• PINS S2 PINS S2 Balance sheet and market risk

    • PINS S2.1 What is balance sheet and market risk?

      Balance sheet and market risk includes:

      (a) investment risk;
      (b) asset-liability management risk;
      (c) liquidity risk; and
      (d) derivatives risk.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.2 What is investment risk?

      (1) Investment risk is the risk of an adverse movement in the value of an insurer's assets, including off-balance-sheet exposures.
      (2) Investment risk includes:
      (a) equity risk;
      (b) interest rate risk;
      (c) foreign exchange risk;
      (d) credit risk; and
      (e) investment concentration risk.
      (3) Because of the nature of insurance business, there is a close relationship between investment risk and asset-liability management risk.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.3 Risk management policy — investment risk

      (1) An insurer's risk management policy for investment risk should include:
      (a) the insurer's investment objective;
      (b) formulation of an investment strategy, including allowable asset classes, strategic asset allocation, asset allocation ranges, benchmarks, risk limits and target currency exposures and ranges;
      (c) a process for how individual asset classes will be managed, including which of those tasks will be done internally and which will be outsourced to investment managers;
      (d) the responsibilities of individuals and committees within the insurer (such as the investment committee and the asset-liability committee) for deciding and implementing the investment strategy, and for monitoring and controlling investment risk, including reporting lines, decision-making powers and delegations;
      (e) a process for the selection of qualified and competent investment managers;
      (f) limits and other restrictions on the actions of investment managers, whether internal or outsourced, and the means by which compliance with those limits are monitored;
      (g) modelling and stress-testing of the effect of the current and alternative investment strategies on financial outcomes and asset-liability management;
      (h) processes for:
      (i) ensuring the continuing appropriateness of the investment strategy, including the timing and nature of strategy reviews;
      (ii) ensuring the continuing appropriateness of the investment implementation process, including the timing and nature of reviews of investment managers and the manager configuration;
      (iii) monitoring compliance with the investment strategy; and
      (iv) making contingency plans to mitigate the effects of deteriorating investment conditions;
      (i) the segregation of duties; and
      (j) performance monitoring and its role in the oversight and control of the investment process.
      (2) For paragraph (1) (b), the investment strategy should be formulated taking account of the investment objective, the insurer's capital position, the term and currency profile of its expected liabilities, liquidity requirements and the expected returns, volatilities and correlations of asset classes.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.4 What is asset-liability management risk?

      (1) Asset-liability management risk is the risk of an adverse movement in the relative values of assets and liabilities of an insurer due to changes in general market factors, such as interest rates, inflation and, if relevant, foreign exchange rates.
      (2) The expected payment profile of an insurer's liability portfolios is a crucial part of asset-liability management, because it determines the exposure of the portfolios' value to interest rates. Property business, such as household insurance, is typically short-term. Liability business, such as public liability, is typically long-term. The interest rate sensitivity of assets and liabilities is broadly determined by the timing of cash flows, although that will not always be the case (for example, in the case of floating-rate notes or options).
      (3) Assets and liabilities are well managed if their changes in value in response to market movements are highly correlated. If assets and liabilities are not well managed, the possibility of a reduction in asset value that is not offset by a reduction in liability value, or an increase in liability value that is not offset by an increase in asset value, becomes significant.
      (4) Because of the nature of insurance business, there is a close relationship between investment risk and asset-liability management risk.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.5 Risk management policy — asset-liability management risk

      An insurer's risk management policy for investment risk should include details about how:

      (a) the insurer's investment and liability strategies allow interaction between assets and liabilities;
      (b) the correlations between assets and liabilities are taken into account;
      (c) cash outflows to policyholders and other creditors will be met by cash inflows; and
      (d) the valuations of assets and liabilities will change under an appropriate range of scenarios.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.6 What is liquidity risk?

      (1) Liquidity risk is the risk of the insurer not having sufficient cash or liquid assets to meet its cash outflows to policyholders and other creditors as they fall due.
      (2) The nature of insurance activities means that the timing and amount of cash outflows are uncertain. This uncertainty may affect the ability of an insurer to meet its obligations to policyholders or require an insurer to incur additional costs through, for example, raising additional funds at a premium on the market or through the sale of assets.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.7 Risk management policy — liquidity risk

      An insurer's risk management policy for liquidity risk should include:

      (a) consideration of the level of mismatch between expected asset and liability cash flows under normal and stressed operating conditions;
      (b) the liquidity and realisability of assets;
      (c) commitments to meet insurance and other liabilities;
      (d) the uncertainty of the incidence, timing and magnitude of insurance liabilities;
      (e) the level of liquid assets required to be held by the insurer; and
      (f) other sources of funding, including reinsurance, borrowing capacity, lines of credit and intra-group funding.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.8 What is derivatives risk?

      Derivatives risk is the risk from transactions in derivative instruments such as forwards, futures, swaps, options, contracts for differences and other similar instruments.

      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • PINS S2.9 Risk management policy — derivatives risk

      An insurer's risk management policy for derivatives risk should include:

      (a) the insurer's objectives and policies in using derivatives;
      (b) a framework with limits on the use of derivatives consistent with the insurer's risk tolerance;
      (c) appropriate lines of authority and responsibility for transacting derivatives, including trading limits;
      (d) consideration of worst-case scenarios and sensitivity analysis; and
      (e) a process for reporting of scenarios and analysis.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).