session 149 panel discussion, effective risk reporting for life

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 [email protected]

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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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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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


• 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


• 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


• SFAS 97 (DAC)

• SFAS 91 (host contract)

• SFAS 133 (EGP and balance sheet)

• SFAS 157 (risk margin, nonperformance risk, …)

EIA GAAP Valuation - Combination of


• 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


• “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


• 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


Black-Scholes Model for Call Option


Factors Affecting Option Prices

Product Sensitivity


Factors Affecting EIA Value

Risk Management


Where do risks come from?

Bundled Together

Data

Product Features

Assumptions

Questions?

session 149 panel discussion, effective risk reporting for life

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