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An executive's handbook for understanding and risk managing unit linked guarantees

Published online by Cambridge University Press:  17 February 2012

J. Maher ,
J. Corrigan ,
A. Bentley  and
W. Diffey
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Abstract

The focus of this paper is the identification, and more importantly, sustainable management, of risks embedded in guarantees attaching to unit linked savings and retirement contracts (as commonly referred to as GMxBs). In developing customer centric guarantees that are not readily transferrable to the capital markets, insurance undertakings require the skills and resources to hedge the guarantees within their own balance sheet (or with a temporary use of packaged solutions such as reinsurance). In taking on the guarantee manufacture task insurers are departing from areas of historic competence and need to develop a comprehensive understanding of all elements of market risk replication. These include both first order market exposures as well as the material second order risks associated with market micro structure. The paper seeks to integrate this comprehensive analysis within a practitioner focused framework and concludes with a senior executive summary of “Seven key considerations in successful guarantee manufacture”.

Keywords

Variable AnnuityGuaranteed Maximum Benefit (GMxB)Dynamic HedgingGuarantee ManufactureRisk AssessmentRisk MitigationAsset AccumulationBasis RiskRepoReplicationGreeksReinsurance CollateralTotal Return SwapCaptiveValue at Risk (VaR)Conditional Tail Expectation (CTE).
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 17 , Issue 1 , March 2012 , pp. 71 - 125
Copyright
Copyright © Institute and Faculty of Actuaries 2012

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