Nationale-Nederlanden

Nationale-Nederlanden (NN) provides insurance and pension products to private individuals, small and medium-sized businesses and big corporate clients. This last category includes large employers and other pension funds with a collective premium volume of more than EUR 1 billion per year. The client’s interest is the top priority at NN and the recently introduced ‘deal teams’ aim to act in the client’s best interest. For example, NN enters into a long-term relationship with their clients with unique, joint-client services offered via three labels: Nationale-Nederlanden Corporate Clients (NNCC), AZL and ING Investment Management (IIM). NN also offers customized solutions with innovative products such as eight integrated product propositions. Deal teams from NNCC, AZL and IIM offer these propositions to the client with a focus on transparency and low implementation costs.

Hans Bonsel is chief risk officer (CRO) at NNCC and he explains that the client-specific investments all go into separate deposits. “The client pays a particular premium depending on the risk profile it has chosen. If things go well, the client has something extra at the end of the ride. If things do not go well, NN guarantees the pension payments.”

Material volatility

Although the agreements drawn up with different clients are similar, they usually differ in certain details, providing a solution tailored to each client’s specific situation. The value of this sizable portfolio moves in line with the financial markets. In order to hedge these risks, NN keeps a hedge portfolio of derivatives. Bonsel says: “Until 2008 the market was stable but in the course of that year our profit and loss account became subject to material changeability, also called volatility, because of the guarantees in this portfolio.”

“What we have achieved is tremendous. We are ahead of the pack when it comes to understanding and hedging these kinds of risks.”

Challenges

Because of the extreme fluctuations in value, successful products had a great impact on the result. Bonsel explains that, in 2008, things that had previously been overlooked came to light. “We therefore had two important questions. Firstly, do we understand all the risks in the product optimally? And secondly, if we know the risks, how can we safeguard against those risks and make sure that the volatility remains within the right bandwidth?”

In order to hedge these risks, NN developed a high-priority program which started at the beginning of February 2009. A team was set up with internal experts from various departments at NN, as well as external experts. Bonsel asked Jaap Karelse of Zanders to lead the program. “I was looking for someone who could steer this kind of program and who also had sufficient understanding of the substance of the material. You don’t often find that combination.” In addition to Karelse, three other consultants from Zanders also joined the program.

Detailed analysis

One member of the team was Robbie Rondagh, a risk manager within NNCC. He says: “At first we set about analyzing the product in further detail along with various parties. How are the future money flows expected to run and how do these depend on market conditions? How effective are the hedges and can we improve this strategy? When is what kind of behavior expected from our clients, when will they exercise their rights?” With regard to this last point, it does not help that there is only a limited set of contracts. “With our regular products we have vast quantities of observations to chart out client behavior. That is much less the case with this product but still it is very important to get a grasp of that.”

It was a challenging process. “Time was a factor,” says CRO Bonsel. “Specifying, testing and documenting the models to predict the future development in the contracts takes a lot of time. We had dozens of fast computers, but even with that kind of set-up it can take a week to calculate certain scenarios. To administer the hedges for covering the risks, assistance was called in from colleagues at ING Life Japan, where a similar system for hedge activities had already been implemented. This system was made ready for remote use by NN. Bonsel says: “In the meantime, the financial world kept moving. For example, if interest rates peaked and differences in results arose, we were immediately asked all sorts of questions. It was very beneficial that we could work with Jaap and his colleagues.”

Various adjustments

Another challenge, not to be underestimated, was the international aspect of the project. Bonsel explains: “You have to take into account the time difference, language differences and cultural differences between the Netherlands and Japan.”

According to Robbie Rondagh, the advantage of working with Zanders was that the consultants were able to understand and start work on the project very quickly. He adds: “They are also used to working independently.”

The team accomplished its mission. The analyses and studies resulted in numerous improvements such as adjustments in the quotation process as well as a complete modification of the fund offering, making it easier to hedge the whole and to hedge risks.