Description: In this article, we summarize inflationary factors that may result in a sharp increase in interest rates and implications for life insurer convexity risk exposure, most notably to dynamic policyholder lapsation. We further provide insights into potential ALM strategies to mitigate this convexity risk. Due to the prolonged low-interest rate environment and low minimum interest rate guarantees offered to policyholders, liability convexity is higher than prior historical periods, which results in life insurers’ ALM positions being extremely vulnerable to short-term interest rate spikes. Convexity mismatches cause issues for life insurers under both rising and declining interest rate scenarios. This means that life insurers are not compensated for taking convexity risk and, therefore, convexity matching should always be considered in the asset optimization process. There are mixed signals from policymakers and financial markets regarding potential inflationary and sharply rising interest rate scenarios. The key takeaway is that life insurers are not compensated for taking convexity risk and it is the right time for insurers to review convexity exposure. There are different approaches available to mitigate convexity exposure through rebalancing of asset positions and hedges within each life insurer’s risk limits.

Description: This is the second of a two-part article introducing and elaborating an “Adaptor” strategy for ERM. Such a strategy is intended to fulfil two purposes: first, switching among four styles of risk-coping strategies in order to track qualitative changes in a business’s risk environment; and, second, to support the business in navigating with resilience through all the seasons of a business-economic cycle, i.e., of boom, bust, moderate, uncertain. This latter requires careful study of the nature of resilience, the familiar idea of bounce back, and the less familiar idea of bounce forward. Part I of our article is underpinned therefore by a supplementary document (available from https://riskviews.wordpress.com/adaptor-exceptionalism/), which addresses the issue of structural change in a business or economy. It draws heavily on ideas taken from the discipline of control engineering, as well as some from ecology, social anthropology, and economics. The entire two-part article is thus an exercise in cross-disciplinary Systems Thinking.

Description: Duration matching is a risk management strategy, commonly used in the insurance industry, where the duration (price sensitivity to a yield curve movement) of an asset portfolio is adjusted to be made equal to the duration of the liability. However, this approach has flaws. In this essay, I note some key failures of duration matching and offer a potential alternative.

Description: Strategic Risk Management was given lower priority in a recent survey of ERM Objectives. This article tells how the author believes that recent events have caused many to shift to a more short term focus and in the future there will be a shift back to a priority for the longer term view that stands behind Strategic Risk Management when the environment settles down and things again seem to be more predictable.

Description: Combinations of risks are an important component of the Survey of Emerging Risks, now in its 15th iteration. Also known as risk clusters or compound risks, the most popular in the survey define threat multipliers, where a risk makes other risks worse. The top risks chosen are trended for the last 10 years, showing interesting cycles and discontinuities.

Description: Since most cash flows being discounted in the value calculation are dependent on the forward rates, in the key-rate calculation forwards (not spots) should be shifted. I will show that if spots are shifted up/down, they would not necessarily result in forwards being up/down for all the years in the particular key rate, resulting in unexpected results. I will further show how metrics calculated by shifting forwards versus spots enhance the accuracy of the approximation of projected value in various rate environments.