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Capital Management in a Volatile Environment

Capital Management in a Volatile Environment. Altaf Rahim, FSA, FCIA, CERA Vice President & Chief Risk Officer AEGON Canada. Agenda. Equity Risk in Products Reactions to Market Volatility Risk Mitigation Pricing Discipline. Equity Risk in Products.

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Capital Management in a Volatile Environment

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  1. Capital Management in a Volatile Environment Altaf Rahim, FSA, FCIA, CERA Vice President & Chief Risk Officer AEGON Canada

  2. Agenda • Equity Risk in Products • Reactions to Market Volatility • Risk Mitigation • Pricing Discipline

  3. Equity Risk in Products • Understand the evolution of investment products and the associated equity risk • Segregated Fund Contracts

  4. Equity Risk in Products • GMWB • Relatively new product in Canada • Significant sales growth • more experience in USA and UK • Longevity risk

  5. Reactions to Market Volatility • USA • Significant product changes in the USA • Increased fees, reduced payout provisions and streamlining benefits • More than 126 substantive VA product changes became effective in May, up from 25 in April and 24 in March • Some companies have exited the VA market • A few companies have entered the market

  6. Reactions to Market Volatility • Canada • Change is slower in Canada • Products may not be as aggressive as USA • Companies may be reviewing products • A few carriers have made some changes to their products • one new entry with more conservative product that is hedged

  7. Risk Mitigation • Product Feature Changes • Lag time from pricing to implementation • How often can you reprice? • Diversification • Product mix • Time diversification • Robust sales • Can be difficult to turn away sales

  8. Risk Mitigation • Reinsurance • Reinsurers not interested in equity risk • Reinsurance costs can be perceived to be high • Hedging • Can be costly during high market volatility • Reflect cost of hedging in pricing • May be difficult to compete versus competitors who have not reflected the cost of hedging or are not hedging • May not be able to reflect hedge in reserves and capital

  9. Risk Mitigation • Hedging Considerations • Requires specific skills and expertise • Operational risks • Model risks • Transaction costs • dynamic hedge programs may require frequent rebalancing • Basis Risk • Correlation of hedging indices and funds • May result in hedge ineffectiveness

  10. Risk Mitigation • Shock testing • Test magnitude of shock as well as the type of shock • DCAT • Shows impact of stress tests and may reveal potential risk mitigation options • Economic capital • Models can show the impact of the worse case scenario • Company risk tolerance • Market risk tolerance limits

  11. Pricing Discipline • Reflect product features that pose material risk • Correlation of the funds offered to hedging indices • Include hedging costs • Potential loss of upside benefit • May not be able to reflect hedge in capital and reserves • Sensitivity testing

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