2 new Life Working Parties – Asset Liability Management for Life Insurers

The Life Research Committee is planning to launch two new member-led working parties looking at different topics on asset-liability management for life insurers.

1. "Non-traditional assets – insurers as providers of long-term finance" Working Party:

The low yields available on traditional assets, such as corporate bonds, and the high sector concentration, incentivise insurers to diversify into alternative sources of yield.

At the same time, the ongoing deleveraging in the traditional banking sector could create new opportunities for insurers to expand their investment into non-traditional forms of long-term finance such as social housing, infrastructure and commercial real estate.

The aim of this Working Party is to identify the opportunities available to insurers, and the risks and impediments to their adoption.

Areas for research could include:  

• Bank deleveraging - has it been as dramatic as originally forecast - and the potential opportunities created.
• The different types of investment opportunity available, their characteristics and suitability for insurers, including potential market changes needed to make them compatible with insurers needs.
• Risks to insurers of investing in such assets.
• Impact of different insurer liability profiles e.g. annuities vs. with profits.
• Role for non-fixed income alternative assets, such as private equity or hedge funds
• Regulatory impacts, including the potential impact of Solvency II and the Classic Matching Adjustment
• Precedents for asset allocation amongst unconstrained long-term investors e.g. US endowment funds and Sovereign Wealth Funds.

2.  "Dynamic hedging strategies" Working Party:

Life insurance companies have typically adopted a relatively passive approach to hedging interest rate risks, treating it as “unrewarded risk”.

In contrast, liability-driven investment mandates for pension funds often take a more active and dynamic approach to managing risk, e.g. using options and trigger levels to implement hedges.    And with profit funds often dynamically manage equity risk.

The aim of this Working Party is to contrast the different approaches, understand the reasons for the differences, and see what lessons can be learned for ALM best practice.

Areas for research could include:

• Whether interest rate risk is really an unrewarded risk.
• Merits and disadvantages of the different approaches.
• Approaches to managing inflation risk (e.g. caps and floors, CPI vs RPI).
• Impact of traditional Pillar 1 rules (e.g. cashflow mismatch reserves) versus an economic capital approach (Pillar 2, Solvency II).
• Role of the different regulatory approaches and solvency position of insurers vs, pension funds.
• International precedents – e.g. the approach adopted by Dutch and Danish pension funds, who are subject to risk-based regulation.
• Identifying opportunities for life insurers to enhance their ALM approaches.

Outputs:

Working parties should aim to produce a written record of their findings, as well as seeking opportunities to present their research.  The potential outputs could include:

• Actuary article to draw attention to the research
• Present at Life Conference in 2014
• Preparing and presenting a Sessional Event or British Actuarial Journal paper
• Presentations at regional societies and other Professional conferences (e.g. Risk & Investment conference)

Time Commitment:  

For each of these working parties, volunteers will typically be expected to attend between 8 – 12 meetings per annum and to perform research between meetings.  Meetings are held in London, often Staple Inn, and usually last for 2 hours.  Please note that there is flexibility regarding your attendance at meetings and members can attend by conference call as necessary.

Getting involved: 

If you would like to offer your support and consider volunteering for either or both of these working parties, please contact Debbie Atkins, Head of Volunteer Engagement.

When contacting Debbie, please indicate which of these working parties you are interested in being part of and please give brief details of your relevant experience and your reason for wishing to become involved.  A note of your ARN would also be helpful. 

An initial scoping meeting for each working party will be held in early September 2013 at Staple Inn Hall, London, and attendance can either be in person or by conference call. 

At these initial meetings, which will be chaired by a member of the Life Research Committee, interested members will discuss the feasibility and interest in moving forward with research on the topic and appoint a Chair for future meetings.