An analysis of the recent market volatility on Variable Annuity hedging programs
Last updated 19th March 2009 - Read this latest research report authored by Craig Turnbull, New York office
Recent months have clearly represented a challenging period for the global economy in general and the financial services sector in particular. The insurance sector has not been immune from such malaise. In particular, the volatile financial market environment has exposed the limitations of some companies’ strategies for managing the market risk exposures created by the provision of significant long-term guarantees in VA products. We expect this will result in the sector incurring hedging losses of the order of many billions of dollars in Q4 2008, representing several years of the expected profit stream from these VA product lines.
We anticipate that this experience may trigger a significant evolution in the sector’s approach to the pricing, design, risk management and (perhaps) regulation of the guarantees embedded in VA products. In particular, we expect that there will be a number of key themes that will consistently arise in the development of more robust hedging analytics and strategies for 2009. This will include more robust hedge evaluation and projection; greater scrutiny of model risk in hedge derivation; and allowance for the credit risk in underlying VA funds and the impact it has on guarantee valuation and hedge requirements.
Overall, 2009 will see better recognition, measurement and management of the market risks embedded in VA business, and Barrie & Hibbert looks forward to supporting the sector in implementing these improvements.
Read the Insights article here