Page 81 - Risk Management in current scenario

1. Keeping the margins in the interest rate at the time of pricing. For
example when the interest rates were high at say 8%, the pricing
interest rate could be taken as 6.5% as long term interest rate
assumption,this will help the company in managing the assets and
liability mismatch even when the interest rate falls below 6.5%
because extra return have been earned during the time when the
return were 8% and the pricing interest rate was 6.5%. These extra
return will come handy when interest rates falls below 6.5%.
2. Keep guarantees low: The level of guarantees can be reduced or
limiting the tenure of the product which will limit the exposure to
limited term.
3. Move to other products such as Par, Linked or Protection: To reduce
the interest rate risk and keeping guarantees lows is to sell more of
participating business where guarantees build over the period of time
limiting the interest rate risk. Similarly, in the unit linked product, the
assets investment is in underlying assets, so ALM mismatch risk is
very low. Similarly, under the protection products, there is a no
maturity guarantees and only death benefits are paid, leaving
negligible risk of assets and liabilities mismatch.
4. Use derivatives, if allowed. Interest rate derivatives may be used to
hedge the interest rate risk to the extent allowed by the regulators.
5. Monitor the emerging economic situation and withdraw the product
in advance rather than waiting for interest rates to fall further
6. Perform regular SST exercise in advance to see the warning singles:
The scenario and stress testing helps in looking into the adverse
economic scenarios leading to stressful results on interest rate and
how does the assets and liabilities will behave if those situation occur
in reality. The company need to identify the management actions for
such scenarios so that they are not caught on the wrong foot, if those
adverse event occurs.

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