1. Impact of Liability Profile on Investment Strategy
NZ Society of Actuaries Conference 2010
Presented by Rob Paton
24 November 2010
Based on a paper by Anton Kapel, Graeme Miller and Rob Paton prepared for the Institute of Actuaries of Australia Financial Services Forum, 13 and 14 May © 2010 Towers Watson. All rights reserved.
Melville Jessup Weaver is the Alliance Partner of Towers Watson in New Zealand.

2. Contents Background to paper Why do we invest? Common practice
An alternative approach
Role of Appointed Actuary

3. Background to paper What prompted this paper Investment practices vary
GFC
Universal concepts that apply to all underlying insurance businesses
Avoid addressing some of the more complex areas associated with particular liabilities

4. Why do Insurers invest? Insurers invest assets to meet liabilities
In most cases, there is an asset portfolio that would (closely) “match” the liabilities
Complications arise:
What measure of liabilities?
Matching is not always possible
We are not suggesting an insurer should always hold the minimum risk investment portfolio
But it is important to understand the implications of not doing so

5. Good investment practice
The allocation to investments from the insurer’s overall risk appetite should be central
How is “risk” assessed?
Benchmark asset mixes set to align investment risk taken with the investment risk appetite
Regular monitoring and periodic review

6. Current Investment Practice in New Zealand
Little publicly available data (none?)
Proposed Minimum Solvency Capital strict on Asset Risk Capital Factors (eg minimum risk investments, risky investments, no diversification benefit, unlisted trusts, investments in $Australian)
How will Appointed Actuaries approach the investment related parts of their FCR’s
Will current investment practice need to change under new regulatory requirements (if so, what are implications)

7. Issues that may arise
Risk exposures can move out of line with risk appetite
Asset class managers have different view of risk
Focus on performance relative to benchmark
“Tactical” decisions made from an asset-centric viewpoint

8. A “textbook” approach Governance structures are critical
ALCO or similar body
Actuarial input (particularly regarding capital) is needed
Treasury function
Separates investment (mismatch) decisions from underlying liability portfolio management
Monitoring function
Current investment risk appetite versus current investment risk taken

9. Liability management team Investment management team
Treasury function
Delivers “matching” cash flows to the liability management team
Articulates minimum risk portfolio and risk appetite to investment management team
Treasury function
(responsible for management of mismatch risk between assets and liabilities)
Liability management team
Investment management team
Advises Treasury of minimum risk portfolio
Delivers returns from underlying investments to Treasury function
Insurance business earns matching portfolio return
Investment business “owns” mismatch capital and actual returns (and pays matching portfolio return)

10. Role of Appointed Actuary
Communicate capital implications
Communicate the investment-related implications of the insurer’s liability profile
Develop appropriate trigger points
Communicate any cash flow patterns and liquidity constraints which have implications for investments
Calculate and communicate the investment component of the insurer’s total risk budget
Monitor the suitability of the insurer’s overall investments in the context of the insurer’s investment risk appetite

11. Discussion Do insurers do it now? What’s stopping it being done now?
What New Zealand characteristics get in the way?
Do Appointed Actuaries have sufficient powers?