The role of actuarial technologies for insurance companies in crisis conditions

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The role of actuarial technologies for insurance
companies in crisis conditions

• Prof. Dr. Martin Balleer
• Yalta Forum, September 2009

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Introduction

• Martin Balleer
• Member of Board Gothaer Insurance Group, CEO
  Gothaer Life, 1975 2002
• Member Presidential Board of the German Insurers
  Association (GDV) 1998 2003
• Member Advisory Board German Supervisory
  Authority (BaFin) 1997 2007
• Past president (1995-2003) German Actuarial
  Association (DAV)
• Member of Board German Actuarial Academy (DAA)
  initiator and founding member of the European
  Actuarial Academy (EAA)
• Lectures in insurance technics, insurance law and
  risk management at Göttingen University

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The financial crisis

• The financial crisis
• is generated by products (asset backed
  securities, subprimes etc.)
• is generated by human behavior that is against
  prudency, consumer protection and social
  responsibility, focussed on shareholder value
• is infuenced by procyclic panic behaviour within
  the financial market sector
• is influenced by globalization of asset
  management without an equivalent globalization of
  regulatory systems
• is also a crisis of an efficient and serious risk
  management and of corporate governance,
  especially in the asset management

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Actuarial technologies

• Actuarial technologies.
• traditionally used in pricing, valuation of
  technical reserves
• are also the basis for an efficient risk
  management and enable the companies to monitor
  and to manage risks and to stabilize the
  financial results
• Some very few examples
• Reinsurance techniques used to decrease risks and
  to implement risk mitigation
• Hedging techniques used to eliminate risks
• Market Consistent Embedded Value (MCEV) and cash
  flow analysis
• Modelling techniques used for asset-liability
  management and solvency concepts

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Financial crisis and insurance risks
Risk structure in the insurance industry (Germany)
Influenced by financial crisis
Source Popielas, JP Morgan
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Financial crisis and insurance risks

• Influences on the insurance market by financial
  crisis
• Critical assets in the asset portfolio (ABS,
  structured products, subprimes etc.), even in
  asset funds that cover guaranteed liabilities -
  even assets nobody would have anticipated
• Depreviations with regard to the stock market and
  shares in the banking sector
• Policyholder behaviour that is correlated with
  the financial crisis (underwriting new policies,
  cancellation rates etc.)
• But generally The infection of the life
  insurance and pension market generated by the
  financial crisis is managable less problems
  within the insurance industry compared with the
  banking sector.
• Why
  ?

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Financial crisis and insurance risks

• Influences on the insurance market by financial
  crisis
• In most countries (especially within EU) a legal
  framework of actuarial requirements is
  implemented that requires prudency in pricing and
  technical provisions and asset management
• These requirements influenced a cautious
  management of the asset fund for guaranteed life
  products
• In the unit linked sector the asset risks are
  transfered to the policyholder so there is no
  asset risk for the companies the victims are the
  consumers

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Financial crisis and insurance risks

• Influences on the insurance market by financial
  crisis
• Germany No real problem against the background
  that there are strict rules for the asset
  management
• A strong actuarial infrastructure and competence
• But If the German HypoReal would have become
  insolvent because of its international
  involvement this would have infected the
  classical asset portfolios (Pfandbriefemortgage
  bonds) of the German life insurers dramatically
  therefore the German government stabilized that
  institute by financial guarantees of more than
  100 Billion (!) Euro it is now a state owned
  company.

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Financial crisis and insurance risks
Germany Asset allocation of life insurers
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Financial crisis and insurance risks
Germany Critical assets investments in German
life insurance companies
Source Deloitte
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Actuarial technologies

• How can actuarial techniques help to manage the
  actual crisis ?
• Actuaries are not able to solve the actual
  financial crisis the crisis has
• been made by investment managers against the
  background that there
• are no global regulations with regard to risk
  management,
• But actuaries are able to analyse the actual risk
  situation of the
• company more efficiently in order to navigate the
  operating
• risk management and to stimulate actions, i.e.
• to identify risk potentials that have to be
  reduced, it is important to measure the risk
  potentials on the asset side by actuarial
  technics as soon as possible
• to reduce risks by reinsurance and hedging the
  technologies are available (stress tests,
  stochastic simulations etc.)

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Actuarial technologies

• How can actuarial techniques be implemented in
  the market in
• order to avoid a future crisis ?
• to encourage the companies to implement an
  efficient risk management driven by actuarial
  techniques that are able to monitor the risks
  potentials on the asset side
• to encourage the countries to implement solvency
  requirements that are based on actuarial technics
  and to implement a risk based supervision
  (Ukraine !)
• 3. to implement actuarial responsibility,
  techniques and behaviour even in the banking
  sector, minimum in all those product lines that
  are related with savings (pension fund, saving
  banks etc.) otherwisea loss of moral standards
  should be substituted by an increase of
  regulation (?)

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Actuarial technologies (Example 1)
Actuaries have to deal with the risk potentials
of the assets

• Risk capital
• Equity
• free reserves on liabilities
• free reserves on assets

Products have to generate sufficient risk
capital as free reserves on liabilities
High quota of shares ask for high risk capital
and/or low guarantees

• Key challenges
• determining the risk exposure
• asset-liability-matching

Asset allocation e.g. quota of shares
Quality of products e.g. Level of
guarantees, risk adjusted products
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Actuarial technologies (Example 2)
ALM in Life Insurance
modelling assets
modelling liabilities
modelling capital market
Actuarial kernel
modelling consumer market

• actuarial
• analysis
• cash flows
• office
• modelling
• ALM
• etc.

projections simulations valuations
management rules
stochastic
deterministic
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Actuarial technologies (Example 3)
Actuarial driven MCEV as tool for risk management
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Actuarial technologies

• Some conclusing comments
• Modelling the asset/liability portfolio is the
  central actuarial technique to control the risk
  management but its only a necessary navigator
  that can fail and isnt able to reflect the real
  world perfectly
• Actuarial models can never predict crisis, but
  models are able to prevent crisis
• The principles of actuarial techniques have to be
  understood also by the leading persons who run
  the company so actuaries have to be integrated
  in the management best practice
• A legal framework and competence has to be
  developed in order to implement risk management

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• Thank you for your attention !
• Prof. Dr. Martin Balleer
• European Actuarial Academy GmbH (EAA)
• martin.balleer_at_actuarial-academy.com