In this video blog, Jim Jockle, CMO and Alex Marion, Vice President of Product Management at Numerix for Insurance discuss the de-risking of insurance products and the state of the state within the variable annuity industry. Alex focuses on the evolution of actuarial modelling including the impact of hedge projection strategies and the role of predictive analytics.
Jim Jockle (Host): Hi welcome to Numerix Video Blog. I’m your host Jim Jockle. Joining me today is Alex Marion, Vice President of Product Management here at Numerix for Insurance. Alex, how are you?
Alex Marion (Guest): I’m great. Thanks for asking.
Jockle: I want to talk specifically around variable annuities. In terms of issuance, we’ve seen spikes come back to pre-2008-2007 type levels in that upward trend continuing. So from your perspective and regarding the companies that you work with, where would you say we are as it relates to?
Marion: Well I think it’s sort of like the pig in the python thing. Companies have done a lot of de-risking. Last year they had actually offered buy outs from some of these guarantees. And they continue to dial down different levers they have in controlling how rich these benefits are. They’re lowering withdrawal rates. They may be increasing fees and really they’ve been focused on managing the risk inside the funds using target volatility strategies, capital protection strategies and so forth. And that really was the trend over the last two years. In fact some companies last year even got out of the VA market completely. Like Sunlife, Hartford. So a lot of the de-risking is still going on.
There is some pickup in sales from some of the more conservative offerings. But really the growth has been in the fixed index annuity market. Those sales, last year I think hit another record of around 34 billion for index annuities. And there’s been a lot of innovation in some index annuity designs that mirror some of the features that you’d normally see in a variable annuity product.
Jockle: So in thinking about lessons learned. So we had a boom in terms of the products. What has fundamentally changed since 2007? Because we did see a lot of loses.
Marion: Well I think really it was the credit crisis and a mispricing of risk. A lot of the original market participants offered very rich benefits. How roll ups. Things like that. That didn’t anticipate the 2008 credit crisis. And their hedging programs weren’t nearly as sophisticated as they were today. And the push has really been – and the other thing too is the regulatory environment has changed considerably. New regulations whether it’s reserves or capital, are more demanding for variable annuity writers. So, they’ve got to balance this increasing consumer demand for retirement securities while on the other hand they have increasing stringent regulatory requirements that place more emphasis on their hedge strategies.
Companies now have to under AG 43, which has been coming out for a while. They have ORSA coming out in 2015 and in Europe they have Solvency II coming out in 2016. So these new regulations are coming down the pipeline. They are placing more demands which is adding pressure to the variable annuity de-risking process.
Jockle: But there are capital relief in some of those regulations.
Marion: Sure, there is. Companies that have analytics that are capable of projecting their hedging strategy forward, companies who have a clearly defined hedging strategy can actually lower their AG 43 reserves by simulating their hedges going forward. Additionally companies that have ability to identify different hedging strategies, through hedge projection are able to allocate capital more efficiently across different product lines.
Jockle: So in terms of technology – obviously the world is changing. We’re driven by the consumption of IT and the actuarial sciences as you are an actuary as well - are pretty well defined in advance. What is fundamentally changing in terms of the underlying modelling and how is that impacting product design?
Marion: Well I think insurance companies – their bread and butter has always been the eveolution of actuarial modelling and the role of predictive analytics. You know mortality, policy holder behavior. They got a lot of data on that. They’re using. And that’s really what their focus has been. As far as managing equity risk and interest rate risk, that’s been a new development in the last decade for insurance companies.
Traditionally they were a spread shop that was focused on managing the actuarial assumptions. So, a lot of companies are still looking to hedge out a lot of that equity risk or at least move some of the hedging into the underlying funds themselves and focus again on policy holder behavior on their actuarial assumptions. That’s really where they want to be making their margins.
Jockle: Also traditionally a lot of the asset side of the business has been outsourced. Do you see any trends as that’s coming back more into house in investments?
Marion: Indeed it is yes. When the VA market was much younger, outsourcing was typically the way insurance companies processed. Back then, they didn’t have the analytics and the technology infrastructures to support dynamic hedging programs. They needed a trading desk. They needed quantitative models. Risk neutral economic scenario generation capabilities. A lot of the bigger insurance companies and even the smaller shops now have those capabilities.
They built out the teams of quants who can do the risk neutral modeling. So they’re able to do some of the hedging themselves. They may not be trading themselves, but they’re starting to bring that in-house now that they have the tools to do so. So that really has been moving away from outsourcing and moving some of the risk management into the funds and then taking additional responsibilities in-house.
Jockle: Well, Alex thank you so much. And of course we want to hear what you have to say. And please feel free to engage with us on twitter @nxanalytics. Or follow all of our updates on LinkedIn for upcoming webinars and programs and events that we’re hosting. And Alex thank you so much for your time today.
Marion: Sure thank you
Jockle: And we’ll talk to you soon.