Integrated risk management for the entire range of assets
UNIQA has been using SimCorp Dimension for asset management since 2004. SimCorp Dimension replaced a number of legacy applications and harmonized the IT landscape across Europe, making it possible for all capital assets to be included in the market risk calculations across the company.
The low-interest challenge
In 2011, UNIQA launched ‘UNIQA 2.0,’ a long-term growth strategy program designed to concentrate on profitable growth in UNIQA’s core business as a direct insurer. UNIQA 2.0 introduced various new tactics and strategies in order to mitigate the challenges presented by a persistent low-interest environment. This included implementing a sustainable approach for asset liability management, taking into account the particular sensitivities of a structured portfolio containing capital assets compared to the underwriting liabilities. In addition, UNIQA 2.0 looks intensively at UNIQA’s product strategy and profitability control in the framework of a risk-return approach.
Because of the risk-return trade-off, it is imperative to be aware of the risk tolerance when selecting investments. Taking on some risk is the price of achieving returns; therefore, in order to increase returns, it is impossible to eliminate all risk. The goal instead is to find an appropriate balance and to manage the risk effectively.
Growing relevance of structured products
In recent years, the markets for structured products and exotic derivatives have experienced tremendous growth in both size and variety. Traditional and new asset classes are used in innovative ways to create instruments tailored for specific investment objectives. While this represents new investment opportunities, it also poses new operational challenges and risks.
Structured financial products are characterized by a combination of several basic financial products, which are different in terms of price sensitivity and risk profile, making them more complex in terms of pricing and management. The diversity and quantity of structured products on the market make it even more difficult to gain an overall overview.
In low-interest periods, excellent risk-return profiles make structured financial products increasingly attractive for institutional investors, despite the narrow regulatory limits set by law for the insurance industry.
With XpressInstruments we are able to effectively mitigate the operational risk of managing our portfolios of structured products.
Increasing need to take action
The composition and complexity of UNIQA’s structured portfolio make it unique in Austria. Previously, UNIQA had evaluated these structured products using a legacy solution based on a third-party pricing add-on and imported prices on a weekly basis over to SimCorp Dimension. With risk management outsourced, information about interest rate sensitivities failed to reach SimCorp Dimension, making it impossible to effectively, or efficiently manage risk across the entire portfolio.
The decision for SimCorp’s XpressInstruments
XpressInstruments allows firms to rapidly add system support for complex and non-standardized instruments in a seamless environment.
XpressInstruments dramatically speeds up time-to-market, automates the handling of instruments, and reduces overall operational risk. Instruments once managed in spreadsheets or on in-house developed systems can be handled in SimCorp Dimension alongside standard exchange-traded and OTC products. This single framework system enables access to portfolio overview tools in one seamless front-to-back state-of-the-art system. XpressInstruments is able to manage the complexity of the insurer’s structured portfolio, while reducing the time taken to introduce structured products and exotic instruments to the system. And since XpressInstruments utilizes SimCorp Dimension’s core database, there is no need to re-key data or to consolidate or reconcile information between disparate internal systems.
An entirely integrated solution across all kinds of asset classes also offers the possibility for risk management and the calculation of solvency capital, whereas an isolated calculation fails to take correct account of the diversification. The only alternative would have been to continue the external calculation of prices and sensitivities and to import them to SimCorp Dimension, a timely and risk-prone procedure.
Time-to-market for complex products
SimCorp’s fully integrated XpressInstruments solution was developed to offer swift system support for complex, non-standardized financial products without having to take account of the regular update cycles entailed in conventional software development. XpressInstruments now allows UNIQA to manage structured products in one consistent investment management system across the whole value chain, from pricing and risk management through to settlement, together with plain-vanilla instruments. This brings about a huge reduction in operational risk compared to conventional solutions, such as the use of homegrown Excel spreadsheets.
Altogether, about 30 different product types were identified as being suitable for the project. For each of these product types, a corresponding template was created.
We were really impressed by the great commitment shown by the SimCorp staff during the roll-out of the system.
XpressInstruments characterizes the main attributes of these products in a discrete programming language. For UNIQA’s current holdings, SimCorp was able to program and customize new templates so that UNIQA could then test the templates accordingly. Since autumn 2012, work has been in progress on migrating the more than 65 existing structures in live operation, including the constantly updated market data for evaluation together with the entire history, including write-offs.
As an ongoing operation, there is still a constant influx of new structured products. In most cases, these can be integrated by UNIQA itself by adapting existing templates.
The ongoing issue: Solvency II
Implementing the new solvency regulations is a challenge for every insurance company. However, utilizing SimCorp Dimension provides an excellent basis as the system already contains much of the required data. In addition, market risk calculations are available at all times and amendments to regulations can be implemented simply. Market risk can only be calculated comprehensively by taking a consistent, day-by-day view across all capital assets in the company, including the structured products being utilized, and UNIQA is able to utilize SimCorp Dimension to calculate the Solvency Capital Requirement (SCR), one of the set points for equity capital. As with other parts of SimCorp Dimension, help and support is always available for XpressInstruments.
Well equipped for the future
XpressInstruments has proven indispensable for UNIQA’s structured portfolio and for integrated risk management. The capacity for depicting random structures is highly flexible and very swift.
XpressInstruments helps us to measure and to control the capital requirements for complex financial products sustainably.
Thanks to XpressInstruments, the management, pricing, and risk measurement of all strategically important asset classes is taking place within one common, flexible system – SimCorp Dimension – allowing for swift and consistent reaction throughout the entire range of assets. Integrated risk management is now equally possible for complex products, thus reducing the capital requirements while improving the possibilities of market and credit risk management. The market for structured products stands out by being highly dynamic with a constant range of new structures with novel characteristics.
However, thanks to XpressInstruments, UNIQA now feels well equipped to cope at any time with the new challenges.
Headquarters: Vienna, Austria
AUM: EUR 29.42 billion (end of 2015)
The UNIQA Group is one of the leading insurance groups in its core markets of Austria and Central and Eastern Europe (CEE). The group has approximately 40 companies in 19 countries and serves more than 10 million customers. UNIQA and Raiffeisen Versicherung are the two strongest insurance brands in Austria and are well positioned in the CEE Markets. UNIQA is an all-category insurer and supports its customers in every possible circumstance.
Read how SimCorp’s XpressInstruments facilitates integrated risk management, supports complex products, and enhances market and credit risk management at UNIQA.