Insurance - Asset Liability Management under Solvency II

Day One

Prerequisites Refresher

• European insurance company Asset Liability Management (ALM) objective – strong and market-resilient, actuarially-resilient Solvency 2 (S2) ratios at Group consolidated level and at key cash-remitting entities to ensure dividend stability

• Insurance business and Solvency 2 essentials – key products (life and non-life); financial statements; Solvency 2 (S2) balance sheet, eligible own funds (EOF) and SCR; internal model vs standard formula

• Specifying risk appetite and management actions at a range of S2 ratios

ALM Tool 1 – New Business / Product Design To Increase EOF

• Case Study 1 – How much S2 EOF do major European insurance companies generate each year from writing new business (as a % of SCR)?

• Why writing profitable new business increases EOF and S2 ratio

• Which experience variances can subsequently detract from underwritten value-in-force (VIF) from new business?

• Case Study 2 – Illustrative impacts of different life and non-life new business on our hypothetical S2 balance sheet (both under standard formula, SF, and under internal model, IM)

• How S2 altered attractiveness of writing different life insurance products for insurance companies (IRRs and paybacks on traditional guaranteed savings, unit-linked and protection business across different countries)

ALM Tool 2 – Reducing Interest Rate Risk SCR & S2 Ratio Sensitivity To Interest Rates

• How changes in interest rates impact EOF and S2 ratio – asset and liability side impacts

• Role of duration gap, UFR drag and last liquid point

• Case Study 3 – Using interest rate swaps (IRS) and out of the money (OTM) interest rate swaptions to reduce interest rate risk SCR and reduce S2 ratio sensitivity to interest rates. Illustrative impacts on our hypothetical S2 balance sheet (under SF and IM). Includes background on IRS and swaptions

Day Two

ALM Tool 3 – Reducing Credit Spread Risk SCR & S2 Ratio Sensitivity To Credit Spreads

• How changes in credit spreads impact EOF and S2 ratio – asset and liability side impacts

• Volatility adjustment (VA) and VA reference portfolio

• Case Study 4 – Illustrative reduction of credit spread SCR and of S2 ratio sensitivity to credit spreads on our hypothetical S2 balance sheet (under SF and IM) from bringing investment portfolio closer to VA reference portfolio

• Case Study 5 – Using OTM CDS index payer options to reduce credit spread SCR and S2 ratio sensitivity to credit spreads. Illustrative impacts on our hypothetical S2 balance sheet (under IM). Includes background on CDS index options

ALM Tool 4 – Reinsurance & Insurance-Linked Securities To Reduce Underwriting SCR

• Non-life and life reinsurance products and markets – longevity, mortality and catastrophe, lapse, financial and other risks

• Treatment of reinsurance under S2 – SF vs IM; asset side impacts – reinsurance assets,  technical provisions and risk margin; counterparty credit risk

• Case Study 6 – Delta Lloyd – Longevity swaps with Reinsurance Group of America Inc to bolster S2 ratio

• Case Study 7 – Illustrating benefits of using multiple reinsurance counterparties

• Counterparty credit risk

• Basis risk

• Case Study 8 – Rothesay – Counterparty credit risk resulting from use of longevity reinsurance within its bulk annuities business

• Case Study 9 – Illustrative reduction of underwriting SCR and partial offset from increased credit risk from introducing various life and non-life reinsurance policies to our hypothetical S2 balance sheet (under SF and IM)

• How VIF monetisation can reduce S2 ratio volatility

• Insurance-linked securities and treatment under S2

ALM Tool 5 – Commutations To Reduce Interest Rate Risk SCR

• Reducing interest rate risk through commutations of long-duration liabilities in life insurance

• Case Study 10 – Switch transactions at Ethias to terminate long duration guaranteed return life policies and reduce interest rate risk SCR

ALM Tool 6 – Harvesting Illiquidity Premia

• Matching adjustment

• Direct loans / private debt

• Infrastructure

• Project finance

• Real estate lending

• Case Study 11 – Legal & General – alternative investment portfolio

• Case Study 12 – Rothesay – harvesting illiquidity premia in bulk annuities business

ALM Tool 7 – Use Of Subordinated Debt Within EOF

• Cost-efficient capital structure construction through use of Restricted Tier 1 (RT1), Tier 2 and Tier 3 subordinated debt within EOF

• Features of RT1, Tier 2 and Tier 3

• Case Study 13 – S2 EOF composition of major European insurance companies

ALM Tool 8 – Internal Model vs Standard Formula

• EIOPA internal model (IM) comparative studies (vs standard formula, SF) – market and credit risk, non-life underwriting and life underwriting

• EIOPA studies on diversification benefits within IM

• Cost-benefit analysis of moving from SF to IM

• Internal model approval process (IMAP)