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Role of ALM within RM framework -by Goldman Sachs (Reporting Metrics…
Role of ALM within RM framework
-by Goldman Sachs
Reporting Metrics
Accounting (GAAP, IFRS)
Regulatory (Statutory)
Economic (MCEV, Solvency II)
Rating Agencies
Insurers during Fin. Crisis
Challenges
Realized losses
AOCI losses
Drop in market cap
Drop in RBC ratio
Responses
Raise Capital
Challenges
Hard to raise during difficult time
Liquidity needs increase
Pressure on RBC ratios
increasing VA capital requirements
downgrades on MBS
Approaches
Issue common/preferred equity
Issue corporate bonds
De-risk whenever possible
Divest business
Change portfolio allocations
Hold more cash
Hold general accounts in fixed-income securities
Allocate more into gov. bonds
Playing Offense and Defense
GSAM's ERM
Key points
Clear define market risk budget (risk appetite)
Economic basis
Req. capital basis
Evaluate economic objectives vs insurance constraints
Determine roles of ALM in ERM framework
Process
Risk Governance (Risk Communication)
Risk and Capital Measurement
Risk budgeting (Risk Appetite)
Set at aggregate level => diversification benefits
Liquidity RM
ALM and SAA
Goals
Maximize risk-adjusted returns
Minimize surplus volatility
Process
Investment Objectives and constraints
target yields
duration mismatch tolerance
exposure limits
Asset universe & assumptions
ID asset classes and correlations
Liab. CF & replicating portfolio
ID liability profile & duration profile
Risk measures
Asset-only volatilities
Surplus volatilities
Economic/Req. capital
VaR, CTE
Risk/return tradeoffs
Evaluate it based on risk measures
ALM & SAA
make SAA & ALM decisions
Risk reporting
Case Study
Asset-only risk framework
Portfolio volatility
A/L risk framework
Surplus volatility
Key takeaways
Asset allocations vary when risk measure changes
Surplus volatility is the most appropriate metric
Relaxing duration constraints is more efficient than constraining durations
Duration mismatch should be evaluated from a TAA perspective