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Life Insurance - ALM or What It Takes To Keep Our Promises

Life Insurance - ALM or What It Takes To Keep Our Promises. Croatian Insurance Days 6th November 2006 Bernhard Geismann. What is Insurance . „... We are actually paid for holding other people‘s money ...“.

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Life Insurance - ALM or What It Takes To Keep Our Promises

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  1. Life Insurance - ALM or What It Takes To Keep Our Promises Croatian Insurance Days6th November 2006 Bernhard Geismann

  2. What is Insurance ... „... We are actually paid for holding other people‘s money ...“ Warren E. BuffettCEO Berkshire Hathaway Inc. Croatian Insurance Days Opatija 6th November 2006

  3. Clients‘ money Stream of incoming and outgoing cash-flows Allocation ofProfit Participation Life Insurance - Sources of Assets • Shareholder‘s Equity • Depending „only“ on risk / solvency position • No / little cash flow volatility (??) Croatian Insurance Days Opatija 6th November 2006

  4. Life Insurance – Product Considerations • Endowment Insurance (Annuity Option) • Savings • Additional Pension • Family Protection • Self Protection through Riders • Differentiation from banks, investment funds, pension funds Croatian Insurance Days Opatija 6th November 2006

  5. Savings – Aspects to be considered Security Investment Yield Liquidity Croatian Insurance Days Opatija 6th November 2006

  6. Investment Considerations Security Investment Yield Liquidity Croatian Insurance Days Opatija 6th November 2006

  7. Investment Considerations Security Investment Yield Liquidity Croatian Insurance Days Opatija 6th November 2006

  8. Investment Considerations Security Investment Yield Liquidity Croatian Insurance Days Opatija 6th November 2006

  9. Investment Considerations Security Investment Yield Liquidity Croatian Insurance Days Opatija 6th November 2006

  10. Endowment Insurance – How do we score? Security ++ Investment Yield + Liquidity - (-) Croatian Insurance Days Opatija 6th November 2006

  11. How about ... Security Investment Yield Liquidity Croatian Insurance Days Opatija 6th November 2006

  12. Security vs. Investment yield Expected Yield Risk FreeInterest Risk Appetite Croatian Insurance Days Opatija 6th November 2006

  13. Stock Market Crash 2000 - 2003 Croatian Insurance Days Opatija 6th November 2006

  14. German Life Insurers‘ Solvency Position Mid 2003 – Gen Re Estimation Croatian Insurance Days Opatija 6th November 2006

  15. Stock markets – e.g. Germany: 1.5 bankruptcies Interest rate – e.g. Japan: 7 bankruptcies The interest rate risk is the biggest risk of a Life Insurer Life Insurance – How about security Croatian Insurance Days Opatija 6th November 2006

  16. Annual risk report 2004 [Life]Number of risks by impact and probability Croatian Insurance Days Opatija 6th November 2006

  17. Asset Liability Management (ALM) Assets Liabilities Profit Testing Market scenarios Claims Management Investment strategies Reserving ALM Modelling of assets Underwriting Product Development Outsourcing of Asset Management Sales Croatian Insurance Days Opatija 6th November 2006

  18. Life Insurance – Cash Flows • Factors influencing cash flows: • New business volumes • Maturities • Lapsation / paid-off policies • Claims • Premium Payment Mode • Profit Participation Allocation Croatian Insurance Days Opatija 6th November 2006

  19. Duration • Duration := • Average weighted duration of binding capital • Weighted with the average present value of individual cash flows • Measure of sensitivity of present values to interest chanegs (Modified Duration) • Duration of Liabilities: • Usually run-off excluding new business • Depending on lapses etc. • German Life Insurance Industry: > 10 years • Duration of Assets: • German Life Insurance Industry: average approximately 6 years • Examples: 10-year bond with 3,5% interest: 8,3 years mod. Duration 30-year bond with 3,5% interest : 18,0 years mod. Duration Croatian Insurance Days Opatija 6th November 2006

  20. Duration-Gap in Life Insurance Investment Risk depending on Asset Duration Sample Calculation Source: Gen Re Capital Croatian Insurance Days Opatija 6th November 2006

  21. Risk Management Strategy • Model asset and liability side of balance sheet • Define Corporate goals • Analyse Modell results considering Corporate goals • Derive strategic decisions Croatian Insurance Days Opatija 6th November 2006

  22. How To Model FANTASTIC Life Insurance Co. – Sample Check List • Parameters to be fixed: • Balance sheet rules, Asset allocation, Solvency Position, Life insurance related assumptions • Minimum Targets of Management (Example) • Always above 110% of solvency requirements • Capital Market assumptions Croatian Insurance Days Opatija 6th November 2006

  23. Shares – Real Estate Shares - Funds Direct holdings 3% 2% Subsidiaries 1% Fixed interest funds 6% 15% Mortgages 10% Mixed funds 8% Fixed interest Direct holdings 55% FANTASTIC Life Insurance Co. Investment portfolio Ca. 2 Mrd. Euro Buchwert per 31.12.2004 Croatian Insurance Days Opatija 6th November 2006

  24. FANTASTIC Life Insurance Co. Fixed Interest - Duration und Credit Modified Durations: • Fixed Interests Direct Holdings 5,2 Total: 5,0 • Fixed Interest and Mixed Funds: 4,6 per 31.12.2004 Croatian Insurance Days Opatija 6th November 2006

  25. FANTASTIC Life Insurance Co. Technical Cashflow Run-off Modified Duration: approx. 14,5y per 31.12.2004 Croatian Insurance Days Opatija 6th November 2006

  26. FANTASTIC Life Insurance Co. Stochastic Projection of Interest Rates Croatian Insurance Days Opatija 6th November 2006

  27. Projection Results FANTASTIC Life Insurance Co. Equity Croatian Insurance Days Opatija 6th November 2006

  28. Revised Projection – Reduction of Duration GapEquity Croatian Insurance Days Opatija 6th November 2006

  29. Summary • Life Insurers provide good products • Guaranteed interest • Investment Performance • Security • Appropriate Risk Management needed • Major risk: Investment risk (Interest Risk) • Necessity of AssetLiabilityManagement with stochastic modell of markets • Asset Management as an integrated part of Risk Management Strategy Croatian Insurance Days Opatija 6th November 2006

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