External Context

The main long-term factors that may significantly affect the business and the ability to create value for the Group are:

Regulatory context

The regulatory context within which the Generali Group operates is constantly changing.

In its business, in the actions and long-term strategies, Generali is strongly influenced by the changes of two distinct classes of laws and regulations:

  • the legislation in force in the stock market, and in particular the governance regulations, since the Parent Company is listed on regulated markets;
  • legislation that defines and characterizes the insurance industry, extremely dynamic at national, European and international level.

The European project on the reform of prudential supervision of insurance and reinsurance business, known as Solvency 2 has a great impact on the insurance business. The significant innovations provided by the Solvency 2 Directive (2009/138/ EC) require a coordinated approach within the Group. Specific implications are being identified through a dedicated action plan, where priority is given to the formal adoption of internal models for capital requirement measurement. Last 13 November 2013, an agreement was reached between the European Parliament, Council and Commission on the Omnibus 2 Directive, which is going to amend the Solvency 2 Framework Directive. Omnibus 2 is crucial to a correct and sustainable integration of the principles identified by the Solvency 2 Framework Directive into corporate practice. On the dates of implementation in each Member State and first application of Solvency 2, Omnibus 2 fixed the dates of 31 March 2015 and 1 January 2016 respectively.
The following year will in particular require European insurers to implement several aspects of the Solvency II regulations (so called Interim measures), also by considering current and prospective assessment of the risk profile.

The European Institutions are also discussing the introduction of new provisions and stricter rules for the distribution of insurance products, with the aim to increase consumer protection, enhance transparency of information and reduce conflicts of interest.

Furthermore, following the designation by the Financial Stability Board (FSB) of Assicurazioni Generali S.p.A. in the initial cohort of 9 Global Systemically Important Insurers (G-SIIs), the Policy Measures aimed at increasing the financial stability by reducing the moral hazard have started to be applied. The Enhanced Supervision, the first step of the process, is intended by Generali not only as a measure to comply with but also as an opportunity to take advantage of. The Systemic Risk Management Plan (SRMP) which Generali is preparing represents an occasion to deepen an internal analysis on the risks raised by the designation process methodology. In particular, an additional focus within the overall risk management system is given to the management of systemic risk aspects as well as on the liquidity risk.
The next stage of the process will be the implementation of the Recovery and Resolution Plan, the tool to adequately assess and manage stress situations. At the same time Generali will be pursuing its stated strategy of narrowing its business focus onto core insurance activities, and disposing of non-core assets. Needless to remind that Generali as well as other traditional insurers are agents of stability for the whole economy and act as shock-absorbers, as they run their business with a typical long-term approach.

Macro-economic context

The second half of 2013 evidenced an increase in global activity, mainly in various advanced economies, such as the United States. Growth in the US is expected by the International Monetary Fund (IMF) at 2.8% in 2014 after 1.9% in 2013, thanks to the reduction in fiscal drag. The Euro-zone should also continue to increase in 2014 (1% yoy GDP growth after a -0.4% in 2013), but the recovery should remain uneven. Emerging market economies should grow by 5.1% in 2014, after 4.7% in 2013. China is expected to slow down due to policy measures aimed at slowing credit growth and rising the cost of capital. The decision of the Federal Reserve to begin tapering its quantitative easing measures could have a negative impact on those emerging markets which are reliant on global liquidity.

Life insurance and household saving have been gravely affected by financial volatility, low interest rates and by the decrease in per capita income and rise in unemployment, with a dramatic downturn in volumes and turnovers especially between the end 2010 and the beginning 2013. This trend has been particularly pronounced in peripheral European countries, but has also affected France and Germany. In the US and in the key emerging markets where the Generali Group operates the picture is more varied. Property&Casualty insurance has a stronger, longer term linkage with the real business cycle, and not always and unambiguous one. Lower GDP and income per capita negatively affect demand but may at the same time have a positive impact on profits (combined ratios) via the reduction in claim frequency (Commercial and Motor). Recently there seems to have been a “reversal” in the outcome of these two segments, with life business slowly recovering with financial stabilization and a timid overall economic recovery, and property&casualty business starting to show the strains deriving form persistent economic stagnation and renewed tariff competition.

Demographic change

Societies are facing dramatic and unprecedented demographic changes: an ageing population, low birth rates, altering family structures and migration. This composite process is a worldwide phenomenon that affects industrialized and emerging countries alike. The two main causes for population ageing globally are longevity (i.e. greater life expectancy) and falling fertility rates, two drivers that are the result of major successes in healthcare, education and increasing affluence but that create an impressive social challenge.

Population ageing has many potentially upsetting effects on the economy, including pressures on growth and the labor market, on state budgets (through both pension and health care costs), on the private savings behavior by individuals, and on interest rates.

Life insurance has a central role to play in mitigating the effects of ageing society. In economies with aging populations there is a growing demand for post-retirement income products, especially those that provide some form of income benefits that would give retirees comfort that their savings will be adequate to fund their retirement.
Individuals are progressively in charge of their own financial security after retirement but most older workers know little about the size of the pension plan they are accumulating and the rules governing social security benefits. Insufficient levels of financial literacy and lack of information affect the ability of the individuals to save and to secure a comfortable retirement.

The objective of Generali is to improve financial awareness in the society by educating the sales force to dialogue with the individuals and facilitate the comparison between pension funds accumulated and projected salary at retirement age; moreover Generali participates in many interdisciplinary initiatives that promote the study of future mortality improvement of the population, in association with national social security organizations, public statistical institutes and associations of actuaries. For Generali, future mortality improvement is a longterm open issue of primary importance based on the projection of mortality rates subject to periodical review.

The adequacy of pensions is associated with their ability to prevent social exclusion in old age while the sustainability relates to the possibility of contributing to a pension plan without destabilizing the financing of other key aspects of sustainable societies. In this respect, the Generali Group is offering specific solutions aiming at achieving the adequacy and sustainability of individuals’ income after retirement. On the basis of projected mortality tables, a wide selection of private life annuities is available to mitigate the longevity risk and reduce the financial gap:

  • fixed annuities, that make payments in fixed amounts or in amounts that increase by a fixed percentage;
  • variable annuities, by contrast, pay amounts that vary according to the investment performance of a specified set of investments, typically bond and equity mutual funds.
  • guaranteed annuities, under which the annuity issuer is required to make annuity payments for at least a certain number of years;
  • joint-life and joint-survivor annuities, where payments stop upon the death of one or both of the annuitants respectively. For example, an annuity may be structured to make payments to a married couple, such payments ceasing on the death of the second spouse.

The social ageing process and its economic and social consequences is associated with the growing challenge of long-term care (LTC) for the elderly population and how to finance it.
Research shows that in OECD countries today, there is a 40 per cent chance of a 65-year-old individual requiring LTC in the future. At the same time, the number of informal caregivers is decreasing, because of split families, better educational opportunities and a growing employment rate for women.

Private LTC insurance is still under-developed but the Generali Group is present in many marketplaces. The benefits typically provided are:

  • individual cash benefit payments proportional to the degree of dependency;
  • private supplementary LTC covers offered in combination with life-time annuities.

By attributing a considerable role in pension provision to privately managed schemes, Generali likewise considers the financial management of people’s retirement savings of primary importance and has always adopted a conservative investment strategy in order to minimize the volatility of the financial markets.

Environmental changes

Insurance and reinsurance companies have always followed catastrophe events carefully, mainly because of the specific catastrophe covers they provide to their clients, and not only because of the possible effects on their own operations and infrastructure.

The Generali Group constantly monitors the environment in which it operates, to correctly assess the potential impact of catastrophe risks. Economic growth and development, coupled with higher insurance penetration - both in industrialized and emerging nations - have led to increased risk accumulations. As a side effect to this process, higher complexity and advanced technology are leading to the emergence of new risks. For example, the climate is changing, becoming more unpredictable and extreme. This adds to the factors that may influence the risk landscape especially for insurance protection against events that depend on the weather (e.g. floods, windstorms, etc.).

With respect to the management and development of its business, Generali views these changes as a potential source of additional risk, but also as an opportunity. The challenge lies in identifying, assessing, monitoring and managing the risk, while simultaneously being able to exploit the new business opportunities originating from the demand driven by change itself.

The main area of risk derives from the rise in claims tied to catastrophic events. This is reflected not only in higher expected losses, but also in an increase in their volatility. This results in greater uncertainty in pricing and in higher risk capital absorption associated to the business being underwritten.

These factors may require tariff adjustments, which, if unmitigated or not well managed, for example through careful redesigning of products and conditions, could eventually make it unaffordable for customers to access insurance, or, in extreme cases, even lead to the impossibility of insuring particular risks altogether, if the hazard, coupled with exposed accumulation, exceed the level of sustainability.

To counter this trend, Generali is actively working on identifying and assessing the significance of these risks, so as to minimize the negative repercussions that may follow. The Group constantly monitors the main perils and territories to which it is exposed, using specialized models capable to assess the impact of natural phenomena on written business considering the characteristics of its risk exposures. It is thus in a position to verify the adequacy and enhance the effectiveness of its insurance underwriting and risk mitigation strategy. The constant monitoring of risk and the regular updates that are incorporated within risk models, enable Generali to follow the evolution in climate change, and therefore to quickly adapt if and when the need arises. Regarding mitigation, Generali is now managing its reinsurance cessions centrally at Group level, to leverage scale and diversification and to maximize the value of its operations. The Group is also committed to investing in research and studies on these topics.

As mentioned, these changes also constitute a significant opportunity. This mainly derives from the possibility of better promoting existing products and developing new ones, associated with a high level of services, to satisfy the potential greater need of protection against catastrophes.

With respect to services, over the past few years, the Generali Group has excelled in the response to its customers following severe catastrophic events. As an example, in 2012, in the aftermath of the earthquake in Emilia, Italy, six ad hoc claim facilities were set up, supported by 60 credited loss adjustors. In 2013, following the severe floods in Central Europe, special crisis units were set up in Germany to accelerate claim procedures and assist clients, while in the Czech Republic 330 employees volunteered with the same purpose.

Although most of the actions being described can be carried out by the insurance sector on its own, to better achieve these goals it is fundamental that a supportive regulatory context is promoted. This should include: 

  • legislative and regulatory tools that prevent adverse risk selection. This could be achieved by expanding the scope and mix of coverage, for example introducing obligatory or semi-obligatory mechanisms, but still maintaining price differentiation based on the actual exposure and vulnerability of risks being insured;
  • tax incentives, which would make the purchase of this type of insurance more affordable for customers;
  • the State acting as risk carrier of last resort, in those cases where the insurance sector alone cannot offer sufficient capacity.

In this context, Generali, as a leading member of the insurance industry, is strengthening its role as a key player, while also helping society to achieve a greater resilience against catastrophes, including those exacerbated by climate change.

These risks are captured by the integrated risk management system, which relies on the Group internal model and methodologies (for financial and underwriting risks) as well as on the results shared at European level by the insurance industry providing the market best practice for the emerging risk identification and management. The underwriting risk methodologies are being regularly updated on the basis of the expected trends being mentioned above.

A more detailed insight on the risk profile and the related risk assessment methodologies is provided in the Risk Report, being part of the Notes to the Consolidated Financial Statement. Its content is developed according to the risk disclosure reporting requirements under Solvency II and to the enhanced internal risk reporting framework.

Assicurazioni Generali S.p.A. - C.F. e P.IVA 00079760328