Swiss Life Holding AG · SIX:SLHN
Swiss Life — Fox-Pitt, Kelton ALM Conference (October 2003)
26 slides from Swiss Life's conference presentation, Oct 20, 2003
Slide 1: Fox-Pitt, Kelton ALM Conference
Fox-Pitt, Kelton ALM Conference Prof. Dr. Michael Koller, CRO and Group Chief Actuary London, 20 October 2003
Slide 2: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n ALM n Pricing New Business n Summary 2
Slide 3: 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 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 Curve 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% 2
Slide 7: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n ALM n Pricing New Business n Summary 7
Slide 8: 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 9: 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 10: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n ALM n Pricing New Business n Summary 10
Slide 11: Required Capital: How to determine
Required Capital: How to determine • The following steps are necessary 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 Sw
Slide 12: 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 Activities Counterparty / Issuer Structural CF ALM Mismatch Funding Mismatch / Risk Liq
Slide 13: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n ALM n Pricing New Business n Summary 13
Slide 14: Duration mismatch properly understood
Duration mismatch properly understood n Most life insurers have a duration 40000 mismatch 30000 n Example Duration Assets 6 yrs, liabilities 10 yrs. 20000 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 n Effects will be seen
Slide 15: Achieving Stakeholder Balance
Achieving Stakeholder Balance Policyholders Shareholders View View • Risk adjusted return • Security optimisation • Competitive bonus • High dividends • Regular bonus • Regular dividend payments payments Company View • Sustainability • Achieve corporate strategy • Ensure sufficient reserves 15
Slide 16: Structuring the Balance sheet & Business model
Structuring the Balance sheet & Business model Assets Liabilities Functions Benefits to Benefits to Policyholder Shareholder Mathematical è Cash Flow Matching è Guaranteed è "Fees" Assets and immunisation of benefits Reserves the guaranteed (for guaranteed benefits based on è Risk-Coverage è Risk re
Slide 17: Embedded value: Key assumptions
Embedded value: Key assumptions HY 2003 FY 2002 • Weighted new money CH EU CH EU return based on asset allocation Risk discount rate 7.0% 7.9% 7.0% 7.9% • Weighted returns are lower due to reduced future assumed Equity return 5.0% 6.0% 7.0% 8.0% investment returns Bond return – FX 2.5% - 4.5% - • Lo
Slide 18: Cost of interest guarantee
Cost of interest guarantee RA/SL, in million CHF (statutory basis) RA/SL EV FY 2002 5 616 Unwind 2003 + 202 Actual investment return 2003 +126 Future investment return - 978 Cost savings + 270 Methodology and model changes - 112 Strengthening of reserves - 124 Value of new business 2003 + 36 Taxatio
Slide 19: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n ALM n Pricing New Business n Summary 19
Slide 20: 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 Ø Increase of equity • Highly professional Ø Financing of solvency tariff rating • No cross subsidies between different branches, • Focus on profitability pro
Slide 21: 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 21
Slide 22: Product Management: Reporting Example
Product Management: Reporting Example 22
Slide 23: Contents
Contents n Understanding economic principles n Fair values et al n Risk Taking n ALM n Pricing New Business n Summary 23
Slide 24: 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 24
Slide 25: Learnings from Pricing Theory
Learnings from Pricing Theory • The consequent application of APT and RoRAC within an insurance entity enhances the insights into the business considerably n Application of APT and RoRAC leads to a competitive advantage This is in particular useful for identifying the cost of guarantees (interest, s
Slide 26: Discussion
Discussion
Swiss Life Holding — Fox-Pitt, Kelton ALM Conference (October 2003) on 6ix