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  #21  
Old 10-13-2017, 09:08 AM
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Hydraskull Hydraskull is offline
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Originally Posted by jas66Kent View Post
Those two correlations are a normal part of calibrating lapse risk. Lapse risk is done using a lognormal distribution.

We handle what you call the "dynamic" part via a correlation between lapse risk and interest rate risk. Same with lapse risk and equity return risk.

Seems that your models are quite simple to be frank.
I see, yes, we're quite simple.

Tell me, how have you calibrated the correlation between lapse risk and interest rate risk? Do you have historical data for lapsation given large (more than 200bp) changes in interest rates, over a short period, with today's modern product structures?
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  #22  
Old 10-13-2017, 09:30 AM
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I joke that our surrender form has one box for regular lapse, another box for dynamic lapse.
This is brilliant! I wish we'd all thought of that 30 years ago. We'd be so much better off today.
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  #23  
Old 10-13-2017, 10:00 AM
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elleminopee elleminopee is offline
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Quote:
Originally Posted by jas66Kent View Post
Those two correlations are a normal part of calibrating lapse risk. Lapse risk is done using a lognormal distribution.

We handle what you call the "dynamic" part via a correlation between lapse risk and interest rate risk. Same with lapse risk and equity return risk.

Seems that your models are quite simple to be frank.
I don't know that I would entirely agree that lapses are correlated with interest rates, at least not for fixed deferred annuities. I would say that lapses are correlated with the difference between your own credited rates (OCR) and competitor credited rates (CCR). CCR will often be a function of current market interest rates. But it is possible (although maybe not common) to change (raise) your OCR so that the difference between OCR and CCR stays small. In that case, interest rates would be rising, but presumably your lapses would not.

This is why many dynamic lapse formulas take the form of lapse = base lapse + M(CCR-OCR)^P. M and P may be based on "actuarial judgment". Again, I'm speaking from the context of fixed deferred annuities. VAs with fancy guarantees may base the dynamic lapse on the "in the moneyness" of the embedded option.

I've heard some people even get into using sigmoid, logit, or logisitic functions for dynamic lapses. More power to you, I guess. I'd have to do a math refresher to even remember what those do and how they apply. And as stated by Jack in this thread (http://www.actuarialoutpost.com/actu...d.php?t=184474) which is well worth reading "They're more sophisticated ways of applying what we don't know" which as stated by DixieFlyer in the same thread helps us to be "more precisely wrong".

For me, I take accusations of simplicity as more of a compliment than an insult. I've seen more mistakes made in "brilliant, complex" models than I have simple, parsimonious ones. When the level of complexity in your model is more than you can validate, you are wasting your time.
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"A new tree had grown from the stump and its trunk had grown along the ground until it reached a place where there were no wash lines above it. Then it had started to grow towards the sky again. Annie, the fir tree, that the Nolans had cherished with waterings and manurings, had long since sickened and died. But this tree in the yard--this tree that men chopped down...this tree that they built a bonfire around, trying to burn up its stump--this tree had lived!" - Betty Smith, A Tree Grows in Brooklyn
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  #24  
Old 10-13-2017, 01:05 PM
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I personally like an asymptotic function because an exponential function increase too rapidly and the early excess lapse is "too small"... but this is over-refinement... but the function fits a lot better for times when CCR is a little over OCR + a threshold. There is lots of data where this is true for "modest" excesses and an asymptotic function works quite well for that.
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  #25  
Old 10-13-2017, 01:06 PM
Steve Grondin Steve Grondin is offline
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Originally Posted by elleminopee View Post
VAs with fancy guarantees may base the dynamic lapse on the "in the moneyness" of the embedded option.
VAs are my area of focus. Interest rates may play a role in determining ITMness, but the account value (being variable) has a dominant role.
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  #26  
Old 10-13-2017, 01:41 PM
ishamael ishamael is offline
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Originally Posted by elleminopee View Post
For me, I take accusations of simplicity as more of a compliment than an insult. I've seen more mistakes made in "brilliant, complex" models than I have simple, parsimonious ones. When the level of complexity in your model is more than you can validate, you are wasting your time.
A common attitude I have seen among UK actuaries is Complexity = Quality.
On a separate note, "Dynamic" lapses isn't exactly a term alien to my UK trained colleagues. I have also heard it being used by actuaries from Belgium and Netherlands.
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