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Séance TR-4 : Le nouveau domaine de la gestion du risque pour les rentes variables et les fonds distincts. Session PD-4: The New World of Risk Management for Variable Annuities and Segregated Funds. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009.

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2009 seminar for the appointed actuary colloque pour l actuaire d sign 2009

Séance TR-4 :

Le nouveau domaine de la gestion du risque pour les rentes variables et les fonds distincts

Session PD-4:

The New World of Risk Management for Variable Annuities and Segregated Funds

2009 Seminar for the Appointed Actuary

Colloque pour l’actuaire désigné 2009

Frank Zhang, CFA, FRM, FSA, MAAA, PRM

Executive Director

VA Financial Risk Management and Hedging Advisory Practice Leader

Ernst & Young LLP, New York

agenda
Events since 2008

Capital market disruptions

Segregated fund/variable annuity losses

New areas of focus

Robust hedging program

Advanced financial modeling

Integrated financial risk management and pricing

Hedging strategy best practices

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Agenda

1

capital market disruptions
Capital market disruptions

What has happened since 2008:

Normality — what’s normal?

Liquidity — what liquidity?

Volatility — what volatility?

Could this happen again?

Market fall another 50%?

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

2

segregated fund and va losses
Segregated fund and VA losses

Segregated fund and VA losses:

Capital squeeze from general account investment losses

Tracking errors — what errors?

Marked-to-market losses — short-term or real?

Trading losses — buy high and sell low?

Effectiveness of risk management:

Hedged and unhedged

Market and actuarial

Is it clear who is responsible for everything?

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

3

agenda1
Events since 2008

Capital market disruptions

Segregated fund/VA losses

New areas of focus

Robust hedging program

Advanced financial modeling

Integrated financial risk management and pricing

Hedging strategy best practices

Agenda

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

4

new areas of focus
New areas of focus

Robust hedging program

Advanced financial modeling

Integrated financial risk management and pricing

Hedging strategy best practices

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

5

robust hedging program
Robust hedging program

Gold standard operation/process controls and risk management framework:

Banks versus insurers

Hedging performance is now a critical component of a company’s financials:

New Board-level concerns

Is your program (or product) too complex for the CEO to understand?

Robust hedging P/L performance attribution:

Know why, so problem areas can be fixed

Reporting and transparency

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

6

advanced financial modeling
Advanced financial modeling

Gold standard modeling tools

Continued improvements in research

Principles-based valuations/reporting

Nested stochastic simulations

Watch out for garbage in/garbage out

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

7

integrated risk management and pricing
Integrated risk management and pricing

Gold standard pricing methodology

Start with the fundamental — pricing

Focus on underlying funds first

Integrate capital market inputs in pricing

Apply robust risk management techniques

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

8

hedging strategy best practices
Hedging strategy best practices

Gold standard of risk management strategies

Greeks based versus the new mix of new metrics

Determine trade-offs between:

Earnings volatility and capital optimization

Marked-to-market P/L (forward-looking implied or expected volatility) and trading P/L (realized volatility)

Identify implied risky bets

Link pricing with hedging

Know your options:

Before you need them

When things are normal

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

9