Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-10T10:52:04.830Z Has data issue: false hasContentIssue false
  • English
  • Français

Asset Allocation to Optimise Life Insurance Annuity Firm Economic Capital and Risk Adjusted Performance

Published online by Cambridge University Press:  10 May 2011

Bruce T. Porteous  and
Pradip Tapadar
Bruce T. Porteous
Affiliation:
Head of Solvency 2 and Regulatory Development, Standard Life UK Financial Services, 30 Lothian Road, Edinburgh, EH1 2DH, U.K. Email: bruce_porteous@standardlife.com
Get access Rights & Permissions [Opens in a new window]

Abstract

The impact that asset allocation has on the economic capital and the risk adjusted performance of financial services firms is considered in this article. A stochastic modelling approach is used in conjunction with a life insurance annuity firm illustrative example. It is shown that traditional solvency driven deterministic approaches to financial services firm asset allocation can yield sub optimal results in terms of minimising economic capital or maximising risk adjusted performance. Our results challenge the conventional wisdom that the assets backing life insurance annuities and financial services firm capital should be invested in low risk, bond type, assets. Implications for firms, customers, capital providers and regulators are discussed.

Keywords

Economic CapitalFinancial Services FirmsRisk Adjusted PerformanceStochastic Models
Type
Papers
Information
Annals of Actuarial Science , Volume 3 , Issue 1-2 , September 2008 , pp. 187 - 214
Copyright
Copyright © Institute and Faculty of Actuaries 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Dev, A. (2004). Economic capital: a practitioner guide. Risk Books, London.Google Scholar
Lauritzen, S. (1996). Graphical models. Clarendon Press, Oxford.CrossRefGoogle Scholar
Matten, C. (2000). Managing bank capital — capital allocation and performance measurement. Wiley.Google Scholar
Porteous, B.T., McCulloch, L. & Tapadar, P. (2003). An approach to economic capital for financial services firms. Risk Magazine, April, 28–31.Google Scholar
Porteous, B.T. (2004). Economic capital for life insurance with profits long term business funds. Journal of Risk, 6, 1–26.CrossRefGoogle Scholar
Porteous, B.T. (2005). The “benefits” of smoothing. Life and Pensions Magazine, August/September, 42–48.Google Scholar
Porteous, B.T. & Tapadar, P. (2005). Economic capital and financial risk management for financial services firms and conglomerates. Palgrave MacMillan.Google Scholar
Porteous, B.T. & Tapadar, P. (2008). The impact of capital structure on economic capital and risk adjusted performance. Astin Bulletin, 38(1), 341–380.CrossRefGoogle Scholar
Willets, R.C., Gallop, A.P., Leandro, P.A., Lu, J.L.C., MacDonald, A.S., Miller, K.A., Richards, S.J., Robjohns, N., Ryan, J.P. & Waters, H.R. (2004). Longevity in the 21st century. BritishActuarialJournal, 10, 685–832.Google Scholar