Sponsored roundtable: Solvency II and the economic environment – The effect on Italian insurance

The Panel
Luigi di Capua, Head of risk management, Poste Vita
Dario Focarelli, Chief economist, Italian Association of Insurance Companies
Gianluca De Marchi, Head of the financial & credit risk unit, Unipol Gruppo Finanziario
Marco Palacino, Managing director, BNY Mellon Asset Management
Marco Vesentini, Chief risk officer, Cattolica Assicurazioni Group

What effect will the implementation of Solvency II and International Financial Reporting Standard 4 (IFRS 4) have on asset allocation for insurance companies? Which asset classes will be favoured? Will property and infrastructure be included? What about diversified growth funds?
Luigi di Capua Asset allocation for insurance companies will tend to differ in order to adjust to the underlying types of insurance business. With Solvency II, a great deal of attention will be focused on managing volatility of balance sheet and on the optimisation of risk and returns. This will be a recurring topic for discussion because Solvency II introduces a great deal of volatility in capital, in terms of both available capital and capital requirements. We are already seeing a tendency in the marketplace towards a reallocation of portfolios with a greater emphasis on diversification. In addition to government securities – which will remain a key asset class, partly because they come with no capital charge for default risk – preferred asset classes will include high-quality, short-term corporate securities and real estate loans. Conversely, there will be less weight given to equity and direct investment in infrastructure. There will also certainly be heavy use of derivative instruments, precisely because it will be necessary to balance the need to allocate assets to the instruments favoured by regulations and the need to match assets and liabilities. The new regulations are the source of my concern about the use of diversified growth funds, in that the rules force us to apply the look-through approach, and this makes managing these instruments more of a problem, both in terms of asset and liability management and for the amount of information to be provided.

Dario Focarelli I would add that we still do not know the final calibration of the Solvency II regulation – the level 2 and level 3 measures are still being discussed. Many countries are complaining – not without reason, I would say – about the fact that the capital requirement is highly sensitive to increases in duration. An internal European Commission working group is working on this matter and has recently altered a number of features of this sensitivity. Prior to its intervention, the capital requirement increased linearly with duration (for example, if the duration doubled from five to 10 years, the capital requirement doubled as well). Now, sensitivity to portfolio duration is lower, but has increased for low-rated securities. In this way, the capital charge for a low-rated bond can be as high as the charge for an equity security, even for quite short durations. To give an example, a five-year unrated bond has the same level of risk as equity, whereas under the working group’s proposal a 29-year BBB rated bond would have that level of risk. These examples underscore the importance of the final calibration of the Solvency II criteria. Whatever happens will have a decisive impact, but at the moment it’s difficult to make any predictions.

Marco Palacino Asset management can essentially take action in two areas. The first area is that of the asset class of liquidity. A money-market fund has a very low capital charge, even lower than direct bank deposits. The second area, despite the look-through approach, is that of diversified growth funds, which have a capital charge based on look-through of the underlying components at that point in time. Twenty-five per cent might be an indicative capital number for these funds on average, but the key point is that the dynamic nature of the fund means that higher capital charges are only incurred when the outlook for risk assets is strong. Similarly, when the outlook is less certain, these funds can reduce exposure to risky assets, which means lower economic risk and lower capital charges, whereas the charge for direct equity investments is 39%. A flexible fund gives asset managers room to manoeuvre between zero and 70% equity and to manage the fund dynamically. As currency risk is ‘expensive’, we recommend that overseas investments are hedged back to the base currency, unless the currency position is actively sought. In order to dynamically manage currency investments, a managed instrument could be preferred over direct investment in currency.

Gianluca De Marchi Insurance companies, particularly within the eurozone, keep a large proportion of their investments in a fixed-income portfolio, in which government securities definitely play a key role. Furthermore, as long-term investors, they represent the main source of funding for banks. Following the financial and sovereign debt crises and as a result of the actions of the European Central Bank (ECB) to create a certain degree of system stability, there is now a very high correlation between financial and government securities. One of the main problems for insurance companies as they approach Solvency II is that of managing correlations in a context where, due to the characteristics of the book being managed, it is difficult to find instruments that are not highly correlated with these two predominant asset classes.

I share the interest in currencies. Even though there is a preference in Italy – and elsewhere for that matter – to seek to match assets and liabilities, thus holding investment portfolios that do not take on risks that are different from those of liabilities, currencies may be a way to diversify a portfolio, providing benefits in terms of capital savings. Decisions will need to be guided by return targets on the capital absorbed. Therefore, the capital charge calculated for a given asset class will also need to be compared with the expected return, probably reducing the incentive to invest in unlisted equities or non-eurozone equities that do not receive preferential treatment under the regulations, while preferring global listed shares. Recently, insurance companies have increased their positions in sovereign bonds, preferring these over other credit securities. However, we should specify that the standard formula favours government securities within the eurozone, but insurance companies using their own internal models will not necessarily have these signals. Furthermore, risk in certain countries is greater for government securities than for financials, thus the specific context in which an insurance company operates will be a decisive factor in decisions in this area.

Marco Vesentini We are probably seeing a gradual de-risking of strategic asset allocation by insurance companies – at least in Italy – because it is easier to intervene on the asset side than on the liability side in optimising the solvency capital requirement. Changing products is much more difficult than reducing the risk profile of investments so, at least initially, insurance companies that have been affected by the introduction of Solvency II are likely to try to reduce their capital requirement under the new regulatory framework by de-risking their investments. Even in Europe, investment in equities has dropped sharply, not only because of the crisis of the early 2000s, but also following the introduction of the new requirements under Solvency II. In terms of regulation, I believe we are seeing a trade-off within market risk between interest rate risk and credit risk sub-modules. However, we are currently showing a preference for hedging interest rate risk over credit risk. Of course, a change in asset allocation must also take account of any mismatch between assets and liabilities since such a mismatch is currently heavily penalised under the interest-rate risk sub-module. With regard to funds, we can expect the look-through approach could create greater obstacles from a management point of view, given that these funds will have to be managed and administered internally. In the future, these investments will be used much less for yield enhancement and will mainly take on a more strategic role. For this reason, they will need to be developed as a liability-driven investment.

Counter-cyclical premium or matching premium? What impact will regulatory decisions have on insurance companies’ products and solvency ratio?
Dario Focarelli The adjustment mechanism for high volatility is the subject of much debate, and my impression is that it is a non-negligible obstacle in the process of finalising Solvency II. The text issued by the Italian Parliament proposes the mechanisms suggested by the industry: a matching premium in the event of strong matching between assets and liabilities; and a counter-cyclical premium (CCP) in periods of market stress. However, my impression is that we are a long way from reaching a conclusion on this point for two reasons. The first is that a great deal of discretionary power is given to the European Insurance and Occupational Pensions Authority with regard to CCPs, while neglecting the need for a good degree of predictability of its value. If there insufficient predictability, it will be very difficult to incorporate it into hedging strategies and, when volatility stays high for extended periods, it will be difficult to support long durations. We are still quite far from reaching consensus, so the doubt concerns more its predictability, rather than whether or not we will have a CCP (which is quite likely). Indecision on this matter may continue to fuel uncertainty and discourage long-term investment. The second reason regards the limits imposed to the matching adjustment. It is fairly clear there will be matching for single premium products and for products where there is not the freedom to withdraw from the contract due to the policyholder. This, at least for the time being, affects just a small percentage of the products offered in Europe, and an even smaller percentage in Italy, where it may only include products with specific funding. To reduce the effects of artificial volatility, it would be necessary to drastically relax the conditions. Specifically, the matching adjustment should be applicable when a relevant part of obligations is matched by the identified portfolio of assets and when surrender options are allowed provided that are adequately taken into account.

Even if we see a very restricted definition of matching adjustment, I believe that the supply of this type of product will increase, because it is clear that a significant reduction in volatility is of great value to insurers. I am not sure that policyholders will be happy with products with very severe restrictions and no surrender option.

Marco Vesentini I agree with Dario, and I feel, in particular, that failure to extend the matching premium mechanism to the segregated funds, that is, typical Italian insurance products, risks penalising our insured since separate accounts have always offered a very good-value proposition for the insured in terms of the low volatility of yields. If the new regulatory framework favours products with specific funding, insurance companies will have to shift their product offerings. Products with specific funding are essentially just repackaged securities. Furthermore, there is a significant risk that the combined effect of failure to apply the matching premium and the significant capital requirement for credit risk could cause segregated funds to essentially be transformed into money-market funds that, as a result, offer a less attractive value proposition than in the past. I believe that this is a strategic risk for our industry because segregated funds are the insurance product that truly characterises the life insurance segment in Italy.

Luigi di Capua My views are in line with those of my colleagues. The worrying thing in this period is the lack of a specific focus on Italian products, first and foremost, separate account products, as Marco noted, but also other products specific to the Italian market. For example, in the case of index-linked products, the attractiveness of the products compared with the cost of capital for insurance companies will be affected by application of a matching premium or a CCP. The problem lies in the fact that there are new products being sold that are of a long-term nature and, accordingly, will be on the market when Solvency II is introduced, despite this high level of uncertainty. I hope that there will be an analysis of the impact of this that focuses more specifically on the products common to the Italian market.

Gianluca De Marchi The principles underlying the matching premium are fundamentally sound because insurance companies, as long-term investors, could have divestment needs within specific portfolios, which are likely to be tied to the need to match assets and liabilities. The greatest risks to a portfolio are default risk and migration risk. Spread risk includes a spread volatility component and an illiquidity component, the volatility of which can have a significant impact on the mark-to-market measurement of assets. Of course, the applicability of the matching premium, as currently formulated, is very limited, particularly for Italy. I believe that we will see a combination of both solutions in order to facilitate a solution that can be applied in all countries. In those countries where asset and liability management calls for perfect matching, the possibility of holding portfolios until maturity without constant reallocation among asset classes can ensure stability and eliminate the type of volatility that needs be prevented in order to avoid impacting insurance companies in a way that compromises their role as long-term investors.

On the other hand, I believe that the CCP, as it has been formulated, can be a feasible solution for Europe. In the Italian industry, which is represented by the Italian Association of Insurance Companies (ANIA) and in the CRO Forum, the goal is to find a twofold solution that calls for the introduction of the adjustment based on spreads on corporate and government securities. This approach should come into effect when precise indicators – and not discretionary observations – signal a market crisis. One of the solutions proposed was to adopt an adjustment based on the maximum between the illiquidity premium and the spread between the ECB AAA and others, the euro government curve and the euro swap curve, which include certain mechanisms that provide a fairly homogeneous representation of the European portfolio. However, this would be accompanied by certain asset allocation effects since, in order to ensure the matching of assets and liabilities, the discounting of liabilities requires insurance companies to replicate the composition of their assets in line with the sensitivity to the credit spreads of the liabilities. I believe that, for the Italian industry, the CCP solution with a formula approach is to be preferred.

Marco Palacino I think the capital market will also be affected by this reform because issuers will have to adapt their funding policies to meet the needs of European insurance companies. It’s true that there is a risk that the separate accounts tend to hold a lot of government bonds, but we think covered bonds are also attractive instruments, as are asset-backed securities for the short-term segment of the yield curve. Assuming the adoption of ECB AAAs as a benchmark, it would be interesting to see what sort of equilibrium would be established between outsourced management and management handled within the insurance companies themselves.

Gianluca De Marchi Replicating the benchmark is something that can be handled by the insurance companies themselves, especially if they are organised to actively manage their portfolios. The ECB AAA and other curves are published on a daily basis. Should it be adopted, the markets for the underlying securities would need to provide more information. The purpose of this would be to adequately match the spread risk that would arise in terms of asset and liability matching. This type of approach, which is contingent upon the factors that are key to introduction of the CCP in its current form, would require a sensitivity analysis of the portfolio compared with benchmark and, above all, a verification of the likelihood that these triggers will reach certain levels. This trigger would identify situations in which, as an example, AAA and AA euro government securities show a positive spread over the swap curve.

Luigi di Capua Regarding asset allocation, there are direct implications depending on how the matching premium and CCP are configured. For the matching premium, there could be an incentive to allocate assets to longer-term, less liquid securities. This could help to create certain hedges, such as against inflation risk, for which the market does not currently offer sufficiently liquid instruments. Only the matching premium could offer a solution to this type of problem or foster the structuring of these products, also considering the growing demand for this type of insurance product.

What effect could not implementing Solvency II and IFRS 4 simultaneously have on insurance companies?
Gianluca De Marchi From my point of view, this is one of the main problems, together with the discounting of liabilities. From the initial questions and observations made thus far, we have seen that the insurance companies will need to take a total balance-sheet approach to risk management under Solvency II, which calls for a total balance-sheet mark-to-market mechanism. This means that any difference between accounting standards and the rules established by Solvency II could imply that certain business strategies that are optimal in terms of solvency may be less than optimal in terms of the company’s financial performance. Take, for example, transactions to hedge interest rate mismatching and credit risk within transactions. I believe we risk failing to match the timing of the introduction of Solvency II and IFRS 4 phase 2. From the point of view of management and goal-setting, this creates a conflict between safeguarding capital and reaching the risk-adjusted profitability targets. This distortion could affect the management and planning of insurance companies and could prevent reaching decisions or making them less than optimal in terms of Solvency II when opting for strategies that only optimise financial performance.

Luigi di Capua In addition to lack of timing co-ordination, I would add that there is a mismatch in measurement criteria. IFRS 4 brings financial reporting closer to the Solvency II approach but, in my opinion, we have missed an opportunity to ensure that one of the two sets of rules takes the initiative over the other. On the one hand, the IFRSs were not able to act as a guide for Solvency II regarding measurement principles; on the other, the Solvency II measurement principles are not likely to be accepted in their current form for accounting purposes. Once implemented, we will need to deal with a sort of dual constraint that will affect both optimisation of the risk-return profile and of capital absorption. However, Solvency II and IFRS 4 are not the only regulatory interactions that we must pay close attention to. For example, it is not yet clear what criteria will be used to classify insurance companies as systemically important financial institutions. For certain organisations, such classification entails greater charges than those called for by Solvency II. Finally, there is a lack of co-ordination among regulatory regimes concerning different industries, such as the banking and insurance industries in the US. This could result in arbitrage opportunities – the treatment of loans under Basel II and III and Solvency II is radically different even though we are dealing with the same asset class.

Marco Vesentini I believe that the introduction of a total balance-sheet approach under Solvency II could cause a number of problems for insurance companies, who already have to manage multiple forms of financial statements: International Accounting Standards (IAS) statements, which companies use to report performance to the market; financial statements prepared in accordance with the Italian Civil Code, which we currently use to calculate solvency and pay dividends; financial statements for tax purposes; and, finally, the segregated funds financial statements for life insurance companies. In terms of the decision-making process, a manager needing to make an investment decision should look at all four or five of these monitors and take diametrically opposed parameters into consideration. Take, for example, an investment in corporates. Under Solvency II financial reporting, they will be measured at market value, including in terms of available capital, so there will be high volatility and high capital requirements. Under IAS, they could be classified as loans receivable and measured at cost. Under the life insurance separate accounts, the bonds have to remain at cost until sold. All of this will have a negative impact on the efficiency of investment allocation, leading to sub-optimal decisions both for shareholders and for the insured. I believe that this is the problem of all problems. Introducing this additional metric without eliminating others could be harmful to the profitability of insurance companies.

Marco Palacino Under Solvency II, the management of interest rates will require special reserves, so it will be important to understand how insurance companies will act in the area of collateral management and in the management of counterparty risk, given that they have not worked much with these instruments thus far.

Dario Focarelli I would like to bring this topic to a close with reference to Italian legislation. The agreement we had with the supervisory authority and government was to shift from local Generally Accepted Accounting Principles reporting to IAS reporting at the same time that Solvency II goes into effect and, as was hoped at the time, at the same time as the introduction of the IFRS 4 phase 2. In this way, it could be possible to reduce the number of types of financial reporting. With the introduction of Solvency II we may be able to rationalise things a bit. I expect that, after a settling-in period, we will move towards greater uniformity, but there will certainly be a phase during which we will have to deal with very different measurement methods.

Are insurance companies buying protection against equity investment and interest rate risks?
Marco Vesentini The greatest risk in the life insurance segment is surrender risk, the convexity of our liabilities and thus the fact that, as interest rates increase, the duration of our liabilities decreases. I believe that the ability to protect ourselves from this risk depends a great deal on the ability of insurance companies to understand the preferences of their insured. There are corporate and institutional clients that are more sensitive to interest rates, and there are retail customers who have a longer-term, less speculative investment profile. In the interests of the insured as well, surrender management should fall within the scope of the agreement of the partner bank. For this type of risk, it is essential to manage relations with the distribution networks, banks in particular, and to understand the portfolio, to segment it, and to understand which parts of the portfolio are the most exposed. For those parts, that is, for the corporate and institutional segments, hedging surrender risk could be a good idea, given the predictability of the cashflows of liabilities.

Dario Focarelli Given their time horizons, insurance companies should be natural buyers of equity, rather than buyers of protection against this asset class. In my view, it is one of the problems that Solvency II will bring. I have always been opposed to solutions that penalise equity much more than other asset classes. This comes from a decision that many in Europe wanted, particularly in the UK, but I feel that it goes against the very nature of insurance companies. That said, it remains unlikely that someone would offer long-term equity protection and even less likely that it would have any economic value.

Marco Palacino Regarding equity management, we’re seeing room to introduce collar, call and put options. If well structured, they could meet regulatory requirements. The other thing that we’re wondering is whether it is advisable to invest directly in equity when the structure of options like these can give you at least the same upside while absorbing less capital.

Luigi di Capua I believe that Solvency II places a great deal of emphasis on the issue of managing balance-sheet volatility, both for assets and liabilities and thus the matching of the two. Matching can be achieved in various ways, either by understanding and studying the essential characteristics of the insured or by structuring products so that they focus on a given configuration of guarantees. There is still plenty of room for derivatives, particularly on interest rates, in order to match the various mark-to-market valuations of the insurance guarantees. The use of these mechanisms and acquiring protection against movements in interest rates are certain to undergo considerable development.

Gianluca De Marchi I agree with Luigi’s approach and other considerations and would like to add one more element to the discussion. With the evolution of accounting standards and the introduction of Solvency II, it will most likely be necessary to establish specific hedging programmes, especially in terms of effectiveness for capital. Derivatives are used mainly in the presence of high levels of market stress in order to keep insurance companies out of difficult situations and avoid increasing capital requirements too much. I believe that the problem of the guaranteed minimums and low-interest-rate scenarios, in addition to that of high rates of inflation and of surrender, has yet to be sufficiently studied. I’m thinking in particular of the definition of rules that the insurance companies should seek to adopt in order to be able to face extended periods of recession and to manage the risk of extremely low interest rates. Particularly in the Italian market, where government securities play a significant role, the issue has yet to be studied in the way it should be, and this is due in part to the fact that yields on Italian government securities are still attractive.

The context in Japan is totally different from what we are seeing in Europe because, when designing their products, insurance companies took steps to try to deal with these critical situations in advance by reducing guaranteed minimum returns and pushing term guarantees, thereby avoiding cliquet guarantees paid year after year. The use of derivatives will evolve towards a total balance sheet management approach and will seek to hedge risks. In terms of Solvency II, insurance companies that find themselves with limited excess capital compared with available capital could achieve two objectives at the same time by adopting a hedging strategy. There will be a price to pay, but also an immediate reduction in both capital absorption and the volatility of the available capital from their own funds.

How are insurance companies dealing with counterparty risk?
Marco Palacino Managing counterparty risk will become important in the insurance industry, so managing collateral will also become important as a result. As asset managers, it is essential that we understand what approach Italian insurance companies are taking towards this type of risk, given that management calls for specific techniques that are currently not considered or properly developed within the insurance industry.

Luigi di Capua I feel that insurance companies still have a lot to do when it comes to counterparty risk. These risks will become increasingly important due, in part, to the growing use of strategies that make use of over-the-counter derivatives. The module for calculating these risks under the regulations has been changed, and the latest approach has been criticised for its complexity and for the excessive use of ratings as the basis of the requirement. Nonetheless, the latest document issued by the European Commission with regard to implementing measures points to significant changes in this regard. I think that the regulations should introduce an effective incentive for reducing and managing this risk similar to the principles introduced by Basel III regarding clearing and hedging. Insurance companies need to improve their methods for managing counterparty risk, with the creation of in-house guidelines, increasing diversification and monitoring this risk in a structured manner. This will require a significant effort because it is not a risk that has typically been monitored by insurance companies.

Gianluca De Marchi Solvency II and Basel III take different approaches to managing counterparty risk, which is likely due to the fact that banks have a large number of contracts with various counterparties, requiring more highly evolved methods for managing counterparty risk and collateral, whereas insurance companies normally have a small number of contracts with very high notionals. The counterparty default risk module of Solvency II does not go into detail about the procedures for calculating the potential future exposure in the way that Basel III does. Furthermore, banks took action before insurance companies as a result of the liquidity agreements that came out of collateral management and, above all, as a reaction to the events in the aftermath of the Lehman Brothers default. I believe that insurance companies must make an effort to understand not only what their exposure is today, but also what it will be tomorrow, and to add liquidity risk to their various metrics even though their cycle is inverted compared with that of banks. I therefore expect to see a great deal of development in the insurance industry on this front.

In a context of low interest rates and high inflation, how is the demand for inflation-linked products changing and what opportunities are there in this market?
Marco Vesentini The liabilities of Italian life insurance companies have been expressed in nominal values for some 25 years, and the last inflation-linked product came out in the mid-1980s. Nonetheless, this is an interesting market, particularly from the point of view of pension plans. At this time, demand is fairly limited for life insurance companies, but not for non-life companies, where we know that endogenous inflation is different from the inflation found on the capital markets, so there is this underlying risk, which makes hedging more difficult. I believe that the portfolio of a non-life insurance company needs to have an exposure to inflation. Durations for non-life companies are generally quite low, typically around two to three years. It might then be natural to hold positions in short-term instruments but, from a going-concern perspective, it would be best to think in terms of longer effective durations and to also have some strategic investments in real assets or inflation-linked securities.

Dario Focarelli I get the impression that there would be a great deal of retail investor interest in inflation-linked products. The problem is that it’s not easy to package them into insurance products. It could be that two conditions need to be met. The first is that we would need regulations regarding matching premiums or CCPs that allow for such an offering and that reduce volatility for insurance companies. Second, we would need a more continuous, more liquid product offering. Most issues of inflation-linked securities in Italy are indexed to European inflation, but the great success of Italian long-term treasury bonds (BTPs), which are indexed to Italian inflation, should be cause for reflection. I believe that the Treasury should come up with a way to have a product offering linked to Italian inflation that mimics the way the Italian severance pay system works. In this way, we would see strong growth in the offering by insurance companies, too.

Luigi di Capua At Poste Italiane Group, we are also seeing demand and awareness among consumers for inflation-linked products. In Italy, we also have an inflation-linked postal savings bond, which is one of the few instruments to be linked to Italian inflation rather than European inflation, like most products of this type. For insurance companies, it is a narrow path, and one tool they could use would be product design, which must reconcile the limited hedging opportunities on the market with appropriate operation of guarantees, so as to minimise costs for the customer together with capital absorption and volatility for the insurance company. Another issue that must not be overlooked is the proper pricing of this type of guarantee. Finally, knowledge and awareness on the part of the insured is also of great importance. Most likely, consumers today would still prefer guaranteed higher returns to inflation-linked returns.

Gianluca De Marchi We, too, have noticed this interest in inflation-indexed products. In fact, many of the pension funds that we manage lately are asking for this feature when they renew their management contracts. This makes us think that the goal for people approaching life insurance products, particularly if looking to supplement their pensions, is to protect the real value of their principal. The Italian market for inflation-linked treasury bonds is certainly one that has seen significant growth, but the bid-ask spread – which is an indicator of how liquid a security is – is very high compared with ordinary securities, which means that divestment could be expensive.

Marco Palacino Driven by the needs of our customers, we are developing emerging-market inflation-linked products, which are being requested by pension funds and other institutional investors. This is a new asset class, and we are looking to make these products available to our investors.

Low interest rates and long-term guarantees. How do these two elements interact? And what are the solutions to the problems they entail?
Gianluca De Marchi This scenario should scare insurance companies, particularly if the expectations of recession and low interest rates continue for much longer. The current situation regards swap rates, but it does not apply to the yields on Italian government securities. Accordingly, there is currently a component of spread risk implicit in the positions of insurance companies that still enables them to maintain higher returns than the guaranteed minimums. In my view, in this type of environment, we need to take an approach that focuses on asset and liability management techniques that enable us to foresee these situations and to determine the most appropriate strategies to adopt. For an insurance company, strategies typically include cashflow matching and duration-convexity matching. The best approach is probably a combination of both, along with an approach to managing liquidity risk that is similar to that taken in the banking industry.

Luigi di Capua I think that the challenge lies in product design. Insurance products need to be made attractive but, at the same time, the guarantees need to be appropriate to market conditions. This is something that many insurance companies (including Poste Vita) are now doing. The trend we are seeing is that of offering non-cliquet options on the guaranteed minimums. This is a strategy that many companies (including Poste Vita) are adopting. In addition, I believe that accurate pricing of the guarantees offered is of key importance. Together with product design and efficient asset and liability management, this is something that can enable life insurance companies, and particularly those that offer traditional with-profits products, to survive situations such as the one we are currently experiencing and what we would be experiencing if not for the high sovereign spread supporting returns. On the supply side, we are seeing that it is more important to focus on how these solutions are structured than on changing the minimums. The key is whether these minimums are cliquet or non-cliquet. Cliquet products, which are to be consolidated year by year, are more costly for the company than increasing guarantees. To me, the important thing, then, is not only the level, but also how the contract is written.

Marco Vesentini Marketing and sales are important because from the point of view of distribution, there is often a tendency or risk of associating insurance products with money-market products, and there are some big differences: the guarantees that we write as insurance companies are much different from those that any other financial services firm can offer its customers. I agree that product design is an important issue. In addition to guaranteed minimums and the convenience, both for the insurance companies and for their customers, of moving from cliquet guarantees to term guarantees, I believe that there is a need for an overall product redesign and, in particular, a rethinking of benefits in the event of surrender, because this is the greatest risk for a life insurance company. Making outflows more predictable would greatly improve the quality of our products and would likely enable our insured to build a pension plan that is more suited to their future needs, including in the light of welfare reform and the public system.

_{Material contained within this article is intended for information purposes only. It is not intended to provide professional counsel or investment advice on any matter, and is not to be used as such. No statement or expression is an offer or solicitation to buy or sell any products or services mentioned. The views expressed within this article are those of the contributors only and not those of The Bank of New York Mellon or any of its subsidiaries or affiliates, and no representation is made as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this article.}

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