Gastvortrag: Solvency II, Asset Liability Management, and the European Bond Market Theory and Empirical Evidence

Transcription

1 Risikomanagement von Finanzinstituten Gastvortrag: Solvency II, Asset Liability Management, and the European Bond Market Theory and Empirical Evidence Meik Friedrich Hannover,

2 Gliederung Solvency II A major change in the regulatory environment Integrated Asset-Liability-Management for Life Insurers Interest rates and the bond market Empirical findings Conclusion 2

3 Three Pillar Approach Three Pillar Approach Pillar 1 Quantitative Capital Requirements Pillar 2 Quantitative Supervisory Review Pillar 3 Market Discipline Minimum Capital Requirement (MCR) Solvency Capital Requirement (SCR) standard formula SCR Internal model Supervision process Internal controls and embedding risk management Principles and tools Transparency Disclosures Support of riskbased supervision through market mechanisms 3

4 Integrated ALM Approach A L Assets to optimise at NPV Liabilities at Fair Value Equity 4

5 The Fisher equation i = r + E(π) + rp i: nominal interest rate r: real interest rate E(π): expected rate of inflation rp: risk premium 5

6 Government bond yields (10 y) in selected countries USA UK Germany France Italy Data: Bloomberg 6

7 Three decades of falling inflation rates US CPI Y/Y UK RPI Y/Y GERMANY CPI Y/Y Data: Bloomberg, EcoWin 7

8 German Government Bond Yield Spreads SPREAD 7Y/5Y SPREAD 10Y/7Y SPREAD 30Y/10Y Data: Bloomberg 8

9 Term Structure of Interest Rates: German Government Bonds (2 Years to 10 Years) Dec Dec Dec Dec Dec Dec Data: Bloomberg 9

10 Yield spread (government bonds) and the ifo Business Climate SPREAD 10Y/5Y IFO BUSINESS CLIMATE (R. H. S.) Data: Bloomberg 10

11 Explanations for low interest rates... New guidelines for monetary policy in the 1980s have reduced inflation rates and inflation expectations Today there is less uncertainty about future inflation because of a decreased variability of inflation The growth of government debt has diminished There may be a global savings glut Demographic change could already have reduced the real interest rate 11

12 ... And the flattening of the yield curve Lower long-term inflation expectations Fears of a major economic downturn Pension reform and Solvency II may have increased the demand for longterm bonds (preferred habitat hypothesis) 12

13 Interest rates: Testing for stationarity Null Hypothesis: Time series has a unit root Time series: ADF-test statistic 5% critical value Prob.* i10: Δi10: i30: Δi30: critical values from eviews 13

14 Interest rates: Is there cointegration? Sample (adjusted): 1999M M12 Included observations: 103 after adjustments Trend assumption: Linear deterministic trend Series: J30 J10 Lags interval (in first differences): 1 to 4 Unrestricted Cointegration Rank Test (Trace) Hypothesized Trace 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None At most Trace test indicates no cointegration at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level Critical values from eviews Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized Max-Eigen 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None At most Max-eigenvalue test indicates no cointegration at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level Critical values from eviews 14

15 Long-/medium-term interest rate relation Δi 30 = Δi 10 (t-stat) (-0.78) (22.92) R 2 = 0.834, Adj-R 2 =0.832, AIC =

16 Solvency II time line 2001 Start of the project 2003 Start of Phase II QIS QIS QIS QIS 4 Until 2011 Standards, Norms, Indicators, Guidelines, Implementing Regulation 2012 expected use time 10/2003 9/2003 Ending Phase of Phase I I 10/ /2004 QIS QIS 1 1 5/2006 5/2005 QIS QIS

17 Testing for structural breaks: Chow tests Chow Breakpoint Test Null Hypothesis: No breaks at specified breakpoints Varying regressors: All equation variables Equation Sample: 1999M M M10 F-statistic Prob. F(2,103) Log likelihood ratio Prob. Chi-Square(2) Wald Statistic Prob. Chi-Square(2) M10 F-statistic Prob. F(2,103) Log likelihood ratio Prob. Chi-Square(2) Wald Statistic Prob. Chi-Square(2) M05 F-statistic Prob. F(2,103) Log likelihood ratio Prob. Chi-Square(2) Wald Statistic Prob. Chi-Square(2) Note: probabilities calculated using critical values from eviews 17

18 Testing for structural breaks: Quandt/Andrews test Quandt-Andrews unknown breakpoint test Null Hypothesis: No breakpoints within trimmed data Varying regressors: All equation variables Equation Sample: 1999M M12 Test Sample: 2000M M07 Number of breaks compared: 73 Statistic Value Prob. Maximum LR F-statistic (2004M11) Maximum Wald F-statistic (2004M11) Exp LR F-statistic Exp Wald F-statistic Ave LR F-statistic Ave Wald F-statistic Note: probabilities calculated using critical values from eviews 18

19 Conclusion Solvency II has not changed the relationship between medium-term and long-term interest rates so far Intuitively, there are three possible explanations for this finding: 1. Insurers may not have yet made any significant changes in their asset allocation policy 2. Other market participants (e.g., hedge funds) could also have reacted to the new investment policy of life insurers 3. Solvency II may not change the investment philosophy of European insurance companies at all 19

20 Vielen Dank für ihre Aufmerksamkeit Basse T/ Friedrich M: Solvency II, Asset Liability Management, and the European Bond Market Theory and Empirical Evidence, in: Zeitschrift für die gesamte Versicherungswissenschaft, 97, 2008, S