iCPPI / Micro-CPPI Solutions

CPPI Overview

CPPI (“Constant Proportion Portfolio Insurance”[1]) is a risk management trading strategy that determines a portfolio’s allocation between two pools of assets: risky (or growth) asset(s) that are intended to provide the returns and risk-free (or protection) asset(s) that are intended to provide some level of pre-defined capital protection.

In rising markets, the asset allocation mechanism (which is typically algorithmic and fully deterministic) is designed to either i) maintain maximum permitted exposure to the growth asset(s) or ii) increase exposure to the growth asset(s) where the maximum permitted exposure has not been reached.

In falling markets, the asset allocation mechanism will allocate more to the protection assets and in extreme markets will allocate 100% of the portfolio assets to the protection assets.

In managing the portfolio assets in this manner, the CPPI asset allocation mechanism aims (but does not guarantee) to provide returns via the growth assets subject to meeting the pre-defined capital protection constraints.

A variation on the regular CPPI strategy is TIPP (“Time-Invariant Portfolio Protection”). Rather than providing protection at a distant point in the future, TIPP solutions typically provide a certain level of protection next day (always less than 100% and typically one of 70%, 80%, 85% or 90%), allowing one to structure open-ended solutions where the value of the portfolio is protected from falling below say 80% of its highest value achieved since inception.

Intro to iCPPI, Micro-CPPI & iTIPP

The concept of CPPI is not new and has been used by market practitioners since the 1980’s. However, what is still in its infancy is iCPPI (“individualised CPPI”), also commonly referred to as Micro-CPPI, or in certain cases, iTIPP (“individualised TIPP”).

iCPPI employs the exact same mechanisms as CPPI but rather than applying this to a pooled set of assets (i.e. many policyholders invested in the same CPPI fund), it applies this at the individual policyholder level (hence “individualised” or “micro”) thereby allowing a Life Insurance company to provide protected / guaranteed solutions fully tailored to the individual policyholder. Furthermore, the market risk associated with providing such guarantees can be precisely and fully hedged out to a 3rd party (typically an Investment Bank with iCPPI capabilities) leaving the Life Company with the residual actuarial risk that it is best positioned to manage.

This concept is incredibly powerful and allows Life Insurance companies to develop a range of guaranteed propositions specifically tailored to the individual policyholder across the full spectrum of Savings & Investment products, pre-retirement and post-retirement solutions. iCPPI remains a new, emerging concept that will likely be a force of disruptive change within the Life Insurance market across global markets.

Perhaps not surprisingly then, the means to implement such iCPPI solutions are non-trivial and present considerable operational and technological challenges to Life Companies more accustomed to their technology platform being well in the background rather than centre of stage in a typical iCPPI implementation.

At Investment Solutions, we comfortably position ourselves as the market leading experts in the implementation of iCPPI / Micro-CPPI / iTIPP projects when taking into account the full suite of skills necessary to ensure a successful implementation.

For further information on this topic, please refer to our iCPPI Insights page under the Resources tab.

Please use our Business Enquiries form on our Contact us page should you wish to discuss a potential iCPPI / Micro-CPPI / iTIPP project implementation.

[1] Refer to https://en.wikipedia.org/wiki/Constant_proportion_portfolio_insurance