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m arr s
DRAFT 12 January 2011 V1DRAFT 12 January 2011 V1
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Agenda
Economic Capital and its role at Aviva
Economic Capital and Solvency II
How we calculate our Economic Capital
,
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Economic Capital: Part of our continual developmentof risk management
Front line
Accountabilit for
econ nedefence
r nedefence
managing all risks
CEO, CFO, operational
challenge & oversight
Executive level
assurance
Internal & external
management etc appointment au , n epen en
actuarial reviews etc
A CEO & CFO team with a
comprehensive knowledge &experience in financial
Aiming for a balance oftechnical & businessexpertise
A comprehensive range ofleading industry advisorsactively engaged in
services
Deep bench of expertise withstrong succession planning
Recent recruitment ofrecognised industry talent
Ongoing and high priority
independent audits &reviews
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Solvency IIEconomic
CapitalCalculation What & How
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One of a range of measures used forcapital assessment
Economic Avivas own assessment of both capital available and capital required*
Formula-based assessment of both capital available and
Agencycapital required
Each agency uses a defined set of rules for rating assessment
IGD(Solvency I)
Current means for assessing regulatory capital, will be replaced by
Solvency II in 2013
Not a risk-based measure
ICA UK regulated entities risk-based measure which allows some
economic principles to be used
Solvency II Detailed requirements and transition rules remain uncertain
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CapitalCalculation What & How
* throughout this presentation this capital is required based on internal assessment andcapital management policies. The term required does not imply required by regulators orother third parties
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Solvency II
Solvency II
2013
Public
Solvency I
1970s
Public
ICA
2005
Private
EU market consistent
Based on three pillars
Internal economic
Not market consistent
Arbitrary
Factor based
UK regulated entitiesonly
Firms required to
models
Prudent person
Own Risk & Solvency
No incentive foreffective riskmanagement
to mitigate risk to 99.5%VAR
Consider all risks
incentives for improved
risk management
Incentives for improvedrisk management
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CapitalCalculation What & How
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Solvency II on track for a sensible outcome
Solvency II likely to go ahead on 1 January 2013
but lengthy transition arrangements likely to be
Final requirements and transitional
arrangements remain unclear but:
Current outlookRecent proposals
in place
QIS 5 is a request for information.
The final Solvenc II rinci les will not be in line
VIF expected to be allowable
Hybrid debt expected to be allowable under
transition rovisions
with some principles in QIS5 Liquidity premium likely to be allowable
Transition arrangements likely to be put in
competitively disadvantaged against theUSA & other non equivalent countries
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CapitalCalculation What & How
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Economic Capital management
Available Economic Ca ital Re uired Economic Ca ital*
Capital resources available tothe group measured on an
Our Required Economic Capitalis the amount of risk capital,
,
which is needed to cover riskstaken by the group, such as
market risk, credit risk, insurancerisk and operational risk
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* throughout this presentation this capital is required based oninternal assessment and capital management policies.The term required does not imply required by regulators or otherthird parties
Solvency IIEconomic
CapitalCalculation What & How
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Setting the Target Capital Requirement
Required Economic Capital
The Tar et ca italisation of the Grou is to have
sufficient surplus capital to meet policyholderliabilities following:
a 1 in 200 year loss, followed by a further
1 in 10 year loss
This is broadly similar to a 1:2000 calibration.
percentile percentile
cons s en w cap a o an ra e rm
Surplus is expressed as the buffer over 1:200
Target Surplus
Important to avoid excessive, inefficient,capitalisation by adding a further buffer on top of
these two - better to plan management actions torespond to risks if they occur
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90th
percentile50th
percentileSolvency II
EconomicCapital
Calculation What & How
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Calculation of Available Economic Capital at Aviva plc
Available Economic Capital (AEC) - The amount of Economic Capital we hold
Based on the audited MCEV balance sheet adjusted for:
Intangible assets (excl. VIF) and goodwill are excluded
GI businesses adjusted from IFRS basis to an economic valuation (by removing reserve
margins and discounting the liabilities) u or na e y r e s rea e as ava a e cap a
Adjustments to arealistic basis
bn
Hybrid debt
MCEVBalance Sheet
Economic
Balance Sheet(1.6)bn5.0bn
14.2bn
17.6bn
FY09 Adjustments FY09
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MCEV
Shareholders Equity*
Available Economic
Capital
Solvency IIEconomic
CapitalCalculation What & How
* including preference shares and DCI
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Calculating the Required Economic Capital
Distribution ofbalance sheet outcomes
Evolution of risks Balance sheetvaluation
50th
percentile
Capitalrequi
A L
99.5th percentile
rement
t=0 t=1
All-risk scenariosallowing forde endenc
A L
Identify all of therisks
Choose stresses to
cover all of these
Define the
confidence levelsand the time
Model the impactof these stresses
on the economic
Quantify and
modelde endencies or
horizon balance sheet correlationsbetween the risks
Spreads widen, defaultsIncluding Credit, Equity, 1 in 10, 1 in 200 over Pension Scheme risk Geographic, risk andon bonds, fall in shareprices, claims inflation,bodily injury, floods,higher lapses, medicalbreakthroughs, fraud,
General Insurance(reserving, underwriting,catastrophe etc.), LifeInsurance (persistency,longevity, mortality etc.),
(1 year) allowed for through fiveyears of stressedcontributions
scale diversificationeffects
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, ,foreign exchange
Solvency IIEconomic
CapitalCalculation What & How
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Available and Required Capital at Aviva plc FY09
bn
Surplus Surplus
Within the range of a AA-calibrated
AvailableEconomic
. r s appet te
Available EconomicCapital (AEC)
17.6bn RequiredEconomic
The amount of Economic
Capital we hold
Required Economic Capital (REC)*
The amount of capital required to cover
12.8bn
e r s s ace
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CapitalCalculation What & How
* throughout this presentation this capital is required based onAvivas own assessment and capital management policies. Theterm required does not imply required by regulators or other thirdparties
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Model Review and Governance
.evolved significantly over that period and will continue to do so
There are 3 internal lines of internal model review
1st Line: Review and sign off of results by Businesses, Regional teams andthen Group Finance teams
2nd Line: Risk function review of results at all levels 3rd Line: Internal Audit review of processes and results
Board review
Avivas external auditors, Ernst & Young, provide a reasonable assurance report* on
Engagements (ISAE 3000)
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CapitalCalculation What & How
* this report is made solely to the company's directors, as a body. Tothe fullest extent permitted by law, Ernst & Young do not accept orassume responsibility to anyone other than the company and thecompany's directors for the opinions. The inherent limitations involvedwith setting assumptions are highlighted in the basis of opinion
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What does Economic Capital tell us?
Avivas risk profile FY09The graph illustrates the relative
Credit
Othermarket
8%
Credit is the single largest exposurefor the grou followed by general
25%Operational12%
insurance and life insurance risks
Equity risk exposure has been
Life15%
Equity12%
is residual exposure in policyholderfunds
Interestrate10%
GI
18%
Credit & Insurance related risks
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er r s s
Solvency IIEconomic
CapitalCalculation What & How
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How do we use Economic Capital?
Economicmodels
Optimise capital deploymentStrategy
(capital & risk) Product design
Pricing
Ca ital structure
enterprise wide holistic basis
Optimise product design
Increasingly anintegral part ofrunning the
Reinsurance
Asset/liability
Transparent evaluation of assets, risks,
scenarios and strategic options
Optimal diversification of riskma c ng
Investmentmanagement
Business lines/liability mix
Prosperity and peace of mind forour customers
Hedging
Enterprise risk
management
Use of Economic Capital models helps to inform strategy and support decision making tomaximise return on shareholder capital while protecting policyholders
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CapitalCalculation What & How
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Conclusion
Economic capital models calibrated to AA risk appetite
.
Economic capital key to optimising financial discipline and performance
15This reflects Avivas own assessment of economic capital and is separate from capital required by regulators
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