Tim has written a white paper entitled “Modern Variable Annuity Risk Management”, which can be downloaded here. The paper describes the three key risks facing modern variable annuity companies — investment risk, insurance risk, and policyholder behavior risk — and how the Ruark Companies are uniquely positioned to help our clients develop and maintain integrated solutions to these risks. In particular, mortality in the accumulation phase and longevity in the guaranteed living benefit payout phase are large yet under-appreciated risks in the industry that prudently structured (and available!) reinsurance can mitigate. And regular installments of our industry-leading experience studies of policyholder behavior provide the profound and detailed insights that variable annuity companies need to effectively manage this risk. Please contact Tim if you would like to discuss how we can help you implement these solutions for your company.
Ruark Consulting is an Event Sponsor at the Equity-Based Insurance Guarantees Conference taking place in Chicago on November 14 & 15, 2011. Tim Paris is the presenter on November 15 of “Policyholder Behavior Trends, Dynamics & Cohorts for VA’s and IA’s”. Stop by and see Tim and his associates. More information on the conference can be found at the SOA website at:
SOA Equity-Based Insurance Guarantees Conference
Tim Paris’ presentation at the SOA Annual Meeting on Managing Longevity and Mortality Risks is available here. Longevity risk is an under-appreciated risk in variable annuity guaranteed living benefits. Tim welcomes comments and discussion.
Tim Paris – Managing Longevity and Mortality Risks
Tim Paris will be a presenter at the SOA Investment Symposium on April 11-12, 2011 in New York City, as part of the session “Variable Annuities – 24 Months Later”. Tim will be addressing the topic of variable annuity policyholder behavior during the financial crisis.
Tim will also be a presenter at the Insights into the Pricing of Policyholder-Related Assumptions Seminar on May 18, 2011 in New Orleans, where he will also be addressing variable annuity policyholder behavior.
Methodology
For the Variable Annuity Benefit Utilization Study that we released in December 2009, RCL used the classical Limited Fluctuation (LF) credibility method. We believe that this method is reasonable for this purpose, as it reflects both withdrawal frequency and severity and is computationally straightforward. In this context, severity measures the amount of a withdrawal in relation to a guaranteed Benefit Base.
The LF method utilizes the Central Limit Theorem, and assumes that withdrawal frequency and severity are independent, and that withdrawals are mutually independent. RCL believes that these assumptions are reasonable for this study, and that investors’ regular review of their financial plans and product performance with their financial advisor tend to mitigate the potential dependency effects of systematic withdrawal programs from year to year.
Credibility theory often utilizes the following basic formula to calculate a credibility-weighted estimate:
Estimate = Z * [Mean of current observation] + (1-Z) * [Prior mean],
where 0<=Z<=1.
Z is the credibility ascribed to the mean of the current observation. The prior mean may be based on prior observed data or some type of benchmark. The question is – how do we determine Z?
Three approaches are commonly used:
As actuaries, we are quite familiar with the rigorous use of double dots and bars in mathematical symbols and equations, and we often use software packages that facilitate their rendering in electronic documents. However, it is sometimes tempting to ignore such diacritical marks when using foreign words or names in English. This is particularly true for electronic documents — I see the tilde and circumflex on the keyboard, but how do I put it over the letter?
Of course, computer keyboard settings can be adjusted to accommodate non-English characters, and certain font settings also display as some of these characters. But as a shortcut, it is useful to know that many of these characters can be produced by simply using the ALT key and a four digit code on the number keypad in the course of your normal typing. For example, you need ALT-0252 to properly type “the Bühlmann credibility factor approaches one asymptotically”, and ALT-0244 for “Itô’s Lemma is used in the derivation of the Black-Scholes option pricing formula”.
You can find reference materials and other codes with an internet search on “diacriticals” or “international symbols”. But be warned — those with a certain musical affinity and/or blatant disregard for the appropriate use of diacriticals may find some combinations difficult. For example, in spite of our best efforts, we have been unable to code the dotless i or umlaut n as parodied in the movie “This is Spinal Tap”, which is troubling. Then again, in the immortal words of the great David St. Hubbins, “It’s such a fine line between stupid and clever”.
Credibility Theory is a branch of actuarial science that attempts to determine the extent to which data can be trusted to inform estimates of the future. While the concept of credibility is often associated with casualty actuaries, it is relevant to virtually all fields of actuarial endeavor. The academic literature on this subject is extensive, and includes several different approaches with a range of mathematical sophistication.
Poetry is foundational to the history of RCL/RIA, so in celebration of our new website we have penned the following haiku:
behold! new website
RCL wisdom profound…
clients’ contentment
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