The LTGA was intended to assess the impact of suitable ways that adjustments to the discount rate curve could be made to further the discussion on rules for inclusion in the Solvency ll directive.
However, the assessment has also highlighted practical issues when firms came to apply the rules including difficulties of interpretation in respect of certain products (e.g. UK style with-profits). This, coupled with the short timelines, has meant that companies have taken a variety of approaches, making a like-for-like comparison between companies potentially difficult.
While there is still much to be discussed, there are some indications as to what the final rules could be in key areas. These clarifications, coupled with changes in the pricing of derivative contracts in the markets, demonstrate that companies should start to assess their investment strategies and their product design.
- Capital management teams should be following the results of this assessment to assess the implications for future investment and hedging strategies – in particular, with interest rate swaps typically priced on an OIS curve, what action should be taken to minimize the potential basis risk?
- Companies will also need to be considering policy documentation and new product design to ensure that policy conditions do not restrict them from applying the matching adjustment.
How can KPMG help
KPMG professionals help insurance firms design their capital management framework, investigate potential future asset and hedging strategies and design the most capital efficient products. We can bring external expertise from across the insurance industry, coupled with investment specialists to help clients.
If you would like further information on any of the items covered in the Long-Term Guarantee Assessment please contact us at email@example.com.