Brexit from the Perspective of an EU 27 Based Insurance Group - Bill Von Seggern
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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
10 September 2019 2AZ Group and AZ SE Exposure to Brexit 10 September 2019 3
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? 10 September 2019 4
Brexit Example – Continuation of Coverage 10 September 2019 5
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 6AZ 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
10 September 2019 7Brexit: 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
10 September 2019 8Brexit 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 9Brexit: 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
10 September 2019 10Solvency 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
10 September 2019 11Questions Comments The views expressed in this [publication/presentation] are those of invited contributors and not necessarily those of the IFoA. The IFoA do not endorse any of the views stated, nor any claims or representations made in this [publication/presentation] and accept no responsibility or liability to any person for loss or damage suffered as a consequence of their placing reliance upon any view, claim or representation made in this [publication/presentation]. The information and expressions of opinion contained in this publication are not intended to be a comprehensive study, nor to provide actuarial advice or advice of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this [publication/presentation] be reproduced without the written permission of the IFoA [or authors, in the case of non-IFoA research]. 10 September 2019 12
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