Handbook of Asset and Liability Management: From models to optimal return strategies

32

Economic Value Management in Insurance Companies and in Capital Book Management

C'est I'imagination qui gouverne les hommes. (Napoléon 1^er)

32.1 ECONOMIC VALUE MANAGEMENT IN INSURANCE COMPANIES

The Insurance Book is manageable as a Banking Book. The optimization will take also into account all the different possible investments:

• credit risk investment;
• interest rate investment;
• real rate investment;
• business risk investment;
• new incremental business risk including operational risk;
• model risk investment;
• equity investment;
• liquidity investment;
• real estate investment.

The Capital manager will use the economic capital as a risk measure. For each investment, he will ask the concerned front office A/L managers and the concerned business lines managers for their expected risk premium on those investments.

The margin solvency of the Solvency II regulation provides an economic measurement of risk.

The specificity of the Insurance Book is given by the computation of a full fair value of the non unit-based insurance contracts.

The full fair value of insurance contracts is sensible to the level of the business factor and to the level of the financial markets. This full fair value represents the economic value of the existing clients, since the variations of this economic value are possibly correlated with the variations of the financial markets. For example, the results on the non-unit base life insurance contracts are computed as the multiplication of the liquidity amount of contracts ...