© 2010 Towers Watson. All rights reserved. Impact of Liability Profile on Investment Strategy NZ Society of Actuaries Conference 2010 Presented by Rob

© 2010 Towers Watson. All rights reserved.

Impact of Liability Profile on Investment StrategyNZ Society of Actuaries Conference 2010Presented by Rob Paton24 November 2010

Based on a paper by Anton Kapel, Graeme Miller and Rob Paton prepared for the Institute of Actuaries of

Australia Financial Services Forum, 13 and 14 May 2010. © 2010 Towers Watson. All rights reserved.

Melville Jessup Weaver is the Alliance Partner of Towers Watson in New Zealand.

© 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.comR:\Conferences\External\2010\IAAustFSF\InvtStrategy\FSF2010_ImpLiabInvStr_NZConf_181110.ppt

2

1. Background to paper

2. Why do we invest?

3. Common practice

4. An alternative approach

5. Role of Appointed Actuary

Contents


3

• What prompted this paper• Investment practices vary• GFC

• Universal concepts that apply to all underlying insurance businesses• Avoid addressing some of the more complex areas associated with

particular liabilities

Background to paper


4

• Insurers invest assets to meet liabilities• In most cases, there is an asset portfolio that would (closely) “match”

the liabilities• Complications arise:

• What measure of liabilities?• Matching is not always possible

• We are not suggesting an insurer should always hold the minimum risk investment portfolio• But it is important to understand the implications of not doing so

Why do Insurers invest?


5

• The allocation to investments from the insurer’s overall risk appetite should be central• How is “risk” assessed?

• Benchmark asset mixes set to align investment risk taken with the investment risk appetite

• Regular monitoring and periodic review

Good investment practice


6

Current Investment Practice in New Zealand

Little publicly available data (none?)

Proposed Minimum Solvency Capital strict on Asset Risk Capital Factors (eg minimum risk investments, risky investments, no diversification benefit, unlisted trusts, investments in $Australian)

How will Appointed Actuaries approach the investment related parts of their FCR’s

Will current investment practice need to change under new regulatory requirements (if so, what are implications)


7

• Risk exposures can move out of line with risk appetite• Asset class managers have different view of risk

• Focus on performance relative to benchmark• “Tactical” decisions made from an asset-centric viewpoint

Issues that may arise


8

A “textbook” approach

Governance structures are critical ALCO or similar body

Actuarial input (particularly regarding capital) is needed

Treasury function Separates investment (mismatch) decisions from underlying liability portfolio

management

Monitoring function Current investment risk appetite versus current investment risk taken


9

• Insurance business earns matching portfolio return• Investment business “owns” mismatch capital and actual returns

(and pays matching portfolio return)

Treasury function

Liability management

team

Treasury function

(responsible for management of mismatch risk between assets and liabilities)

Investment management

team Advises Treasury of minimum risk

portfolio

Delivers “matching” cash

flows to the liability management team

Articulates minimum risk portfolio and risk

appetite to investment management team

Delivers returns from underlying investments

to Treasury function


10

1. Communicate capital implications

2. Communicate the investment-related implications of the insurer’s liability profile

3. Develop appropriate trigger points

4. Communicate any cash flow patterns and liquidity constraints which have implications for investments

5. Calculate and communicate the investment component of the insurer’s total risk budget

6. Monitor the suitability of the insurer’s overall investments in the context of the insurer’s investment risk appetite

Role of Appointed Actuary


11

• Do insurers do it now?• What’s stopping it being done now?• What New Zealand characteristics get in the way?• Do Appointed Actuaries have sufficient powers?

Discussion

Documents

© 2010 Towers Watson. All rights reserved. Impact of Liability Profile on Investment Strategy NZ Society of Actuaries Conference 2010 Presented by Rob