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ALM / Market Risk Working Group - PowerPoint PPT Presentation

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ALM / Market Risk Working Group

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  1. ALM / Market Risk Working Group AA Meeting September 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008

  2. Scope of work • Investigation of impact of several different capital methodologies on simple product designs • Risk free interest rate ALM risk analysed so far • Equity risk to be covered in next stage (including segregated funds) • May move on to look at • credit spread risk • real estate price risk • inflation risk • FX risk

  3. Summary of products investigated • GIC – short / medium / long strategies • Payout annuity – dynamic / static strategies • Universal Life – complex product • T100 – long term ALM risk (focus of following slides) • Renewable Term – best estimate vs Padded cashflows

  4. Methodologies tested • One year projection period • Real world terminal provision at various CTE levels • Risk neutral terminal provision • Term-to–maturity • MCCSR

  5. Terminal Provision scenarios Stochastic calculation of terminal value t = 0 Real world scenarios t = 1 t = maturity • One year projection period

  6. Deterministic projection – discount along yield curve Risk neutral terminal provision (simple product) t = 0 Real world scenarios t = 1 t = maturity

  7. Example of Yield Curve Extension for 1-Yr Risk Neutral

  8. 1) Part of the 30-yr bond is allowed to age to back liab CFs • Principles-based risk reduction strategy • Maturity Values @ Dec 31, 2006 Maturity Values @ Dec 31, 2007 2) The remaining 30-yr bond will be sold & reinvested in a new 30-yr bond This process repeats for the next 30 years until all liab CFs are eventually matched

  9. Results (BE Liab = CTE0 of Runoff) • Capital is expressed as (TBSR – Best Estimate liability) / Best estimate liability

  10. Alternative strategy (TBSR) • Alternative strategy assumes that cashflows in years 31+ are matched by 1-year bonds

  11. Distribution of real world interest rates • The ESG assumes the long term interest rates mean revert to 7.27%

  12. Comparison between strategies (TBSR) • The TBSR of the alternative reinvestment strategy is higher in all approaches under the new ESG, reflecting the higher risk inherent in the strategy

  13. Findings so far • Investment strategies can be complex to model • Risk neutral approach may be difficult to apply when markets are not liquid • Results sensitive to yield curve extension methodology • More work still needed to set risk margins methodology • Calibration of ESG is critical to a modelled capital methodology