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Old 03-21-2018, 04:14 PM
rhoucag rhoucag is offline
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Default GMDB ROP and $4$ partials

Sanity check - say you issued some GMDB ROP onlys and then the market only goes down. People take the usual expected partials. If the partials are $4$, we would expect the ROP to very ITM right? More ITM than pro-rata? Even if we would have added a ratchet (MAV) it wouldn't matter.
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Old 03-21-2018, 04:19 PM
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Carol Marler
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Sanity check - say you issued some GMDB ROP onlys and then the market only goes down. People take the usual expected partials. If the partials are $4$, we would expect the ROP to very ITM right? More ITM than pro-rata? Even if we would have added a ratchet (MAV) it wouldn't matter.
If I understand your question, the answer is going to depend on what exactly the contract says about partial withdrawals.
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Old 03-22-2018, 11:19 AM
Steve Grondin Steve Grondin is online now
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Originally Posted by rhoucag View Post
Sanity check - say you issued some GMDB ROP onlys and then the market only goes down. People take the usual expected partials. If the partials are $4$, we would expect the ROP to very ITM right? More ITM than pro-rata? Even if we would have added a ratchet (MAV) it wouldn't matter.
At the risk of being too terse, Partials on a $4$ GMDB that is already ITM don't affect the magnitude of the NAR at time 0; they affect the amount of assets around to fund that NAR. They also affect the likelihood of the AV to recover and reduce/eliminate the NAR. (Protip: Those old $4$ GMDBs that have been stripped aren't coming back).
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Old 03-22-2018, 12:32 PM
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Ah, could somebody explain what $4$ signifies?
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Old 03-22-2018, 01:12 PM
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Ah, could somebody explain what $4$ signifies?
Dollar for dollar.

And yes, dollar for dollar can result in guarantees that are much more ITM as a % of in-force AV. This would, all else equal, increase the cost of hedging per unit of in-force AV.
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Old 03-22-2018, 01:57 PM
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Dollar for dollar.

And yes, dollar for dollar can result in guarantees that are much more ITM as a % of in-force AV. This would, all else equal, increase the cost of hedging per unit of in-force AV.
Oh! I know dollar for dollar, but I just wasn't making the connection.
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This. And everything else JMO wrote.
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Old 03-22-2018, 02:18 PM
rhoucag rhoucag is offline
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Thanks. The question was about the relative ITMness between a $4$ and pro-rata ROP as it goes forward in a down market. Hedging doesn't matter for what I'm wondering. I'm looking at past policies and trying to validate admin systems and in-force data.
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Old 03-22-2018, 02:57 PM
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Thanks. The question was about the relative ITMness between a $4$ and pro-rata ROP as it goes forward in a down market. Hedging doesn't matter for what I'm wondering. I'm looking at past policies and trying to validate admin systems and in-force data.
Yeah I was trying to answer that. Here's a simple example at the contract level:

Suppose a guarantee is ITM (i.e. down market). The guarantee level is 1000 and the fund value is 800. ITM% = G/F = 125%.

Now suppose the policyholder takes a withdrawal of 100.

If dollar for dollar, the new ITM% is (1000 - 100)/(800 - 100) = 129%.

If pro rata, the new ITM% = (1000 x (1 - 100/800))/(800 - 100) = 125% = original ITM%.

So with the dollar for dollar design, the relative ITM'ness is exacerbated by the combination of a falling market and higher policyholder withdrawals. This is a risky scenario if the insurer didn't price for it.
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Last edited by E; 03-22-2018 at 03:01 PM..
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Old 03-22-2018, 03:37 PM
Steve Grondin Steve Grondin is online now
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Pro rata partials don't change the ITMness of the contract, just the size of contract and amount of NAR. $4$ partials don't change the amount of NAR, just the size of the contract and the ITMness.
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