Insurance guarantees are exotic in nature because they have to take into consideration not only actuarial parameters (e.g. mortality) but have to address financial market guarantees and be tailored to more detail. Given that exotic derivatives can be, in general, very sensitive to all kinds of modeling assumptions, we immediately see that their appropriate modeling is a key for a company dealing with more and more narrow profit margins and lower returns on investments.

In this research paper,  Pawel Konieczny, PhD, FRM, and Vice President of Insurance Solutions at Numerix, explores how GLWB guarantees have different risks when attached to an Fixed Index Annuities (FIA) vis-a-vis a Variable Annuity (VA). This paper assesses the risks associated with this rider and analyze how different modeling choices can affect these risks. In particular, the impacts of improving the estimate of future caps will be explored.

Highlights include:

  • Challenges and Best Practices for Modeling Fixed Index Annuities
  • Illustrations using Renewal Cap setting for Point to Point, Index Modeling, Point to Point Structure
  • Renewal Cap Setting, Dynamic Cap Setting, Static Cap Setting
  • Monthly Sum Caps (Cliquets), Impact of Modeling and Pricing Challenges

Author Biography

Pawel Konieczny, PhD, Vice President, Insurance Solutions, Client Solutions Group, Numerix
Dr. Konieczny is Vice President in the Client Solutions Group at Numerix and is responsible for the Insurance line of products: Numerix Leading Hedge and Numerix Economic Scenario Generator. Prior to joining Numerix he was the Head of the Quantitative Modeling group at Transamerica Capital Management in the Variable Annuities line of business.

Dr. Konieczny has international publications in theoretical Fluid Mechanics and before joining the finance industry he carried out scientific research at Carnegie Mellon University, the Institute for Mathematics and its Applications at the University of Minnesota, and the University of Iowa. He holds a PhD in Applied Mathematics as well as an MSc in Mathematics and an MSc in Computer Science from the University of Warsaw.

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