1 / 13

The C3P2 Project “Lessons Learned”

The C3P2 Project “Lessons Learned”. Larry M. Gorski, FSA, MAAA Claire Thinking. US Regulatory RBC Formula Life Insurers. Regulators wanted a formula that : Served as a minimum capital standard As simple as possible Objective Auditable. US Regulatory RBC Formula Life Insurers.

kory
Download Presentation

The C3P2 Project “Lessons Learned”

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. The C3P2 Project“Lessons Learned” Larry M. Gorski, FSA, MAAA Claire Thinking

  2. US Regulatory RBC Formula Life Insurers • Regulators wanted a formula that : • Served as a minimum capital standard • As simple as possible • Objective • Auditable

  3. US Regulatory RBC FormulaLife Insurers • Required capital calculation is primarily formulaic • Factors based on the practices of a “well-managed” company and industry-wide experience • In most cases, factors applied to values reported in the annual statement

  4. C-3 (Interest Rate Risk) • Generally recognized that a factor based approach doesn’t work • RBC based on the results of stochastic modeling introduced into formula in CY 2000 • Most life insurers exempt from the requirement • Regulators unwilling to rely on company actuary • Industry argued that modeling “not needed” in all cases • Factor based floor and ceiling included in regulatory requirement

  5. Variable Annuity Guarantees • Product variety and complexity of risk rules out use of factors • Regulators ask AAA to provide recommendations on a modeling approach • AAA accepts charge and begins work • Project expanded from RBC to include reserves

  6. Practical Issues • All practical issues stem from: • Unwillingness of regulators to rely professionalism of actuary (“Asymmetric knowledge” issue) • Insurer concern over resources and cost • Concerns of the actuarial profession • (AAA) Finding resources to assist regulators • Dealing with constraints of corporate organizational structure (“Reliance” issue)

  7. Regulatory Concerns/Solutions • Little experience with modeling of complex financial products • Single Standard Scenario • Training provided by AAA • Uncomfortable with “actuarial judgment” in conjunction with certain assumptions • Single Standard Scenario • Calibration points for distribution of equity fund returns for different time horizons • Mortality • 65% or 100% of 1994 MGDB Mortality Table

  8. Regulatory Concerns/Solutions • Uncomfortable with “actuarial judgment” in conjunction with certain assumptions – Other possible solutions • Peer Review • Required PUBLIC disclosure of assumptions • Proprietary assumptions disclosed via actual to expected studies • Direct exposure of Non-proprietary assumptions • Distribution of equity fund returns for different time horizons • Interest rate paths

  9. Insurer Concerns/Solutions • Volatility of Required Capital • Not yet resolved • Resources and cost • Alternative Methodology Factors • Factor picking tool • Pre-packaged scenarios • Research needed to determine acceptable “n” • Scenario picking tool

  10. Professional Concerns/Solutions • Guidance needed • Number of scenarios • Variance of CTE estimator • Representative scenarios • Modeling dynamic hedging strategies • Updating assumptions in light of emerging experience • Bayesian methods

  11. Lessons Learned • A solution to the “asymmetric knowledge” problem is needed • A more responsive, independent actuarial research program is needed • The “reliance” problem needs to solved

  12. An Example – Dynamic Hedging • The AAA C3P2 Recommendation allows for required capital to be reduced as a result of hedging. • Open Questions • What techniques can be used to demonstrate that a dynamic hedging program is effective? • What assumptions should be used in this demonstration? • Who is responsible for the demonstration? • What methods should be used to reduce required capital for dynamic hedging programs that are partially effective? • How should required capital requirements deal with deviations from a dynamic hedging program?

  13. An Example – Dynamic Hedging • Regulatory expectations and insurer hedge modeling abilities may be different. • Research that identifies and evaluates different approaches to dynamic hedging is needed. • Regulatory standards applicable to dynamic hedging whether person responsible is an actuary or other professional

More Related