Swiss Life Holding AG · SIX:SLHN
Swiss Life — Goldman Sachs Financials Conference 2003
24 slides from Swiss Life's conference presentation, Jun 18, 2003
Slide 1: Goldman Sachs Financials Conference: Surviving in a low interest rate environment
Goldman Sachs Financials Conference „Surviving in a low interest rate environment“ Prof. Dr. Michael Koller, CRO and Group Chief Acturay Rome, 18 June 2003
Slide 2: Management Summary
Management Summary Understanding Economic No Principles? Yes Yes Economically Bancrupt ? No Are you gambling ? Yes No Are able to take risk ? Yes No 2
Slide 3: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n Pricing New Business n Summary 3
Slide 4: Current Problems
Current Problems • Underestimated risk in asset allocations of life insurers lead to huge losses • The traditional methods • Low interest environment leads to the for valuation of life question whether statutory reserves are contracts are sufficient insufficient • IASC and FASB want to introduce the
Slide 5: Is your company run by accounting or economically?
Is your company run by accounting or economically? Interest rate rise Statutory IAS Economic Equity Equity Equity Liabilities Liabilities Liabilities Securities Securities Securities (long-term) (long-term) (long-term) Real estate Real estate Real estate Fixed Fixed Fixed maturities maturities matur
Slide 6: Are your actuaries understanding economic valuation?
Are your actuaries understanding economic valuation? Yie ld Cu rve Calc F orward Rates B as e Y ear 2003 S tat Interes t 3.50% S c enario 1 2 3 4 5 6 7 8 9 10 11 30.11.2002 0.95% 1.02% 1.25% 1.62% 1.89% 2.03% 2.18% 2.35% 2.53% 2.62% 2.71% -25B P 0.70% 0.77% 1.00% 1.37% 1.64% 1.78% 1.93% 2.10% 2.28%
Slide 7: Overview of the actuarial process
Overview of the actuarial process Actuarial competence is a major strength of Swiss Life Pricing policies l Profitability oriented l Margin protection l Profit testing l Computer aided pricing Underwriting policies Prudent reserving l Strict result control l Regular update of tables used l No compro
Slide 8: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n Pricing New Business n Summary 8
Slide 9: Why Fair Values (FV)
Why Fair Values (FV) • Traditional valuation methods focus on value creation and do not take into account the corresponding risks • This effects become apparent in particular for Ø Interest guarantees Ø Implicit policyholder options (e.g. taking capital or annuity) Ø Surrender values Ø Different str
Slide 10: Mark to market B/S: Available capital
Mark to market B/S: Available capital CF- Pattern Yield curve (ZCB) Expected Cash Flows for a contract 200'000 100'000 0 -100'000 Cash Flow -200'000 -300'000 Premium (BoY) -400'000 Expense (BoY) Surrender (EoY) -500'000 Claims (EoY) -600'000 -700'000 40 41 42 43 44 45 46 47 48 49 Age of Policyholder
Slide 11: Liabilities
Liabilities SL Example Company Liabillity Report December 2000 Currency CHF In Force 2 In Force . SL_- Virtual Example Porth New Gismonmes, “Age Portfolio New Business: * Aa Client View Mathematcal Reserve (statutory) Boda 629565 Premium current year MS 351985212 4% Costrato 45% 10.0% Cureton 101 12
Slide 12: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n Pricing New Business n Summary 12
Slide 13: Required Capital: How to determine
Required Capital: How to determine • The following steps are required for the definition of the required risk capital Ø Definition of the risk map Ø Model for the different risks Ø Calculation of the probability distribution and the required risk capital • In order to measure market risk capital Swi
Slide 14: Risk management landscape
Risk management landscape Interest Rate Equity FX Market Risks Real Estate Alternative Investments Diversification Financial Risk Liquidity Risks Trading Default Credit Risk Rating Migration Activites Counterparty / Issuer Structural CF ALM Mismatch Funding Mismatch / Risk Liqu
Slide 15: Duration mismatch properly understood
Duration mismatch properly understood n Most life insurers have a duration 40000 mismatch 30000 n Example Duration Assets 6 yrs, 20000 liabilities 10 yrs. 10000 n Falling interest rates are a real danger (Japanese situation) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -10000 n Effects will
Slide 16: ALM
ALM Investment Investment Management Management •• Historical Historical focus: total focus: total return return •• Responsible: Responsible: CIO CIO ALM ALM Management Management •• Focus: Focus: Economic Contribution Economic Contribution •• Responsible: Responsible: all all CFO CIO EC/FV(1) CMO C
Slide 17: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n Pricing New Business n Summary 17
Slide 18: Pricing policies ensure long term profitability and adequate reserving
Pricing policies ensure long term profitability and adequate reserving • Tariff/premium rate allow Ø Setting up sufficient technical reserves • Highly professional tariff rating Ø Increase of equity Ø Financing of solvency • Focus on profitability • No cross subsidies between different branches, pro
Slide 19: Mixed Endowment (Pricing)
Mixed Endowment (Pricing) 1.2 1 0.8 0.6 0.4 0.2 0 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 6 Interest 2.75% Interest 2% Interest 3.5% Y ield 30.11.2002 19
Slide 20: Product Management: Reporting Example
Product Management: Reporting Example 20
Slide 21: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n Pricing New Business n Summary 21
Slide 22: Scylla and Charybdis
Scylla and Charybdis 1) Valuation needs to seek a way between Scylla and Charybdis! 2) In order to do this one needs to properly understand the Methods 3) There is not only one method which can answer each question 4) A lot of pragmatism is required 22
Slide 23: Learnings from Arbitrage Free Pricing
Learnings from Arbitrage Free Pricing • The consequent application of AFP and RoRAC within an insurance entity enhances the insights into the business considerably n Application of AFP and RoRAC leads to a competitive advantage This is in particular useful for identifying the cost of guarantees (int
Slide 24: Discussion
Discussion
Swiss Life Holding — Goldman Sachs Financials Conference 2003 on 6ix