Infographic: Insights From the Towers Watson 2013 Variable Annuity Hedging Survey
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Infographic: Insights From the Towers Watson 2013 Variable Annuity Hedging Survey

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Hedging programs remain a variable annuity (VA) writer’s primary line of defense against market exposures embedded in VA guaranteed benefits. The global financial crisis put these programs to the ...

Hedging programs remain a variable annuity (VA) writer’s primary line of defense against market exposures embedded in VA guaranteed benefits. The global financial crisis put these programs to the ultimate test, and despite difficulties, they proved themselves a valuable risk
management tool.

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Infographic: Insights From the Towers Watson 2013 Variable Annuity Hedging Survey Infographic: Insights From the Towers Watson 2013 Variable Annuity Hedging Survey Infographic Transcript

  • Challenges Remain Want to learn more? Contact your local Towers Watson consultant. Sophistication Gains, Challenges Remain Insights From Our 2013 Variable Annuity Hedging Survey towerswatson.com Invest to Reap the Benefits The benefits of dynamic hedging are many, but VA writers must commit to investments in both operations and systems, and the talent to manage these complex programs. For the foreseeable future, hedge programs will be the risk management tool of choice for VA writers. But there are still challenges that must be faced. Hedging has evolved, but has not changed dramatically since the last time we took a survey in 2011. Modeling sophistication has increased, with wider adoption of stochastic interest rate models, use of volatility surface or skew assumptions, exploration of advanced IT infrastructure and wider use of macro-hedging strategies. Most of our survey participants have economic reasons for hedging, but we believe that a growing number of VA writers want their programs to help them fulfill new statutory reserving requirements such as Actuarial Guideline 43. But there is a great deal of rigor needed to perform the calculation that comprises reliable statutory-based attribution analyses. As technological gains are made and modeling capabilities expand over time, we expect more programs to introduce statutory-based metrics on a more frequent basis. Evolution, Not Revolution Hedging programs remain a variable annuity (VA) writer’s primary line of defense against market exposures embedded in VA guaranteed benefits. The global financial crisis put these programs to the ultimate test, and despite difficulties, they proved themselves a valuable risk management tool. VA writers will need to pay greater attention to how their hedging programs work under multiple accounting and regulatory frameworks. The complicated operations of dynamic hedging programs require a substantial investment in talent that may require a dedicated staff of full-time employees. Operations and Systems Massive amounts of calculations are needed to develop trading grids and produce performance reports that let the VA writer know how hedges are performing. Feedback is frequent, often daily. And even the most basic of programs requires a fair number of stochastic valuations over a short period of time. In response, the industry is paying a lot of attention to the use of graphical processing unit (GPU) microchip technology, and we expect its use to increase. Talent Pools One More Thought on Hedging Strategies More Than Just a Test The global financial crisis was more than just a test. It also helped shape the hedging strategies VA writers are using. Macro-hedging is growing in popularity. This balancing of an estab- lished portfolio with derivative positions is preemptive. It maintains liquidity and reduces the likelihood that derivatives won’t be available if times turn bad. Macro-hedging helps manage multiple strategic hedging objectives. More than of the industry is engaged in this practice. 50% Macro-hedging strategic objectives 22%Statutory reserve management 33%Supplemental economic cover 11%Income and capital sensitivities ing 34%Capital preservation 0% 2% 4% 6% 8% 10% Hedge- effectiveness calculations Risk/ Exposure reports Statutory- based attribution analyses Economic or GAAP-based attribution analyses Trading grid 1010 11 88 33 44 22 33 22 33 Daily Weekly Monthly Quarterly 11 11 22 99 77 00 00 00 00 00 00 35%Operations 25% Research 27%Model development 13% Trading Hedge reports and metrics produced by frequency Operations and research draw upon 60% of our participants’ full-time staff. Average distribution of FTEs across various hedging functions