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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
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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

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