Markedskonsistent risikomåling og asset-liability management i Danske livsforsikringsselskaber med Solvens II: Med fokus på markedsrisiko og forsikringskontrakter med garantirenter

Kasper Riis

Student thesis: Master thesis


This thesis deals with solvency capital requirements and assets–liability management in Danish life insurance funds in respect to the European Union Solvency II legislation, which is expected to be implemented in the year 2012. Moreover, it focuses on defined benefit plans, i.e. contracts with interest rate guarantees. Current EU Solvency I regulation is only a simple liability driven measure and ignores the investment risk. In Denmark, these shortcomings where solved by the traffic light stress test of the market value of balance sheet, which hence imposed additional solvency requirements. Solvency II regulation is also built on a stress test of the fair value of assets and liabilities in a balance sheet approach. The approach, however, incorporates all risks of the company and value the capital requirement by a standard model that is based on a Value-at-Risk approach. The standard model in the Solvency II framework, however, does not fit the risk profile of individual companies and therefore it will be possible to create an internal model to assess the capital requirements. The impact of the Solvency II framework is thereby expected to improve the internal risk management and internal control. The approach to investigate this is a theoretical and empirical analysis, where the theory and the empirical analysis are linked. Due to the scope and complexity of the problem, I will only deal with the savings part of the defined benefit plans. This also means that I will only deal with the market risk. The empirical analysis, however, ignores the credit- and counterparty risk in measuring the solvency capital requirement. The theoretical analysis investigates the problem with the interest rate guarantees and looks at the Danish legislation and guide lines in defining the fair value of the balance sheet. Furthermore, I look at the difference in the solvency regulation and define the theory about Value-at-Risk. The empirical analysis is based on a fictive insurance fund with two types of defined benefit plans with different interest rate guarantees. In order to incorporate reality, I use current market data to value and measure the assets and liabilities. The level of accruals of defined benefit plans is the incremental progress of a problem that is widely recognized. The problem is that the fair value of the technical provisions is sensitive to the movement in interest rates. When the interest rate guarantees are high, the problems with the duration mismatch between the assets and the technical provision increase as the interest rates fall. This problem has been solved by lowering the level of guarantees on future benefits and thereby lowering the value of the technical provision, hence creating a bigger buffer on solvency capital. But the insurance funds’ assets are often not divided between the different guarantees. This creates a conflict of interest between the different policy holders. Because when the interest rates are low the fund need to lower the risk on the asset portfolio, both to ensure that it is able to meet the future obligations and at the same time are able to meet the solvency requirement regulations. By using an internal Value-at-Risk model and the Solvency II standard model stress test, this problem is revealed by the difference in the volatility on the technical provisions but a similar higher volatility on the assets. Further, the two types of guarantees are impacted differently by the Solvency II stress test. The Value-at-Risk model, however, imposes a lot of problems that makes it imprecise. Moreover, it is a short sighted model used on long-term investments. The Solvency II standard model combined with an internal Value-at-Risk model, however, provides valuable information of the risk profile of the asset portfolio and the liabilities. Hence, an internal Value-at-Risk model is a forward-looking risk measure which can guide insures toward a better risk-return profile and insures can monitor their market risk better.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2010
Number of pages107