The company is exposed to ALM risk when changes in different market risk variables (e.g. interest rates, inflation, foreign exchange rates, equity prices) cause a change in the value of investment assets that is of different size than the respective change in the economic value of technical provisions. In addition, the cash flows of technical provisions are modelled estimates and therefore uncertain in relation to both their timing and amount. ALM risk also includes this component of uncertainty.
In Sampo Group, ALM risks are managed as a part of managing the investment portfolios. ALM risks are analyzed regularly and these analyses together with actual capitalization, regulatory requirements and rating targets are taken into account when defining the Group companies' investment policies.
The asset and liability management process applied in Sampo Group is illustrated in the figure "Asset and liability management process in Sampo Group".
If P&C and Mandatum Life may apply slightly different approaches which are based on the specific characteristics of their businesses.
Asset and Liability Management in If P&C
If P&C´s approach in asset and liability management is defined in accordance with the above described group wide principles.
Most of the technical provisions in If P&C are stated in the balance sheet in nominal terms. The provisions for annuities are discounted, and potential changes in the discount rates will affect the level of technical provisions in the company's balance sheet. The discount rates vary between countries mainly due to differences in legislation but they are at least indirectly impacted by the prevailing market interest rate environment. Hence, from an accounting perspective, the company is mainly exposed to changes in expected future claims inflation and in the regulatory discount rate. The economic value of these reserves, i.e. the present value of future claims payments, is however exposed to changes in market interest rates.
When deciding the investment allocation the first step is to derive a replicating portfolio based on the cash flow of technical provisions and their sensitivities, in economic value, to changes in inflation, currencies and yield curves. Thereafter the investment allocation and limits for surplus capital, and thereby the total investment allocation, is derived by taking risk-bearing capacities, regulatory requirements, rating targets and risk tolerance into account.
In order to enhance returns with acceptable risks, the portfolio may also contain equities in addition to fixed income investments. Within the limits set in the Investment Policy, investments are managed actively by utilising market views.
Asset and Liability Management in Mandatum Life
In Mandatum Life, the approach to ALM risk management is also based on an analysis of technical provisions. A common feature for all with-profit technical provisions is the guaranteed rate and bonuses based on principle of fairness. The cash flows of Mandatum Life´s technical provisions are relatively well predictable because in most of the company's with-profit products, surrenders and extra-investments are not possible. The company's estimates for claims costs do not contain any significant element of inflation risk and thus the inflation risk in Mandatum Life is mainly related to administrative expenses.
The most significant interest rate risk in the life insurance business is that fixed income investments will not over a long period of time generate a return at least equal to the guaranteed interest rate of technical provisions. This risk is managed through constant monitoring of the duration gap between technical provisions and fixed income investments, and the adequacy of capital is managed by the use of internal models in different market situations.
Mandatum Life has prepared for low interest rates on the liability side by e.g. reducing the minimum guaranteed interest rate in new contracts and by supplementing the technical provisions by applying a lower discount rate. In addition, existing contracts have been changed to accommodate improved management of reinvestment risk.
The long-term target for investments is to provide sufficient return to cover the guaranteed interest rate plus bonuses based on principle of fairness as well as the shareholder's return requirement with acceptable level of risk. The company manages its investment portfolio actively.
The Board approves the Investment Policy annually, which sets principles and limits for investment activities. The Investment Policy also includes measures and limits for maximum acceptable market risk. These measures and limits are based on both Solvency I and Solvency II type of approaches. When it comes to the Solvency I type of approach, limits are defined for the regulatory solvency capital in relation to the regulatory capital requirement using a VAR-analysis of the investment assets. In the Solvency II type of approach, limits are set based on different confidence levels in addition to the 99.5 per cent level used in Sampo Group. ALCO reports limit breaches to the Board who makes the decisions related to the capitalization and the market risks in the balance sheet. The general objective is to maintain the required solvency and to ensure that investments are sufficient and eligible for covering technical provisions.
Sampo plc's investment organization makes the day-to-day investment decisions based on principles set in Mandatum Life's Investment Policy. However, the most significant investment decisions are made by the Board. The ALCO regularly controls that limits and principles defined in the Investment Policy are followed.Previous page Next page