The rationalisation of the IT environment of VIVAT Group is safeguarded in the long-term plan and is closely monitored by means of roadmaps.
The roadmaps contain the overall plan for achieving the business objectives in the form of a detailed summary of the existing and future business and IT landscapes. That plan has been translated into a long-term tranche plan, which states which projects need to be carried out to achieve the business objectives on a year-by-year basis. The implications of these projects in terms of IT costs are also shown, by linking the cost allocation model for VIVAT Group's IT costs to the IT components.
In this way, the roadmaps provide the basis for monitoring the progress of the change calendar. This contributed to the successful implementation of change in the IT landscape (including rationalisations) in recent years. The implementation of the roadmaps is well on
schedule, and as a consequence the number of applications will continue to decline in the next few years.
IT security
VIVAT Group attracts a great deal of attention from cybercriminals since it is a financial organisation. Fighting cybercrime is therefore a key priority. In view of this, VIVAT Group has made a specific choice to ensure that the level of information security will not be adversely affected by the disentanglement of the bank and VIVAT Group. This means that preventing and combatting cybercrime will remain high on the agenda of the management and the Supervisory Board in the coming years as well. Appropriate organisational and
technological measures will be taken in order to be able to tackle crime. With regard to the organisational measures, the joint arrangements with strategic partners will be strengthened. In the area of technological measures, the use of new tooling will be investigated.
Outsourcing
With regard to IT matters, VIVAT Group is shifting away from handling matters itself in favour of providing direction. We are moving towards outsourcing in areas of the consumer value chain where we are less
distinctive. We assess how the required functionalities in that value chain can be purchased or outsourced as components. A range of different forms of outsourcing are used, including the use of package software, the purchase of services from the cloud and the full
outsourcing of services. We face other risks in relation to outsourcing, and in order to maintain the desired level of control over outsourcing we perform risk assessments. To comply with our requirements in the area of risk management, steps have been taken to raise the level of the knowledge and capacity of the IT & Change
organisation.
5.9
Capital management
5.9.1
Definition
Capitalisation refers to the extent to which VIVAT Group and its underlying legal entities have a capital buffer, which is necessary to cover unforeseen losses or to achieve the strategic objectives of the company. This capital buffer has to comply with our internal standards
as well as the external requirements of regulators and rating agencies.
Capitalisation generally refers to the relationship between risk-bearing activities and available regulatory capital (own funds). There is a risk that the amount of capital required will be greater than anticipated. This may be due to factors such as a write-off charged to regulatory capital or a change in the scale of the risk- bearing activities. The most significant risk in this context arises if VIVAT is unable (either temporarily or otherwise) to raise new capital or is unable to reduce risks.
5.9.2
Capital policy
VIVAT Group has a capital policy. The objective of the capital policy is to ensure that there is always sufficient capital to fulfil obligations towards policyholders and all legal requirements. The second objective of the capital policy is to ensure capital is used as efficiently and flexibly as possible and to facilitate the implementation of VIVAT's strategy.
In addition to the capital policy, there is also a Capital Contingency Plan (CCP) which describes the policy that applies in a contingency situation. In this context, a contingency situation is defined as a situation in which a capital deficit arises, or threatens to arise, at VIVAT Group, and which poses a direct threat to the continued existence of VIVAT Group in its current form and thus for its stakeholders. In its Risk Appetite Statements, VIVAT Group has defined specific triggers that determine whether a contingency situation exists. The emphasis of these triggers is on measures of capital that are linked to governance and management measures. VIVAT Group's capital policy forms the basis for translating policy into lower level policy, process descriptions, procedures and the like.
Management uses the Capital and Funding Plan, the ALM study, the Risk Dashboards and the Financial Risk Reporting for the purpose of managing the capital position. The Capital and Funding Plan describes the medium-term plans in the area of capital and funding. This includes a forecast of solvency for the next three years. The Capital and Funding Plan is based on the OP as supplied by the underlying Business Units plus supplementary information if appropriate. The Balance Sheet Optimisation department within BSM is
responsible for delivering this plan.
5.9.3
Regulatory framework
Solvency I
VIVAT Group’s solvency is currently still calculated in accordance with the Solvency I regulatory framework. Available capital is mainly based on the market value of assets and liabilities, adjusted for intangible assets and increased by subordinated debt. Required capital is related to the size of the underwriting provision.
Solvency II
The next phase will come into force under the Decree on Prudential Rules for Financial Undertakings 2015 (Bpr 2015), before Solvency II is implemented in 2016. The Solvency II ratio based on the Solvency Capital Requirement (SCR) will be implemented in 2015. As of 2015, the calculated Solvency II ratio will be an important criterion that is used for all insurers to determine whether a declaration of no objection is required for withdrawals of capital.
The European Solvency II project will create a new regulatory framework and a solvency framework based on market-consistent valuation. Under Solvency II, the supervision of the risks to which an insurer is exposed and the management of those risks will play a more central role. The financial requirements will more accurately reflect the risks to which insurers are exposed. Moreover, Solvency II is more in line with market developments and the internal risk management systems used by insurers.
Capitalisation is covered in all three pillars under the Solvency II framework:
The first pillar contains the prudential rules regarding minimum solvency. This pillar introduces two risk- weighted measures: the Minimum Capital Ratio (MCR), and the Solvency Capital Ratio (SCR).
The second pillar includes a process under which the insurer (or its senior management) has to evaluate its capitalisation periodically: the (Own Risk and Solvency Assessment or ORSA). A fixed part of the ORSA involves determining whether the standard model is appropriate for the needs of the insurer in question. If the standard model is not appropriate, the insurer has to develop its own models and methodologies in order to determine for itself whether its level of capitalisation is adequate. Based on the ORSA, a dialogue will take
place between the insurer and DNB (in its capacity as regulator) in the context of the Supervisory Review Process (SRP). In the SRP, DNB assesses the ORSA outcomes of an insurer. The outcomes of the SRP determine the minimum level of capital for an insurer. The way in which insurers have to report their exposure and capital adequacy to the market (disclosure) is laid down in the third pillar. VIVAT Group will disclose its solvency position and financial condition on a Solvency II basis by means of public reports. Solvency II will apply to the supervised insurance entities and also to the consolidated activities of VIVAT Group. Other parts of VIVAT Group are not within the scope of Solvency II.
5.9.4
Capital position
Solvency I
The regulatory solvency of SRLEV NV (the legal entity that encompasses the majority of the Life insurance
business) fell from 187 percent at year-end 2013 to 141 percent at year-end 2014. Much of this decline was due to a more detailed and revised modelling of product features, an expected increase in costs due to the dissynergistic effect of the disentanglement of SNS REAAL NV, lower projected cost savings, and revised projections of premium income. In addition, there was a decline in solvency at SRLEV NV owing to the credit facility granted of € 105 million to REAAL NV in 2014. This credit facility has to be subtracted from the available capital, leading to a reduction in SRLEV NV's solvency. Trends in market parameters and the client base also contributed to the decline in solvency.
In € millions 2014 2013
Regulatory solvency - REAAL NV 136% 172%
Regulatory solvency - SRLEV NV 141% 187%
Regulatory solvency - Reaal Schadeverzekeringen NV 191% 235%
Available regulatory capital 2,213 2,473
Capital requirement 1,624 1,439
Double leverage 128.2% 121.9%
The regulatory solvency of Reaal Schadeverzekeringen NV fell from 235 percent at year-end 2013 to 191 percent at year-end 2014, due to an additional increase in the IBNR provision for the Motor segment and by the underlying loss at Reaal Schadeverzekeringen NV, which was due to the combined ratio rising above 100 percent.
Compared to year-end 2013, double leverage at the insurance business increased from 122 percent to 128 percent, mainly as a result of a parallel fall in both the own funds of REAAL NV and the value of the associate. In absolute terms, double leverage increased by € 3 million to € 569 million and thus exceeds the internal norm of 115 percent.
Solvency II
REAAL NV went through a process in order to determine Solvency II earnings in the run-up to application of Solvency II. A description of the significant assumptions
used by VIVAT Group when determining its capital (own funds) position under Solvency II is provided below. As Solvency II has not come into force yet, a shortened process has been followed, rather than the full reporting process. VIVAT Group uses the standard model under Solvency II. The figures reported under Solvency II are based on this standard model. The final results as reported to DNB may differ.
The required and available capital (own funds) under Solvency II are determined on the basis of information at year-end 2014. The Delegated Acts of October 2014 have been used as a starting point. The further development of the Level 3 breakdowns, for example, may yet lead to changes in the methodology used. The used curve as at 31 December 2014, including the Ultimate Forward Rate (UFR), Credit Risk Adjustment (CRA) and Volatility Adjustment (VA), has been supplied
by DNB. Once Solvency II comes into effect in 2016, the applicable curve will be supplied by EIOPA.
When calculating the capital position under Solvency II, VIVAT Group makes use of the possibility of applying long- term guarantee measures. VIVAT Group applies the VA. It does not apply the Matching Adjustment (MA). VIVAT Group is keeping its options open regarding applying for the MA in 2015 or later.
When determining the Solvency II capital ratio, deferred tax assets may be set off against the required capital. In that case, it is necessary to demonstrate that, following a loss of the same scale as the SCR shock, future profits will be sufficient to enable the deferred tax asset created by that loss to be set off. Tax offsetting in the SCR has
not been applied to the Solvency II earnings. This had a negative impact of 30 percent on the Solvency II ratios of VIVAT Group, SRLEV NV and Reaal
Schadeverzekeringen NV.
The classification of the hybrid capital of REAAL NV and SRLEV NV into Tier 1 and Tier 2 capital is based on VIVAT Group's interpretation of the transitional measures contained in the level 1 regulations as known in January 2015.
A Similar to Life ( SLT) model is used for occupational disability insurance when determining the SCR of Reaal Verzekeringen NV. This also takes into account the impact of future management actions.
Summary of main assumptions for Solvency II
Item Solvency II
Legal basis Delegated Acts October 2014
Curve Swap -/- CRA + VA
CRA 10bps
VA 21bps
MA Not applied
UFR UFR (from year 20 to UFR of 4.2% over 40 years)
Model used for Risk Margin Standard Model
CoC% in Risk Margin SRLEV NV 6%
Reaal Schadeverzekeringen NV 6%
Reduction factors applied to Risk Margin No
Reduction factors applied to SCR for underwriting risk (longevity / lapse)
No
Surrender value floor No; surrender value floor does not apply
Required capital Based on correlated results of SCR calculations
Deferred tax assets utilised in required capital 0% of tax asset in required capital
Tiering of capital In line with Solvency II Delegated Acts (restrictions on subordinated capital
and deferred tax assets). Since the Solvency II rules are still subject to change
and interpretation, only an indication is reported. As at year-end 2014, the Solvency II ratio was around or just above 100 percent. The indication of the actual solvency is around € 2.6 billion. As these calculations are new and improvements to processes were made during 2014, it was decided not to provide comparative figures for year-end 2013.