An Integrated Risk Management Model for Japanese Non-Life Insurers. Sompo Japan Insurance Inc. Mizuho DL Financial Technology 25 February 2005

Transcription

1 An Integrated Risk Management Model for Japanese Non-Life Insurers Sompo Japan Insurance Inc. Mizuho DL Financial Technology 25 February 2005

2 Contents 1. Background 2. Model Overview 3. Scenario Generator Design 4. Empirical Results and Insights 5. Conclusion

3 1. Background

4 Balance Sheet 4

5 Important Facts behind the Risks 5 Asset Investment Risks Cross-holdings Real Estate Investment Overseas Investment Corporate Bonds & Loans Credit Risk Interest Rate Mismatch Risks Saving Type Policies Life Insurance Business Catastrophe Risks Earthquake Storm and Flood

6 Model Coverage 6 Market Risk Stock Prices (systematic risk & unsystematic risk) Interest Rates (HJM Model) Foreign Exchange Rates Credit Risk Default Credit Rating Transition Credit Spread Widening Realty Investment Risk Interest Rate Mismatch Risk (i.e. Negative Interest Rate Margin)

7 Purpose of Integration 7 Recognition and Understanding of Risk Measurement of Risk (Reflecting Diversification Effect) Risk Capital Control (Capital Adequacy) Internal Communication Information for Decision Making Risk Adjusted Return Shareholders Value Added etc.

8 How we define integrated model 8 An integrated model should: (1)cover all major risk factors. (2)cover all major B/S items. (3)measure risks by a common unit. (4)reflect diversification effects among different types of risk. The NEW MODEL is a communication tool.

9 2. Model Overview

10 Definition of Risk 10 Mark-to-Market Concept Applicable to Asset Allocation Applicable to Surplus ALM XVaR Downward Potential of the Market Value of our Capital VaR is Defined as the difference between (a) expected value and (b) x percentile point

11 Model Implementation 11 Monte Carlo simulation applied to all major BS items A scenario generator deals with major risk factors, including equity, interest rate, forex, credit risk. The scenario generator provides 50,000 probabilistic scenarios. Assets and Liabilities are valued under each scenario. Distributions of possible market values in one year are generated.

12 B/S Items and Explanatory Factors 12

13 3. Scenario Generator Design A Method to Link Market Risk and Credit Risk

14 Relationship among Risk Factors 14 Dollar Yen Rate USTR Yield Curve Macro Risk Factors JGB Yield Curve X Corporate Bond Price Credit Rating Transition Cholesky Decomposition S&P 500 TOPIX corporate specific factor Equity Price Random Variables Model Outcomes

15 Credit Risk Factor X and TOPIX 15 A correlation between X and TOPIX can be observed TOPIX X

16 4. Model Results and Insights How do we utilize the model?

17 Model Applications 17 Current Function Risk Monitoring Risk Measurement Risk Attribution ALM Assessment of Asset Allocation Plans

18 Risk Mapping 18 Risk Mapping Simplified Form) RISK FACTOR Assets& Liabilities Market Value DOMESTIC INTEREST RATE FOREIGN INTEREST RATE DOMESTIC STOCK MARKET FOREIGN STOCK MARKET FOREIGN EXCHANGE CREDIT RISK REAL ESTATE MARKET DIVERSI- FICATION EFFECT TOTAL Cash XXXXX XXXXX XXXXX XXXXX Domestic Bond XXXXX XXXXX XXXXX XXXXX XXXXX Corporate Loan XXXXX XXXXX XXXXX XXXXX XXXXX Personal Loan XXXXX XXXXX XXXXX XXXXX XXXXX Domestic Equity XXXXX XXXXX XXXXX XXXXX XXXXX Foreign Bond XXXXX XXXXX XXXXX XXXXX XXXXX Foreign Equity XXXXX XXXXX XXXXX XXXXX XXXXX Alternative Investment XXXXX XXXXX XXXXX XXXXX Real Estate XXXXX XXXXX XXXXX Credit Insurance XXXXX XXXXX Foreign Currency Hedging XXXXX Asset TOTAL (Gross) XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX Diversification Effect XXXXX XXXXX XXXXX XXXXX Asset TOTAL (Net) XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX Liabilities XXXXX XXXXX XXXXX Surplus XXXXX XXXXX XXXXX

19 Risk Measurement (Total Risk) TOTAL RISK Expected Value Frequency 99% Threshold Value 99%VaR Surplus Value

20 20 Risk Measurement (Asset by Asset) HIGH QUALITY BOND Loan Frequency Frequency Asset Value Asset Value

21 21 Risk Measurement (Hedge Effect) Hedge Effect No hedge Option Frequency Asset Value

22 Risk Attribution Risk Attribution 22 Asset 11 Asset 10 Risk Attributed Capital Risk, Attributed Capital Asset 1 Asset 2 Asset 3 Asset 4 Asset 5 Asset 6 Asset 7 Asset 8 Asset 9

23 23 Asset Liability Management Sensitivity Analysis Sensitivity Analysis Liabilities Asset Value Liabiity Value Assets Sensitivity Analysis Surplus Interest Rate Interest Rate LIABILITIES Surplus Value ASSETS SURPLUS Interest Rate

24 24 Asset Allocation Alternatives and Risk Assessment of Asset Allocation Plans Current Plan Current Plan Tail Analysis Frequency Frequency 99% Threshold (Current) Surplus Value 99% Threshold Surplus Value (Plan)

25 5. Conclusion

26 Summary 26 Financial risks are integrated by the model. The model results are to be used for risk measurement to check capital adequacy. asset liability management. risk attribution. risk monitoring. assessment of asset allocation alternatives. The following risks are not integrated. Insurance Risk Operational Risk