Asset Liability Management at Munich Reinsurance Company

  • 3,276 views
Uploaded on

 

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
3,276
On Slideshare
0
From Embeds
0
Number of Embeds
1

Actions

Shares
Downloads
126
Comments
0
Likes
2

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Asset Liability Management at Munich Reinsurance Company Helsinki, 17th November 2004 Bernhard Kaufmann and Jochen Mayer
  • 2. Asset-liability management for insurance companies Agenda ALM: Governance and Management The Munich Re ALM-Model: ALM on Macro Level The general Concept The different modules Reports and Analysis ALM and pricing: ALM on Micro Level 2
  • 3. Asset-liability management for insurance companies Strategic objectives for ALM Deliver a return to shareholders in excess of cost of capital Operational profitability Business focus Risk limitation Financial strength – Strict underwriting – Reinsurance - Comprehensive risk – Retain clients’ and discipline management investors’ confidence • Focus on achieving a leading market – Rigorous application position in target – Integrated view on – Reduce dependency of Value Based markets depending insurance risk and on equity market Management on the cycle financial mismatch developments, risk thereby increasing – Commitment to • Exit business not flexibility achieving target financial targets – De-risk balance returns sheet – Primary insurance • Strong platform for profitable growth • Sustainable strengthening of business model 3
  • 4. Asset-liability management for insurance companies Evolution of ALM in global insurance market • Development of coherent Integrated Risk Management Framework 4 • ALM processes integrated with active capital management 66% of and other financial risk management processes insurers are • Governance processes provides independent oversight of aggregate financial risk position less than 50% of the way • ALM function and processes developed to integrate risk through the profiles of both assets and liabilities evolutionary 3 • Management action focused on the integrated asset and liability view journey • Governance process provides independent oversight of ALM • Enhanced awareness of the value of formalized ALM process 90% of 2 • Development of partially integrated asset and liability insurers measurement processes believe that • ALM governance primarily focused on asset-side benefits outweigh the • Identification, measurement and monitoring of asset costs of the 1 and liability risks undertaken in isolation, with varying degrees of sophistication journey • Limited or informal / ad hoc integration of individual risk profiles Source: Ernst & Young LLP. 2004 4
  • 5. Asset-liability management for insurance companies ALM in the Solvency II project Special Call for advise from CEIOPS (MARKT/2506/04-EN – App.2): … “In the future all insurance undertakings need to have an asset-liability management system (ALM) as part of their general business and risk management processes. General principles concerning A/L analysis shall be harmonized at the EU level.”… ... “One major use for ALM in pillar I is to contribute to investment planning.” … … “standard formula for calculating the solvency capital requirement should capture the ALM risk in a sufficiently prudent approach.” … … “The pillar II supervisory review process should encompass the undertaking’s ALM.” … 5
  • 6. Asset-liability management for insurance companies ALM Governance of Munich Re Group ALM GOVERNANCE LIABILITIES REPLICATING STRATEGIC TACTICAL ASSETS PORTFOLIO ASSET ASSET ALLOCATION ALLOCATION Stochastic Portfolio of Asset allocation Asset allocation The risks and representation of assets that most targets that targets that are cash flows cash flows closely matches provide optimal selected by the associated with associated with the risk level of return Asset Manager assets of the insurance and characteristics given the to optimize Group reinsurance associated with predetermined return within obligations on a the stochastic appetite of Board given class of business representation of and other investment and the liabilities investment risk constraints constraints, as dictated by external stakeholders (e.g. regulators, rating agencies) 6
  • 7. Asset-liability management for insurance companies Agenda ALM: Governance and Management The Munich Re ALM-Model: ALM on Macro Level The general concept The different modules Reports and Analysis ALM and pricing: ALM on Micro Level 7
  • 8. Asset-liability management for insurance companies What would happen if? The ALM model is an evaluation tool An optimisation tool The AL-team analyses the generates, for example, a simulated results for the strategic asset allocation considered SAA and trades off risks and chances “The AL-team” “The optimiser” “The ALM model” Capital market model Liability model Asset module Life Non life Corporate model The ALM model simulates the implications of the considered SAA over a 5 year horizon in Reports combination with the liabilities 8
  • 9. Asset-liability management for insurance companies The ALM model allows to analyse the impact of strategic decisions and changes in the general framework General framework Accounting rules Regulation Volatility sources Distributions of corporate results Capital market ALM- Balance sheet scenarios Model P&L statement Operative business Risk positions Strategic decision Investment strategy Operative strategy 9
  • 10. Asset-liability management for insurance companies Agenda ALM: Governance and Management The Munich Re ALM-Model: ALM on Macro Level The general Concept The different modules Reports and Analysis ALM and pricing: ALM on Micro Level 10
  • 11. Asset-liability management for insurance companies The different Modules Capital market model Asset model Liability model Corporate model Sub models HGB IFRS Reports 11
  • 12. Asset-liability management for insurance companies The capital market model: 3000 Scenarios form the basis of the ALM simulation EURO Zinsraten über einen 5-Jahres-Horizont 10% 9% 8% 7% Interest rate 6% 5% 4% 3% 2% 1% 1Y 3Y 5Y 7Y 10 Y Maturity 1% quantile 5% quantile 10% quantile 25% quantile 50% quantile 75% quantile 90% quantile 95% quantile 99% quantile start mean Short term interest rates are more volatile than long term rates For most of the scenarios interest rates are below the average In many of the scenarios the spread between long and short term rates reduces over time 12
  • 13. Asset-liability management for insurance companies The capital market model: Equity indices EUROSTOXX 10.000 9.000 8.000 7.000 6.000 Value 5.000 4.000 3.000 2.000 1.000 - 1 Year 3 Years 5 Years Horizon The mean of the chosen calibration is clearly positive: 5- year return EUROSTOXX: 6,7% p.a. The probability of a loss for the EUROSTOXX is nevertheless very high at 28%. 13
  • 14. Asset-liability management for insurance companies The asset model: Focus of the analysis should rule the granularity of the model MODELLING EURO ASSETS - IAS Asset Classes Market value modelling Book value modelling IAS Governments Interest yield curve (term) Bonds – Available for sale Corporates + Bonds – Held to maturity Market Pfandbriefe Static Spreads Value Bonds – Trading Loans (Dynamic Spreads) Loans (ABS/MBS) Relevant price index and Affiliated Companies - Equities divident yield (Eurostoxx) consolidated Participations Price index and dividend Affiliated Companies – Ergo yield (DAX) Market non consolidated Value Allianz Insurance index and Associated Companies dividend yield HVB Equity – Available for sale Banking index and Commerzbank Equity - Trading dividend yield Market Real Estate Relevant real estate index Real Estate Value Market Cash Short term interest rate Cash Value 14
  • 15. Asset-liability management for insurance companies The non life model simulates catastrophe, basic and large losses based on MR risk model INCURRED LOSSES AND PROVISIONS FOR OUTSTANDING CLAIMS ARE PROCESSED BY MEANS OF STOCHASTIC PAY OUT PATTERN Flexible premium and budget development (GDP, CPI) Consideration of internal/external retrocession and FRe-treaties Derivation of commission and admin expenses as ratios of earned premiums Major Non-Life Loss and Combined Ratios (Mean and Quartiles) 210% 180% Interaction with 150% 120% 90% 60% 30% 0% 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Casualty Property Marine Other other modules Non-Life Module Claims Division Report Ext. Retro Finite Re LoB Report Currency Report Input Output Input Input Cash Flows Balance sheet Income statement 15
  • 16. Asset-liability management for insurance companies Life model: reserving is strongly affected by interest rates Average "Umlaufrendite" over 10 years (yield in %)2) 6 5.5 5 4.5 4 3.5 Change in Interest Sensitive Reserves3) 3 2003 2004 2005 2006 2007 2008 0.03 0.025 99%-Quantil 0.02 0.015 95%-Quantil 0.01 0.005 0 2003 2004 2005 2006 2007 16
  • 17. Asset-liability management for insurance companies Agenda ALM: Governance and Management The Munich Re ALM-Model: ALM on Macro Level The general Concept The different modules Reports and Analysis ALM and pricing: ALM on Micro Level 17
  • 18. Asset-liability management for insurance companies A number of ALM reports can be generated International & local GAAP financial statements Capital market model scenarios Risk analysis Technical results Return and growth Investments and investment result 18
  • 19. Asset-liability management for insurance companies Balance sheet IAS €m mean over scenarios ASSETS Actuals 2003 2004 2005 2006 2007 Intangible assets 131 130 130 130 130 Investments I. Real Estate 1.050 1.040 990 978 1.068 II. Investments in affiliated and associated enterprises 6.808 6.823 6.825 6.826 6.828 III. Loans (mortgage loans, loans to aff/ass) 666 580 582 604 627 IV. Other Securities - Available for sale (excluding Allianz) 14.459 14.557 14.939 15.764 17.014 - Available for sale (Allianz only) 2.347 2.483 2.656 2.884 3.060 - Trading 56 56 56 56 56 Total 16.862 17.096 17.651 18.704 20.130 V. Other investments 11.893 12.527 12.620 12.956 13.054 Total 37.279 38.067 38.667 40.068 41.706 Ceded share of underwriting provisions 1.789 1.527 1.503 1.520 1.529 Other assets 4.499 4.584 4.711 4.729 4.724 Balancing item Assets 0 410 410 410 410 19
  • 20. Asset-liability management for insurance companies The ALM model simulates balance sheet and income statement numbers for MR AG under HGB and IFRS Development of insurance business, Assets and investment return premiums and claims − Asset structure at book and market 1. Stochastically simulated figures values − Incurred losses (gross and net − Unrealised capital gains and losses expenses for claims and benefits) − Net investment return (components) − Gross and net underwriting provisions − RoI (referring to the average market 2. (Deterministically) projected figures value of total investments) − Gross and net earned premiums − Performance of selected asset classes − Gross written premiums − Duration 3. Derived figures (by ratios) − Commission and admin expense ratios − Loss ratios (LR) − Expense ratios (ER) Security and risk measures − Combined ratios (CR):= LR + ER − Relevant rating figure (S&P CAR) − Ins. business result ratio:= 1 _ LR _ ER − Relevant solvability figures (solo solvency) Rentability − Value at risk − Return on equity (RoE) − Currency over/under coverage − Comprehensive income per equity − Duration missmatch 20
  • 21. Asset-liability management for insurance companies Example 1: Risk/return analysis for different strategic asset allocations (SAAs) Comprehensive Income in € bn Unchanged SAA Increase in equities (SAA with higher risk) Mean Decrease in equities (SAA with lower risk) 2004 2005 2006 2007 Standard Deviation 21
  • 22. Asset-liability management for insurance companies Example 2: Impact of dynamic investment strategies Static investment strategy Dynamic investment strategy linked to VaR- limit 22
  • 23. Asset-liability management for insurance companies Example 3: Analysis of duration mismatch Definition EUR-Duration: = Change in market value of assets and liabilities if all interest rates change by 100 basispoints EUR-Duration:= MacAulay-duration* market value * 0.01 23
  • 24. Asset-liability management for insurance companies Example 4: Analysis of currency mismatch at book and market value Def: Currency mismatch = Market value of assets - Market value of liabilities 24
  • 25. Asset-liability management for insurance companies Example 5: Effect of changes in accounting standards (e.g. after tax profit under IAS 39 old and new) IAS Profit (in Billion EUR) with 90%-Confidence bands 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 new 2003 new 2005 new 2006 new 2007 new 2004 old 2004 old 2007 old 2006 old 2003 old 2005 The graph shows the change of the IAS profit as a result of the first-time implementation of IAS 32/39 (rev. 2003) compared to the previous version. 25
  • 26. Asset-liability management for insurance companies Agenda ALM: Governance and Management The Munich Re ALM-Model: ALM on Macro Level The general Concept The different modules Reports and Analysis ALM and pricing: ALM on Micro Level 26
  • 27. Asset-liability management for insurance companies Primary Life Insurance – the past must be placed in perspective, lessons have been learned for the future Max Discount / "Min. G'teed Rate" (1) Market Value Raturn (2) Average Participation Rate (3) 12% PA % Interlinking the 8% Fundamentals 4% 0% The Future ALM 1994 1996 1998 2000 2002 2004 -4% Dynamic Pricing -8% Bonus German Life Market Value Earnings Market Value Earnings Exceed Declared Rates Less than Declared Rates (Surpluses Accumulated) (Draw Down of Surplus) Hedging Start of Deregulated Market (1) Estimated for 1994 & 1995, Actual for later years (2) Before allowance for Terminal Bonus, typically in the range of 0.3% to 0.5% (3) Rate applying to business written in that year 27
  • 28. Asset-liability management for insurance companies Securing Risk Adequate Prices in German Primary Life Business – Market Consistent Pricing of Guarantees What is meant by ‘market-consistent’ pricing of a guarantee? The cost of a portfolio of assets with the same pay-offs as guarantee in all possible scenarios i.e. the cost of hedging risk Why is it useful? Pricing: Shareholder cost of writing guarantee Capital: Minimum capital required to hedge risks. Can indicate drivers of risk-based capital requirements For simple guarantees, formula may be available:e.g. ‘plain-vanilla’ put options => Black Scholes formula Insurance guarantees usually more complex : cost dependent on Bonus and asset management rules Simple formula not available Use simulation model 28
  • 29. Asset-liability management for insurance companies Improving Capital Productivity Requires Optimising Management Actions on Both Sides of the Balance Sheet Managing the Liabilities Managing the Assets Bonus Smoothing Policies (Annual & Defining the Strategic Asset Terminal Bonus) Allocation and Portfolio Making use of direct bonus Rebalancing Rules declaration („Direktgutschrift“) Developing a sound dynamic Consideration of cost of guarantees hedging strategy and embedded options in setting Optimising reinvestment and bonus rates disinvestment decisions Special treatment for policies close Management of unrealised gains to maturity – proactively managing and losses policyholders‘ reasonable Flexing the equity backing ratio in expectations response to changing excess Shareholder participation pre and capital levels post 1994 Rules 29
  • 30. Asset-liability management for insurance companies Active ALM can improve the risk/return profile substantially German Primary Life Business – Improving Capital Productivity - ILLUSTRATION FOR - ILLUSTRATION FOR ENDOWMENT ASSURANCE - ENDOWMENT ASSURANCE - MARKET CONSISTENT PRICING Vision ASSET/ LIABILITY MANAGEMENT Passive Bonus Dynamic Bonus Policy – Market Policy – Market Business Required Shareholder Risk Capital Consistent Consistent Focus Assets Invested in Assets Covered in % in Bonds (Base by Structured Management Cost Cost Discipline AUM1.5 % Case) Hedge Pricing 150% Risk 1.0 Passive Policy (Market Consistent Cost) .1 Dynamic Policy (Market Consistent Cost) 100 Passive Policy (Market Consistent Cost) 25 Dynamic Policy (Market Consistent Cost) 1 Strategy 100% 0.5 50% 0 0% Distribution & Cost Management Optimising Investment Power of Management Strategy for Shareholder Actions to Reduce Costs of Funds Provides Leveraged Guarantee & Improve Potential to Improve Capital Returns for Shareholders Productivity 30
  • 31. Thank you for your interest. Münchener Rück Munich Re Group