|
Asset and Liability Management Matching assets and liabilities is one of the most important aspects of risk management in life insurance. Asset and liability management ensures that benefits can be paid when due and that core capital will always be available to absorb fluctuations in the value of assets and liabilities.
Asset and liability management (ALM) is aimed at systematically getting the right match of assets and liabilities, thereby ensuring that commitments to policyholders can be met at all times. Another objective is to adequately compensate shareholders for making risk capital available. Based on the underlying economic principles, Swiss Life determines the risk budget, asset allocation, product design and distribution policy, taking the statutory and regulatory framework into account. Asset and liability management addresses the following questions:
Risk budget The amount of risk capital available is determined in the risk management process by an economic valuation of the assets and liabilities. The risk capital at Swiss Life’s disposal sets the risk appetite parameters for the Group. Two types of limits are applied:
Both of these limits form the parameters for spreading the funds invested over various types of investment vehicles, i.e. the asset allocation. The risk budget is based on a purely economic perspective. Non-economic restrictions such as regulatory and accounting requirements form part of the determination of the risk appetite and the limits, and are considered in the asset allocation itself.
Asset allocation Swiss Life manages the asset side of the portfolio in such a way that economic risk capital deployment is consistent with its risk appetite. The limits referred to above are set by the following bodies: at the Board of Directors level, the Investment and Risk Committee, and at local level, the Asset and Liability Committees. Within these limits, the individual market units define their asset allocation themselves.
Given that developments on the liabilities side are dynamic, a static asset allocation approach would be unsuitable. Insurance liabilities can be split into a guaranteed segment and a non-guaranteed segment (bonus component). The guaranteed segment corresponds to the guaranteed minimum interest rate. The bonus is subject to change over the course of time, because the amounts to be distributed are directly influenced by developments on the financial markets.
With regard to interest-rate risks, the management of the duration gap between assets, on the one hand, and liabilities, on the other, is decisive. Swiss Life’s risk capacity enables it to enter into interest rate risks selectively. In this connection, Swiss Life has lengthened the asset duration since 30 June 2006 by almost three years in response to interest-rate developments, thus shortening the duration gap by two years. Moreover, under the holistic ALM approach, asset allocation differentiates by product line to a greater extent, thereby facilitating optimisation of the equity ratio. As a result, the Group’s equity exposure may exceed the previous target range (0% to 7%) in future.
In addition to purely economic considerations, other factors still have to be taken into account for asset allocation, such as regulatory requirements and international accounting standards. Moreover, the level of equity (solvency), the need for liquidity and the requirements of rating agencies also influence the asset allocation.
Distribution policy Swiss Life’s distribution policy seeks to harmonise the interests of policyholders and shareholders. For policyholders the accent is firmly on the need for security: They favour a guaranteed minimum interest rate coupled with regular and appropriate discretionary participation. Meanwhile, shareholders place greater emphasis on returns commensurate with the level of risk: They are looking for adequate compensation in the form of dividends and capital gains for the equity capital they provide.
From the company’s point of view, the focus is ultimately on ensuring the long-term success of the business model: Swiss Life is therefore interested in a sustainable balance between the different interests of policyholders and shareholders.
Product design Swiss Life offers its customers the products they need. These products include guarantee commitments while allowing customers to participate in positive market trends. In designing products, Swiss Life coordinates asset and liability management and the distribution policy to ensure that future developments on the capital market only have a marginal impact on profitability. Product development guidelines have been introduced throughout the Group to ensure that the product design principles are observed. They serve as standards for the local guidelines. When business is written, therefore, the responsibility does not rest exclusively with the local business unit; in certain cases, it lies with the Corporate Executive Board as stipulated by directive.
There must always be sufficient reserves to meet the contractual and regulatory requirements arising from the existing business. Consequently, not only must the regulatory constraints be observed, but internal estimates concerning specific types of risk must also be taken into consideration.
Swiss Life reviews the product design principles every half year, while the economic viability of new business is examined quarterly. This permits the company to adapt the conditions of sale for the individual products to a dynamically changing environment.
Process management Swiss Life manages the asset and liability process centrally. Responsibility for the Group-wide ALM process rests with the Group Chief Risk Officer. The areas of risk management, asset management, actuarial services, product management and finance management determine the ALM process which is extensively monitored by the Group CFO.
The responsible bodies at local level implement the decisions reached for the Group in close collaboration with the local Asset and Liability Committee at their business unit.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
