Hedging or securitization of minimum death benefit guarantee

[dummy]

I will be grateful to receive any input on the latest developments on actually MANAGING the risk associated with variable annuities MDBG (exotics, synthetics. securitization, ..).

There are many discussions in Records but all seem to concentrate on valuation and sometimes design.

By the way, is there an alternative to the superb Rebel Forum for business discussion (mail list, Usenet or other forum)?

[Moderator2]

http://soafor.syn.net/~soaforums/login

[dummy]

Thanks I was hesitant on this one as it may be as dormant as the desert forum! Any experience or comment?
It's particularly nice of you to direct people to the "competition"! :D

[Axis of Symmetry]

I don't claim to be an expert on this, but a few thoughts do occur to me.

Now is perhaps not the ideal time to look for hedges on these products. Expecially if there is an existing inforce block. However, if you are serious about the subject, you may want to begin by contacting your favorite reinsurer. Perhaps Ms Re would like to chime in.

It is my impression that suitable hedges in the financial marketplace either don't exist at all, or are prohibitively expensive.

Sorry I can't help any more that that.

[Steve Cooperstein]

Hi Dummy,

Two other actuaries and I have been offering a proprietary approach to using capital market instruments to hedge benefit guarantee risks in equity products. It is effective and can be efficient, albeit not perfect of course.

Such hedging uses more static than fully dynamic approaches, can hedge pretty much any portion of the risk desired (an important consideration), including path-dependent designs, and can be integrated with reinsurance and other hedge programs.

Our approach lends itself to managing the ongoing costs and risks
involved in an insurance financial management friendly way. This can be
most helpful in reporting to management, rating agencies, regulators,
for FAS 133, and smoothing unrealized effects on earnings. It can also help in designing new product offerings.

I can be reached at SC@IS4Life.com for more info.

Steve

[dummy]

Thanks Steve for offering your help,

I looked at your interesting Toronto Spring 2001 talk: The patented Unbundled Variable Annuity with the «living credit», I bet the agents love it. How would you call this product? UVA?

At present I am simply looking for published theoretical or practical papers possibly using new financial instruments.

Pricing with puts is the only thing I have seen so far! And no theoretical work on strike and maturity diversification.


Thanks Axis of Symmetry,
Reinsurance is dominant but reinsurers do not hold the funds, so synthetics will be problematic. I guess they retrocede most of the risk.

[Steve Cooperstein]

Thanks "Dummy" about the "UVA" for my Unbundled Variable Annuity - I like it, and also think agents will love product when they find consumers like it, but unfortunately I am still looking for a carrier. I've been in a frustrating Catch 22 - companies know there is a big payout annuity market looming; like the approach; query distribution demand (which has to date been weak because the current products are not agent/consumer friendly); and yield to other priorities. But I am getting closer, and am now incorporating it, including its broader patents, into a boomer deferred/payout variable annuity package.

As you surmise, we can't publish much on our hedging approach, but can progressively share it at no cost or obligation with a confidentiality agreement.

Can you elaborate a bit more on what you mean by:

* "new financial instruments" - I assume you mean other than delta hedging with futures?

* Pricing with puts - Do you mean and hedging with them if they were available?

* And no theoretical work on strike and maturity diversification - Are you talking here about what might be called "incomplete" or "catastrophic" hedges?

Steve

[dummy]

Thanks again for your willingness to share your knowledge,

Once the payout market picks up the transparency and flexibility of “UVA” will make it a winner. Also the deferred/payout is a good answer for tapping the bulk of the market.

Now for the GMDB:

I have to answer Yes to all your 3 precision questions.

I can see that in you innovative frame of work, you have carefully researched this question.

This is a new subject to me. I guess once you apply the mortality the underlying get too small for much interest from investment banks (it’s not the mortgage market!). Nevertheless, it is theoretically fascinating. I can see this as contingent diversified options (assuming fac reinsurance for outsiders). Somehow, I am not comfortable to just sum with a face amount of the corresponding put prices.

By "new financial instruments" - I meant securitization, swaps (similar to volatility swaps), and exotic options, somebody’s fancy paper (even if it is not very practical!). However, you are right all instruments are in a way hedged with the underlying!

Another question if I may is: has there been any interest for aggregate protection or benchmarks when you do not have access to daily mortality and/or do not wish to look at the exact loss of each death? That will make it easier to think of financial solutions.

I understand the amount of public info you can share, and the same concern for other experts in Records transcripts. I am trying to have the opportunity to research this area in detail; in that case you will receive a private message. At present I am just looking at what is available very publicly.

Thanking you,

dummy!

[Steve Cooperstein]

Thanks you again on the UVA comments and innovation.

We too ran into the difficulty of the risk premium being too small to get a reinsurer into the market, but agree it is theoretically fascinating - the capital markets and honing its risk. And agree that the sum of the long put prices is not realistic.

I know some of the Investment Bankers looked at this market early on, and I think a speaker in Toronto from Lehman Brothers, Doug McBeth, talked about this and still being open to it. You might do a search for his remarks - there are also audio tapes of SoA sessions available for purchase at I think aven.com.

We've looked for swaps, but haven't found any of any effective significance.

One exotic we have been looking for is for the MIBG, where low interest combined with low equity performance is the risk. We have approaches for dealing with this, but if you find anyone offering such an exotic we would be interested.

As to aggregate mortality or even GMIB or other risk aggregating, there is some stop loss reinsurance available and one can frame a hedging program along those lines.

[Spectrum]

The inability to get economic put prices could lead you to the decision to try investing the GMDB reserves in some asset class that is fairly uncorrelated with stocks. How about investment grade bonds with five years to maturity? Or treasuries? Gold? A basket of foriegn currencies? Stocks that do well in a recession like healthcare, discount retailers, resume writers?