Legal & General Retirement America's chief risk officer (CRO) Carl Groth explains the pension risk transfer (PRT) provider's strategy for long-tail risks and operational challenges. He also considers the need for efficient deal execution
How is Legal & General Retirement America approaching long-tail risks like longevity and interest rate volatility, particularly considering recent market swings?
For longevity risk, one of the things we do that underpins the development of our pricing models is to devote considerable resources to the science of mortality. For example, we study the uptake and impact of new drugs, such as semaglutides, and trends in various forms of disease across demographic groups.
This effort helps us to calibrate longevity trend factors used in our pricing, as well as providing insights to our longevity model. We use a multifactor model to predict longevity and update the model regularly. The size of our PRT back book is considerable and this approach enables us to back-test actual results against pricing assumptions and make any necessary adjustments.
Management of interest rates is primarily done through ALM-matching asset duration or cash flows to the liability asset duration or cash flow, depending on the size of the business and the regulatory requirements. ALM matching starts with the PRT pricing portfolio in the bidding process, so out of the gate, we are comfortable that we have a significant degree of insulation to rate volatility. We also have opportunities to fine-tune ALM in the back book. Additionally, we run sensitivities and stresses to get comfortable with the ability to stay reasonably matched as rates change over time.
In an increasingly digitised ecosystem, how are you thinking about operational risks, particularly cyber threats, that could disrupt the PRT chain?
An increasingly digitised ecosystem is a double-edged sword. While digitisation creates opportunities to improve customer service to annuitants and deferred lives, it creates opportunities for threat actors to take advantage of opportunities to commit cyber crimes.
There are also unique risks during the process of developing digital applications. While these "transformation" risks are not directly cyber-related, building new applications using new technology can be challenging. These risks are top of mind, and we continue to invest in our information security control environment, IT transformation control processes, and related oversight activities to manage the risk within our appetite.
As new tools, and partners enter the PRT space, where do you see the most friction between the push for innovation and the discipline of risk management?
I see increased investment in private credit and increased use of funded reinsurance as two areas of innovation and potential complexity that, while affording benefits through the value chain (plan sponsors, insurers, reinsurers and investment managers), there are risks involved.
In other words, innovation and creativity often come with additional risk. From my perspective, such innovation is a natural evolution of the PRT market, and the risks that come with it continue to make the risk management discipline interesting. Companies need to be aware of this and drive responsible innovation that creates sustainable value for market participants.
How do you balance efficient deal execution with rigorous risk oversight in today's fast-moving PRT market?
For the most part, we are all cost-conscious and need to find ways to make deal execution more efficient through the deal lifecycle. There are many activities that are played out during this lifecycle, such as the RFP review, decisions on which deals to bid on, the pricing and bidding process, trade ahead authorities, hedging, investing (sourcing private credit), onboarding new business, and administering annuitants and deferred lives.
Each part of this lifecycle involves a different functional area that is responsible for identifying opportunities to gain efficiency. Additionally, these opportunities can involve integrated coordination across two or more functions. Often, opportunities to gain efficiency involve automation of some kind. Consequently, solutions that drive more efficient deal execution can be both complex and opaque. These characteristics require second-line oversight to ensure the appropriate solution development process (testing, sign offs, etc.) as well as back-testing to ensure outcomes are consistent with expectations.
Looking ahead, what slow-moving or underappreciated risks are you watching most closely?
Longevity risk can be seen as a slow-moving risk, although it is certainly not underappreciated. I covered how we watch and manage that risk in an earlier question. Perhaps an underappreciated slow-moving risk is people risk in terms of burnout or feelings of disenfranchisement. As companies try to do "more with less" and face an ever-changing landscape, this risk can manifest unexpectedly through the loss of high performers. At LGRA, we place a high priority on our culture and behaviors and make time available on a regular basis to give recognition to our employees for their various contributions.