We live in a world of constant and rapid change where an insurance group like Generali plays a fundamental role, both through our ability to generate value and drive development, and our capacity to anticipate and overcome the current challenges.
In an operating context made even more complex by the pandemic, we have continued to monitor the mega trends that pose significant risks and opportunities for the Group and for our stakeholders, with a view to sustaining our ability to create value over time. The Generali 2021 strategy has proven to be particularly resilient, enabling us to implement the activities envisaged by our plan, also taking these challenges into account and guaranteeing the systematic assessment and adequate risk monitoring.
Geopolitical and financial instability
The year 2020 was characterised by the rapid spread of the Covid-19 pandemic, which has become one of the greatest global challenges in decades. In the main world economies, governments took prompt measures to handle the crisis and the consequent recession: in Europe, in particular, the bold monetary stimulus of the Central Bank was combined with the creation of the Next Generation EU. Overall, however, the Covid-19 pandemic is predicted to have caused long-term economic damage. As economic insecurity persists, linked, among others, to unemployment and to low financial returns, the propensity for saving is likely to increase further and the deterioration of company finances are expected to hinder business investment. The significant boost of monetary and fiscal policies will contribute to mitigating, but not offsetting, these dynamics. After the setback experienced in the first quarter, in the last few months of the year the financial markets showed a recovery following the result of the US elections and news of the development of vaccines against Covid-19.
Geographical diversification and selective focus on alternative investments and real assets continue to be important factors in our current investment activities that aim to contain portfolio risks and sustain current profitability. We have continued to develop the multi-boutique platform for insurance asset managers to enhance investment capacity in these market sectors. We have also further integrated ESG dimensions (Environmental, Social and Governance) in the process of strategic investment allocation, specifically focusing on climatic change, backing companies that have a lower impact in terms of fossil emissions and that are focused on sustainable development, both environmental and social.
We are exposed to the market risks arising from the value fluctuations of the investments and to the credit risks linked to the risk of counterparties’ non-fulfilment as well as to expansion of the credit spread. We are handling these risks by following principles of sound and prudent management, in line with the Prudent Person Principle and with the Group Investment Governance Policy and risk guidelines. We also measure financial and credit risks using the Group’s Partial Internal Model, which offers us a better representation of our risk profile.
Digital revolution and cyber security
We are facing a profound change guided by the interaction and the cumulative effects of various developments in technology: Internet of Things, cloud services, cognitive computing, advanced analytics, Robotic Process Automation (RPA), Artificial Intelligence, 5G and the development of mobile networks are elements that contribute to creating a renewed environment in which to operate in order to optimise efficiency, operations and proximity with customers, agents and employees. Technological evolution also involves exponential growth in cyber threats, such as attacks aimed at stealing information or blocking operational processes.
Thanks to specific tools and skill sets we formulate and analyse customer data - while guaranteeing anonymity - to enrich customer relations and be able to customize the offer and anticipate their needs. The increasing internal culture has made it possible to consolidate platforms that let us leverage synergies coming from the RPA and the cognitive technologies, thus allowing increasingly complex processes to be automated which increases quality and efficiency.
We are in step with the new technologies and are protecting ourselves from the new threats. We defined a new cyber security strategy, named Cyber Security Transformation Program 2, 2020-2022, with the aim to further increase our security posture through the adoption of innovative and advanced solutions and the progressive standardisation and centralisation of the Group cyber services. Adequate management of this risk is therefore fundamental in order to limit potential effects of economic and operational nature but also to preserve, in particular, the confidence of customers in the processing of their data, which are frequently sensitive.
Climate change is a material risk with potential more limited effects over the short term, however potentially catastrophic over the long term. Associated with this risk is a high degree of uncertainty in accurately determining a time frame and magnitude of the impacts, especially at the local level. The identified impacts can be classified as physical risks - determined by the change or intensification of weather phenomena, including extreme natural events - and transition risks - associated with the decarbonisation of the economy.
Climate mitigation and adaptation strategies also offer opportunities: as weather phenomena and extreme events evolve and intensify, a related increase in the demand for protection through specific insurance solutions and risk management is plausible. The new regulations and the public plans launched in Europe aimed at creating incentives for transition to a green economy, together with the changes in consumer preferences, are also supporting the market of insurance products tied to the renewable energy sector, and this strengthens the demand for investment products linked to green finance and boosts demand for insurance solutions that accompany the customer in adopting sustainable lifestyles. In addition to expanding the offer of thematic investment products linked to green finance for the retail segment as well as increasing our investments in green bonds and in sustainable infrastructure projects, we also joined the Net-Zero Asset Owner Alliance and issued our first green bond to finance or refinance projects relating to, for example, the improved energy efficiency of the Group’s real estate assets in 2019; a second emission occurred in 2020.
Ageing and new welfare
Modern communities continue to be influenced by distinct demographic and social phenomena with a strong impact on their socio-economic balances. In the more mature European economies, we are witnessing a continual process of population aging, driven by an increase in life expectancy and a decrease in birth rates. The international migration phenomena only partially counter-balance this trend, which is in any case otherwise influenced by socio-political initiatives adopted locally.
In the most European countries, the younger age groups are affected by a reduced and often discontinuous capacity to generate average income; this is strongly influenced by a flexible but precarious labour market that does not ensure reasonable certainty for financing the public welfare system. The pandemic will lead to some impacts - although still not well defined - on the communities’ demographic structure: mostly the elderly were affected by Covid-19, but at the same time increased the weakness of singles and young families, who are part of that unstable labour market most heavily affected. Therefore, it is expected the confirmation of unbalanced communities, where the increase in social security and healthcare needs do not match the appropriate funding and coverage of public systems by the active population.
The healthcare need naturally evolves towards increasingly sophisticated, hence costlier, supplies and services, which have to face new, and even extreme, needs, as the pandemic has highlighted. At the same time, an enhanced awareness of the bond between health, lifestyles and the environmental context is developing thanks to both public social initiatives and greater proactiveness and promotion from private market.
We actively engage in creating more stable communities while monitoring and tackling the effects of a changing society. This is why we develop and offer flexible and modular pension and welfare solutions for the coverage of healthcare costs and other potential current and future needs for individuals, families and communities. The pandemic scenario highlighted even more how the availability of appropriate services and information can be a key element of differentiation. We are increasingly paying attention to the digital transformation, both as a communication channel and as a lever to enhance the efficiency in services to our customers and our distribution network. Through its digital approach, Generali stood close to its customers and its network even in the lockdown phases.
We provide customers with complete and easily accessible information on products and services while helping them to understand the primary factors that may affect their income capacity and quality of life, and aiding them in accurately assessing their capacity to save as well as identifying their current and future needs. We manage the risks through underwriting processes that are based on an updated assessment of the socio-demographic conditions of the population. We also have solid pricing and product approval processes.