2007 Annual Meeting ● Assemblée annuelle 2007
Vancouver
2007 Annual Meeting ● Assemblée annuelle 2007
Vancouver
Canadian Institute
of Actuaries
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
L’Institut canadien desactuaires
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007 Modelling standards
Risk Assessment Models
• Will be released as a Research Paper this summer
• General guidance is applicable to all models, but focused is on risk assessment models
• Fairly comprehensive list of considerations
• Not yet a “how to” model primer• Expected to evolve as other Working Groups
develop methodologies
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Contents
• Model Design• Questions to consider early in the model building process
• Model Implementation• Assumptions, IT systems, data and processes
• Model Validation• Validation and calibration
• Governance• Internal models for capital purposes are only appropriate
when the risk management practices are adequate
• Reporting• Results must be reported in a manner appropriate for the
purpose and the intended stakeholder
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Capital Model Considerations
• Extreme scenarios• Measuring tail risk with a valuation model• may be like measuring time at the North• Pole with a sundial
• Aggregating stand-alone results• Must consider diversification, risk dependencies, risk
interactions and risk concentrations
• Practical implementation of framework• Nested stochastic framework requires approximations
• Need for “pervasive use”• Capital models should be actively and regularly used for
decision-making
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007 ALM / Market risk working group
Early modelling results
Summary• An overview of some examples based on
potential market risk “Advanced” methods• Very simple product – but some complex
messages• Scope - risks arising as a result of
companies’ investment and matching strategies:– Interest rates (risk free)– Equity markets– Real estate values– Foreign exchange rates– Inflation
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Potential ‘Advanced’ methodologies
• One year projection period– Real world terminal value at various CTE
levels– Risk neutral terminal value
• Run-off
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Product and investment strategies• Simple GIC – 1 benefit cashflow, 5 years
from now• ALM strategies
a) Matched - 5yr zero coupon bond
b) Short - 3yr zero coupon bond (On maturity of the bond, a 2yr bond will be purchased.)
c) Long - 7yr zero coupon bond. (After 5 years, the bond will be sold to provide the funds
needed to make the payment to the policyholder)
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Summary of cashflows
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Results* Capital is expressed as (TBSR – Best Estimated
Liability) / Best Estimated Liability
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One year real world (CTE0)
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One year real world method (CTE50)
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One year risk neutral method
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Interest rate distribution
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Interest rate distribution
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Run-Off method
Sensitivity tests
• Results were reproduced for the same product using the same ESG, but with different starting yield curves.
• Historical dates chosen were:– July 1989 – high interest rates and
inverted yield curve– May 1992 – steep upward sloping yield
curve
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Sensitivity tests
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1989 Results
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1992 Results
Conclusions• Complex dynamics – even for this simple
product and strategies• Products and strategies can drastically
affect ALM capital – modelled approaches can recognise this
• Choice of method can have a significant impact on capital - method and framework must be carefully evaluated and defined
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