Zurich's Tom Rogers on the group's risk-based asset model

Tom Rogers, Zurich Insurance Group’s head of strategy implementation, talks to Michael Faulkner about the insurer’s risk-based approach to asset allocation

Insurance Risk: What is the role of the investment strategy implementation team?

Tom Rogers: Zurich has separated the investment management side of things from the insurance business. Our role is to take the liabilities being generated [by the insurance operations] and optimise the risk-adjusted returns, subject to the restrictions we have in place on the capital side and how much risk we can take.

We have a strategy development group that runs quant models and asset-liability management analysis and takes care of the systems support. With the help of their models, and in conjunction with the chief investment officer, we determine what the group’s strategic asset allocation should be. My role is to implement that strategy. This is [focused on] local balance sheets around the world. The job is to make sure that from the bottom up it [the asset allocation] looks like what we want it to be from the top down.

IR: What is the group’s asset mix and to what level of granularity can you view the positions?

TR: Our asset mix is diversified, primarily fixed income. We do take some credit risk in our fixed-income portfolio so there is some corporate credit – financial, non-financial, covered bonds and so on – in the portfolio. We have an allocation to public equities, a small amount in private equities, some exposure to hedge funds and a little exposure to real estate.

We have a global investment data warehouse that shows us all of the positions around the world, so we can slice and dice that any way we like. We can look down into any individual country and sometimes get into the product line in each country.

We haven’t done a lot of global aggregation across product lines as they are not quite the same. With-profits [policies] in Germany are not exactly the same as universal life in the US, although they have many similarities. But we can drill pretty far down into the businesses from the central team at Zurich.

Where we do segregate business lines, it would be on the life side. This would be done largely where it is required by the regulation or where the business thinks the products should be segregated – for example, the annuity book, deferred annuities, universal life. We segregate it out where it supports the business. From a practical point of view, I have never heard of policyholders complaining about where the dollars came from to pay their claims, so it is really the aggregate of the global position that matters the most in terms of how we can make sure our obligations to policyholders are met.

On the general insurance side, we don’t break it down by product line nearly
as much as on the life side, as the focus is in aggregate whether we have enough assets to cover the liabilities with a degree of certainty.
 
IR: How does Zurich determine the optimal allocation of assets?

TR: The measure of success is the total return of the assets relative to liabilities. We track that over time and attempt to measure that using the best proxy of the liabilities that we can. The models we use for strategic asset allocation focus on the risk factors: equity market risk, interest rate risk, credit risk. There are also liquidity and inflation factors in the model. It is a risk-factor driven model.

We map the liabilities into those risk factors and work with our actuarial team to get the optimal allocation of investments, the net position essentially, of assets versus liabilities. We then work on how we achieve that allocation to the risk factors with the various asset classes that are available.

So for Treasury bonds, that’s an interest rate risk factor, for public equity it’s the equity factor, and that’s all. But when I get to high-yield bond, I have elements of interest rate risk, credit risk and equity risk at the deep end of the high-yield bond market. So I have to take all of those into account and my allocation to a high-yield bond would reflect all of those.

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Zurich's Tom Rogers on the group's risk-based asset model

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