Description: A discussion of methods used to determine the liability of segregated fund or separate account investment guarantees.

Description: John Shuttleworth explains why our exam syllabus needs updated and shares examples of inconsistencies in the material and actual financial economics. Edward Friend responds to this article.

Description: Explains the method used to calculate Liquidity Cost Score and Price Impact Score. Describes the rationale for and applications of these methods.

Description: The article focuses on the need to develop a strategy for investing surplus resulting from the buildup of significant excess capital. The author discusses three principles on which a company can base its surplus investment strategy, including the risk/return preference of the client, attribution of surplus to the products and an investment strategy based on all company risks.

Description: The author uses a generalized asset risk model to explore C1 risk, drawing heavily from investment theory and pension fund management, applying these to an insurance general account. This article has two parts the first part, contained in this issue of Risk and Reward, describes the basic C1 model itself. The second part, which will be published in the next issue of Risks and Rewards, discusses various implications of the basic C1 model, especially related to managing the company’s investment portfolio.

Description: The author refers to a separate article in this edition of Risks and Rewards, in which Babbel, Gold and Merrill provide an excellent exposition of three approaches to present-valuing a series of risky cash flows and provide several insights into the way modern finance theory deals with risk. The purpose of this article is to bring these insights to the world of insurance risks and view them in relation to existing actuarial techniques. The author also discusses direct discounting and the actuarial appraisal method and their consistency.

Description: The author notes that “current market value is highly relevant, but its accuracy is limited. Historical accounting, on the other hand, is highly accurate, but is of little relevance.” The article then goes on to discuss two leading methods for performing fair valuation of liabilities: the actuarial appraisal method and the option pricing method, and how they can be reconciled.

Description: This article focuses on one fundamental modeling assumption — the choice of a benchmark rate or risk-free rate. The author looks at this bond market assumption as a case study of how one needs to monitor fundamental market changes for their impact on assumptions.

Description: This article explores the effectiveness of hedging delta and rho of equity options. This provides insight into the frequency and severity of losses due to not hedging volatility risk or other higher order risks. 10yr-equity put option strategies were chosen to represent the risk of hedging guaranteed benefits attached to variable annuities, while 1-yr put and call strategies were modeled to investigate the risk of hedging equity index interest credited to fixed indexed annuities. In both cases, the value of the option was compared to the value of delta/rho hedges in the tail of both actual historical and simulated scenarios for equity returns and volatilities. The historical path of interest rates and equities was generally used to highlight the hedge impact for different implied volatility assumptions in each example.

Description: Recaps the evolution of VA products and hedging programs. Reflects on strategic considerations that contributed to relative performance in this market.