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Course 2021-2022 a.y.

20636 - ALM FOR LIFE INSURANCE AND LONG TERM INVESTING

Department of Finance

Course taught in English

Go to class group/s: 31

DES-ESS (6 credits - I sem. - OP  |  SECS-P/11)
Course Director:
GIUSEPPE CORVINO

Classes: 31 (I sem.)
Instructors:
Class 31: GIUSEPPE CORVINO


Suggested background knowledge

While there are no formal prerequisites to attend the course, it is recommended to possess a basic knowledge of descriptive and inferential statistics (e.g. correlation, variance-covariance matrices , main statistical distributions,...), investments (bond duration and convexity, capital asset pricing model,...), derivatives (characteristics of forward contracts, options, swaps, ...), risk management in banking, portfolio construction.


Mission & Content Summary
MISSION

Asset and Liability Management (“ALM”) is an essential component of the management of any financial institution that invests financial resources to meet its future cash flow and capital requirement needs. The importance of ALM to life insurers and long-term investors – such as pension funds – results from their liability driven business model, with assets purchased and managed to match, in a risk/return efficient manner, the estimated future cash flows; which may be uncertain for various reasons such as financial market conditions (rates, credit spreads, equities, FX, inflation, liquidity), client behavior and demographic trends. The course deals with ALM and its primary objective is to introduce students who wish to pursue a career in the insurance sector, asset management, investment banking and capital markets to the financial profiles typical of life insurance companies and long-term investors such as pension funds. The Course mainly addresses investment topics and has a strong practical orientation, aimed at maintaining constant attention to the operational implications of each topic. Classroom exercises, case studies, PC simulations and lectures from primary financial institutions professionals assure the connection between theory and practice.

CONTENT SUMMARY

The course explains how to determine, formalize, implement and monitor a long term Strategic Asset allocatio (SAA) wich includes private markets investments from an ALM standpoint, about the size and the form of the following:

  • identification of client's investment objective and constraints
    • targets (e.g. the overall portfolio IRR)
    • constraints (e.g. SCR, B/S loss,  probability of not having sufficient liquidity to comply with the subscribed Commitments)
    • ​​​​​​​time horizon (e.g. consistent with the liabilities)
  • definition of the investable universe (asset classes and vehicles, e.g.  secondaries)
  • construction of a robust database (e.g. internal sources and data providers), for risk and return based on available information on illiquid strategies, manager experience and liquid proxies. 
  • modeling of the cash management strategy
  • modeling of the vehicles’ cash flows using individual strategy profiles and parameters.
  • projection of markets, cash management strategy, cash flows for central scenarios and sensitivity analysis of input assumptions
  • definition of the final SAA at least in terms of:
    • weight and characteristics of each traditional asset class 
    • commitment to be given to each alternative fund over time
    • portfolio in which to invest the uncalled committed capital (not necessarily different from that referred to in point a.)
    • cash management strategy or overall portfolio adjustment over time towards the efficient frontier
    • expected return / book yield
    • risk profile over time and metrics for monitoring
    • capital budgeting
  • implementation and ongoing monitoring 
    • hedging implementation
    • vehicle structuring
    • capital and regualtory implications
    • liquidity management

Intended Learning Outcomes (ILO)
KNOWLEDGE AND UNDERSTANDING
At the end of the course student will be able to...
  • Explain why life insurance companies and long term investors are different from other institutional investors - from a portfolio management standpoint.
  • Describe the life insurance and long term investor business model, relevant investment strategies, ALM models, metrics and regulation.
  • Determine, formalize, implement and monitor the SAA while investing in private markets

 

APPLYING KNOWLEDGE AND UNDERSTANDING
At the end of the course student will be able to...
  • Analyze the liability structure of life insurances and long term investors and to identify the best investment strategy in terms of asset classes, Strategic Asset Allocation, investment strategy, and monitoring.
  • Assess liability driven investment strategies.
  • Deal with the relevant ALM value/risk models and metrics.

Teaching methods
  • Face-to-face lectures
  • Guest speaker's talks (in class or in distance)
  • Exercises (exercises, database, software etc.)
  • Case studies /Incidents (traditional, online)
  • Group assignments
  • Interactive class activities (role playing, business game, simulation, online forum, instant polls)
DETAILS
  • Guest lectures include flectures by senior managers (e.g. chief investment officers, heads of asset and liability management…) of leading life insurance companies, pension funds and other long term investors.
  • Case studies are mainly based on discussions of equity analysts’ reports about listed life insurance companies.
  • PC simulations are aimed at making student making practical exercises in investment strategies definition and risk monitoring.

Assessment methods
  Continuous assessment Partial exams General exam
  • Written individual exam (traditional/online)
  •     x
  • Group assignment (report, exercise, presentation, project work etc.)
  •     x
  • Active class participation (virtual, attendance)
  •     x
    ATTENDING STUDENTS

    The group assignments are teamworks that can obtain a grade up to 1 point each.  The final exam comprises open ended questions and can obtain up to 30 points. Students are allowed to tap into any kind of tool (notes, readings, internet, ...) in order to deliver the requested tasks. The point of both group assignement and final exam is to assess the student's ability to recognize basic knoledge and concetps regarding the  intended learn outcomes of the course ad well as the ability to "connect the dots" by resolving the requested tasks. The assignments will be evaluated trough the ability to summarize and communicate concisely the results of the work completed as well as the ability to speak in public. 

    NOT ATTENDING STUDENTS

    Non-attending students are evaluated only through the final written exam, that comprises open ended questions. The point of the  final exam is to assess the student's ability to recognize basic knoledge and concetps regarding the  intended learn outcomes of the course. 


    Teaching materials
    ATTENDING STUDENTS

    The teaching materials are composed of:

    • notes taken during the lessons
    • slides prepared by the instructors and guest speakers
    • A. BELTRATTI, G. CORVINO, Why are insurance companies different? The limits of convergence among financial institutions, in Geneva Papers on Risk and Insurance: Issues and Practice, volume 33, Issue 3, July 2008.
    • G. CORVINO, Asset allocation and private markets: the need for a cash management, April 2020, https://www.researchgate.net/publication/340886960_Asset_allocation_and_private_markets_the_need_for_a_cash_management_strategy 

    • G. CORVINO, With Profit Products, June 2017

    • MILLIMAN, Solvency II in a nutshell, November 2014

     

     

    NOT ATTENDING STUDENTS

    The teaching materials are composed of:

    • A. BELTRATTI, G. CORVINO, Why are insurance companies different? The limits of convergence among financial institutions, in Geneva Papers on Risk and Insurance: Issues and Practice, volume 33, Issue 3, July 2008.
    • G. CORVINO, Asset allocation and private markets: the need for a cash management, April 2020, https://www.researchgate.net/publication/340886960_Asset_allocation_and_private_markets_the_need_for_a_cash_management_strategy 

    • CFO FORUM, Market Consistent Embedded Value Principles, April 2016 – first 20 pages

    • ERNST & YOUNG, Fair value measurement, July 2019 – from page 108 to 110

    • G. CORVINO, With Profit Products, June 2017

    • MILLIMAN, Solvency II in a nutshell, November 2014

    • MORGAN STANLEY, Insurance Primer, several years – first 16 pages

    • UBS, Insurance primer, January 2009 – first 22 pages

    • slides prepared by the instructors 
    Last change 08/10/2021 12:26