Session 149 Panel Discussion, Effective Risk Reporting for Life ...
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Session 149 PD, Effective Risk Reporting for Life Insurers
Moderator:
Anthony Dardis, FSA, CERA, FIA, MAAA
Presenters: Dariush A. Akhtari, FSA, FCIA, MAAA
Anthony Dardis, FSA, CERA, FIA, MAAA Joshua Liu, FSA, MAAA
Randi Woods Webber, FSA, CERA, MAAA
ALM Risk Reporting for A Large, Global Enterprise
Society of Actuaries Presentation – Session 149September 28, 2015
Dariush AkhtariHead of Life ALM1-212-770-6366Dariush.akhtari@aig.com
This document is provided for informational purposes only and should not be relied on for decision-making prior to confirmation with independent sources.The Company, its financial professionals and other representatives are not authorized to give legal, tax or accounting advice.
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Content
1. ALM Framework in Today’s Environment
2. Commonly Used ALM Metrics
3. ALM Industry Benchmarking
4. Challenges in ALM in a Multiline, Multinational Organization
5. Response to These Challenges Technical Aspect Non-Technical Aspect
ALM Framework in Today’s Environment
ALM Cycle
Formulating
Observing Assets/Liability
Behavior
Revising Strategy
Monitoring
Clearly define goals (earnings, risk appetites, etc).
Define base and stress scenarios
Refine risk metrics and performance measurement
Quantify existing exposure and consider additional exposures
Analyze lapse drivers Competitor rate / crediting strategies Consider and quantify potential
management actions in the base and stress scenarios
Assets Hedging Asset class allocations Credit risk Interest rates Liquidity
Liabilities/Customer Reinsurance option; Contingent new business; Policy exchanges/buyouts Plan for base and stress; Document and approve
management actions;
Asset portfolio Liability performance Current and projected risk and capital
analysis Market scan Goals scorecard
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Commonly Used ALM Metrics
DurationPros: Indicates timing of CF and sensitivity to interest rate movement;Cons: Works well for small change in interest rate; MVL is not well defined.
ConvexityPros: Capture large shifts in rates; reflect non-linearity of price change; Cons: Hard to communicate.
Tail RiskPros: Provide view on capital at risk; Cons: Dependency on scenario parameters, risk metric and risk measurement technique; excludes info on what drives the mismatch.
Embedded Value Risk ProfilePros: Illustrates impacts to enterprise value from various risks; often consistent with pricing and ROI analyses;
Cons: Difficult to summarize and communicate; dependency on large number of scenarios.
Portfolio ReplicationPros: Quickly refresh ALM metrics with changing market conditions; theoretically sound and explainable; Cons: Complex; Universe of assets may not provide a good fit; ignores A/L differences in credit risk.
Trade off between Accuracy and Complexity
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ALM Industry Benchmarking
Reporting Frequency
• Quarterly reporting;
• Monthly update Liability information (e.g, running actuarial models) ;
• Daily analyzing ALM results (portfolio replication for monitoring purpose).
Assets and Liabilities Modeling
• Rely on actuarial software to model most of assets and liabilities;
• Specialized software to model complex assets
Analysis
• Commonly used metrics, (e.g., duration, convexity, dollar duration);
• Additional metrics: VaR, VIF, IRR;
• Liability driven investment strategy.
• Line of business/product reporting.
ESG
• Combine both RW and RN scenario sets;
• Rely on either AAA or external vendors.
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Challenges of ALMin a Multiline, Multinational Organization
• P&C • Life &
Retirement• Mortgage
Insurance
Multi product
lines
• North America• Asia Pacific• Japan• EMEA
Multi national
Challenges
Complex structure of governance and control
Various accounting/regulatory regimes
Relationship building among various functions/business units/legal entities
Fluid and diverse culture
Reporting process (e.g., timelines)
Roles & responsibilities
Various stakeholdersComplex structure
• By function• By product• By Region
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Response to the Challenges
I. Technical Aspect (Analytics)• Define economic value of liability• Consider multiple lenses• Select ALM metrics
II. Non-Technical Aspect (Insight)• Integrate ALM analysis within the
organization through: • Alignment with firm’s priorities
and structure• Vertical integration• Horizontal integration
ALM Analytics
Insight
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Response to the Challenges
I. Technical Aspect (Analytics)• Define economic value of liability• Consider multiple lenses• Select ALM metrics
II. Non-Technical Aspect (Insight)• Integrate ALM analysis within the
organization through: • Alignment with firm’s priorities
and structure• Vertical integration• Horizontal integration
ALM Analytics
Insight
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Economic Valuation Framework – A Level Playing Field
EconomicCapital
Market Risks
Equity Risk
Credit Spreads
FX (Currency)
Equity Volatility
Inflation
Interest Rate Risk
Insurance Risks
Mortality
Longevity
Morbidity
PolicyholderBehavior
Credit Risks
Migration
Loss GivenDefault
Operational Risk
Best Estimate Liability (BEL)
Extra MVM
Market Value Margin (MVM) –Unhedgeable Risk
Solvency Capital Requirement (SCR)
Free Surplus
Ris
k C
apita
l
Mar
ket V
alue
of L
iabi
litie
s
Market value of tangible assets
Not to scale; Only to represent subcategories
A consistent ALM structure can be achieved on an internal economic basis;
Building a unified framework for discounting liability cash flows for all business lines is an important building block of managing the firm’s risk exposures.
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Consider Multiple Lenses
Statutory GAAP
Economics Stress Testing (CCAR)
ALM Analysis
Look at ALM through multiple lenses to capture risk at various dimensions
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ALM Metrics - Considerations
• Applicability across different LOBs• Appropriateness in changing market conditions• Clear risk aggregation and diversification approaches
Applicability
• Consistency between assets and liabilities• Consistency with firm policies, e.g., risk appetite/limits,
liquidity requirements, capital management, hedging, etc.• Must provide useful and actionable information to
management
Consistency
• Confidence in assumptions driving liability option values and tail risk
• Ability to sensitize metrics to alternative actuarial assumptions
Sensitivity of metrics to actuarial
assumptions
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ALM Metrics - Considerations (Cont’d)
• Capital flow restrictions within the group• Legal entity regulatory capital requirement Capital fungibility
• Ability to see how exposures evolve over time or various environments
Snapshot metrics vs. dynamic projections
• Modeling capabilities and runtime• Data availability • Plan for improvement
Infrastructure
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Response to the Challenges
I. Technical Aspect (Analytics)• Define economic value of liability• Consider multiple lenses• Select ALM metrics
II. Non-Technical Aspect (Insight)• Integrate ALM analysis within the
organization through: • Alignment with firm’s priorities
and structure• Vertical integration• Horizontal integration
ALM Analytics
Insight
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Alignment with Firm’s Priorities and Structure
1. Form a clear vision on the role ALM plays in the organization;
2. Cultivate decision-awareness culture;
3. Leverage others. Key Priorities Visible
Structure
Invisible Structure
Talent and Social IntelligenceKey PriorityCompany
Strategy
Performance (e.g., ROC, VoNB)
ALM is more than a technical function……
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Horizontal Integration
ALM
Investment(SAA)
Asset Management
(Asset analytics)
Pricing Actuaries(Crediting Strategy)
Finance Actuaries
(CFT, Valuation)
Actuarial modeling capabilities
Data management and IT infrastructure
Production process
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Vertical Integration
Chief Finance Actuaries review and sign-off
ERM review and challenge
ALCO
Improve governance and control process
Manage internal (actuarial) and external (non-actuarial) review and sign off;
Facilitate reporting and discussions between BUs and Corporate;
Document and provide governance for the key ALM activities;
Enhance insight into value creation
Quantify value creation by the businesses both at issue and over time; Improve ability to make investment risk-return
trade-offs;
ALM
Enhance information consistency and transparency
Improve communication among relevant parties;
Ensure consistent and reliable information is used across functions;
Enhance operational efficiency
Streamlining production -> Review -> Reporting Process;
Leverage resources and knowledge;
Tony Dardis
SOA 2015 Annual Meeting & Exhibit
October 11 – October 14, 2015
Austin TX
Effective Risk Reporting for Life Insurers
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Effective Risk Reporting for Life Insurers
Introduction (Dardis) – 5 mins
ALM Risk Reporting for a large, global enterprise (Akhtari) – 20 mins
Operational Risk Reports and Aggregation (Woods Webber) – 20 mins
Risk Analysis & Reporting: Equity Indexed Annuities (Liu) – 20 mins
Q&A – 10 mins
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Line
of B
usin
ess
Leve
l Act
iviti
es
The Risk Reporting Spectrum
Enterprise Risk Reports
CreditRisk
Reports
Operational& Strategic
RiskReports
{
Ent
erpr
ise
Leve
l Act
iviti
es
{LoBInsurance Risk
Reports
LoB ALM Risk Reports
LoBMarket Risk
Reports
Enterprise ALM Risk Reports
Operational Risk Reports & Aggregation
Randi Woods Webber – FSA, CERA, MAAAVice President & Chief Risk Officer
Key Risks for Fee-Based Businesses
Volatility vs. Risk
Investment Control
Operational Risk Business Risk
In More Detail…
• Fraud• Employment Practices & Workplace Safety• Clients, Products & Business Practices• Execution, Delivery & Process Management• Damage to Physical Assets
Operational Risk
• Reputation• Legislative, Accounting & Regulatory
Change• Strategy
Business Risk
Operational Risk Reporting
Operational Loss Data Collection• Absolute Levels• Trends
Escalation Requirements• Severity• Frequency• Reputation
Aggregation Challenges
International Drivers of Risk Reporting
Driver Examples
JurisdictionU.S. Securities Exchange CommissionU.S. Federal ReserveNAIC
Country Financial Services Agency (Japan)Monetary Authority of Singapore
Regional & Industry OECD, IMF, Basel CommitteeIAIS, IOSC
Global Regulators (Associations) Joint Forum, G20, FSB
Three Reasons International Risk Aggregation Fails
Fungibility
Federal Regulators
FX (Exchange Rates)
Example of Aggregated International Reporting
Brazil Chile China Columbia FranceHong Kong
India Malaysia Mexico
Chief Risk Officer
Risk Committee
Operational Loss Data
Quarterly Risk Report
Risk Culture
Presentation X May 2006
Risk Analysis & ReportingEquity Indexed Annuity
Joshua Liu FRM, FSA, MAAADirector of Actuarial Valuation
10/14/2015
Introduction
Presentation X May 2006
• 55-62 (under Topic 815-15)• This Subtopic defines an equity-indexed annuity as a deferred
fixed annuity contract with a guaranteed minimum interest rate plus a contingent return based on some internal or external equity index.
• The guaranteed contract value is generally designed to meet certain regulatory requirements.
• Typically have minimal mortality risk and are therefore classified as investment contracts under Topic 944.
Equity-Indexed Annuity Contracts 1/2
Presentation X May 2006
• 55-62 (Topic 815-15)• These Equity-indexed annuities often do not have specified
maturity dates.
• Customers typically can surrender the contract at any point in time, at which time they receive their account value.
• The account value is generally defined in the policy as the greater of the policyholder’s initial investment plus the equity-indexed return or a guaranteed floor amount.
p.s. Policyholder receives cash surrender value in the event that his or her policy is voluntarily terminated before its maturity or the insured event occurs. The cash value is the account value after deducting any stipulated costs such as surrender charge, partial withdrawal, advanced loan, administration cost,… Therefore, it is also known as "cash value", "surrender value" and "policyholder's equity"
Equity-Indexed Annuity Contracts 2/2
Presentation X May 2006
• SFAS 97 (DAC)
• SFAS 91 (host contract)
• SFAS 133 (EGP and balance sheet)
• SFAS 157 (risk margin, nonperformance risk, …)
EIA GAAP Valuation - Combination of
Presentation X May 2006
• Value of Embedded Derivatives (VED)
• Actuarial present value of FAS133 excess benefit between projected EIA fund and projected guaranteed fund discounted at risk free rate
• Theoretically, this is a call option reserve for which value can go up or down depending on market performance
• Guaranteed Host Contract (GHC)• GHC = Initial premium – VED
• EIA reserve t at any time = GHC t + VED t
FASB 133 Reserve
Presentation X May 2006
• “The carrying value assigned to the host contract is the difference between the proceeds received from the issuance of the hybrid instrument and the fair value of the embedded derivatives.”
• GHC 0 = Initial Premium – VED 0
• No gain/loss at issue
Derivatives Implementation Group
Bifurcation
Presentation X May 2006
• An embedded derivative shall be separated from the host contract and accounted for as a derivative instrument
• 25-1 (Topic 815-10)• The economic characteristics and risks of the embedded
derivative are not clearly and closely related to the host contract.
• The hybrid instrument is not re-measured at fair value under otherwise applicable GAAP as they occur.
• A separate instrument with the same terms as the embedded derivative would, pursuant to Section 815-10-15, be a derivative instrument.
Hybrid Instruments
Hedging Budget
Presentation X May 2006
Black-Scholes Model for Call Option
Presentation X May 2006
Factors Affecting Option Prices
Product Sensitivity
Presentation X May 2006
Factors Affecting EIA Value
Risk Management
Presentation X May 2006
Where do risks come from?
Bundled Together
Data
Product Features
Assumptions
Questions?
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