Microsoft PowerPoint - ALM in Asia (for a Cdn company) GH v7.ppt2
ALM in Asia vs. North America
Questions
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World War II disruption
Today, Asia Division represents
• 20% of total company Net Income (36% in 2008*)
Plan for the Future
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Risk Mitigation
• Instruct asset transfers and rebalancing activities
Risk Monitoring
• Periodic reporting, both Internal (I) and External (E)
Risk exposures (I and E)
Asset mix compliance with targets (I)
Investment performance (I and E)
Intermediary between Investments and BUs
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• Short / Long term
• Single / Recurring Premium
• Pass-Through / Non Pass-Through
• Guaranteed / Non Guaranteed
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Setting Investment Strategy
Step 2: Understand Risk Profile of Available Assets • Fixed Income (FI) Gov’t / Corp. Bonds, Mortgages
• Non Fixed Income (NFI) Public / Private Equity, RE, Natural Resources
• Derivatives IR and Fx swaps, forwards
Step 3: Select Assets to
• Provide required Yield (Reward) while Minimizing Investment Risks
• Provide timing of cash flows appropriate for obligations
Considering
• Expertise to manage the assets selected
• Reserve and Capital implications of different asset mixes
• Competitive pressures from Marketing
Net Liability CF
• No reinvestment risk as short term and single premium
• Minimal risk of early lapse as low surrender benefit
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• Few decisions to make
Bonds, mortgages, or both
Target credit quality - influenced by competitive pressures
Trigger point for re-pricing
Non fixed income not used to back short term obligations
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( 200,000 )
(150,000 )
(100,000 )
(50,000 )
50,000
100,000
150,000
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Expenses Benefits Premiums Net Product Cashflows
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Product features
• Long term
• Guaranteed benefit
• Recurring premium
• Non pass-through
Investment Risks
• Interest rate risk as assets shorter than liabilities
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(200,000)
(150,000)
(100,000)
(50,000)
0
50,000
100,000
150,000
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(200,000)
(150,000)
(100,000)
(50,000)
0
50,000
100,000
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Matched Unmatched
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Strategies
• Longer term FI
Better risk management
• 100% FI
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Product Design
Investment Markets
Regulatory Environment
Variable Annuities (VA) Short Term Endowments
Long Term Care Medical riders
Combinations of the above
Investment guar’s Non-gtd elements
Distinct products Par / Non Par line blurry
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Taiwan 8-Pay Par Whole Life
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Total Net CF
Taiwan 8-Pay Par Whole Life
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Premiums 'Coupon' Payments
Dividends Surrender Benefits
Death Benefits Expenses
Product features are complicated
• Low protection component
• Reinvestment risk - recurring premium and long liabilities
• Interest rate risk - longest FI assets in Taiwan are 10 years
• Disintermediation risk - high CSV gives ph’er option to lapse early
• Modelling risk – need to cost the option
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• Lack of alternative forms of NFI
Lack of • Long term bonds
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Vietnam
Thailand
Philippines
Malaysia
Indonesia
China
Taiwan
Singapore
Lack of alternative forms of NFI
• Lack of • Long term bonds
• Corporate bonds
• Liquid swap market
Lead to Risks • Lower yields • Reinvestment risk • Interest rate risk • Equity market risk • Concentration risk • Currency risk
Developed vs. Emerging Markets • Wide range of interest rates – 1.5% in Japan to 14% in Indonesia • Limited historical market data Conservative assumptions
Impact of Global Financial Crisis
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• Accounting
• Tax
Impact on available investments, onshore and off
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• Post crisis opportunities could provide a lot of ALM work
Capital injections from Parent to Sub
• Fund New Business strain
Operational Challenges
Commingled portfolios
Dealing with a merger or acquisition
Integrating asset inventory systems
Speaking the same ‘language’
Cultural differences
• Work habits
Interest Rate
Disintermediation
Equity Risk
Operational
Modelling
Currency
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Mismatch generally caused by
• Lower tolerance for NFI, as all in public equity
Highest for long term, guaranteed NP products
Exacerbated in Asia by
• Lack of long term FI assets (10 to 15 year max)
• Lack of alternative forms of NFI
• Limited swap market (illiquid beyond 5 yrs)
End result is higher interest rate risk for NPWL in Asia
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Require sophisticated models to cost option
• Integrated asset / liability pricing model
• Interest rate scenarios
• Dynamic lapse formulae
Block lapses in each year for different interest rate spikes
• Conservative strategy 100% short term bonds
Some products exposed to rate decreases AND increases
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• Underdeveloped markets
• Less diversification in some Asian stock markets
• Higher volatility of returns (Hang Seng vs. S&P or TSX)
• Marked to market under CGAAP
Resulting in
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Small start-up blocks have challenges
• Less flexibility in internal asset transfers
• Can’t purchase assets in small lot sizes
• Commingled portfolios – hard to track experience (e.g. Par)
Can lead to
Can you act on a risk quickly?
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• 10 to 15 years for bond returns
• Leads to more conservative long term assumptions
Unique Product features
• Par / NP hybrid
• Insurance / Savings hybrid
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• Pick up yield
• Corporate Policy limits mismatches
• Frequent monitoring / rebalancing of positions
Trading one risk for another
• Currency risk exchanged for Counterparty risk
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Recap
• Different Product types / unique features
• Limitations in available Investments
• Interest Rate
My job is always interesting!
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Questions?