A retooled internal model permitted Allianz to revise down its estimate of how much a market shock could deplete its Solvency II capital ratio. 

The German insurer said it improved the modelling of cross effects between risk types in the fourth quarter, which reduced the sensitivity of its regulatory ratio to a sudden widening of credit spreads and a jolt to interest rates compared to the year prior. 

The firm now estimates that a 50 basis point collapse in interest rates would shave just four percentage points off its Solvency II ratio, compared to 11 percentage points at end-2017. A 50bp widening of government bond spreads is anticipated to knock the ratio down six percentage points, rather than nine percentage points a year ago. 

On the flipside, Allianz's vulnerability to a collapse in equity markets edged up in 2018. A 30% drop in stock prices is predicted to erode eight percentage points from the Solvency II ratio, compared to six percentage points in 2017.

The insurer's Solvency II ratio was 229% at end-2018, flat on the year prior. Management predicts that in a severe financial crisis in which rates plummet 100bp, equity markets fall 30%, and credit spreads blow out, the ratio would fall to 177% – well above the 100% regulatory minimum.

Who said what

“[One of the sensitivities] which is much improved is the sensitivity to the interest rate. If you remember, just 12 months ago, that sensitivity was -11% and now it is -4%. So we don't have a significant sensitivity to interest rate. We should keep in mind this sensitivity can be a little bit volatile. We saw some volatility over the quarter, but definitely we are in a different position compared to the position we were just a few years ago,” – Giulio Terzariol, chief financial officer at Allianz

What is it?

Under Solvency II, an insurer’s solvency ratio is the ratio of eligible own funds to its solvency capital requirement (SCR). The latter is calculated as the amount of own funds needed for the insurer to honour policyholder obligations after a one-in-200-year stress event.

The SCR is calibrated to each insurer’s risk profile, either through the application of a regulator-set standard formula or the use of a firm’s own internal model.

Why it matters

The Solvency II framework has few fans at Allianz. Chairman Oliver Bäte said on the fourth quarter earnings call that the assumptions used to gauge credit risk under the rules are bogus as they reflect "run risk that we don't really see". This implies that management thinks it has to hold excessive amounts of capital against its bond portfolio. 

To counterbalance this and other supposed flaws with the regulatory regime, the insurer has taken great pains to adapt its internal model to better align with its own view of the risks to its capital. Yet there is only so far such refinements can go to offset regulatory requirements. In light of this, it's an open question as to whether Allianz will continue to reduce its Solvency II ratio's sensitivity to market risk going forward.

Get in touch

Do the comments made by Allianz's top brass on Solvency II's "flaws" demand a response from regulators? Let us know where you stand on the insurance capital framework by emailing louie.woodall@infopro-digital.com, tweeting @LouieWoodall, or messaging on LinkedIn.

Follow @RiskQuantum for updates from the Quantum team.

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