Description: Target volatility, as an investment strategy, has been used by many funds not only as a way to smooth return but also as a way to manage risks of the VA guarantees. Contrary to existing research which favors volatility targeting over fixed allocation, this article shows that because of the existence of market jump risk, target volatility strategy does not necessarily offer an improved risk profile for VA writers. Further, target volatility coupled with leveraging can significantly increase tail risk for insurance companies.

Description: This paper demonstrates that extreme value theory (EVT) can be used as a tool to model policyholder behavior in the extreme tail. This paper applies EVT to the study of variable annuity dynamic lapse behavior in the extreme tail. It illustrates a process whereby a company can fully model policyholder behavior, including the extreme tail, with existing data. No judgment about the extremal behavior is necessary.

Description: Building on the Part 1 article, Introduction to the Representative Scenarios Method, this article describes testing the methodology with respect to four product types, fixed indexed annuities with GLIBs, level term life insurance, universal life with secondary guarantees, and variable annuities with GLWBs. This Part 2 article describes testing results, refinements to the RSM methodology, and next steps.

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