CIA Annual Meeting
Assemblée annuelle de l’ICA
June 29 & 30, 2006  Les 29 et 30 juin 2006
Ottawa, Ontario
Session GEN-6
Update from ALM / Market risk working
group
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Agenda
• Scope and composition of group
• Timeline, priorities and approach
• Technical issues
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Membership of group
•Mike White
•Wally Bridel
•Stephanie Fadous
•Charles Gilbert
•Ron Harasym
•Andrew Norville
•Christian-Marc Panneton
•Sylvain St Georges
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Scope
•Methodology to replace “Changes in interest rate environment (C3)” MCCSR
component
–includes impact of non-fixed income assets supporting liabilities
–current phase excludes seg fund guarantees
–allow for correlation and diversification
•Analysis of sensitivities
–1 year vs run-off
–real world vs risk neutral
–new approach vs existing MCCSR
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Scope
•Implementation issues (working with Modelling Standards group)
–use of approximations
–comparability of results
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Timeline
Define methodology
Q2-Q3 2006
Simple initial modelling
Q3-Q4 2006
Pilot studies
2007
More complex issues
2007
•“More complex issues” includes:
–correlations across products
–non NA products
–policyholder behaviour
–implementation issues and
approximations
–asset side features (prepayments etc.)
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Issues faced so far
•
Terminal value methodology
–real world vs risk neutral
PADs or no PADs
•Interactions between market movements and insurance
cashflows
•Run-times
•
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Risk neutral
Uses current market prices
•No arbitrage
•Actuarial assumptions at best estimate
•...adjust for risk to the extent that not diversifiable
•
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Real world
Uses judgement and historical experience
•Possibility for arbitrage
•All risks merit a risk premium
•Margins for risk are calibrated for consistency
•
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Comparison
•Risk neutral
–objective (....sort of)
–consistent with banking definitions
–some international approaches use this method
–consistent with market cost to close out risk
–non-market risks?
•Real world
–subjective?
–consistent with existing practices
–consistent with cost of continuing to run risk
–need to have a margin for prudence – how?
–works well for non-market risks
Session GEN-6
Update from Modelling Standards
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Membership of group
•Bill Beatty
•Ron Harasym
•Trevor Howes
•Jean-Guy Lapointe
•Robin Li
•Sylvain St.-Georges
•Stuart Wason
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Objective
Best practices for internal capital models to ensure:
1.
2.
3.
4.
5.
6.
Accuracy: Each risk is accurately reflected.
Comparability: Between companies.
Consistency: Between valuation dates and risks.
Transparency: Including capabilities and limitations.
Reliability: Robust process of generating capital results.
Practicality: Recognizing cost and time constraints and
appropriate trade-offs between theoretical accuracy and
materiality.
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Need for Capital Model Guidance
Capital models have some unique issues:
• Tail Considerations: Models that work well around the
expected may be inadequate at estimating losses under extreme
events.
• How to calibrate the tail to a 1 in 200 year event?
• What management action assumptions are appropriate?
• Do correlations increase in the tail?
• Practical Implementation: Theoretical framework is stochastic
upon stochastic which generally will not be achievable.
• Risk Aggregation: Reflection of diversification benefits.
Paper will not provide solutions to these issues per se, but rather
highlight them and discuss ways to ensure a chosen approach is
appropriate.
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Scope
•Best practices paper only, standards and regulatory
guidance notes may follow.
•Includes
•Model Design
•Model Implementation
•Governance
•Reporting
•Excludes
•Risk based capital principles
•Methodologies
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Timetable
•First Draft: End of summer
•Final Base Document: End of 2006
•Risk Specific Appendix on ALM/Mismatch
Risk: Q107
Session GEN-6
CIA Annual Meeting  Assemblée annuelle de l’ICA
Issues Faced So Far
•To what extent should Advanced Methods be
standardized?
•Should capital be based on the company’s risk profile
at the valuation date, or include anticipated changes in
risk profile?
•What minimum requirements should be met before a
company adopts an advanced method?
Session GEN-6