The core function of insurance is the transfer of risk, and the Group is exposed to risk in both its insurance and investment operations. Identification, measurement and management of risk are essential parts of the operations. Any insurance company must adapt its risk exposure to its capital base. On the other hand, solvency capital, or equity, has a cost. A key objective of capital management is to balance these two aspects. Gjensidige’s overall capital management objectives are to ensure that the capitalization of the Group can sustain an adverse outcome without creating a financially distressed situation and that the Group’s capital is used in the most efficient way.
Gjensidige’s minimum capitalization is determined on the basis of the strictest of three criteria: regulatory requirements, rating requirements and internal risk-based requirements. For all three, board-approved buffers are in place for management purposes. In the calculations of excess capital, consideration was given to an assumed dividend of NOK 3,400.0 million for the 2013 on the basis of the profit after tax and 3,000.0 million in distribution of excess capital, which reduces the excess capital equivalently from all three perspectives. The Group has a strong capitalization from all three of these perspectives.
Insurance operations and banking business are subject to capital requirements specified by the authorities. Capital adequacy and solvency positions are reported for the Group and subsidiaries to the financial supervisory authorities. In accordance with capital adequacy rules (BIS rules) as at 31 December 2013 the excess capital was NOK 5,187.1 million, equivalent to a capital adequacy ratio of 13.4 per cent. As associated companies, the stakes in Storebrand and SpareBank 1 SR-Bank are consolidated in the calculation of capital adequacy. The Group’s excess capital above the solvency margin requirements was NOK 9,860.0 million as at
31 December 2013. The stake in Storebrand is consolidated in this calculation.
Before internally set buffers, the rating requirement gives the lowest excess capital on group level. Gjensidige Forsikring’s target financial strength rating is "A" (single A) from Standard & Poor’s or the equivalent from another rating institution. This target has been achieved by actual rating of "A" (Stable) from Standard & Poor’s (unchanged since 1999, last updated on 25 November 2013). The rating is subject to an annual review. Standard & Poor’s capital model is used as an approximation of the capital require- ments from this perspective, even though a number of other factors also play an important role in determining the Group’s rating. Based on data as at 31 December 2013, the excess capital relative to the targeted A rating is estimated at NOK 2,830.7 million. Gjensidige Bank ASA has its own rating of A- from Standard & Poor’s (last updated on 5 July 2013) while covered bonds issued by Gjensidige Bank Boligkreditt is rated AAA (also updated on 5 July 2013).
Table 1 – Capital in excess of legal requirements per company
NOK million 2013 2012 Requirement
Gjensidige Forsikring 8,079.9 11,576.6 Capital adequacy (8%) Nykredit Forsikring 31.2 90.5 Individual solvency test Gjensidige Baltic 149.5 159.3 Solvency I requirement (100%) Gjensidige Bank Holding
Group 284.8 559.3
Capital adequacy (12,5 % / 8 %) Gjensidige Pensjon og
Solvency II regulations. Gjensidige Forsikring ASA and all subsid- iaries met all regulatory capital requirements during 2013. The internal risk based capital requirement is determined in the Group’s capital management policy, which is approved by the Board. It is defined as the capital that is necessary in order to have a probability of 99.5 per cent of not using up all capital measured over one year, including all of the general insurance group’s assets and liabilities and without counting the expected profit perfor- mance during the period as available capital. A buffer of 20 per cent is added on top of this requirement. In this context both profit/loss and available capital are measured according to eco- nomic principles, even if these may deviate from the accounting policies, in keeping with the proposals that have been made for the Solvency II regulations. Among other things, this means that actuarial reserves are assessed at the discounted value instead of at recognized (nominal) value.
Gjensidige has, over several years, been developing an internal stochastic simulation model for its insurance operations, based on state-of-the-art modeling technology. The model is customized to Gjensidige’s risk profile and provides fully stochastic simulations of both insurance and investment operations. This model is a key tool for aggregated risk measurement and capital management as it provides an overview of the aggregated risk profile. The main areas of use of the internal model are
• Overall risk profile and capital need, both presently and
during the planning period
• Capital allocation to lines of business and products
• Capital consequences of asset allocation
• Requirements for and optimization of reinsurance
Using the internal model, with the definition of internal capital as stated above, the internal capital requirement for the insurance group was set at NOK 11,400 million at the end of 2013, compared to NOK 10,700 million at the end of 2012. Excess capital above the internal capital requirement is NOK 9,500 million.
The necessary capital for the insurance business is allocated to the products in order to set a more correct cost of capital for pricing and assessments of profitability. The excess capital relative to the most binding of the capital requirements inclusive buffer is re- garded as a strategic buffer and is available to meet regulatory uncertainty, equalization of dividends and financing growth. Gjensidige Forsikring is adapting to the upcoming Solvency II rules, which will both replace the current capital rules and specify re- quirements for good risk management and reporting. One of the elements in the new rules is that it allows for the utilization of the Group’s own model for setting the statutory capital requirements according to clearly defined criteria. Gjensidige participates in the formal pre-application process for internal models with the Norwegian FSA (Financial Supervisory Authority). Gjensidige’s existing model is deemed to be a good point of departure and is further developed for this purpose.
0 2.000 4.000 6.000 8.000 10.000 12.000 14.000 2012 2013 2012 2013 2012 2013 Buffer/ stress test Excess capital after buffer/ stress test
insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and must therefore be estimated. For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency and/or severity of claims and benefits are greater than estimated. Insurance events are random, and the actual number and amount of claims and bene- fits will vary from year to year from the level calculated using statistical techniques.
Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability around the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected by a change in any subset of the portfolio. Gjensidige has developed its steering documents for insurance risk to diversify the types of insurance risks and within each of these categories to achieve a sufficiently large population of risks to reduce the fluctuation of the expected outcome.
The Group has an overall underwriting policy, approved by the Board in Gjensidige Forsikring ASA, with more detailed under- writing guidelines for each of the product segments, supported by strictly defined authorisation rules.
Factors that aggravate insurance risk include lack of risk diversifi- cation in terms of type and amount of risk, geographical location and type of industry covered. Unexpected rise in inflation rate will also have negative effect on claims and benefit payments. Gjensidige writes general insurance in Norway, Sweden, Denmark and the Baltics. General insurance in these countries have a lot of similarities. The description of risks to the insurance business is, with a few exceptions, common for the Group. In case of signifi- cant deviations between the countries, these are commented separately.