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Institutional Investment - April 26, 2011

Insurance companies in Europe are facing great challenges - an interview with Pascal Duval

In this month's interview, we talk to Pascal Duval, executive managing director of Russell Investments for Europe, the Middle East and Africa (EMEA) region, about the background to the new Russell Investments research chair at EDHEC-Risk Institute on Solvency II Benchmarks. In the interview, Pascal discusses the purpose and methodology of the benchmarks and the reasons behind the partnership with EDHEC-Risk Institute.

Pascal Duval

It was recently announced that EDHEC-Risk Institute would be designing a series of Solvency II benchmarks in cooperation with Russell Investments. Could you tell us something about this project from Russell's perspective?

Pascal Duval: Yes, the aim of the research partnership with EDHEC-Risk Institute is to create a set of 12 solvency benchmarks which is able to replicate dynamic asset allocation strategies to optimise capital consumption. These benchmarks will be very attractive and cost effective, in particular for small and mid-sized insurers who can use them as a reference for a partial internal model to calculate solvency capital.

Insurance companies in Europe (both life and non-life), are facing great challenges: new risks must be managed (eg. counterparty, liquidity risk), the quest for higher returns in a low interest rate environment is tough, and, most importantly, new regulation on solvency capital (Solvency II) is fundamentally changing the investment practices of insurance companies. These new regulations will be effective on January 1st, 2013.

Solvency II will require insurers to pursue capital-sensitive asset allocation (eg. using LDI, hedging overlays) and also make it more attractive for them to outsource alpha to fiduciary-like asset managers.

Could you give us more information on the background to the Solvency II benchmarks EDHEC-Risk Institute will be developing?

Pascal Duval: Solvency II is the risk-based regulation for European insurance companies. The Solvency II framework is severe on investment in equities - the consumption of capital makes the investment in equities very costly. The fall in global equity has been set to 30% for the global index and to 40% for other equities such as alternative assets. This is referred to as the standard formula. Solvency II, however, allows or sometimes favours departures from the standard formula. The standard formula can be adapted to use undertaking-specific parameters, mainly for company-specific liabilities and possibly for some alternative assets. Then, the standard formula can be supplemented with partial internal models, where the aim is to have better modelling and better risk management practices within one risk-type.

EDHEC-Risk will construct benchmarks that are representative of a dynamic allocation strategy between bonds and equities providing a confidence level above 99.5% and maximal consumption of capital (non-aggregated SCR consumption). These benchmarks are based on dynamic core-satellite techniques. This kind of approach allows investors to respect a maximum drawdown or maximum loss limit for specific horizons. If the techniques are properly documented and implemented in a systematic manner by investment firms, they can be recognised as investments in equity with low capital consumption for insurance companies.

What is the purpose and the methodology behind these benchmarks?

Pascal Duval: The purpose of the benchmarks is to enable all small- or medium-sized European insurance companies which do not have a full internal risk mitigation model to be able to avail of an objective academic reference in order to manage the risk of their equity investments.

The methodology is a two-step process: first, to design an optimal allocation strategy, and second, to integrate the regulatory requirements in order to achieve risk-controlled investing. The result will focus on long-term investment objectives while respecting short-term constraints to maximise the equity exposure. The dynamic asset allocation will dynamically adjust the equity exposure to limit the downside but keep the upside potential.

Why are Russell Investments and EDHEC-Risk Institute partnering on this initiative?

Pascal Duval: EDHEC-Risk Institute is the leading risk and asset management research centre in Europe. Its philosophy is to carry out research that is relevant for business and applicable in practice, so this is obviously attractive to Russell. EDHEC-Risk has carried out research on the Solvency II directive and its consequences for the industry for several years, with notably the publication in 2006 of a major research study entitled "The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies." EDHEC-Risk's partnership with Russell on this initiative corresponds to an association with one of the top investment industry players in the world in order to provide comprehensive investment solutions for institutional investors.

About Pascal Duval

Pascal Duval is executive managing director of Russell Investments for Europe, the Middle East and Africa (EMEA) region, based in London. Since he joined Russell in 1994, Pascal has held various positions in Europe. He has been head of partnerships and distribution alliances business in EMEA, which included responsibility for development of new strategic relationships across the region, such as Russell’s multi-manager fund programmes for the U.K. with the Lloyds TSB/Scottish Widows Group, Italy with ARCA SGR Spa, France with the Société Générale Group and Israel with Bank Hapoalim. Pascal plays a key role in raising Russell’s profile in the marketplace and is a frequent speaker at investment conferences and seminars. Pascal is a member of Russell’s global leadership forum.

Prior, Pascal was managing director and head of Russell’s institutional investors business in the EMEA region.

Before moving to London in 2001, Pascal was based in Russell’s Paris office, as managing director of the French office. Prior to this he was director of Russell’s consulting and analytical services operations in France. He was responsible for developing those lines of business, including the ongoing development of client relationships.

Prior to Russell, Pascal worked for Wyatt Paris from 1989 to 1994 as a consultant in the company’s newly created asset consulting department. He was involved in the development of the business and performed asset allocation work, money manager searches, performance attribution and other major asset-related projects. He spent one year with Eurospet Associés, an organization and information systems consulting firm, where he consulted with financial services companies.

From 1985 to 1988, Pascal worked as a commodity trader on physical and futures markets for Riz et Denrées, an international commodity trading company.