Description: A collection of essays that discuss the principles and ideas underpinning the ORSA initiative and the risk metrics used for decision making.

Description: Increased attention was paid to regulatory capital with the global financial crisis in 2008. Whilst companies may not have the incentives to retain a large amount of capital in the absence of regulatory capital requirements, overcapitalized entities can have drawback such as its impact on competitiveness. There are other weaknesses in the regulatory capital model such as its limitation in facilitating risk-based decisions as regulatory capital does not necessarily reflect the economic reality and risks an entity faces. Nonetheless, there are ways for regulators and/or companies to handle the weaknesses in the regulatory capital model. For instance, granularity can be introduced in determining regulatory capital. Economic capital can be used to encourage entities to implement risk management controls and facilitate risk-based business decisions (e.g., risk-adjusted performance assessment and risk-based capital allocation). Ultimately, hav ing effective risk management and risk-based capital determination are ways to prevent company failures and bankruptcies.

Description: The Market Cost of Capital approach has emerged as the standard for estimating risk margins for insurers' fair value balance sheets. This paper takes some of the ideas developed for valuing life insurance liabilities and applies them to the problem of valuing credit risky bonds. The basic idea is that credit spreads should cover the cost a) best estimate defaults plus the cost of holding capital for b) contagion risk (e.g. a credit crunch) and c) parameter risk, this risk that the best estimate is wrong and must be revised. We argue that the margins required for parameter risk can capture liquidity issues. In addition, the models developed here allow the cost of capital rate itself to be a random variable which allows credit spreads to open and close stochastically. Finally, the paper argues that it is reasonable to include something like AA best estimate default rates and liquidity spreads when valuing insurance liabilities. The main rationale for doing so is the idea that there are elements of the total credit risk issue that can be hedged between the assets and liabilities.

Description: In this article, we summarize inflationary factors that may result in a sharp increase in interest rates and implications for life insurer convexity risk exposure, most notably to dynamic policyholder lapsation. We further provide insights into potential ALM strategies to mitigate this convexity risk. Due to the prolonged low-interest rate environment and low minimum interest rate guarantees offered to policyholders, liability convexity is higher than prior historical periods, which results in life insurers’ ALM positions being extremely vulnerable to short-term interest rate spikes. Convexity mismatches cause issues for life insurers under both rising and declining interest rate scenarios. This means that life insurers are not compensated for taking convexity risk and, therefore, convexity matching should always be considered in the asset optimization process. There are mixed signals from policymakers and financial markets regarding potential inflationary and sharply rising interest rate scenarios. The key takeaway is that life insurers are not compensated for taking convexity risk and it is the right time for insurers to review convexity exposure. There are different approaches available to mitigate convexity exposure through rebalancing of asset positions and hedges within each life insurer’s risk limits.

Description: In this article, we provide practical guidance for understanding how to develop and apply an effective risk appetite statement.

Description: Introduction and table of contents of essay collection.

Description: This article discusses a good way for insurance companies to calibrate economic capital (tail risk level) that is consistent with the market opinion on its risk. It also establishes a bridge between a risk neutral evaluation and a real world evaluation.

Description: discussion of the capital management alternatives for funding the additional reserves required due to Actuarial Guideline XXX

Description: Presented at May 2005 Spring Meeting. Panelists discuss annuity risk management, with particular focus on RBC and the proposed Actuarial Guideline on reserving, and how this can be applied to new product development as well as in-force product management.

Description: This article discusses the whys and hows of managing risk and capital at the enterprise level.