3. Risk Management
- Risk identification which is aimed at ensuring that all significant risks faced by the Company and by the Generali Group are properly identified.
- Risk measurement which is aimed at evaluating the possible impact of risks on the Company’s solvency and on the achievement of goals set by the business plan.
- Risk management and control aimed at maintaining the Company’s risk profile within the limits set by the Company’s risk strategy. The risk strategy is defined both in qualitative terms, through the Company’s risk preferences, and in quantitative terms, through specific solvency position limits.
- Risk reporting which is aimed at communicating the Company’s risk profile and solvency position to all key counterparties, both internal and external.
3.1. Risk classification
- Quantifiable risks that are included in the calculation of the solvency capital requirement; the Company applies the Standard Formula for the calculation of the requirement and for regulatory reporting.
- Liquidity risk and additional risks that are material, however they are difficult to quantify and are not included in the calculation of the solvency capital requirement (i.e. “non-quantifiable risks”).
Based on the above, risks are classified in the risk map presented in the chart below.
Risk map
| Quantifiable risks included in the calculation of the solvency capital requirement applying the Standard Formula | Non-quantifiable risks | |||||
|---|---|---|---|---|---|---|
| Market risks | Counterparty default risk | Insurance risks | Operational risks | |||
| Non-life underwriting risks | Life underwriting risks | Health underwriting risks | ||||
| Interest rate risk | Counterparty default risk | Pricing and reserving risks | Mortality risk | NSLT Health Insurance | Compliance risk | Liquidity risk |
| Equity risk | Catastrophe risk | Longevity risk | SLT Health Insurance | Financial reporting risk | Strategic risk | |
| Property risk | Lapse risk | Morbidity / disability risk | Catastrophe risk | Internal fraud | Reputational risk | |
| Credit spread risk | Expense risk | External fraud | Contagion risk | |||
| Concentration risk | Revision risk | Employment policies | Emerging risks | |||
| Currency risk | Lapse risk | Clients & products | ||||
| Catastrophe risk | Tangible asset damage | |||||
The risk map is revised annually on the basis of the results of the risk identification process to ensure the map is adequate and complete. For any significant risk category identified in the risk map, a risk management concept is defined, including specific processes for risk identification, measurement, management and control, reporting as well as process roles and responsibilities.
Additional information about the Company’s overall risk management system and each category will be issued as part of the Solvency and Financial Condition Report (SFCR) in late May 2017.
3.2. Market risks
Market risks include risks deriving from unexpected movements in interest rates and exchange rates and in the values of equities and properties that may have an adverse impact on the economic or financial results. In addition, market risks include losses incurred as a result of excessive asset concentration with one counterparty or losses from movements in value of assets, liabilities and financial instruments resulting from changes in their credit rating or from the widening of their credit spread.
3.3. Counterparty default risk
The risks of possible losses arising from the default or failure of counterparties to meet their financial obligations.
3.4. Non-life insurance risks
Non-life insurance risks arise from uncertainty as to the occurrence, amount and timing of insurance liabilities.
- Reserving risk relates to the uncertainty as to the adequacy of non-life technical reserves to cover all future insurance claims.
- Lapse risks relates to the uncertainty as to the volume of voluntary withdrawals from insurance contracts for the purpose of technical reserve calculation.
- Pricing risk and the catastrophe risk cover the risk that the premium earned in the following year is insufficient to cover actual future claims, expenses and extreme events.
3.5. Life and health insurance risks
Life and health insurance risks include biometric risks embedded in life and health policies deriving from the uncertainty in the expected future claims pay-out related to assumptions regarding mortality, longevity, morbidity and disability rates and also risks coming from uncertainty concerning the expected value of lapses and expenses.
3.6. Operational risks
Operational risks refer to risks of losses arising from inadequate or failed internal processes, personnel and systems or from external events.
- Compliance risk, which is defined as the risk of legal and regulatory sanctions, material financial loss or reputational damage the Company may suffer as a result of not complying with laws, regulations and administrative provisions applicable to the Company’s business.
- Financial reporting risk, which is the risk of a transaction error that could entail an untrue and incorrect representation of assets, liabilities, profit or loss in financial reporting.
3.7. Liquidity risk
Liquidity risk is defined as the uncertainty arising from business operations, investment or financing activities as a result of which the Company may lose the ability to meet payment obligations in a full and timely manner, in a current or stressed environment. Stressed environment may mean, for example, the ability to meet commitments only through a credit market access at unfavorable conditions or through the sale of financial assets incurring additional costs due to illiquidity of (or difficulties in liquidating) the assets.
3.8. Other non-quantifiable risks
- Strategic risk refers to the risk arising from external changes and/or internal decisions that may impact on the future risk profile of the Company or the Generali Group.
- Reputational risk refers to the risk of potential losses due to a reputational deterioration or to a negative perception of the Company’s or the Generali Group’s image among its key counterparties.
- Contagion risk is the risk that problems arising from one of the Generali Group’s local entities could negatively affect the solvency, economic or financial situation of other Group companies or the Generali Group as a whole.
- Emerging risks refer to new risks due to internal or external environment changes that may bring to an increase in the exposure to risks already included in the Risk Map or that may require to define a new risk category.
3.9. Solvency
The solvency ratio (i.e. the ratio between the Company’s equity and the solvency capital requirement to capture quantifiable risks) is calculated using the Standard Formula stipulated by the Solvency II Directive.