Risk Measures and Risk Management(42页).ppt
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Agenda
ALM Risks faced by Life Insurers
Essential Features of Risk Measures
A Holistic Approach to Risk Measurement
Traps and Pitfalls
Communicating Results using Risk Measures
Examples
ALM Risks.
ALM Risks
Statutory Risks
Economic (real) Risks
Two Main Categories
Most Economic Risks are also Statutory Risks
Interestrates fall
Time
Statutory insolvency
Companies can (accurately) predict when they will have a statutory problem
For example in Japan:
Statutory Risks may not be Real
Increase inEquity
prices
Reduction in dividend yield
Increase in Reserves
Increasein Assets
Extra Capital
For example, in Hong Kong:
Reduction in HK valuation interest rate
Reduce Equityholding
Inject Capital
or
Statutory Risks
Very different in different statutory reporting regimes
Economic Risks and Statutory Risks
The relationship between economic and statutory risks is very specific to the local
valuation regulations
In Hong Kong, the first example would immediately impact the insurance
company’s statutory solvency
Because of the use of market based valuation interest rates
Note that in Japan, the second example would not have any impact on the
companies statutory liabilities (policy reserves)
Economic Risks
Falling investment returns caused by
prolonged low interest rates, or
poor equity market performance, or
falling real estate values, or
asset defaults, etc.
Falling asset values at a bad time
high interest rates or falling equity markets at a time of significant surrender or
maturity payments
Un-hedged currency movements act against the insurer
Unexpected removal (or failure) of a currency peg
Valuation Basis
ALM problems that materialize are quite different under the following types of
valuation basis:
“slow death”
Less urgency to resolve the problem, unless there is strong regulation there is
a natural pressure for the market to follow the least responsible market player
Time
Passive (Fixed) Valuation Basis
ALM Risks faced by Life Insurers
Essential Features of Risk Measures
A Holistic Approach to Risk Measurement
Traps and Pitfalls
Communicating Results using Risk Measures
Examples
ALM Risks.
ALM Risks
Statutory Risks
Economic (real) Risks
Two Main Categories
Most Economic Risks are also Statutory Risks
Interestrates fall
Time
Statutory insolvency
Companies can (accurately) predict when they will have a statutory problem
For example in Japan:
Statutory Risks may not be Real
Increase inEquity
prices
Reduction in dividend yield
Increase in Reserves
Increasein Assets
Extra Capital
For example, in Hong Kong:
Reduction in HK valuation interest rate
Reduce Equityholding
Inject Capital
or
Statutory Risks
Very different in different statutory reporting regimes
Economic Risks and Statutory Risks
The relationship between economic and statutory risks is very specific to the local
valuation regulations
In Hong Kong, the first example would immediately impact the insurance
company’s statutory solvency
Because of the use of market based valuation interest rates
Note that in Japan, the second example would not have any impact on the
companies statutory liabilities (policy reserves)
Economic Risks
Falling investment returns caused by
prolonged low interest rates, or
poor equity market performance, or
falling real estate values, or
asset defaults, etc.
Falling asset values at a bad time
high interest rates or falling equity markets at a time of significant surrender or
maturity payments
Un-hedged currency movements act against the insurer
Unexpected removal (or failure) of a currency peg
Valuation Basis
ALM problems that materialize are quite different under the following types of
valuation basis:
“slow death”
Less urgency to resolve the problem, unless there is strong regulation there is
a natural pressure for the market to follow the least responsible market player
Time
Passive (Fixed) Valuation Basis