1. Life business
For the savings and death and disability business, the risk measurement methodology relies mainly on an internal model that evaluates the Company’s risks by simulating its asset-liability matching on the basis of economic approaches. This model is used to make MCEV and capital requirement calculations under Solvency 2. The modelling tool has been in use at Predica since 2005 and is currently being deployed in the main entities outside France active in savings and death and disability business, in Portugal and in Italy. The internal model replicates the policy choices made by the insurer (asset allocation, contract revaluation, fees charged, etc.) and the behaviour of the insured (via application of mortality tables and simulation of structural and cyclical surrender patterns); and obviously incorporates regulatory constraints (minimum policyholder profit participation, technical provisions, asset class limits, etc.).
1.1. Risk monitoring at Predica
Predica’s risk strategy has been formally approved by the risk management bodies at Crédit Agricole S.A. The strategy sets objectives and risk limits for the different businesses: counterparty limits, security interest limits, allocation limits, underwriting rules, hedging rules, and so on. It has been deployed using risk measures quantified with the internal model.
Risks are reviewed quarterly by Predica’s general management and the Group as part of the consolidated monitoring process.
Predica’s strategic asset-liability Management Committee meets quarterly to scrutinise the risk studies and make proposals for risk management to the entity’s board of directors.
All of the entity’s important decisions on commercial policy (products, rates paid), financial policy (asset allocation, hedging programme, etc.) and insurance policy (reinsurance programme) are made in the light of simulations using the internal model. These simulations also fuel debates within the governance process. The risk strategy was updated in early 2009 to take into account the effects of a steeper yield curve and falling share prices. The update was made on the basis of stress scenarios analysed according the same principles that have been used since the strategy was first implemented in late 2006.
During the first half of 2009, the following strategic orientations were followed:
• continue to reduce risks on non-fixed-income assets (equities, property, etc.) as long as reserves are low and volatilities high;
• reduce upside interest-rate risk by selling low-yielding long-term bonds and hedging against rising rates; • build up investments in medium-term investment-grade “credit market” securities;
• offer unit-linked products invested in corporate bonds within multi-fund policies.
Since the summer of 2009, these orientations have been maintained but adjusted as follows for the rebound in equity markets and the narrowing of credit spreads:
• step up the pace of upside interest-rate hedging;
• reduce the fixed-income allocation in favour of diversification assets, mainly equities and real estate, so as to rebuild a portion of reserves partially protected by downside hedges on equity markets;
1.2. Risk monitoring at the international insurance subsidiaries (FIA)
Since its formation in 2006, FIA, working in concert with the international entities, has built a collection of standards to be transposed for use within each company. The standards establish a framework that clearly delineates the scope of decentralised decision-making. They are underpinned by clear, formal organisational process for decision-making within each entity.
The risk management process was implemented with the entities in accordance with the Crédit Agricole Group’s risk monitoring standards, as adapted to the specific requirements of insurance business.
In 2009, an ALM and Investment Committee was instituted at FIA. In accordance with standards set by the Group and the insurance subgroup, this body establishes the objectives for the subsidiaries, the tools to be used and the organisation to be implemented to meet them.
A risk modelling tool is currently being deployed in the principal international entities.
2.
Property and casualty business
The risk strategy of Pacifica, the principal property and casualty insurance company of the Crédit Agricole S.A. Group, is approved by its management and by the Group Risk Management Committee of Crédit Agricole S.A. It is updated every eighteen months. The most recent risk strategy was presented to the Group in June 2009.
Beginning in late 2009, the financial risk scorecard is transmitted monthly to Crédit Agricole S.A. risk management (previously, every quarter).
The nature of Pacifica’s business is such that its main incurred risks are underwriting risk and reinsurance risk.
Underwriting riskis measured primarily by the claims ratio, i.e. the ratio of claims expenses to net premium
income. The claims ratio is subject to variations in loss experience and is kept on track by means of pricing, underwriting and claims management policies. A target claims ratio for each marketed product is set each year and tracked monthly. This process is a central element of the overall management of the company. Reinsurance risk arises from two sources: reinsurance cover adequacy of liabilities to policyholders (adequacy depends on the level of protection against exceptional losses and the degree of control of volatility in the claims ratio and in earnings) and counterparty risk on reinsurers. The policy in this area remains conservative, with a high level of protection against exceptional events, and reinsurance cover was increased in 2009. As concerns counterparty risk, dispersion across reinsurers was also increased in 2009.
3.
Creditor insurance business
CACI’s first risk strategy was presented to the risk management bodies of Crédit Agricole S.A on 17 November 2009 and received a favourable opinion.
In particular, the strategy establishes the risk management policies that govern underwriting risk arising from pricing and from marketing methods for life insurance products with or without a reinsurance programme and/or delegation to partners.
During 2009, CACI finalised the organisation of its Risk Management and Permanent Controls function. The system that has been implemented covers all risk areas. It relies heavily on the business process mapping, which was approved by the Management Committee in early 2009. The 2009 risk mapping campaign, to map operational, legal and compliance risks, was initiated in October 2009, and the summary mapping will be presented in early 2010 to the Management Committee, the Risk Management and Permanent Controls Committee and the Business Line Monitoring Committee.
Quarterly meetings of the Business Line Monitoring Committees have been held since May 2009. At these meetings, CACI reviews tracking reports on its risk management system, points of topical interest regarding risks and presentations of stress scenarios.
The Group permanent control deployment project has begun, and plans for local controls will be deployed during 2010.