Financial Risk Mitigation

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- Discussion Paper -

Financial Risk Mitigation in Insurance - Time for Change

The Chief Risk Officer Forum Risk Mitigation Working Group

Copyright © 2006 Chief Risk Officer Forum

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- Discussion Paper -

Preface The Chief Risk Officer Forum is delighted to be presenting the study “Financial Risk Mitigation in Insurance – Time for Change”. The Chief Risk Officer Forum comprises risk officers of the major European insurance companies and financial conglomerates, and was formed to address the key relevant risk issues for its industry. It is a technical group focused on developing and promoting industry best practices in risk management. The membership comprises: Aegon NV Allianz AG Aviva PLC AXA Group Converium Fortis Generali ING Group Munich Re Prudential plc Swiss Re Winterthur Zurich Fin’l Services Tom Grondin Raj Singh Sue Kean François Robinet Peter Boller Luc Henrard Paul Caprez John Hele Charlie Shamieh Andrew Crossley Christian Mumenthaler Joachim Oechslin Andreas Grünbichler tom.grondin@aegon.com raj.singh@allianz.de sue_kean@aviva.com francois.robinet@axa.com peter.boller@converium.com luc.henrard@fortis.com paul_caprez@generaliglobal.com john.hele@ing.com cshamieh@munichre.com andrew.crossley@prudential.co.uk christian_mumenthaler@swissre.com joachim.oechslin@winterthur.ch andreas.grunbichler@zurich.com

Chief Risk Officer Forum Contact Details: Via E-mail: secretariat@croforum.org chairperson@croforum.org The report demonstrates that the use of derivatives offers insurance companies a more robust and efficient way to hedge market risk exposures, but there are definitive regulatory/accounting obstacles to the full deployment of these strategies, perversely discouraging state of the art risk management practices. With this report the Chief Risk Officer Forum is proposing a set of principles and policies for insurers and their regulators which would encourage financial risk mitigation activities in the sector. The working group which wrote the report comprised representatives of Munich Re (chair), Winterthur and Zurich Financial Services. Special thanks are expressed to the following delegates of the CROs who assisted in compiling the report: Jan Willing (Munich Re), Robert Lempertseder (Munich Re), Daniel Brönnimann (Winterthur), Doug Niemann (Zurich Financial Services), Markus Spillmann (Zurich Financial Services) and Saeid Samiei (Zurich Financial Services). We hope that this study will provide guidance for best practices in risk management, helping to improve risk management culture and facilitate the greater deployment of sound financial risk mitigation strategies in the insurance sector. Chief Risk Officer Forum

Copyright © 2006 Chief Risk Officer Forum

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- Discussion Paper -

Contents
1. Introduction................................................................................................................... 7 1.1. Purpose of this paper ............................................................................................7 1.2. Example to support motivation: interest rate risk in life insurance ......................7 2. Case for change............................................................................................................. 8 2.1. Life insurance policy: Guarantee plus option for more… ....................................8 2.2. Dynamic duration strategy required .....................................................................9 2.3. Hedging strategies using derivative instruments evolved...................................10 2.4. Some regulators give partial incentives for insurers to make use of hedging strategies ...........................................................................12 2.5. Adequate accounting treatment for hedging strategies achievable.....................13 2.6. Some considerations on market capacities for financial risk mitigation...
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