Solvency Position

Solvency Capital Requirement Coverage

Risk and capital management are closely integrated processes aimed at managing the Group’s solvency position and the Group’s risk profile.

The solvency position is defined as the ratio between Group Own Funds (GOF) and Solvency Capital Requirement (SCR).

The preliminary⁶ Solvency Ratio as at 31 December 2018 is equal to 216%. The increase of 9 pps in respect to previous year is mainly attributable to the significant contribution of the normalised capital generation and to the regulatory model changes and merger & acquisition disposal operations of the period, that exceed the negative economic variance deriving from financial markets and the foreseeable dividend of the year.

SCR and Minimum Consolidated Group SCR (MCR) data hereby reported are based on a preliminary estimate.

SCR coverage

1. Group Own Funds

Group Own Funds are calculated as the sum of consolidated Basic Own Funds related to insurance undertakings and other entities not subject to other solvency sectoral rules and Own Funds attributable to non-insurance entities, defined according to their sectoral regulatory regimes.

Basic Own Funds are calculated as the sum of:

• the excess of assets over liabilities following Solvency II valuation; 
• plus subordinated debt eligible in Basic Own Funds; 
• less foreseeable dividends; 
• plus additional Own Funds related to unrealised capital gains from French pension activities arising from the application of the IORP⁷ transitory regime⁸; 
• less deductions for participations in sectoral entities; 
• less deductions for regulatory filters applied to non-available items at Group level, restricted Own Funds items and shares of the parent company.

The contribution to the Group Own Funds of each element above listed is detailed in the following template:

Group Own Funds components

Commenting the Group Own Funds components, it can be noted that:

• the decrease of the excess of assets over liabilities (€ -1,295 million) is mainly attributable to the payment of the 2017 dividend made during 2018; 
• the reduction of the subordinated debt eligible in Basic Own Funds is due to € 250 million of early redemption occurred during 2018; 
• foreseeable dividends are deducted for an amount of € -1,413 million; 
• the reduced contribution of the unrealised gains on IORP business (€ -770 million) stems from their progressive yearly haircut required by the French regulator; 
• change of deductions for participations in sectoral entities (€ -446 million) are driven by the lower value (quoted market price) of the participation in Banca Generali; 
• filter for non-availability and minorities items and other deductions decrease Group Own Funds for an amount of € -1,389 million; 
• the increased contribution of sectoral entities (€ 179 million) reflects the higher capital held by Group entities operating within the financial segment.

Reconciliation between IFRS Equity and Solvency II Excess of Assets over Liabilities

The following template provides the reconciliation between IFRS shareholders’ equity and Solvency II Excess of Assets over Liabilities at year-end 2018:

Reconciliation between IFRS shareholders’ equity and Solvency II excess of assets over liabilities

The main elements of reconciliation from the IFRS shareholders’ equity (€ 24,643 million) to the Solvency II Excess of Assets over Liabilities (€ 38,225 million) are the following:

• intangibles (€ -10,712 million) are eliminated because not recognised under Solvency II; 
• mark to market of assets: this adjustment (€ 9,310 million) is primarily due to the fair valuation of real estate (€ 8,541 million); 
• mark to market of liabilities: this adjustment (€ 22,826 million) is primarily due to net Technical Provisions (€ 23,898 million deriving from the difference between IFRS and Solvency II evaluation); 
• impact of net deferred taxes (€ -7,843 million) is a consequence of the change to fair value of items reported above.

Group Own Funds Tiering

Group Own Funds are classified into three Tiers representing different levels of quality, depending on the ability to absorb losses due to adverse business fluctuations on a going-concern basis and in the case of winding-up⁹.

The tiering is described below:

• Tier 1 unrestricted Own Funds includes ordinary share capital and the related share premium account, the surplus funds from German and Austrian business, the reconciliation reserve and additional Own Funds from French IORP activities; 
• Tier 1 restricted includes undated subordinated debt; 
• Tier 2 includes the remaining part of subordinated debt which is classified as dated; 
• Tier 3 is composed by net deferred tax assets, which are characterised by lower capital quality being not immediately available to absorb losses.

The Group Own Funds split by tiers is reported in the following table:

Group Own Funds by Tiering

2. Solvency Capital Requirement

The SCR covers underwriting, financial, credit and operational risks as follows:

SCR split by risk

The above SCR breakdown highlights that:

• financial and credit risks, account for the 68% of the total SCR before diversification, due to the predominance of traditional life business; 
• life and non-life underwriting risks, accounting for respectively 11% and 13% of the total SCR before diversification; within this CAT risks remain limited thanks to a comprehensive reinsurance program; 
• health underwriting risk deriving from standard formula based entities accounting for 1% of the total SCR before diversification; 
• operational risks contribute to the Group SCR for 7%. This contribution is calculated using the standard formula.

Each risk category is further detailed in the section D. Risk Profile

Minimum Capital Requirement Coverage

In addition to SCR coverage, the Group calculates the Minimum Consolidated Group SCR (MCR) coverage. The MCR calculation is required to determine the minimum level of capital, under which the Group would be exposed to an unacceptable level of risk when allowed to continue its operations.

The preliminary¹⁰ Minimum Solvency Ratio stands at 256% as at 31 December 2018, with an increase of +8 pps in respect of previous year. In the following table, the MCR coverage is reported.

MCR Coverage

To define MCR coverage, stricter Own Fund eligibility rules are applied compared to the ones previously used for the SCR¹¹. In the following table, the split by tiers of the Own Funds covering the MCR is reported:

GOF to meet the MCR by tiering

Group Partial Internal Model (Group PIM)

Generali deems the Group PIM to be the most appropriate way of assessing the Group SCR. It represents the best way of capturing the risk profile of the entire Group and of the Legal Entities in scope in terms of granularity, calibration and correlation of the various risk factors.

The Group PIM is structured around a Risk Map, which contains all quantifiable risks that Generali Group has identified as relevant to its business, allowing for the calculation of the SCR at single risk level and at higher aggregation levels.

Group PIM Methodology

In implementing the PIM, the Group has adopted the socalled Monte-Carlo approach with “proxy functions” to determine the Probability Distribution Forecast (PDF) of the changes in the Basic Own Funds over a 1-year horizon.

The Own Funds probability distribution allows to determine the potential losses at any percentile for risks in scope and, in particular, the SCR corresponding to the 99.5th percentile. The risk measure applied is the VaR (Value at Risk). Monte-Carlo methods are used in the industry to obtain sound numerical results using the embedded characteristics of repeated random sampling to simulate the more complex real-world events. Proxy functions are mathematical functions that mimic the interaction between risk drivers and insurance portfolios to obtain the most reliable results.

The calibration procedure involves quantitative and qualitative aspects. The aggregation process uses advanced mathematical techniques following market best practices. Dependencies among risks are defined through the use of a so called ‘Copula approach’ that simulates the interaction between several risk drivers (elements that mimic the underlying sources of risk) throughout the simulations generated by the Monte-Carlo stochastic method.

Group PIM Governance

Governance and processes regarding the Group PIM are defined in the Group Internal Model Governance Policy, ensuring that:

• models and components are appropriate for their purpose; 
• procedures are in place to design, implement, use and validate new models and model changes; 
• the appropriateness of models on an ongoing basis is verified.

To rule the activities related to the Internal Model developments necessary to ensure its appropriateness over time and, more in general, to support the Internal Model change process, the Group Internal Model Change Policy has been also defined with the aim to specify roles and responsibilities in the implementation of major and minor changes.

A dedicated committee, the Internal Model Committee, has been established to approve Group PIM calibrations, to support the Group Chief Risk Officer (GCRO) in the decision-making process on Group PIM developments or model changes and to control the full model lifecycle, assuring proper compliance with the Group Internal Model Governance Policy. This Committee is chaired by the Model Design Authority, responsible for ensuring the overall consistency and reliability of the Group PIM.

The GCRO defines the processes and controls to ensure the ongoing appropriateness of the design and operations of the Group PIM, so that it continues to appropriately reflect the Group risk profile. The GCRO is also responsible for defining the methodology of each model component, on the basis of the Group Internal Model Committee’s proposals, as well as for the results production and ultimately for submitting the relevant Internal Model supporting documentation to the AMSB.

The AMSB, assisted by the Risk and Control Committee, ensures the ongoing appropriateness of the design and operations, the ongoing compliance of the Group PIM and also that the Group PIM continues to appropriately reflect the risk profile of the Group.

These roles are generally mirrored within the organizational structure of each Group Legal Entity within PIM scope.

No material changes have occurred during the period with reference to the PIM governance.

Group PIM Validation

The Group PIM is subject to independent validation on an ongoing basis, which aims to gain assurance of the completeness, robustness and reliability of the processes and results of the Group PIM as well as their compliance with the Solvency II regulatory requirements.

The validation process follows the principles and procedures defined within the Group Internal Model Validation Policy and related guidelines.

In particular, the validation outputs are designed to support Senior Management and AMSB in understanding the appropriateness of the Group PIM, including areas of weaknesses and limitations, especially with regards to its use.

To ensure an adequate level of independence, the resources performing the validation activities are not involved in the development and operation of the Group PIM.

Within the validation process also results obtained during previous validation cycles are taken into account, as well as developments within internal and external business environment, financial market trends and Group PIM changes. The Internal Model validation process excludes those aspects covered by the assurance work of the Actuarial Function (i.e. technical provisions and related IT systems, actuarial platforms and their governance).

Furthermore, the validation procedures also serve as an incentive mechanism to ensure timely and accurate incorporation of modelling refinements.

In order to warrant the appropriateness of the array of elements contained within the Group PIM, the validation covers both the quantitative and qualitative aspects of the Internal Model, and is therefore not limited to the calculation engine and methodology. Other important items such as data quality, documentation and uses of the Model are validated accordingly.

The validation process is carried out on regular annual basis and when requested by the AMSB or Senior Management (e.g. in case of PIM changes).

6 On the basis of IVASS Provvedimento n. 53, 2016, the SCR and MCR calculations to be disclosed in the Annual Report can rely on a preliminary estimate. More details on the Solvency Ratio will be disclosed in the Solvency and Financial Condition Report.
⁷ IORP stands for Institutions for Occupational Retirement Provisions.
⁸ These additional Own Funds are authorised by Supervisor for the years between 2016 and 2022, a period during which the proportion of the eligible unrealised capital gains will decrease gradually.
⁹ To grant a high quality of capital available, the amounts of Tier 2 and Tier 3 items eligible to cover the SCR are subject to the following limits. The eligible amount of Tier 1 items shall be at least one half of the SCR; in case of admissible subordinated liabilities and preference shares, exceeding 20% of total Tier 1, it is downgraded towards Tier 2. The eligible amount of Tier 3 items shall be less than 15% of the SCR. The sum of the eligible amounts of Tier 2 and Tier 3 items shall not exceed 50% of the SCR.
¹⁰ On the basis of IVASS Provvedimento n. 53, 2016, the SCR and MCR calculations to be disclosed in the Annual Report can rely on a preliminary estimate. More details on the Solvency Ratio will be disclosed in the Solvency and Financial Condition Report.
¹¹ The amounts of Tier 2 and Tier 3 items eligible to cover the MCR are subject to stricter quantitative limits. The eligible amount of Tier 1 items shall be at least 80% of the MCR; the same limitation on subordinated liabilities and preference shares is set. The eligible amounts of Tier 2 items shall not exceed 20% of the MCR. No Tier 3 items are allowed to cover the Minimum Capital Requirement. No capital from sectoral is considered
¹² Tier 1 includes also available capital of sectoral entities and the unrealised gains and losses on French Institutions for Occupational Retirement Provision (IORP) business as agreed with the Group Supervisory Authority.