alm / market risk working group
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ALM / Market Risk Working Group. AA Meeting September 2008. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008. Scope of work Investigation of impact of several different capital methodologies on simple product designs - PowerPoint PPT PresentationTRANSCRIPT
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
ALM / Market Risk Working Group
AA MeetingSeptember 2008
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Scope of work
• Investigation of impact of several different capital
methodologies on simple product designs
• Risk free interest rate ALM risk analysed so far
• Equity risk to be covered in next stage (including
segregated funds)
• May move on to look at
• credit spread risk
• real estate price risk
• inflation risk
• FX risk
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Summary of products investigated
• GIC – short / medium / long strategies
• Payout annuity – dynamic / static strategies
• Universal Life – complex product
• T100 – long term ALM risk (focus of following slides)
• Renewable Term – best estimate vs Padded cashflows
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Methodologies tested
• One year projection period
• Real world terminal provision at various CTE levels
• Risk neutral terminal provision
• Term-to–maturity
• MCCSR
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
One year projection period
Stochastic calculation of terminal value
t = 0
t = 1
t = maturity
Real world scenarios
Terminal Provision scenarios
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Risk neutral terminal provision
(simple product)
t = 1
t = 0
t = maturity
Real world scenarios
Deterministic projection – discount along yield
curve
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Example of Yield Curve Extension for
1-Yr Risk NeutralSpot discount rates
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
3-mo 6-mo 1-yr 2-yr 3-yr 5-yr 7-yr 10-yr 20-yr 30-yr 40-yr 50-yr 60-yr
377-Spot
377-Fwd
550-Spot
550-Fwd
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2) The remaining 30-yr bond will be
sold & reinvested in a new 30-yr bond
1) Part of the 30-yr bond is allowed to
age to back liab CFs
Principles-based risk reduction strategyMaturity Values @ Dec 31, 2006 Maturity Values @ Dec 31, 2007
Maturity
Assets Liab
2007 -$150 -$150
2008 -$90 -$90
… … …
2035 $1,633 $1,633
2036 $1,638 $1,638
$13,752
2037 $1,633
… … …
2065 $5
2066 $2
Maturity
Assets Liab
2008 -$90 -$90
… … …
2035 $1,633 $1,633
2036 $1,638 $1,638
2037 $1,633 $1,633
$12,725
2038 $1,616
… … …
2065 $5
2066 $2
This process repeats for the next 30 years until all liab CFs are eventually matched
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Results (BE Liab = CTE0 of Runoff)• Capital is expressed as (TBSR – Best Estimate liability) / Best
estimate liability
Time Horizon
Terminal Provision
CTE Level
Perfect Match
CFM up to 30yr (FWD)
CFM up to 30yr (Spot)
Run Time (812
Policies)
1 year RW - CTE50
99 0.0% 1.5% 1.5% 18 hrs / 8 processors
1 year RW - CTE80
99 0.0% 2.0% 2.0% 18 hrs / 8 processors
1 year RN 99 0.0% 13.5% 9.5% 15 hrs / 1 processor
Run-off N/A 95 0.0% 1.9% 1.9% 15 hrs / 1 processor
MCCSR regime* N/A 4.5% 5.9% 5.9%
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Alternative strategy (TBSR)
• Alternative strategy assumes that cashflows in years 31+ are matched by 1-year bonds
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Distribution of real world interest rates• The ESG assumes the long term interest rates mean revert to
7.27%
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Comparison between strategies (TBSR)
• The TBSR of the alternative reinvestment strategy is higher in all approaches under the new ESG, reflecting the higher risk inherent in the strategy
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
2008
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
008
Findings so far
• Investment strategies can be complex to model• Risk neutral approach may be difficult to apply when
markets are not liquid• Results sensitive to yield curve extension
methodology• More work still needed to set risk margins
methodology• Calibration of ESG is critical to a modelled capital
methodology