A GlobeRisk Perspective on Life Insurance
Life Insurance businesses represent a mix/spectrum of three types of risk:
- Mortality/morbidity risk
- Asset/Liability management
- Investment management risk
The first seven years of this century has been a time of unprecedented change for Life firms as mortality improvements, market factors and the development of risk based regulation have forced major change.
Pure risk taking is hampered by the surprisingly weak quality of risk rating models in most firms. Whilst some rating criteria are not permitted in many western economies to avoid a divided society, many useful factors are permitted but not fully used. Examples include:
- Address (e.g., in the UK warm south east England or cold Scotland)
- Educational level
A young but growing business is now emerging in "sub-prime" business, for example impaired life annuities. At present the margin between prime and sub-prime business is sufficiently great that there is little real pressure on the quality of risk rating models. However, it is inevitable that increasing underwriting capacity will intensify risk rating pressure over the next few years.
In the UK, Investment Management based Life firms were dominated by With Profits offices until recently. Here. Weaknesses in ALM were exposed in the early years of the 21st century as stock markets felt dramatically following the end of the dot com / telecommunications stock market frenzy. Most firms were in serious trouble by 2003 with many escaping closure to new business only through an unusual flexibility from the UK regulator.
The principal cause of problems for WP firms was investment guarantees, although guaranteed annuity options were also an issue as UK interest rates fell to very low historical levels in part response to the Stock Markets crisis. As at 2007 most firms have hedged their risks to imbedded guarantees.
Notwithstanding ALM is still major issue for the Life industry:
- ALM systems are typically weak and consider matching rather than risk/reward based optimisation (based on prospective returns)
- The decrease in long dated sterling interest rates has increased the importance of very long dated liabilities at maturities beyond most available investment instruments
- In the first half of 2007 fixed income instruments offered record low yields, offering very little protection against future inflation.
- Mortality/Morbidity firms seeking to use government bonds to match liabilities cannot make a respectable return on capital. This is only available through taking investment risk
Life firms have, in general, made good progress in meeting regulatory requirements for improved risk management and all have agreed a first round of "Pillar2" based capital requirements. Notwithstanding, the regulator has made it clear that firms still have a long way to go to meet their expectations. Typical issues include
- Weak operational risk management infrastructure
- Weak evidence behind correlation structures used to create aggregate risk measures
- Weak formal organisation and documentation of the risk management framework.
Solvency 2 represents the next major challenge...
GlobeRisk has developed several consultancy services to assist Life Firms these issue areas
In respect of controls, governance and operating models, GlobeRisk services include
- Operating model and Governance design
- Controls reviews
- Review of GENPRU 1.2.26/30 (sufficiency of capital, liquidity and other resources) and GENPRU 1.2.42 (stress and scenario testing)
In respect of the extension to Solvency 2, GlobeRisk services include:
- IRCA/ICAAP preparation and/or review
- Pillar2 Health check
- Model review and validation
- Program management
- Solvency2 Program Management
- Review and design of risk management infrastructure
On a more traditional perspective, GlobeRisk services include:
- Review of Office and DFA models
- Selection and implementation of ALM software
- Design and development of an ALM environment and risk reporting
- Reserves and Valuation Reviews
From a Firmwide risk management perspective, GlobeRisk services include:
- Maximise your Share Price
- Risk Adjusted Performance Management and Value Based Management (VBM)
- Risk Based Shareholder Value
- Design of firmwide operating models
- Capital Efficiency program
- Governance, Controls, Audit and Risk Management framework optimisation
- Total Enterprise Risk Management (TERM)
- Strategy Development assistance