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Established own view of risk and validation of economic capital model
Ensured sufficient capital reserves to maximize RAROC
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A top-20 global life insurer operating its own internal economic capital models wanted to analyze the effect its strategic growth plan in the bulk annuities market had on its overall risk profile. The client was looking to acquire large books of annuities and wanted to assess the interaction between longevity risk and existing mortality risk to understand the net effect for a range of stochastic and real-world scenarios.
Longevity risk requires the carrier to hold significant capital against the book. The client wanted to understand the net effect of offsetting annuities business against the life insurance book, to ensure it had sufficient capital – but not more than necessary.
To evaluate the financial viability of its strategic growth plan, the insurer required an independent view of its economic capital position in various scenarios. The aim was to increase shareholder comfort from the perspective of both risk appetite and a risk-adjusted return on capital.
Moody’s RMS LifeRisks is a cloud-based software platform that delivers models and data enabling users to perform portfolio-specific analytics for the management of longevity and extreme mortality risks.
Moody’s RMS conducted an in-depth analysis of the client’s economic capital position using Moody’s RMS LifeRisks models:
Having established the risk profile and economic capital position of the current business, Moody’s RMS then validated the client’s own models using the Moody’s RMS LifeRisks platform. In addition, we carried out a sensitivity analysis to better understand the Moody’s RMS models and demonstrate robustness of the results. Portfolio-specific parameterization of the models was conducted to refine modeling and risk metrics.
Moody’s RMS consulting team worked with the client to conduct analyses of its strategic growth plans in the bulk annuity space. The LifeRisks holistic mortality solutions helped the client understand the impact on its risk profile and risk-adjusted return on capital (RAROC), ensuring better risk selection and therefore better shareholder outcomes.
Moody’s RMS LifeRisks provided the client with a detailed breakdown of the risk capital associated with each book of business on a stand-alone basis, which could be compared with the amount of capital it was holding using its existing models. We also showed the client the total offset between its annuities and life businesses using a range of deterministic and stochastic scenarios, indicating any correlations between portfolios. These were provided under both run-off and business-growth scenarios for the future cash flow of the business.
Real-world deterministic scenarios provided stakeholders with an understanding of the balance-sheet impact of planned strategic growth within the bulk annuity space. The stochastic results informed the optimal level of capital growth required to maximize shareholders’ RAROC.
The probabilistic modeling approach provides a realistic feel to a stochastic outcome, which is more effective for understanding the drivers associated with future 1-in-200 year scenarios, while helping illustrate for shareholders why pursuing a particular growth strategy makes sense from a risk return perspective.
The in-depth analysis of the insurer’s book of business led to the adoption and implementation of Moody’s RMS LifeRisks. The client achieved a better understanding of the current and possible future risk profile of the business and the viability of key growth strategies.
With this consulting project, the insurer benefited from a more bespoke and portfolio-specific view of risk and Moody’s RMS expertise. In addition, going forward, the solution will be embedded in the client’s enterprise risk management framework.