Swiss Life Holding Ag · SIX:SLHN
Swiss Life — Conference Presentation (June 2003)
31 slides from Swiss Life's conference presentation, Jun 16, 2003
Slide 1: In the advent of embedded values?
In the advent of embedded values? (Impact of financial guarantees / interest rates / fair value on EV) Prof. Dr. Michael Koller London, 16 June 2003
Slide 2: Contents
Contents n Preliminary Remarks n Comparing Embedded Values with Fair Values n Examples n Conclusion 2
Slide 3: Current Problems
Current Problems n Underestimated risk in asset allocations of life insurers lead to huge losses n The traditional n Low interest environment leads to the methods for question whether statutory reserves are valuation of life sufficient contracts are insufficient n IASC and FASB want to introduce the
Slide 4: Understanding the economics?
Understanding the economics? Interest rate rise Statutory IAS Economic Equity Equity Equity Liabilities Liabilities Liabilities Securities Securities Securities (long-term) (long-term) (long-term) Real estate Real estate Real estate Fixed Fixed Fixed maturities maturities maturities (mid-term) (mid-
Slide 5: Difference between a model and the reality
Difference between a model and the reality Reality Model Observable Parts of the world: Observable Parts in the model 1) Share Prices 1) Share prices 2) Discount Rates 2) Discount rates 3) Forward rates 3) Forward rates 4) etc. 4) etc. Real Questions: Deductions and solved questions in the model: 1)
Slide 6: Evolution of valuation methods
Evolution of valuation methods n New valuation methods are mainly driven by additional needs of the management and of the shareholders n EV and Fair Value methods can only be applied due to the higher computer power available and mainly due to „new“ mathematical theories (eg. „AFP“) n However: Inter
Slide 7: Contents
Contents n Preliminary Remarks n Comparing Embedded Values with Fair Values n Examples n Conclusion 7
Slide 8: Embedded Value: A known valuation method
Embedded Value: A known valuation method P rofit & Los s Cas h-Flow 400 200 0 CHF -200 -400 Total P/L Administration exp. P/L -600 Acquisition expense P/L Interest margin Risc margin -800 40 41 42 43 44 45 46 47 48 49 50 Age 8
Slide 9: Strengths and weaknesses of Embedded Values
Strengths and weaknesses of Embedded Values Strengths: Weaknesses: n Future Profits and Losses of life n Does not take into consideration the insurance products are modelled ex-ante risks of the actual asset n It can be used as a performance allocation. management tool and shows a proxy n Models int
Slide 10: Example: BVG Contract (EV versus RoRaC)
Example: BVG Contract (EV versus RoRaC) n Assume an equity backing ratio of say 20% with a required capital of 11% of the mathematical reserve. The interest rate earned is then about 5% on a normalised basis. n Assume an interest rate spread of 20 bps for the shareholder corresponding to a surplus o
Slide 11: Embedded Value Profit for the BVG Example (before Tax)
Embedded Value Profit for the BVG Example (before Tax) Age MR BoY MR EoY tpx sx Eff DK BoY 45 100000 104800 1.000 0.050 100000 46 104800 109830 0.950 0.050 99560 47 109830 115102 0.903 0.050 99122 48 115102 120627 0.857 0.050 98686 49 120627 126417 0.815 0.050 98252 126417 Eff DK BoY P/L Interest P/
Slide 12: RoRaC for the BVG example
RoRaC for the BVG example Age MR BoY MR EoY tpx sx Eff DK BoY 45 100000 104800 1.000 0.050 100000 46 104800 109830 0.950 0.050 99560 47 109830 115102 0.903 0.050 99122 48 115102 120627 0.857 0.050 98686 49 120627 126417 0.815 0.050 98252 126417 Eff DK BoY P/L Interest P/L Surrender CoC P/L 45 100000
Slide 13: Why Fair Values (FV)
Why Fair Values (FV) n Traditional valuation methods focus on value creation and do not take into account the corresponding risks n This effects become apparent in particular for n interest guarantees n Implicit policyholder options (eg taking capital or annuity) n surrender values n different strat
Slide 14: Fair Values in general
Fair Values in general n Make everything within an IAS balance sheet mark-to-market n Showing all hidden reserves n As a second priority: performance management n Problem: At present it is quite unclear what a fair value does mean and how to model it n Swiss Life involved within the development of F
Slide 15: RoRAC (Return on risk adjusted capital)
RoRAC (Return on risk adjusted capital) n Swiss Life applies FV in the context of a RoRAC method internally called economic profit (EP) n Tasks in order to determine EP: l Define available capital (Step 1) l Define (measure) required capital (Step 2) l Define return (Step 3) n Main principles of EP:
Slide 16: Mark to market B/S: Available capital (Step 1)
Mark to market B/S: Available capital (Step 1) CF- Pattern Yield curve (ZCB) Expected Cash Flows for a contract 200'000 100'000 0 -100'000 Cash Flow -200'000 -300'000 Premium (BoY) -400'000 Expense (BoY) Surrender (EoY) -500'000 Claims (EoY) -600'000 -700'000 40 41 42 43 44 45 46 47 48 49 Age of Pol
Slide 17: Required Capital: How to determine (Step 2)
Required Capital: How to determine (Step 2) n The following steps are required for the definition of the required risk capital n Definition of the risk map n Model for the different risks n Calculation of the probability distribution and the required risk capital n In order to measure market risk ca
Slide 18: Risk-Landscape (Example)
Risk-Landscape (Example) Method oriented view Integrated RoRAC Model VaR IT Backup ALM Business Interest Rate Contingency Equity FX Market Risks Real Estate Plan Alternative Investments Diversification Financial Risk Liquidity Risks Trading Market Operative Credit Risk De
Slide 19: Model the different risks involved
Model the different risks involved n Problem: How to model the different risks to what extent? n Which risks are dependent resp. independent? n Some risks are relatively easy: Asset risks (eg Geometric brownian motion) n Other risks are more difficult n Bonus rates 150 100 n Disability 50 n Longevit
Slide 20: Defining returns and roll forward (Step 3)
Defining returns and roll forward (Step 3) n A difficult part is the definition of returns n What is the return of a life insurance policy sold? n How to take into account guarantees and bonus rates n Ideas: n Profit before Cost of Capital = PV(Liabilities) with respect to mark-to-market perspective
Slide 21: Strengths and weaknesses of Fair Values and RoRaC
Strengths and weaknesses of Fair Values and RoRaC Strengths: Weaknesses: n Future Profits and Losses of life n Not well developed: It is quite clear insurance products are modelled how to model guaranteed cash flows. n Does take into consideration the ex- However it is not so clear how to model ante
Slide 22: Key Ideas for the Valuation Portfolio Method
Key Ideas for the Valuation Portfolio Method n In the past the value of a insurance liability was always represented as a single number n The idea of the VaPo is to introduce an intermediate step within the valuation of a contract n In a first step a life insurance liability is represented as a port
Slide 23: Contents
Contents n Preliminary Remarks n Comparing Embedded Values with Fair Values n Examples n Conclusion 23
Slide 24: Examples considered
Examples considered n Mixed Endowment policy: n ERM 1995 n No expense loading n Single premium payment n Portfolio of annuities in payment n Statutory: GRM/GRF 1995 n For valuation generation table: Messung 1996/2000 with trend KT 1995 n No loadings 24
Slide 25: Mixed Endowment
Mixed Endowment n Traditional Product sold in individual life. We consider a life insurance policies, which all mature at age 65. n Typically the policies are written with a guaranteed minimal crediting rate (Technischer Zins) which was for a long time at 3.5%. n Government bond with a term of 10 yr
Slide 26: Mixed Endowment (Pricing)
Mixed Endowment (Pricing) 1.2 1 0.8 0.6 0.4 0.2 0 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 6 Interest 2.75% Interest 2% Interest 3.5% Y ield 30.11.2002 26
Slide 27: Annuity Portfolio
Annuity Portfolio n A real life annuity portfolio is considered, which has been written in the past at a technical interest rate of 3.5% with cost tariff 1995 (KT95). n There are two partially offsetting trends: n Lower interest rates than the technical ones assumed n Mortality improvement not as fa
Slide 28: Annuity Portfolio
Annuity Portfolio Yie ld Cu rve Calc F orward Rates B as e Y ear 2003 S tat Interes t 3.50% S c enario 1 2 3 4 5 6 7 8 9 10 11 30.11.2002 0.95% 1.02% 1.25% 1.62% 1.89% 2.03% 2.18% 2.35% 2.53% 2.62% 2.71% -25B P 0.70% 0.77% 1.00% 1.37% 1.64% 1.78% 1.93% 2.10% 2.28% 2.37% 2.46% -50B P 0.45% 0.52% 0.75
Slide 29: Contents
Contents n Preliminary Remarks n Comparing Embedded Values with Fair Values n Examples n Conclusion 29
Slide 30: Scylla and Charybdis
Scylla and Charybdis 1) Valuation needs to seek a way between Scylla and Charybdis! 2) In order to do this one needs to properly understand the Methods 3) There is not only one method which can answer each question 4) A lot of pragmatism is required 30
Slide 31: Learnings from Arbitrage Free Pricing
Learnings from Arbitrage Free Pricing n The consequent application of AFP and RoRAC within an insurance entity enhances the insights into the business considerably n This is in particular useful for identifying the cost of guarantees (interest, surrender, etc) n All newly priced products need to ana
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