@rupeshtatiya, thank you for mentioning quite a few pertinent points.
Let me try to address these below:
Interest rate risk
Interest rate is a key risk for life insurers. However, this risk is more pronounced in non-par savings (life, annuity, pension - wherever there is an absolute guarantee) as compared to other product categories.
- Unit linked is a fee income based product and does not offer any guarantee.
- Par savings offers a base guarantee with the opportunity of upside through regular bonuses. Now, this is similar to variable interest rate products as the bonuses can be adjusted every year in line with yields
- Protection carries some interest rate risk but is not as significant as non-par savings.
So, for non-par the key risk mitigation strategies include duration matching, cashflow matching, natural hedges within other product lines (eg: credit life or annuity), derivatives and partially paid bonds. Insurers do have robust ALM frameworks to manage this risk though it’s difficult to eliminate as complete cashflow matching may not be practically possible.
Perspective on risk
The way I would look at risk is as follows:
- Understand the sources of earnings for life insurers. Since each source is based on assumptions which flow in to cashflows, there is a risk that experience will be adverse compared to expectations.
- Understand the impact of divergence in experience for each source on the cashflows (will put up a post on this later)
- Track year-on-year variance to get to the trends and then evaluate performance
Risk framework
This would include financial and operational risk aspects, some key ones have been mentioned by you. The framework needs to be simple and derived from publicly available information to make it work. Let me give this a thought and come back.