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Transcript of 1 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Session PD-4: The...
1
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
Session PD-4: The New World of Risk Management for Variable Annuities and Segregated Funds
Frank Zhang, CFA, FRM, FSA, MAAA, PRMExecutive Director
VA Financial Risk Management and Hedging Advisory Practice Leader
Ernst & Young LLP, New York
Séance TR-4 : Le nouveau domaine de la gestion du risque pour les rentes variables et les fonds distincts
2
Agenda
• Events since 2008– Capital market disruptions– Segregated fund/variable annuity losses
• New areas of focus– Robust hedging program– Advanced financial modeling– Integrated financial risk management and pricing– Hedging strategy best practices
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
1
3
Capital market disruptions
• What has happened since 2008:– Normality — what’s normal?– Liquidity — what liquidity?– Volatility — what volatility?
• Could this happen again?– Market fall another 50%?
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2
4
Segregated fund and VA losses
• Segregated fund and VA losses:– Capital squeeze from general account investment losses– Tracking errors — what errors?– Marked-to-market losses — short-term or real?– Trading losses — buy high and sell low?
• Effectiveness of risk management:– Hedged and unhedged– Market and actuarial– Is it clear who is responsible for everything?
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
3
5
• Events since 2008– Capital market disruptions– Segregated fund/VA losses
• New areas of focus– Robust hedging program– Advanced financial modeling– Integrated financial risk management and pricing– Hedging strategy best practices
Agenda20
09 S
emin
ar f
or t
he A
ppoi
nted
Act
uary
Col
loqu
e po
ur l’
actu
aire
dés
igné
200
920
09 S
emin
ar f
or t
he A
ppoi
nted
Act
uary
Col
loqu
e po
ur l’
actu
aire
dés
igné
200
9
4
6
New areas of focus
• Robust hedging program• Advanced financial modeling• Integrated financial risk management and
pricing• Hedging strategy best practices
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
5
7
Robust hedging program
• Gold standard operation/process controls and risk management framework:
– Banks versus insurers
• Hedging performance is now a critical component of a company’s financials:
– New Board-level concerns– Is your program (or product) too complex for the CEO
to understand?
• Robust hedging P/L performance attribution:– Know why, so problem areas can be fixed
• Reporting and transparency2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
6
8
Advanced financial modeling
• Gold standard modeling tools• Continued improvements in research• Principles-based valuations/reporting• Nested stochastic simulations• Watch out for garbage in/garbage out
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
7
9
Integrated risk management and pricing
• Gold standard pricing methodology• Start with the fundamental — pricing• Focus on underlying funds first• Integrate capital market inputs in pricing• Apply robust risk management techniques
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
2009
Sem
inar
for
the
App
oint
ed A
ctua
ryC
ollo
que
pour
l’ac
tuai
re d
ésig
né 2
009
8
10
Hedging strategy best practices
• Gold standard of risk management strategies– Greeks based versus the new mix of new metrics
• Determine trade-offs between: – Earnings volatility and capital optimization– Marked-to-market P/L (forward-looking implied or expected
volatility) and trading P/L (realized volatility)
• Identify implied risky bets• Link pricing with hedging• Know your options:
– Before you need them– When things are normal20
09 S
emin
ar f
or t
he A
ppoi
nted
Act
uary
Col
loqu
e po
ur l’
actu
aire
dés
igné
200
920
09 S
emin
ar f
or t
he A
ppoi
nted
Act
uary
Col
loqu
e po
ur l’
actu
aire
dés
igné
200
9
9