The Actuarial Society of Hong Kong Impact and implications of low interest rate environment on insurance companies

Transcription

1 The Actuarial Society of Hong Kong Impact and implications of low interest rate environment on insurance companies Tze Ping Chng 7 November 2012

2 Agenda 1. A new world? 2. Implications of low interest rate environment 3. Conclusions 2

3 Headlines in the past couple of months ECB introduces unlimited bond-buying program September 6, 2012 Federal Reserve launches QE3 September 13, 2012 Bank of Japan announces new monetary easing September 19, 2012 Australia central bank cuts rates, more seen likely October 2, 2012 Hong Kong Intervenes to Defend Peg as Upper Limit Tested October 24, 2012 What comes next? 3

4 The new world economy We are in an era of unprecedented ultra low interest rates Flatline for now but what happens next? 4

5 10-year government bond yield HKD and USD The yields are close to all time lows % year HK & US government bond yield Jan-2010n Mar-2010r May-2010y Jul-2010l Sep-2010p Nov-2010v Jan-2011n Mar-2011r HK May-2011y Jul-2011l US Sep-2011p Nov-2011v Jan-2012n Mar-2012r May-2012y Jul-2012l Sep-2012p Four years into the financial crisis, rates continue to drift lower What if the ultra low rates are here to stay? Source: Hong Kong Government Bond Program and Yahoo Finance 5

6 Implications of low interest rates on insurers 1. Reserving and solvency margin 2. Reinsurance and capital management 3. New product innovations 4. Investment strategies and currency / credit risks 6

7 Reserving and solvency margin (1/3) Valuation interest rate ASHK Reserve Working Group: Chapter 41E reinvestment yield for reserving General format to derive the final reinvestment yield: X% x {Yield at Valuation Date} + Y% x {forward-looking yield} {forward-looking yield} is the average of yields of long term fixed government interest securities over the 3-year period up through the valuation date Japan s valuation rate is reduced to 1.0% (from 1.5%) starting from April

8 Reserving and solvency margin (2/3) Sample interest rate sensitivity: Source: AIA 2012 Interim Results Presentation, 27 July 2012 ( 8

9 Reserving and solvency margin (3/3) Sample interest rate sensitivity: Source: Manulife Asia Investor Day, 7 September 2012 ( 9

10 Reinsurance and capital management Reinsurance agreements subject to regulatory approvals are used to manage capital efficiency and improve solvency margin ratios Internal and offshore reinsurance Modco financial arrangement Subordinated debts Parental guarantees Letter of credit too expensive these days? 10

11 New product innovations (1/2) Back to the basics moving back to the protection-based business Re-pricing and new product innovations Munich Re: Profitability in core insurance business is what counts in the low-interest-rate phase Ludger Arnoldussen, member of Munich Re s Board of Management October 22, 2012 Also don t forget about inforce product management 11

12 New product innovations (2/2) e.g. Stable Value products from Prudential Financial Source: Prudential Financial, Inc. New York Investor Day, May 22, 2012 ( 12

13 Investment strategies and currency / credit risks Investing in longer-term assets offers the potential for additional yield and proper ALM as liability durations extend Increase allocation to risky assets, e.g. investments in lower credit-quality assets, foreign or alternative asset classes The search for the right asset mix is complicated by the varying needs As the Appointed Actuary, have you considered the impact of the de-pegging of the HKD from the USD? 13

14 Efficient frontier There is no single right answer, but optimization depends on corporate risk appetite Illustrative example Long term expected yield Cash x% GovB x% Credit x% RE x% Equities x% Pricing rate 15 year GovB Cash q 30 year GovB Portfolio A Cash x% GovB x% Credit x% RE x% Equities x% q q 5 yr AA corp bond (local) Current Portfolio Cash x% Gov B x% Credit x% RE x% Equities x% RBC Limit 15 yr A Corp bond (local) Portfolio X q Real estate Portfolio Y Cash x% GovB x% Credit x% RE x% Equities x% Equities Key assumptions: Liability duration = 15 years A rated = GovB + 150bps Real estate= Cash + 300bp Equity= Cash +500bps Economic Capital requirement 14

15 Strategic Asset Allocation review Multiple metrics complicate the process, and optimizing requires prioritization Illustrative example Legend: Positive measures (5=Good) i = Long Term Expected Total Retutn Yield P&L = Short term earnings Constraints (5=Good) VaR = Economic Capital RBC = Regulatory Capital EaR = Earnings at Risk (Earnings volatility) 15

16 Conclusions The low interest rates environment are expected to stay In this environment, some insurers are shifting into protection-based business Insurers can also consider new product innovations and inforce management Insurers also utilize reinsurance and various investment strategies to manage capital position and increase portfolio yield Finally, insurers should also consider the impact of a sudden upward interest rate shock 16

17 The Actuarial Society of Hong Kong Breakout Groups Vincent Tsang Tze Ping Chng Florence Ng

18 Breakout groups Suggested structure - 30 minute group discussion and preparation - 8 minute presentation from each group after lunch - Each group also provides feedback as follows: Group Presenting Group Providing Feedback

19 Discussion topics for breakout session (1/4) 1. Reserving and solvency margin a. What are your views on how the valuation interest rate(s) should be determined in the long run? b. Should the Appointed Actuary be granted with more flexibility in determining the valuation rates? If yes, how could IA minimize the potential abuses? c. If you were given the opportunities to change the reserving and solvency requirement in HK, what would you suggest and why? 19

20 Discussion topics for breakout session (2/4) 2. Reinsurance and capital management a. How often does your company use reinsurance to manage capital position? b. How effective can reinsurance be used to manage capital position in such low interest rate environment when compared with other alternatives? c. What other methods does your company use, e.g. parental guarantees, to manage capital requirements? 20

21 Discussion topics for breakout session (3/4) 3. New product innovations a. What changes has your company made to your existing inforce business and/or new business mix in the current ultra low interest rate environment? b. What are your views on product types, product features, and target profitability in such environment? c. Would your company consider focusing on protection-oriented products such as term insurance, or products with minimal interest rate risk exposure? 21

22 Discussion topics for breakout session (4/4) 4. Investment strategies and currency / credit risks a. What are the ALM strategies you have adopted under such low interest rate environment? b. As an appointed actuary, do you consider the impact of an unlikely event such as the de-pegging of the HKD from the USD? c. How does your company take advantage of the appreciation of the RMB and other high yielding assets? 22