Investment Guarantee Product Risk Management

Transcription

1 Investment Guarantee Product Risk Management John Nicholls All rights reserved. A licence to publish is granted to the Institute of Actuaries of Australia.

2 Contents 1. Investment Guarantee Products 2. Risks 3. Risk Management 4. Capital Considerations

3 Investment Guarantee Building Blocks Guaranteed Minimum Death Benefit (GMDB) Guaranteed Minimum Guaranteed Minimum Income Benefit (GMIB) Guaranteed Minimum Accumulation Benefit (GMAB) Standard Feature Investment funds Guaranteed Minimum Withdrawal Benefit (GMWB)

4 US: AXA Financial/MONY Accumulator Main Benefits Description Current Charges Basic GMDB Return of contribution Included as standard Enhanced GMDB Greater of annual ratchet or roll-up (0%, 3%, 6%, 6.5%) GMAB Return of 100% or 125% of principal after 10 years 25 to 85 bps 50 or 75 bps GMIB GMWB Guaranteed roll-up of 6% or 6.5% and guaranteed lifetime annuity rates Guaranteed lifetime withdrawals subject to an annual maximum, with or without an annual ratchet, single or joint life 65 or 80 bps 65 to 95 bps Limited benefit combinations are permitted, particularly GMIB with enhanced GMDB with same roll-up rate The base guarantee level for the GMWB increases 7% per annum for each of the first 10 years where no withdrawal is made, continuing to the time of first withdrawal if no withdrawals are made within the first 10 years 76 investment funds

5 Japan: Tokio Marine and Nichido Financial Life Three-in-One Main Benefits Description GMDB Fund exceeds target level Fund exceeds contribution but not target level Fund less than contribution (GMAB/GMIB) Return of contribution, with additional 30% of contribution in case of accidental death Fund value as immediate lump sum or as deferred annuity certain at current rates (at any time after policy year 3) Fund value as lump sum or as immediate annuity certain at current rates Greater of fund value or 90% of single premium, as either a lump sum or a 15-year immediate annuity certain, with a minimum annuity payment of 1/15 th of the single premium Target level from 110% to 200% of contribution selected at outset but may be altered No investment choice Fixed charge structure, including allowance for the guarantee

6 Europe: Aegon 5 for Life Main Benefits Description Current Charges GMIB GMDB GMAB 5% of initial contribution for life, ratchet every three years if taking income, otherwise annual ratchet Greater of initial contribution or 100.1% of cash value Guarantee of 100% of initial contribution after 10 years 50 to 150 bps Fixed benefit structure 55 investment funds

7 Australia: AXA North Main Benefits Description Current Charges GMAB Return of contributions, with annual ratchet 70 to 245 bps GMDB/GMWB Account value plus percentage of excess of protected balance over the account value Fixed structure, with choice of guarantee period (10, 15 or 20 years) Over 40 investment funds with the protection option, but must select from one of three investment strategies Superannuation and pension product Product offered by N.M. Super, with guarantee provided by NMFM

8 Product observations Small number of building blocks but significant variation Generally charges are not guaranteed, but may be subject to maximum Investment restrictions

9 Contents 1. Investment Guarantee Products 2. Risks 3. Risk Management 4. Capital Considerations

10 Risk Total Risk Market Risks Credit Risks Insurance Risks Operational Risks Yield Curve Spreads Mortality People Equity Loans Longevity Processes Property Counterparty Disability Pricing FX Concentration Catastrophe Systems Volatility Basis Withdrawal External Events Liquidity Expense Concentration Basis

11 Guarantee Product Risks Total Risk Market Risks Credit Risks Insurance Risks Operational Risks Yield Curve Spreads Mortality People Equity Loans Longevity Processes Property Counterparty Disability Pricing FX Concentration Catastrophe Systems Volatility Basis Withdrawal External Events Liquidity Expense Concentration Basis

12 Contents 1. Investment Guarantee Products 2. Risks 3. Risk Management 4. Capital Considerations

13 Stay Naked Purchase Static Protection Financial Risk Management Internal Dynamic Hedging Outsource the Hedging Outsource the Guarantee Reinsure Not recommended for companies that wish to participate in this market in the long term Investment banks could tailor protection to the particular needs of an investment guarantee provider Regular (daily) monitoring of the hedge position against pre-defined limits Outsource the hedging process to a specialist Use an investment bank to provide the investment guarantee May be a viable way of transferring any unwanted risk Hold Capital Cover residual risk or risk that cannot be hedged Source: Brennan, Nicholls and Roberts (2007)

14 Financial Risk Management Understand the risk divested and retained Stochastic analysis Stress analysis Capital Value

15 Financial Risks Financial Risk Analysis Yield Curve Equity Property FX Volatility Liquidity Basis Counterparty Actuaries are accustomed to dealing with these elements Traditional analysis often does not consider these

16 Operational Risks Operational Risks People Processes Pricing Systems External Events People risks are not unique to guarantee products New area with more limited knowledge Backup support Training, training tools, documentation Outsourcing Reinsurance

17 Operational Risks Operational Risks People Processes Pricing Systems External Events New processes and systems may be required Timely (e.g. rebalance hedge before final unit prices are available) Accurate and robust Checks and balances Assigned responsibility Deal with both known and unusual events

18 Operational Risks Operational Risks People Processes Pricing Systems External Events Assumptions No local experience for new product Data from overseas to be used with caution Sensitivity analysis Consistent with actual product conditions Alternative product features

19 Contents 1. Investment Guarantee Products 2. Risks 3. Risk Management 4. Capital Considerations

20 Example Product Analysis GMAB single premium of $100,000 5 year term guarantee return of 0% annual ratchet 75% equity/25% fixed interest total asset based charges of 4.1% per annum (2.8% without ratchet) no taxes considered Hedge delta, rho and vega Stress analysis 25% fall in asset values yield curve fall of 200 basis points 250 basis point increase in volatility withdrawals at 50% of base level

21 GMAB Stress Analysis Combined Stress - Delta, Vega, Rho Hedged 12.0% 10.0% Capital as % of Account Value 8.0% 6.0% 4.0% 2.0% 0.0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Policy Duration Moneyness (Account Value/Guarantee) 0.5

22 GMAB Stress Analysis Price Stress - Delta Hedged 10.0% 8.0% Capital as % of Account Value 6.0% 4.0% 2.0% 0.0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Policy Duration Moneyness (Account Value/Guarantee) 0.5

23 GMAB Stress Analysis Yield Stress - Rho Hedged 10.0% 8.0% Capital as % of Account Value 6.0% 4.0% 2.0% 0.0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Policy Duration Moneyness (Account Value/Guarantee) 0.5

24 GMAB Stress Analysis Volatility Stress - Vega Hedged 10.0% 8.0% Capital as % of Account Value 6.0% 4.0% 2.0% 0.0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Policy Duration Moneyness (Account Value/Guarantee) 0.5

25 GMAB Stress Analysis Lapse Stress - No Hedge 10.0% 8.0% Capital as % of Account Value 6.0% 4.0% 2.0% 0.0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Policy Duration Moneyness (Account Value/Guarantee) 0.5

26 GMAB Stress Analysis Combined Stress - Delta, Vega, Rho Hedged 12.0% 10.0% Capital as % of Account Value 8.0% 6.0% 4.0% 2.0% 0.0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Policy Duration Moneyness (Account Value/Guarantee) 0.5

27 GMAB Stress Analysis Combined Stress - Delta, Vega, Rho Hedged - No Ratchet 12.0% 10.0% Capital as % of Account Value 8.0% 6.0% 4.0% 2.0% 0.0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% Policy Duration Moneyness (Account Value/Guarantee) 0.5

28 GMAB Stress Analysis Combined Stress - Delta, Vega, Rho Hedged Combined Stress - Delta, Vega, Rho Hedged - No Ratchet 12.0% 12.0% 10.0% 10.0% Capital as % of Account Value 8.0% 6.0% 4.0% Capital as % of Account Value 8.0% 6.0% 4.0% 2.0% 2.0% Policy 0.0% Duration 50% 60% % 80% 90% 100% 110% 120% 130% 140% 150% Policy 0.0% Duration 50% 60% % 80% 90% 100% 110% 120% 130% 140% 150% Moneyness (Account Value/Guarantee) 0.5 Moneyness (Account Value/Guarantee) 0.5

29 GMAB Stochastic Analysis Account Value Distribution (Per Policy Issued) 140, , ,000 Account Value 80,000 60,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 40,000 20, Policy Duration

30 GMAB Stochastic Analysis Capital Distribution (Per Policy Issued) 10,000 9,000 8,000 7,000 Capital Level 6,000 5,000 4,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 3,000 2,000 1, Policy Duration

31 GMAB Stochastic Analysis Capital Ratio Distribution 10.0% 9.0% 8.0% 7.0% Capital Ratio 6.0% 5.0% 4.0% 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 3.0% 2.0% 1.0% 0.0% Policy Duration

32 GMAB Stochastic Analysis Account Value Distribution (Per Policy Issued) - Without Ratchet 140, , ,000 Account Value 80,000 60,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 40,000 20, Policy Duration

33 GMAB Stochastic Analysis Capital Distribution (Per Policy Issued) - GMAB Without Ratchet 10,000 9,000 8,000 7,000 Capital Level 6,000 5,000 4,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 3,000 2,000 1, Policy Duration

34 GMAB Stochastic Analysis Capital Ratio Distribution - Without Ratchet 10.0% 9.0% 8.0% 7.0% Capital Ratio 6.0% 5.0% 4.0% 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 3.0% 2.0% 1.0% 0.0% Policy Duration

35 GMAB Stochastic Analysis Account Value Distribution (Per Policy Issued) Account Value Distribution (Per Policy Issued) - Without Ratchet 140, , , , , ,000 Account Value 80,000 60,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile Account Value 80,000 60,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 40,000 40,000 20,000 20, Policy Duration Policy Duration

36 GMAB Stochastic Analysis Capital Distribution (Per Policy Issued) Capital Distribution (Per Policy Issued) - GMAB Without Ratchet 10,000 10,000 9,000 9,000 8,000 8,000 7,000 7,000 Capital Level 6,000 5,000 4,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile Capital Level 6,000 5,000 4,000 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 3,000 3,000 2,000 2,000 1,000 1, Policy Duration Policy Duration

37 GMAB Stochastic Analysis Capital Ratio Distribution Capital Ratio Distribution - Without Ratchet 10.0% 10.0% 9.0% 9.0% 8.0% 8.0% 7.0% 7.0% Capital Ratio 6.0% 5.0% 4.0% 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile Capital Ratio 6.0% 5.0% 4.0% 75th-95th Percentile 50th-75th Percentile 25th-50th Percentile 5th-25th Percentile 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% % Policy Duration Policy Duration

38 Economic Capital Model Risk Measure Definition Time Horizon Risk Measure Risk Appetite Risks Covered Risk Factors and Choice of Model (Stoch. vs Stress) Impact Measure Risk Bearing Value Aggregation Dependence Structure