Pacific Life will use Algorithmics’ market risk system, Algo Risk, for managing the market risk of its asset portfolio, and will use the vendor’s portfolio replication and optimization capabilities to calculate enterprisewide economic capital across its asset and liability portfolios.
Jane Hsu, VP, Pacific Life, says: “Our objective is to allocate our capital as efficiently as possible across our business and to reduce the time it takes us to report enterprisewide economic capital figures. Having this technology will also put us at an advantage when Solvency II is adopted in the United States”
The methodology of portfolio replication enables insurers to create a proxy portfolio of standard capital market products to replicate the scenario-dependent payoffs generated by the company's existing liability projection systems. Portfolio replication enables insurers to calculate their economic and regulatory capital numbers—on a market-consistent basis —faster, more transparently and accurately across the enterprise than existing methods, the companies say.
Under Solvency II, with the regulator's approval, the replicating portfolios also can be used as part of an internal model.
