Measuring and Reporting Hedge Efficiency
Mark Evans
Low Interest Rate Environments and Consequences
Risks Faced by Writers of Investment Guarantees
Variable Annuity in Asia post-2008
How did Variable Annuities Fare in the Crisis?
Traditional Life Insurance Products are Under Pressure
An Overview of Regulatory Requirements
Simulations
Economic Scenario Generators and Variable Annuities
Modelling and Managing Policyholder Behavioural Risks
Modelling and Managing Mortality and Longevity Risks
Valuation of Variable Annuity Guarantees
Understanding and Using Reinsurance Treaties for Guaranteed Products
Hedging of Long-term Fund-linked Exotic Options
Overview of Commonly Used Risk Management Strategies
Taxonomy of Equity, Interest Rate, Hybrid and Customised Derivatives Used for Risk Management
Managing Risks Underlying Variable Annuity Liabilities
Basis Risk
Measuring Hedge Effectiveness
Measuring and Reporting Hedge Efficiency
Eight Important Questions Practitioners Should Ask When Managing Equity-linked Insurance Guarantee Risks
This chapter will focus on attributions for variable annuities (VAs). It will first explore the purpose and motivation of these attributions, as well as the difference between tactical and strategic level attributions, along with the impact of capital market variables and policyholder behaviour. It will then examine some of the unique features of VAs that impact attribution approaches, before concluding with a look at hedge effectiveness.
An important part of hedging variable annuities is performing an attribution analysis. Attribution analysis serves both tactical and strategic purposes. The purpose of this analysis is to explain away (or attribute) the changes in the values of the objective function that is measured and reported due to changes in the underlying factors (inforce decomposition, equity market changes, etc).
On a tactical level, attribution analysis identifies fast-emerging trends, explains liability and hedge movements from period to period, and serves as a control mechanism to audit the hedging activity and capture errors before trading errors result. Tactical attribution analysis should be run at the same frequency as the liability model is updated. Strategic
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