Putting strategic growth plans under the analytical microscope

Moody’s LifeRisks™ platform and services accelerate a top-20 global life insurer’s strategic growth initiatives

Key takeaways

• Validation of economic capital model and establishment of own view of risk
• Better understanding of risk with full stochastic and deterministic analysis
• New detailed breakdown of standalone and diversified risk capital
• Decision-making and shareholder value enhanced through analyzing key metrics such as risk-adjusted return on capital under different growth strategies
• Flexible, open, customizable SaaS-based software platform ready for future initiatives
• Zero hardware and upgrade management required
   

The challenge — understanding the impact of strategic growth plans on overall risk profile

A top-20 global life insurer operating its own internal economic capital models wanted to analyze the effect its strategic growth plan in the bulk annuities market had on its overall risk profile. The client was looking to acquire large books of annuities and wanted to assess the interaction between longevity risk and existing mortality risk to understand the net effect for a range of stochastic and real-world scenarios.

Longevity risk requires the carrier to hold significant capital against the book. The client wanted to understand the net effect of offsetting annuities business against the life insurance book to ensure it had sufficient capital but not more than necessary.

To evaluate the financial viability of its strategic growth plan, the insurer required an independent view of its economic capital position in various scenarios. The aim was to increase shareholder comfort from the perspective of both risk appetite and a risk-adjusted return on capital.
 

The solution — Moody’s LifeRisks: complete turnkey solution with consulting services

Moody’s LifeRisks is a cloud-based software platform that delivers models and data that help users perform portfolio-specific analytics for managing longevity and extreme mortality risks.

Moody’s conducted an in-depth analysis of the client’s economic capital position using our LifeRisks models:

• Moody’s RMS™ Longevity Risk Model — analyzes trend risk and offset between multicountry life and annuity books
• Moody’s RMS Excess Mortality Model — analyzes excess mortality risk associated with life and annuity books, including all modeled perils (infectious disease, earthquake, terrorism, and others), to calculate potential diversification between books and countries and to highlight potential group life accumulations

Having established the risk profile and economic capital position of the current business, Moody's then validated the client's own models using our LifeRisks platform. In addition, we carried out a sensitivity analysis to better understand the models and demonstrate robustness of the results. We conducted portfolio-specific parameterization of the models to refine modeling and risk metrics.

The LifeRisks holistic mortality solutions helped the client understand the impact on its risk profile and risk-adjusted return on capital (RAROC), promoting better risk selection and therefore better shareholder outcomes.

The outcome — creating shareholder value and enhancing enterprise risk management

Moody’s LifeRisks provided the client with a detailed breakdown of the risk capital associated with each book of business on a standalone basis, which could be compared with the amount of capital it was holding using its existing models. We also showed the client the total offset between its annuities and life businesses using a range of deterministic and stochastic scenarios, indicating any correlations between portfolios. These were provided under both run-off and business-growth scenarios for the future cash flow of the business.

Real-world deterministic scenarios provided stakeholders with an understanding of the balance-sheet impact of planned strategic growth within the bulk annuity space. The stochastic results informed the optimal level of capital growth required to maximize shareholders’ RAROC.

The probabilistic modeling approach provides a realistic feel to a stochastic outcome, which is more effective for understanding the drivers associated with future 1-in-200-year scenarios, while helping illustrate for shareholders why pursuing a particular growth strategy makes sense from a risk-return perspective.

The in-depth analysis of the insurer’s book of business led to the adoption and implementation of Moody’s LifeRisks. The client achieved a better understanding of the current and possible future risk profile of the business and the viability of key growth strategies.

With this consulting project, the insurer benefited from a more bespoke and portfolio-specific view of risk and Moody’s expertise. In addition, going forward, the solution will be embedded in the client’s enterprise risk management framework.