Research & Insights
All Research & Insights
- Mar 2012
- Alternative views on extrapolated yield curves: A fundamental question remains unanswered
As a consequence of the move towards a market-based approach to valuation which underpins both the Solvency II regulations and the IFRS/FASB rules, the estimation and extrapolation of market yield curves has captured the attention of insurance firms, accountants and regulators. However, as John Hibbert explains, there is more than one approach to extrapolation.
- Feb 2012
- Solvency II and DB funds: new thinking for assessing capital adequacy
With a more rigorous and quantitative approach to regulating DB pension funds on the horizon, what are the implications for fund sponsors, scheme managers and insurers? In this Insight Note, Craig Turnbull introduces an approach to analysing capital adequacy of DB pension funds consistent with the capital assessment system being implemented in Solvency II.
- Dec 2011
- The challenges of building yield curve stress scenarios for solvency capital assessment
A summary of Barrie & Hibbert's high-level approach to modelling extreme movements in yield curves for the purposes of settings solvency capital within a VaR framework.
- Dec 2011
- ‘PIT’falls of ‘Through-the-Cycle’
In this white paper we consider the implications for policyholders, regulators and companies of ‘Point-in-Time’ and ‘Through-the-Cycle’ capital measures.
We also demonstrate that VaR capital measures conditioned on current available information can demand lower average capital as well as simultaneously delivering lower average policyholder losses in default, when compared to TTC measures.
- Dec 2011
- A comparison between curve fitting and least squares Monte Carlo techniques
This note discusses the similarities and differences between least squares Monte Carlo and ‘curve- fitting’ procedures for 1 year VaR calculation. We look at how both techniques approximate a nested stochastic calculation. Further, we show that ‘curve fitting’ is a special but inefficient case of a least squares Monte Carlo technique.
- Dec 2011
- Pension de-risking roadmap: a slippery path?
Pension fund de-risking through switching strategies doesn’t necessarily guarantee the locking in of benefits or reduction of risk. Celene Lee assesses how the different approaches stack up.
- Dec 2011
- A new toolbox for retirement planning: risk management solutions
Part two of a two-part series. While retirement investors are facing sustained low yields and an uncertain economic environment, the range of risk management solutions is failing to evolve to meet the challenge. Phil Mowbray looks at some new risk management solutions which would enable investors and advisors to build more sustainable retirement income plans.
- Dec 2011
- A new toolbox for retirement planning: risk measurement - an essential tool for retirement income planning
Part one of a two-part series. Phil Mowbray develops a set of metrics which can be embedded within the advice process to allow retirement customers to quantify these risks and identify the most suitable retirement options.
- Nov 2011
- ESG and Solvency II in the Cloud
Is it realistic and cost-effective to build a Solvency II platform on the cloud? Head of Development Matt Little investigates how insurers could use cloud computing to reduce costs when they need large computational power.
- Nov 2011
- Solving the “nested stochastic problem”: a Least Squares Monte Carlo approach to liability proxy modelling and capital calculation
This note outlines a method which can be used for solving the nested stochastic problem, creating a function which approximates a multi-dimensional insurance liability through the use of Monte Carlo Simulation and Regression. The process, model choices, automation and validation are discussed in detail.
Although a liability proxy function has many applications within insurance risk management this note will discuss use of proxy modelling in the context of a Solvency II 1 year VaR capital calculation.
- Oct 2011
- The Collateral Damage of Today’s Monetary Policies: Funding Long-Term Liabilities
The actions of the world’s major central banks over the last three years have been focused on short-term economic stimulus and the support of financial institutions with short-term liability funding structures.
The economic balance sheets of life and pensions sectors have suffered major collateral damage as a consequence of aggressive monetary policies that has driven long-term interest rates to once-in-a-lifetime lows.
- Oct 2011
- Solvency II Schizophrenia
When it comes to Solvency II, John Hibbert believes that regulators are allowing an extraordinary opportunity to slip away. But, he says, the vision of the whole project may yet be realised if only regulators would grit their teeth and develop a technically sound rulebook instead of just muddling through.
In his article, John Hibbert examines the fundamental tensions of the current Solvency II framework and sheds light on some of its inerent contradictions.
- Oct 2011
- From risk profiling to investment suitability: the building blocks of a best practice investment proposition
Phil Mowbray explores how we can combine the FSA's latest guidance paper with practical experience to inform best practice for retail investment planning.
"While it is important to ensure your attitude to risk assessment questionnaire (ATRQ) meets current standards, the client's attitude to risk is only one input into the selection of a suitable investment, not the solution. Simplifying the problem to changing the design of the ATRQ is likely to have only limited impact on customer outcomes."
- Jul 2011
- A primer in replicating portfolios
New to the idea of replicating portfolios? Adam Koursaris will help you to appreciate and understand what they can do for you
- Jul 2011
- Economic considerations for Property & Casualty Insurers
In this article James Norman sets out to demonstrate the ways in which smart Property & Casualty companies can benefit from viewing investment risk management in combination with their underwriting. This article addresses claims inflation, natural disasters and market catastrophes from the perspective of a holistic investment strategy.
- Jul 2011
- Improving capital approximation using the curve-fitting approach
The second article in the SCR calculation series from Adam Koursaris looks at using a curve -fitting approach to improve capital approximation.
- Jul 2011
- Solvency II Fudges
The process of transforming Solvency II from a set of high-level principles into a workable regulatory system now appear to have resulted in compromises in the emerging methodology. Craig Turnbull discusses.
- Jul 2011
- The advantages of Least Squares Monte Carlo
The third article in our SCR calculation series look at the least-squares Monte Carlo (LSMC) approach and some of its advantages over curve fitting.
- Jul 2011
- Calculating the Solvency Capital Requirement
In the first of his series of articles on SCR calculation, originally published in InsuranceERM, Adam Koursaris highlights some of the issues of covariance matrix methodology as a basis of the Solvency II standard formula.
- Apr 2011
- Building a sustainable retirement plan
Do you have a robust risk management framework in place? Can you combine the available options to achieve the best outcomes for your customers?
- Apr 2011
- How sustainable is your retirement?
This case study utilises a Retirement Planning Dashboard to highlight the key trade-offs in the planning process: income bequest and sustainability.
- Apr 2011
- Building risk management into the governance framework for your DC scheme
The widespread growth of Defined Contribution (DC) as the core retirement savings vehicle for individuals has created many governance and regulatory challenges for employers, fiduciaries and advisors. Not least of which is to help DC members achieve required retirement outcomes in the face of increasing exposure to the risks of longevity, inflation, and volatile markets.
- Sep 2010
- Risk aggregation: generalising dependency in the Barrie & Hibbert ESG
In the first of our Global insurance risk management reports, we describe a relatively straightforward way of changing dependency in Barrie & Hibbert’s ESG. This report looks at how dependency arises in the ESG, in particular how we can change dependency through changing the distribution of the random shocks used to drive the ESG models.
- Sep 2010
- Where is that Elusive 1-Year Tail?
Estimates of the location of the ‘tails’ of the equity returns distribution are now a key part of economic capital assessment work for life insurers. In this note we take a very brief look at some possible approaches to estimation of the 99th percentile tail position and highlight one approach we just donÂ’t like: ‘bootstrapping’ (i.e. sampling) daily price changes or returns from the past empirical distribution to manufacture a distribution of possible 1-year returns.
- Sep 2010
- ‘Smart’ Nested Simulation: Learning from Option Traders
Having developed models for market-consistent valuation of their balance sheets, actuaries are now looking to take these models a stage further, asking the question: how will my balance sheet change as I project forward during the course of a best-estimate stochastic projection?
- Aug 2010
- Solvency II for DB pension funds
Could a suitably adapted Solvency II create a risk-based regulatory framework for DB schemes? Andrew Barrie discusses the issues.
- Aug 2010
- Confessions of an investment banker
Andrew Barrie reflects on a career waiting for the pensions sector to change its ways. Finally, he thinks, we're almost there.
- Aug 2010
- TAS Modelling
Are these Standards a good thing? Our special report looks at the best practice and compliance issues as well as the benefits of adopting the Standards.
- Aug 2010
- Governance for DC pension default funds
Investors, advisers and fiduciaries can use Retirement Risk Metrics as a governance ‘dashboard’ for evaluating and communicating risk across a variety of Default strategies. This report provides an outline example of these metrics, applied to the asset allocation glide-paths associated with some sample default strategies.
- Aug 2010
- Combining investment and insurance… managing the retirement risk paradox
Solutions for meeting the challenge of managing retirement risk -- generating enough income to maintain an acceptable lifestyle in retirement without increasing one’s exposure to the risks of longevity and inflation -- are examined in this report, which looks at the case of a 60 year old approaching retirement
- Aug 2010
- Client-focused investment management: the use of scenario-based modelling
Scenario based models offer a reliable tool for designing investment products that do what they say on the tin. Phil Mowbray discusses the benefits of embedding scenario-based modelling into product design and communication processes.
- Jul 2010
- QIS5 Standard Formula Survey Results
Some areas covered in the text of the Fifth Impact Assessment (QIS5) are open to varying interpretations, leading to debate on a number of issues such as; how to set up the base scenarios; and how the spread tests and illiquidity premium stresses interact. Barrie & Hibbert’s Standard formula Survey invited you to submit your views and to comment on how you intended to approach these issues. We would like to thank all of our clients who took part.
- Jul 2010
- 1-year VaR assessment and dynamic management actions
In this note, an illustrative case study is used to demonstrate the materiality of this effect in the context of dynamic management actions in with-profit business.
- Jul 2010
- Thoughts on QIS5 Yield Curves
This Insight note provides an update and comment on the yield curves offered by the European Commission for the forthcoming Solvency II QIS5 study
- Jul 2010
- Capturing the interest rate risk in MBS investments
Mortgage-Backed Securities (MBS) issued by Freddie Mac, Fannie Mae and Ginnie Mae are common holdings in US insurers’ fixed income portfolios. Over the past few years the annual issues of MBS securities by these three agencies has averaged close to a trillion dollars per year. During the credit boom annual issue of MBS directly by commercial banks became increasingly common, often as complex ‘structured’ Collateralised Mortgage Obligations (CMOs). While commercial CMO annual issues have effectively ground to a halt following the credit crisis, great efforts have been made to keep the agencies operating and providing liquidity within the US mortgage market.
- Jul 2010
- Liquidity premiums and contingent liabilities
This note explores how market-consistent liability valuation methodology can be adjusted to allow for liquidity premiums, and the implications this has for the behaviours of the valuation of different types of liabilities.
- Apr 2010
- Retirement risk metrics for evaluating target date funds: a scenario modelling framework
We present a stochastic modelling framework which can be used to evaluate the key risks in different Target Date funds. This risk framework is applied to a range of the largest US Target Date funds, to illustrate how investors can better understand the different risks in Target Date funds and make more informed decisions as to which fund best suits their own risk profile and financial planning needs.
- Apr 2010
- Quantifying and minimizing the uncertainty in tail estimates
An estimate of capital requirements which is simply based on a single 'best guess' number e.g. "my 99.5% 1-year VaR is £1,000m" provides limited information as it says nothing about the statistical error around this estimate. What if the ESG is run under a different seed and the number changes to £1,100m or £900m? Furthermore, it is an estimate of a single point on the distribution (the 99.5th percentile). What about the 99.9th? Or the 99.5th CVaR? This note outlines a methodology (extreme value theory) for answering these questions.
- Apr 2010
- Making the most of a principle-based system
Globally, risk-management rainmakers have embraced principle-based approaches to risk and capital as a best practice to which we should all aspire. But, as with anything else, the beauty of a principle-based risk measurement system lies in the eye of the beholder. To purists, current practices and future intentions may appear to fall short on some of the fundamentals that differentiate a principle-based risk measurement system from the prescriptive approaches that they replace.
- Apr 2010
- A market consistent valuation for India?
Whilst the basics of market consistent calibration are the same, developing economies present greater challenges for market consistent valuation techniques, since, generally speaking, there is less market information available for the purpose. This Insight Note looks at the methodology of preparing market consistent valuations for India.
- Apr 2010
- Inflation risk for P&C insurers
Any firm with assets or liabilities linked to prices within a particular region or sector will be able to improve its understanding of the risks it faces by explicitly modelling the inflation rates of those prices. This note focuses on the potential divergence of country specific inflation rates in the Eurozone and Medical cost inflation in the US from their aggregated counterparts.
- Apr 2010
- One year calibration and choice of equity model
This Insight note provides guidance on how to make the correct choice of equity model for Solvency II. It illustrates the differences between a constant volatility and SVJD model with a back testing example against actual returns in 2009.
- Apr 2010
- Chinese 50 year bond: how does it perform against extrapolated values?
Extrapolation can have a major impact on the market-consistent value of certain classes of liability and in countries where long-term bonds are unavailable. Issues of bonds at previously untraded maturities provide a test of Barrie & Hibbert's extropolation methods.
- Dec 2009
- A Simple Proxy for Liquidity Premium
In October the CFO Forum revised its MCEV principles to allow the inclusion of the liquidity premium. They do not, however, say anything on how it should be calculated. Given the material impact of any estimate on the solvency position of the balance sheet, this begs the obvious question - how good can such a proxy be? Here we examine this and other questions.
- Dec 2009
- A Measure of the Liquidity of Insurance Liabilities
The aim of this note is to add to the discussion of how an objective, quantitative measure for the liquidity of specific classes of insurance liabilities might be developed, by tentatively putting forward a framework for assessing the predictability of insurance cash flows.
- Dec 2009
- Nested Simulation for Economic Capital
A common definition of an insurer‟s economic capital requirements is based around a 1-year Value at Risk (VaR) metric. This defines capital requirements in terms of some tail percentile (typically the 99.5th percentile) of the market-consistent value of the insurer‟s balance sheet in 1 year‟s time. The problem of estimating such a metric naturally leads to the concept of nested simulation.
- Dec 2009
- Stochastic modelling in wealth management: did we spot a black swan?
This report considers the performance of the Barrie & Hibbert stochastic model from the end of 2007, through the period of equity market turmoil during late-2008. We provide results which demonstrate that the model had indeed assigned a reasonable probability weight to the events of 2008. In addition, we show that the ‘extreme’ events of 2008 had very limited impact on the assumptions within our model, and the associated distribution of asset return outcomes. This suggests that an advisor or wealth manager who had relied on a Barrie & Hibbert stochastic projection immediately before this period of equity market turmoil would have been strongly placed to justify financial planning decisions which had been based on the outputs from the model.
- Dec 2009
- Real-world Modelling for Solvency II SCR Internal Models: ‘Point-in-Time’ v ‘Through-the-Cycle’
In this Insights we discuss the aim of our real-world projection: are we aiming to generate a forward-looking projection relevant to the coming year, or a projection that represents a typical year? This decision can have a significant impact on the size of the SCR and also the viability of any hedging and risk management strategies
- Dec 2009
- Solvency II: Preparing your ESG for Internal Model Approval
- Oct 2009
- Liquidity Premium - Summary of Estimation Methods
This report is concerned with the estimation of liquidity premia embedded in the prices of financial instruments. Our focus is on estimation methods and understanding their practical challenges and sensitivities.
- Sep 2009
- Understanding the ESG requirements for Solvency II
- Sep 2009
- New requirements for principle-based statutory reserving for US Variable Annuity business
- Sep 2009
- Proposed regulatory changes by Monetary Authority Singapore
- Sep 2009
- Liquidity premium: myth or reality?
- Sep 2009
- Investment strategy design for defined contribution pension plans
- Sep 2009
- CP39-42: the key implications
- Sep 2009
- Liquidity Premium - Literature review of theoretical and empirical evidence
The price of liquidity – the liquidity premium – and its variability is currently the subject of enormous interest from accountants, actuaries, financial intermediaries and regulators. The outcome of the debate will have an impact on the future price of certain financial products and, arguably, the cost of finance for firms using the capital markets. The primary purpose of this report is to provide a summary of the main conclusions of researchers, with the objective of refining liquidity premium estimation methods.
- Jun 2009
- Lessons for commodity investors
- May 2009
- Inflation Modelling
- May 2009
- Market-Consistent Valuation: Judging the market
Recent market turmoil has further highlighted the challenge the insurance industry faces when valuing their liabilities. Like the CRO Forum1, we believe the principal of market-consistent valuation is the right basis for this job. Whilst financial economics and mathematical models provide the intellectual technology for market-consistent valuation, its application to insurance liabilities can require significant judgement which must be applied within a good governance structure.
In this note we consider how the need for judgement in the market-consistent valuation process arises and what it means for risk managers.
- May 2009
- Is there a case for a less severe equity stress test following 2008 returns?
- May 2009
- What Just Happened?
Craig Turnbull offers a series of perspectives on the global financial crisis.
- Apr 2009
- ESG Insights - In-house ESG
- Feb 2009
- After the Storm: Market-consistent measures of cost and solvency in 2009
Financial market experience in 2008 could have been taken straight from a global insurance group's Board paper on the "perfect storm stress test". This environment has substantially impaired market-consistent measures of the profitability and capital adequacy of insurance groups. This has prompted some revisions to published guidance and accepted implementation practices for a number of global principle-based market-consistent approaches to the assessment of guarantee costs and capital requirements. This note summarises the 2008 financial market experience, and reviews some of the proposed changes in market-consistent methodologies that have been prompted by it.
- Jan 2009
- Model Insights - Constructing a term structure of unconditional interest rate volatility
- Jan 2009
- Model Insights - The absence of equity diversification in times of stress
- Dec 2008
- Model Insights - Replicating portfolios for economic capital
In this note we demonstrate the use of Replicating Portfolios for calculation of economic capital requirements using a simple illustrative example. This analysis indicates that an apparently good RP (based on a standard goodness-of-fit metric) can result in significant errors in estimated capital requirements. We also indicate how the RP technique can be supplemented with Monte Carlo valuation techniques in order to minimise the approximation errors introduced by the use of RPs alone.
- Dec 2008
- Model Insights - Market-consistent valuation of ultra long-term cash flows
- Dec 2008
- Model Insights - Bond - equity correlation
- Dec 2008
- Model Insights - A clarification of terminology
- Dec 2008
- Capital to do what?
- Dec 2008
- Principles or Prescription?
- Dec 2008
- Model Insights: A clarification of terminology
