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Capital Management in a Volatile Environment

Learn about equity risk in investment products, market volatility reactions, risk mitigation strategies, pricing discipline, and more. Understand the impact of shock testing, hedging considerations, and pricing discipline in a volatile market.

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Capital Management in a Volatile Environment

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  1. Capital Management in a Volatile Environment Altaf Rahim, FSA, FCIA, CERA Vice President & Chief Risk Officer AEGON Canada

  2. Agenda • Equity Risk in Products • Reactions to Market Volatility • Risk Mitigation • Pricing Discipline

  3. Equity Risk in Products • Understand the evolution of investment products and the associated equity risk • Segregated Fund Contracts

  4. Equity Risk in Products • GMWB • Relatively new product in Canada • Significant sales growth • more experience in USA and UK • Longevity risk

  5. Reactions to Market Volatility • USA • Significant product changes in the USA • Increased fees, reduced payout provisions and streamlining benefits • More than 126 substantive VA product changes became effective in May, up from 25 in April and 24 in March • Some companies have exited the VA market • A few companies have entered the market

  6. Reactions to Market Volatility • Canada • Change is slower in Canada • Products may not be as aggressive as USA • Companies may be reviewing products • A few carriers have made some changes to their products • one new entry with more conservative product that is hedged

  7. Risk Mitigation • Product Feature Changes • Lag time from pricing to implementation • How often can you reprice? • Diversification • Product mix • Time diversification • Robust sales • Can be difficult to turn away sales

  8. Risk Mitigation • Reinsurance • Reinsurers not interested in equity risk • Reinsurance costs can be perceived to be high • Hedging • Can be costly during high market volatility • Reflect cost of hedging in pricing • May be difficult to compete versus competitors who have not reflected the cost of hedging or are not hedging • May not be able to reflect hedge in reserves and capital

  9. Risk Mitigation • Hedging Considerations • Requires specific skills and expertise • Operational risks • Model risks • Transaction costs • dynamic hedge programs may require frequent rebalancing • Basis Risk • Correlation of hedging indices and funds • May result in hedge ineffectiveness

  10. Risk Mitigation • Shock testing • Test magnitude of shock as well as the type of shock • DCAT • Shows impact of stress tests and may reveal potential risk mitigation options • Economic capital • Models can show the impact of the worse case scenario • Company risk tolerance • Market risk tolerance limits

  11. Pricing Discipline • Reflect product features that pose material risk • Correlation of the funds offered to hedging indices • Include hedging costs • Potential loss of upside benefit • May not be able to reflect hedge in capital and reserves • Sensitivity testing

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