Description: Competition for space in distribution channels has resulted in a proliferation of exotic options embedded in variable annuity products. This article discusses how this has created a need which can be addressed, in part, by hedging variable annuity guarantees with long-dated equity derivatives.

Description: In December 2007, Goldman Sachs launched a product called QxX index swap, which is designed to allow market participants to hedge or gain exposure to longevity and mortality risks. This presentation offers a quantitative analysis of this brand new financial innovation. First of all, the presentation sets up a risk-neutral framework to price QxX index swaps. This framework, which is based on the dynamics of death rates under a two-factor stochastic mortality model in a risk-adjusted probability measure, yields prices [spreads] that are fairly close to the spreads that Goldman Sachs currently offers. The presentation then explores the uncertainty involved in this model-based pricing framework. Specifically, it studies parameter risk by using Markov Chain Monte Carlo [MCMC] and model risk by examining structural changes in mortality dynamics. The results indicate that both model risk and parameter risk are significant. Actuaries should therefore be aware of these issues when placing a value on a longevity index swap.

Description: Presentation from the Actuarial Research Conference describing risk management at a leading Canadian Bank.

Description: Discusses taxation of derivatives, as changed for some types under Dodd-Frank and not changed for others.

Description: As equity markets decline and become more volatile, the likelihood of significant guaranteed benefit claims increases, while increases from mortality and expense fees declines. The article illustrates how to use a derivative contract, a properly structured total return swap, to turn a company's uncertain M&E revenue patterns into predictable revenue.

Description: This presentation discusses a technique to reduce the bias from using Monte Carlo simulation to value American options.

Description: What is the impact of aging populations on economic growth and interest rates?” “Are low interest rates and inflation a short-term phenomenon?” “How will returns from different asset classes be impacted by future demographic trends?” “What are the differences between different countries and regions around the world?”

Description: Introduction to option pricing, with special attention to issues in applying these tools to price equity-linked insurance products. Clear, accessible explanation of key results of mathematical finance including risk-neutral valuation.

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: Proposes alternatives for estimating the long term interest returns in Indexed Universal Life products. Defends expected return of 20%-45% on hedge budgets.