Drawbacks of current regulatory / financial reporting framework

4. Outlook

3. Industry needs and business implications of Solvency II

12

§ Segment specific regulation like Insurance Group directive

§ Regulation of Sub­groups by local regulators

§ Solo regulation based on local standards

§AZ Group

Segments

§Insurance

§Asset Management

§Banking

Operating Entities

Currently Allianz faces multiple regulatory requirements on different levels based on multiple accounting standards

§ Financial conglomerates directive

§ Regulation of parent company AZ SE

§ Partly based on consolidated IFRS, partly local Gaap

Going forward global players depend on an efficient and effective regulation calling for more standardized approaches and defined responsibilities

Current regulatory framework – European Union only (selection)

Sub group treatment in 10 Countries

30 different national supervisors in 19 countries

4/17/2007 13

On Group level we have to monitor three capital regimes for different stakeholders providing mixed signals for steering

Internal model

Consistent coverage of all segments

Systematic evaluation of internal data (economic balance sheet)

Explicitly accounting for diversification effects Covers all risk categories (Market/ALM, credit, actuarial, business) incl. OpRisk

The Internal model is the relevant metrics for steering the business

Financial conglomerates

Inconsistent coverage of segments

Based on B/S, P&L & market data as well as partly on internal data

Not risk based Portfolio effects not considered Limited coverage of risk categories and risk types

S&P model

Only insurance segment

Based on B/S, P&L & market data

Portfolio effects not considered Limited coverage of risk categories and risk types (ALM, OpRisk, not covered)

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Agenda

1. Key elements of Allianz Risk Management framework

2. Drawbacks of current regulatory / financial reporting framework

3. Industry needs and business implications of Solvency II

4. Outlook

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CRO­Forum stipulated five core principles with regard to a general framework for Solvency II

1. Solvency capital and liabilities for solvency purposes should be based on the economics of the business and accurately reflect risk mitigation

2. Solvency capital and liabilities for solvency purposes should not include excessive prudence

3. Solvency capital should accurately reflect diversification

4. Internal models, in addition to standard approaches, should be allowed

5. Solvency reporting can be different from financial reporting because of differences in the scope and objectives, although the differences must be reconcilable

Position papers of other bodies (CFO­Forum, IAIS) are in line with these principles

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A coherent framework for Solvency II and IFRS phase II is envisaged…

Market value

of assets Assets Backing

accounting Liabilities

Customer Intangible Asset

ASSETS TOTAL

LIABILITIES Accounting

TOTAL LIABILITIES Solvency

Available capital for solvency purposes

Accounting Liabilities

MVL (market consistent) = Current Value

Equity

Profit Margin

Best Estimate Liability to

Policyholders

Market value margin

Best Estimate Liability to

Policyholders

Risk Margin

Corresponding liability adjustment to CIA

Insolvency

Policyholder is protected as long as eligible solvency capital absorbs risks

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…which could also form the basis for a future regulatory and financial reporting framework

Commonality

Commonality

Regulators

Investors

Consumers Solvency I and current financial reporting

Financial reporting (CFO Forum / CEA)

Regulatory reporting (CRO Forum / CEA)

Improved transparency

and relevance of information for stakeholders to facilitate their

decision making

IFRS, including IFRS Insurance Contracts Phase II

Supplemental reporting (EEV)

Solvency II

Different perspectives underpinned by a common goal

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Allianz will benefit from the alignment of internal steering and regulatory rules

The company specific risk profile will be better reflected…

Allianz perspective

ü Risk capital based on internal model already embedded into performance measurement

ü Investment strategy (including hedging) based on risk bearing capacity – taking risk sharing with P/H into and risk mitigating funds into account

ü Clearly defined management rules on future crediting strategies in place

§ Capital requirements risk sensitive

§ Investment strategy based on liability structure

Market view

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Level playing field across business segments required

…leading to higher transparency concerning economic capitalization

Allianz perspective

ü Due to strong financial position and diversified portfolio high risk bearing capacity of Allianz to fund growth

ü Effect of risk mitigation activities (e.g. hedging) valued in line with financial markets

ü As Integrated Financial Service Provider peak risks can be diversified across segments

Market view

§ Book value replaced by economic valuation will force weaker undertakings to act

§ Diversification effects will have a positive impact on capital requirements for well diversified undertakings

§ Consolidation accelerated

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…and fostering the efficient usage of economic capital

Allianz perspective

§ Allocation in line with economic requirements

§ Economic excess capital might increase but significant part will be locked (e.g. rating)

ü Risk capital is single currency between entities and segments

ü RoRAC calculations per LoB to make performance transparent

Market view

Consistent approach across segments and countries important

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Product design, pricing and underwriting will be more focused on balance between risk transfer and reward

Allianz perspective

ü Valuation (MCEV) and risk assessment fully integrated

ü MCEV will form main pricing target

ü Portfolio effects are analyzed during underwriting process

ü Capital charge used for pricing reflects already diversification benefits

Market view

§ Peak risks will not be taken by weaker players anymore thus accelerating consolidation

§ Pricing impact of financial guarantees and low frequency/high severity risks

§ Incentives of sales force will reflect risk/return profile of product

§ Increased competition if market price exceeds significantly risk adequate price

Need for risk adequate pricing is getting more obvious

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Agenda

1. Key elements of Allianz Risk Management framework

2. Drawbacks of current regulatory / financial reporting framework

3. Industry needs and business implications of Solvency II

4. Outlook

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The success of Solvency II will depend on some crucial factors

Success factors Modernized regulatory framework Clearly defined lead supervisor concept with separation of roles & responsibilities; allowance for diversification

Harmonisation of supervisory standards & practise across member states

Incentives to implement full internal models (more accurate than standard model)

Supervision of sectors not covered by SII has to be upgraded (e.g. pension funds)

Starting point for public disclosure has to be future IFRS standard

Ensure that groups are supervised in line with their risk profile

Level playing field independent of group location

Foster risk management best practices

Avoid regulatory arbitrage

Ensure efficient reporting

Harmonized group supervision will ensure customer and provider access to a common EU insurance market

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Presented by:

Marco Hauck

Head of Team ‘Life Insurance’ Group Risk Tel.: +49 89 3800 19783 mail: marco.hauck@allianz.com