Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-23T21:22:36.742Z Has data issue: false hasContentIssue false
  • English
  • Français

An executive's handbook for understanding and risk managing unit linked guarantees

Published online by Cambridge University Press:  17 February 2012

J. Maher ,
J. Corrigan ,
A. Bentley  and
W. Diffey
Get access Rights & Permissions [Opens in a new window]

Abstract

The focus of this paper is the identification, and more importantly, sustainable management, of risks embedded in guarantees attaching to unit linked savings and retirement contracts (as commonly referred to as GMxBs). In developing customer centric guarantees that are not readily transferrable to the capital markets, insurance undertakings require the skills and resources to hedge the guarantees within their own balance sheet (or with a temporary use of packaged solutions such as reinsurance). In taking on the guarantee manufacture task insurers are departing from areas of historic competence and need to develop a comprehensive understanding of all elements of market risk replication. These include both first order market exposures as well as the material second order risks associated with market micro structure. The paper seeks to integrate this comprehensive analysis within a practitioner focused framework and concludes with a senior executive summary of “Seven key considerations in successful guarantee manufacture”.

Keywords

Variable AnnuityGuaranteed Maximum Benefit (GMxB)Dynamic HedgingGuarantee ManufactureRisk AssessmentRisk MitigationAsset AccumulationBasis RiskRepoReplicationGreeksReinsurance CollateralTotal Return SwapCaptiveValue at Risk (VaR)Conditional Tail Expectation (CTE).
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 17 , Issue 1 , March 2012 , pp. 71 - 125
Copyright
Copyright © Institute and Faculty of Actuaries 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Boekel, P., Van Delft, L., Hoshino, T., Ino, R., Reynolds, C., Verheugen, H. (2009). Replicating portfolios. An introduction: Analysis and illustrations. Milliman Publications. Available at: http://publications.milliman.com/research/life-rr/pdfs/replicating-portfolios-rr.pdfGoogle Scholar
Corrigan, J., Finkelstein, G. (2008). Operational Manufacturing Activities. Milliman publications.Google Scholar
Corrigan, J., Finkelstein, G. (2009). Implications of Solvency II for Product Development. Milliman publications. Available at: http://publications.milliman.com/research/life-rr/pdfs/implications-solvency-II-product.pdfGoogle Scholar
Eason, S., Diffey, W., Evans, R., Fulcher, P., Wilkins, T. (2010). Does your hedge do exactly what it says on the tin? Hedging Strategies for Insurers: effectiveness in recent conditions and regulatory treatment. Paper presented to the Staple Inn Actuarial Society, available at: http://www.sias.org.uk/siaspapers/listofpapers/view_paper?id=April2010talkGoogle Scholar
European Parliament and the Council of the European Union (2009). Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking up and the pursuit of the business of Insurance and Reinsurance (Solvency II). Official Journal of the European Union. Available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:335:0001:0155:EN:PDFGoogle Scholar
Gatheral, J. (2006). The volatility surface: A practitioner's guide. Wiley Finance. John Wiley & Sons, New Jersey.Google Scholar
Haug, E.G., Taleb, N.N. (2009). Why we have never used the Black-Scholes-Merton option pricing formula Social Science Research Network Working Paper Series available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012075Google Scholar
HMT (2009). The Walker Review of Corporate Governance in UK Banks and other Financial Industry Entities. HMT available at: http://www.hm-treasury.gov.uk/d/walker_review_261109.pdfGoogle Scholar
Hull, J.C. (2008). Options, futures and other derivatives (Seventh edition). Prentice Hall, Upper Saddle River.Google Scholar
Junus, N., Motiwalla, Z. (2009). A Discussion of Actuarial Guideline 43 for Variable Annuities. Milliman Publications. Available at: http://publications.milliman.com/research/life-rr/pdfs/discussion-actuarial-guideline-43-RR04-01-09.pdfGoogle Scholar
Ledlie, M.C., Corry, D.P., Finkelstein, G.S., Ritchie, A.J.,Su, Wilson, D.C.E. (2008). Variable Annuities. British Actuarial Journal, 14(2), 327–430.Google Scholar
Maher, J. (2009). The Vexed Question of Convexity available at: http://www.box.net/shared/v097d48ljyGoogle Scholar
Maher, J. (2010). OTC OPTION Prices for Insurers. Paper presented to the Society of Actuaries in Ireland. Available at: https://web.actuaries.ie/sites/default/files/event/2010/10/OTC%20Option%20Pricing%20For%20Insurers.pdfGoogle Scholar
Piterbarg, V. (2010). Funding beyond discounting: collateral agreements and derivatives pricing. Risk Magazine 3 February 2010. Available at: http://www.risk.net/digital_assets/895/042-048_AR0310_Cuttingedge.pdfGoogle Scholar
Shallis, P., Jones, G., Buckle, I., Hills, M (2009). Variable Annuities: Past, Present and Perfect? Paper presented to the Staple Inn Actuarial Society available at: http://www.sias.org.uk/view_paper?id=VAPastPresentandPerfectGoogle Scholar
Society of Actuaries in Ireland (2009). Response to the discussion paper produced by the Financial Regulator on Capital Requirements for Variable Annuities Available at: https://web.actuaries.ie/sites/default/files/story/2009/12/091215%20SAI_VA_Submission_Final.pdfGoogle Scholar
Taleb, N. (1997). Dynamic hedging: Managing vanilla and exotic options. Wiley Finance.Google Scholar
Varnell, E.M. (2009). Economic Scenario Generators and Solvency II. British Actuarial Journal, 16(1), 121–159.CrossRefGoogle Scholar