The Society of Actuaries and Annuity Systems Inc. Present

241 Pages·2009·3.74 MB·English

The Society of Actuaries and Annuity Systems Inc.

Present:

Annual Equity-Based
Insurance Guarantees Conference

October 12 – 13, 2009

Boston, MA
Table of Contents
Corporate Sponsors..........................................................................................…..….....3
Presenter Biographies .......................................................................................….…....6
Attendee List .…....................................................................................................…….12
Agenda / Handouts..................................................................................................…..20
Overview of the North American Landscape..…………………………………………..21
Hubert Mueller, Towers Perrin
Overview of Hedging Instruments Typically Used by Insurance Companies……..35
Jim Lloyd, Societe Generale
Volatility as an Asset Class…..………………………………………………………….....45
Michael Schmanske, Barclays Capital
Modeling and Managing Basis Risks.......................….….……………………………...65
Thiemo Krink, Allianz Life
Using Exchange Traded FLEX Options to Minimize Counter-party Risks...............80
John Wiesner, Chicago Board Options Exchange
Issues Relating Pricing of Liability Riders.............................................................….86
Ed Astrachan, Sun Life Financial; Kevin Leavey, Commonwealth Annuityand Life Insurance Co.
Incorporating Risk Management into Pricing..…………………..............................…97
Frank Zhang, Ernst & Young
Systems-Related Risks
Trevor Howes, GGY AXIS…………..…………………………………………...…….109
James Norman, PricewaterhouseCoopers………………………………………...…..129
Operational Risks Associated with Running a Hedging Program..........................137
Peter Philips, AON Benfield
Market-Consistent Framework for Managing VA Enterprise………........................156
Ken Mungan, Milliman
Impact of Current Regulatory/Market Environment on Hedging Activities.….......171
Michael Chun & Benjamin Graves, JP Morgan
Outlook for the VA Market: An Analyst's Perspective………………........................185
Darin Arita, Deutsche Bank
Looking Beyond Hedge Effectiveness…………………………………........................193
Charles Gilbert, Nexus Risk Management
An Introduction to The Options Clearing Corporation…...…………........................205
William Eineke, The Options Clearing Corporation
How Do You Know If Your Hedging Program is Working?………..........….............213
Dan Heyer, Nationwide Financial
Impact of FASB 157 on Dynamic Hedging…………………….………........................224
Andy Rallis, MetLife
Platinum Sponsors
Silver Sponsors
Presenter Biographies
Chairman
Dr. K. (Ravi) Ravindran
Founding Partner, Annuity Systems Inc. (ASI)
Dr. K. (Ravi) Ravindran currently spends much of his time traveling, lecturing and very selectively
working on risk–management/trading consulting assignments around the globe. In addition to
this, he runs a private hedge fund that arbitrages mispriced products across different markets
globally and holds a visiting professor appointment in Haskolinn Reykjavik (Iceland).
As a pioneer to apply derivatives–based hedging techniques to manage market risks embedded
in variable annuities, Ravindran's experience and past appointments include:
• Developing equity–based guarantee products and managing in excess of $100 billion in
account value for insurance companies selling these products;
• Global head of exotic derivatives at Toronto Dominion Bank;
• CEO of RGA Financial Products (a subsidiary of Reinsurance Group of America);
• Adjunct professorships at both the University of Waterloo and University of Calgary;
• Author of the well–received book entitled Customized Derivatives: A Step–by–Step Guide
to Using Exotic Options, Swaps, and Other Customized Derivatives;
• Associate editor of the book entitled Handbook of Derivatives.
In addition to the above, he is also the chairman of all the Equity Based Insurance Guarantee
conferences globally, co-editor of upcoming book entitled Variable Annuities: A Global
Perspective and co-author of an upcoming book that is tentatively entitled Mathematical Methods
In Finance.
Hubert Mueller is a senior consultant with the Risk & Financial Services Tillinghast insurance
consulting practice of Towers Perrin in the firm’s Hartford office. He has been with the firm since
1986. He is a principal of Towers Perrin and a member of the firm’s Global Enterprise Risk
Management Team, where he leads the ERM practice for life insurers in the Americas. He also
manages the firm’s quarterly CFO Survey. His more than 20 years of consulting experience in the
life insurance area covers a variety of topics, including equity risk management, ALM, EC and
MCEV. Mueller is a Fellow of the Society of Actuaries (FSA) and a Chartered Enterprise Risk
Analyst (CERA). He is a member of the American Academy of Actuaries’ Life Capital Adequacy
Subcommittee and the Annuity Capital Working Group. He is also a qualified German Actuary
(Aktuar DAV). Mueller is a frequent speaker at industry seminars in the United States and
Europe and has co-authored several articles on insurance topics in trade publications in the
United States and Germany. Born and educated in Germany, Mueller received a Master of
Science in mathematics and economics (Wirtschaftsmathematik) from the Albert Einstein
University at Ulm, Germany. He also received a Master of Science in probability and statistics
from Syracuse University.
James Lloyd is a managing director at Societe Generale Investment Bank. He focuses on
optimizing insurers' capital and reserves with structured investments and reinsurance. Although
most familiar with the U.S. market, he is also versed in European insurance capital, IFRS and
Solvency II-related issues. Of research interest is hybrid model risk estimation/calibration.
Michael Schmanske is a Managing Director and the head of Equity Index Derivatives at
Barclays Capital. His group is responsible for pricing, hedging, and risk transfer solutions for a
wide variety of clients in the Insurance, Pension, and Hedge Fund space. Michael and his team
are also at the forefront of volatility trading as a separate asset class including the VIX index,
Options on Volatility and Variance, and the new Barclays iPath Volatility ETN's (Tickers:VXX and
VXZ). Mr. Schmanske joined Barclays from Lehman Brothers and has fourteen years of
experience in the derivative markets.
John Wiesner is a risk management strategy consultant with the Chicago Board Options
Exchange (CBOE). He is a former CBOE Market Maker and founded Saint Soter Capital (US)
and Saint Soter International (a BVI corporation) to trade option portfolios in the United States,
Europe and Australia. He also has worked as a consultant to the insurance industry providing risk
management/trading software for CDS and CDX tranches. He has researched and designed
hedging strategies to mitigate the negative convexity of semi-rational dynamic policyholder
behavior in annuities with guarantees.
Kevin Leavey is Assistant Vice President and Product Actuary with Commonwealth Annuity and
Life Insurance, a Goldman Sachs company. Specializing in annuity product development,
Leavey has over 20 years experience developing, pricing and launching all types of retail
annuities. In addition to being a Fellow of the Society of Actuaries, he has his CFA charter and is
the incoming Chairperson of the SOA's Management and Personal Development section.
Frank Zhang is EY’s North America VA Financial Risk Management and Hedging Advisory
practice leader. Prior to EY, Zhang was a director, equity derivatives and structured solutions for
insurance at Societe Generale Corporate & Investment Banking, and earlier, vice president and
senior quantitative derivatives strategist at ING USFS, as head of structured derivatives
strategies, quantitative modeling and hedging of the annuity hedging and market risk
management. He has many years of experience developing hedging and risk management
strategies, conducting quantitative research and development, and running VA/EIA hedging
programs from both the buy side and the sell side of the industry. Zhang also worked with several
major U.S. life insurance companies in the areas of ALM, pricing and financial management. He
has been a speaker at many industry conferences, on the topics of “roles for financial engineering
in the life insurance industry,” “dynamic policyholder behavior modeling in hedging and risk
management,” “challenges managing and implementing VA hedging program, “ “VA hedging
capital market solutions,” “structured investment products and actuarial career,” “VA guarantees –
does the industry pricing still make sense,” etc. Zhang holds several quantitative graduate
degrees, including the most recent addition of financial engineering degree (MSCF) from
Carnegie Mellon University in 2001.
Trevor Howes is an actuary with GGY AXIS, an actuarial software company based in Toronto.
Howes works on the marketing team, presenting AXIS to prospects and clients, developing
marketing materials and contributing to internal research and development efforts, including
ongoing initiatives in the areas of hedging, equity-based guarantees and model efficiency. He is
currently an active member of the Model Efficiency Work Group of the American Academy of
Actuaries. Howes has prior experience in both consulting and life insurance companies, covering
corporate actuarial and product development activities.
Peter M. Phillips is managing director of the Annuity Solutions Group at Aon Benfield. Since
2001, Phillips developed an international track record of managing and implementing effective
hedge programs for VA risks and has more than 20 years of derivative trading and risk
management experience. Currently he heads up the Annuity Solutions Group at Aon Benfield,
where his group provides clients with hedge program advisory services and innovative risk
management tools. Phillips obtained an honors master’s degree in business administration from
the University of Chicago, a Master of Science in finance from the London School of Economics,
and an honors bachelor’s degree in commerce. from the University of Toronto, and holds Series
7, 24, 66, 3 and 4 registrations with Aon Benfield Securities, Inc.
Ken Mungan is head of Milliman’s Financial Risk Management (FRM) Practice, which he
founded in 1998. FRM has grown to be the industry leader in the management of retirement
savings guarantees. Mungan has pioneered hedging techniques that are standard practice in the
industry today. He and his team have created technology that has generated paradigm shifts for
the life insurance industry. Mungan’s current focus is on expanding retirement savings
guarantees to new marks and products including 401(k) plans, IRAs and managed accounts. He
is also a frequent speaker at industry events and the author of many professional articles.
Mungan is a Fellow of the Society of Actuaries and a Member of the American Academy of
Actuaries.
Michael Chun runs the structured marketing team for JPMorgan's Equity Derivatives Group in
the Americas. His team provides cross-asset derivative and structured investment product
development and marketing to JPMorgan's institutional and retail client bases in the United
States, Canada and Latin America. In particular, the team offers a robust offering to the
insurance industry that includes flow derivative execution, bespoke structured cash-flow hedging
solutions and valuable pricing and modeling support in product and fund development initiatives.
Prior to joining JPMorgan, Chun spent more than 10 years with Bankers Trust and Deutsche
Bank in their equity derivatives businesses. He also spent three years with a venture-capital
backed trading technology company in San Francisco called Intelligent Markets, Inc.
Charles L. Gilbert, FSA, FCIA, CFA, CERA, is president and founder of Nexus Risk
Management providing advanced risk management solutions to financial institutions globally.
Gilbert works with several insurance and reinsurance companies worldwide to implement and
execute dynamic hedging programs, asset liability management and enterprise risk management.
Gilbert has been actively involved in managing risks associated with equity-based guarantees for
more than 10 years including working with one of the first insurance companies to implement
dynamic hedging, serving on industry task forces and conducting research for both the Society of
Actuaries and Canadian Institute of Actuaries. Gilbert was also responsible for launching one of
the first dynamic hedging initiatives for a major actuarial consulting firm in 2000. He has close to
25 years of experience in the life insurance industry and has personally trained more than 1,000
risk professionals, regulators, rating agency analysts and senior management on risk
management worldwide.
Bill Eineke is Director of Risk Management at The Options Clearing Corporation. He is involved
in the evaluation and mitigation of Member portfolio exposure as well as overseeing the
monitoring of Member credit risk. Eineke also works with the Financial Industry Regulatory
Authority in the administration of Securities and Exchange Commission mandated programs used
for the determination of margin requirements for holders of equity and index option products
(Portfolio Margining, Risk Based Haircuts). He holds an MBA from Southern Methodist
University, with a concentration in Financial Consulting.
Daniel Heyer is vice president, quantitative risk management, at Nationwide Financial Services
and his professional career includes appointments as controls engineer, process-development
statistician, property and casualty actuary and credit derivative quant. Heyer joined Nationwide
Financial Services’ Hedge Team in 2002, where he was responsible for hedging financial
guarantees embedded in variable annuity and other insurance contracts. He now manages this
group and is closely involved in all aspects of product development, pricing, financial reporting
and hedge trading. Heyer has spoken on these topics at several industry conferences including
Society of Actuaries’ annual meetings and the Equity-Based Insurance Guarantees conferences.
Heyer received his bachelor's degree in mechanical engineering from Ohio State University in
1991, his master’s degree in statistics from Rochester Institute of Technology in 1993 and his
certificate in quantitative finance in 2005. He is a Fellow of the Casualty Actuarial Society and
has been recognized by the Society for his innovative research in both reserve valuation and
investment decision-making.
Anthony Cavalier is a consulting actuary with PricewaterhouseCoopers. He is part of their
Actuarial & Insurance Management Solutions (AIMS) practice. Cavalier is involved in many areas
of the life, annuity, and health insurance actuarial consulting practice as a manager for many
assignments including statutory and GAAP financial reporting, asset/liability cash-flow analysis,
and actuarial audit support. He is currently the director on engagements that include audits of
GMWB and GMAB embedded derivative valuations associated with variable annuity products.
Prior to joining PricewaterhouseCoopers, he spent a number of years with a professional
reinsurer and also operated his own consulting firm. Cavalier graduated from Temple University
with a Bachelor of Science in mathematics.
Dr. Pin Chung is a vice president with Allianz Investment Management LLC in the firm’s
Minneapolis office. Since joining Allianz Investment Management in May 2008, Chung has been
the leader of the Asset-Liability Management (ALM) and Strategic Asset Allocation (SAA) team,
which provides ALM/SAA services for the North American Life and P&C insurance subsidiaries of
Allianz, SE. Allianz SE, based in Munich, Germany, is one of the largest insurance and financial
services companies in the world. Chung has more than 10 years of experience in a variety of
areas – experience which includes asset liability management, hedging, financial modeling and
investment management for a variety of life and annuity products. He is an Associate of the
Society of Actuaries (ASA) and a member of American Academy of Actuaries (MAAA). He is also
certified as a financial risk manager (FRM) by the Global Association of Risk Managers (GARP).
Chung earned a Bachelor of Science degree in mathematics from Tung-Hai University in
Taichung, Taiwan, and a master’s degree in mathematics and a second master’s degree in
Actuarial Science and Statistics, both from the University of Iowa. He obtained his Doctor of
Philosophy in economics from Iowa State University. Chung has written several articles about
financial time-series econometrics. These articles have appeared in Quarterly Review of
Economics and Finance, Applied Economics. He has also written two instructors’ manuals
published by John Wiley & Sons.
James Norman is a director with PricewaterhouseCoopers. He is involved in a variety of auditing
engagements for both reinsurers and insurer reporting in US GAAP, local US STAT and
embedded value reporting. Norman is actively involved in reviewing FAS 133 and FAS 157 fair
value liabilities as well as assisting investment banks to developing securitization structures for
term assurance and variable annuities business. He is a member of the Society of Actuaries and
a fellow of the (UK) Institute of Actuaries.