Measuring and Reporting Hedge Efficiency

Mark Evans

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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