Brexit from the Perspective of an EU 27 Based Insurance Group - Bill Von Seggern

 
Brexit from the Perspective of an EU 27 Based
Insurance Group
Bill Von Seggern

10 September 2019
Content

                    ISSUES AFFECTING ALLIANZ
01                  Affected entities
                    Major Issues
                    MAINTAINING THE ABILITY TO SERVE OUR CUSTOMERS AND DO BUSINESS
                    The continuation of coverage problem
                    Options for continuing to do business in the UK
02                  Branch vs separate entity, ring fencing risk capital and insurance pricing
                    PRA/FCA mechanisms
                    Options for entities with incidental business in the UK
                    Data processing issues
                    ECONOMIC IMPLICATIONS
                    Derivatives
03                  Rating agencies
                    Solvency II ratio implications from economic impacts of Brexit

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AZ Group and AZ SE Exposure to Brexit

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AZ Group and AZ SE – Key Brexit Issues
Key Issues

Continuation of Coverage - EU insurers will have no right to service policies or handle claims in the UK after Brexit
even on policies written before March 2019
Ability to write business after Brexit - EU insurers will have no right to write business in the UK without a UK license
after Brexit
Reinsurance flexibility - Uncertainty as to whether insurers in the UK will still be able to use reinsurers not licensed in
the UK
Treatment of derivatives - Certain derivatives cleared in London may not be used as risk mitigation or may need to be
moved into the EU after Brexit
Licensing of rating agencies and risk capital calculations - Ratings from rating agencies with UK licenses and no
licenses elsewhere in the EU cannot be used in Standard Model SCR calculations potentially affecting spread risk,
concentration risk and counterparty risk
Data protection and data transfer - Will insurers be able to transfer data between the UK and EU, and what is the risk
of conflicting data protection requirements?

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Brexit Example – Continuation of Coverage

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AZ Group – Options for Operating Entities (OE) with Significant Exposure
                           Application          Solves Coverage           Capital Intensity      Regulatory         Other
 Option
                           Process              Continuation Problem      (Capital Costs)        Acceptability
                           Expensive and        Yes                       Most efficient, but    Preferred          Ultimately
Branch Application
                           time consuming                                 with uncertainties     option             selected
                           Expensive and time   Requires separate legal   Capital intensive      Preferred option
Legal Entity Application
                           consuming            proceeding
                           None                 Requires separate legal   Relatively efficient   Not acceptable     Subjects AZ UK to
AZ UK Fronting                                  proceeding                                                          undue regulatory
                                                                                                                    risks and costs

Use of a Fronting only     Expensive and        Requires separate legal   Relatively efficient   Not acceptable
Entity                     Time consuming       proceeding

                           None                 Requires separate legal   Capital Intensive      Possibly           Subjects AZ UK to
Write on AZ UK Paper                            proceeding                                       acceptable         undue regulatory
                                                                                                                    risks and costs

Write on New Allianz       Expensive and        Requires separate legal   Capital Intensive      Possibly
Entity Paper               Time consuming       proceeding                                       acceptable

     10 September 2019                                                                                                            6
AZ Group – Options for Operating Entities (OE) with Significant Exposure
                          Risk Capital Impacts of Brexit                                                               Impact of Risk Capital Changes on Insurance Pricing
                                          European       UK                                                                                         European
                                         Operations Operations       Total      Primary driver of                                                  Operations UK Operations   Total
Basic Data                                                                      increase in risk         Basic Data
   Premium                                  1500          1500       3000       capital is                  Premium                                     1500          1500        3000
                                                                                                            Own Funds                                                             1300
    Risk Capital (IM)                                               1000
                                                                                difference                  Cost of Capital                                                       10%
    Ratio IM/SM                                                     67%         between internal            Needed Profit to Support Capital              65             65        130
    Risk Capital (SM)                                               1500        model and                Branch Scenario - No Restrictions
    Own Funds                                                       1300        standard model              Own Funds                                                             1300
    Solvency II Ratio                                               130%                                    Cost of Capital                                                       10%
Branch Scenario - no restrictions                                                                           Needed Profit to Support Capital              65             65        130
    Risk Capital (IM)                                               1000                                 Separate Legal Entity Scenario
    Risk Capital SM                                          750    1500                                    Own Funds                                    650           975      1950
    Own Funds                                                975    1300        No additional               Cost of Capital                                                     10%
    SII Ratio                                               130%    130%        capital needed for          Needed Profit to Support Capital              65          97.5     162.5
Separate Legal Entity Scenario                                                  TCB model                   Additional Needed Profit                       0          32.5      32.5
    Risk Capital (IM)                          500                   1250                                   Addtl Profit as a % of Premium              0.0%          2.2%      1.1%
    Risk Capital SM                                          750
                                                                                assuming full
                                                                                                         Key Assumptions:
    Own Funds                                  650           975    1625        fungibility of funds        Cost of Capital is 10%
    SII Ratio                                                       130%        held in the UK              Income tax effects are ignored
    Needed Additional Own Funds
    to Achieve SII Ratio of 130%                                     325
    Percent increase in Own Funds                                    25%                                                         Increase in needed capital would result in an
Loss of geographic diversification impacts are ignored                                                                           increase in economic costs and depending on
Key Assumptions:
                                                                                                                                 market conditions a commensurate increase
    Insurer maintains a SII ratio of 130%
    Internal model risk capital is 33% lower than standard model   Significant increase in risk capital needed in a legal        in pricing
    Impact from loss of geographic diversification is de minimis   entity scenario. Might well see similar results if
                                                                   regulators determine that funds held in the UK
                                                                   cannot be considered fungible even with a branch

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Brexit: Insurance – UK Transitional Regulatory Regimes

     Category                 Purpose                      Eligibility                    Authorities                  Duration

                   Provide authorization to do                                    May continue to transact
                                                                                                                  Depending on
Temporary          business while Third                                           business as they have done
                                                Companies that have pending                                       Brexit vote up to 3
Permissions Regime Country Branch (TCB) or                                        in the past while application
                                                TCB or subsidiary applications.                                   years with further
(TPR)              Subsidiary (LE) application                                    is pending in anticipation of
                                                                                                                  extensions possible
                   is being reviewed                                              approval of application
Financial Service                               Companies with incidental
                                                                                  May service existing
Contract Regime –  Allows runoff of business in business in the UK on a
                                                                                  contracts and also act to
Supervised Runoff  force as of the Brexit date Freedom of Establishment basis
                                                                                  reduce or transfer the risk of
(SRO)                                           (UK FOS Branch)
                                                                                  those contracts. May also
                                                Companies with incidental                                        15 years on
                                                                                  perform other activities to
Financial Services                              business in the UK on a                                          insurance policies
                                                                                  meet regulatory or legal
Contract Regime –  Allows runoff of business in Freedom of Services basis
                                                                                  requirements. May not
Contractual Runoff force as of the Brexit date (passporting) and are
                                                                                  write new or renewal
(CRO)                                           supervised by their home state
                                                                                  policies.
                                                regulator

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Brexit for Insurers that Write Incidental Coverage in the UK
    Brexit and Data Processing Issues

Insurers that Write Incidental Coverage in the UK            Data Processing Issues
•   Reasons for incidental coverage (examples)               •   Under a no-deal scenario the UK becomes a third
        •  Corporate accounts with locations in the UK           country under the EU General Data Protection
        •  Coverage for long term insureds who have              Regulation (GDPR) subject to the same EU for the
           moved to the UK either temporarily or                 transfer of personal data as other third countries.
           permanently
        •  Coverage for vehicles (e.g. boats or airplanes)
                                                             •   Possible actions
           that are registered in the UK, but are actually
                                                                     •   For data transfers within the Group „Binding
           housed elsewhere in the EU
                                                                         Corporate Rules“ can be developed and
•   Possible actions                                                     implemented that will require adherence to a
        •   Non-renew before implementation of Brexit                    specific code of conduct around data privacy
        •   Maintain until expiration taking advantage of            •   For data transfers to outside parties „standard
            contractual runoff scheme                                    contractual clauses“ must be included in the
        •   Write in UK licensed entity and reinsure back                contracts with these suppliers.
            (Allianz Mulitnational)

    10 September 2019                                                                                                      9
Brexit: Derivatives
   Brexit: Rating Agencies
                             Derivative Positions and Transactions                                                  Rating Agencies
Under a hard Brexit scenario insurers may lose the ability to benefit from the risk mitigating        •   Under a no-deal Brexit UK based rating
impact of derivatives with UK banks                                                                       agencies lose their permissions in the
                                                                                                          EU meaning that credit ratings cannot
Cluster      New Transactions                Outstanding Transactions
                                                                                                          be used in risk capital calculations
OTC          •   For EU entities post        •   Outstanding transactions are not affected, as long       (definitely for the standard model)
Bilateral        Brexit transactions can         as no action is taken. France and Germany are
                                                                                                      •   Actions
                 be executed with EU or          preparing legislation to give regulators temporary
                                                                                                               •    Agencies opening or using EU
                 US counterparties -             powers to waive license requirements
                                                                                                                    based branches (e.g. Moody‘s in
                 Many UK counterparties      •   Many banks are preparing transfer to EU-based
                                                                                                                    Germany, AM Best in the
                 are developing EU-              affiliates in which case derivatives may be
                                                                                                                    Netherlands)
                 based affiliates                transferred or unwound and rewritten
                                                                                                               •    ESMA and FCA have entered
OTC          •   To the extent there is      •   With the announcement for temporary clearing in                    into a memorandum of
CCP              adequate liquidity,             the UK by the EU Commission outstanding                            understanding on cooperation
                 positions can be placed         transactions placed no later than March 2020                       which is one step for the rating
                 with Eurex rather than in       remain valid until the positions are closed.                       agencies to obtain the needed
                 London.                         Germany is proposing legislation to allow                          permissions
                                                 continued validity.                                           •    Other actions are needed by
                                                                                                                    European and UK regulators
ETDs         •   ETDs should be              •   ETDs entered into before Brexit will continue to
                 executed by EU 27               be recognized by the EU
                 brokers who will then
                 subclear the
                 transactions in London

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Solvency II Ratio Impacts – Hard Brexit

                    United Kingdom                                    Continental Europe
   Risk Item          Expected       Impact on SII   Risk Item          Expected       Impact on SII
                      Movement          Ratio                           Movement       Ratio
Interest Rates      Flat to Down     Differs by      Interest Rates     Flat to Down   Differs by
                                     entity                                            entity
Spreads             Up               Decrease        Spreads            Up             Decrease
Equities            Down             Decrease        Equities           Down           Decrease
Inflation           Mixed            Unclear         Inflation          Flat           None
Premium             Up               Decrease        Premium            Flat           None
(Loss Ratio)                                         (Loss Ratio)
Reserves            Up               Decrease        Reserves           Flat           None

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Questions                                                                             Comments

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