The insurance industry has utilized risk neutral models for many years to help manage market risks embedded in complex insurance products such as variable annuities (VAs). However, as the complexity of VA guaranteed living benefit riders has increased, insurers have needed to adopt more sophisticated modeling capabilities in order to properly assess and mitigate risk exposures.

Moreover, the combination of long-dated liabilities and persistent low rate environments presents challenges when constructing stochastic rate models, which can often produce explosive rates or negative rate scenarios which are undesirable for valuations and other ESG applications. And insurers with exposures across multiple currencies can sometimes encounter problems handling quanto adjustments when modeling equities and rates across multiple currencies.

On April 16, 2014, featured speaker Alex Marion, Vice President, Product Management at Numerix, discussed how practitioners can deal with complex issues in risk neutral modeling for ESGs, as well as overcoming several other common but difficult challenges.

Mr. Marion covered:

• Brief review of risk neutral scenario generation

• Validating risk neutral scenarios using calibration reports and martingale tests

• Avoiding explosive and/or negative interest rate scenarios from stochastic rate models

  • Using the Shifted LMM and CIR2F models

• Dealing with cross currency risk

  • Modeling multiple currencies within a hybrid model, producing martingale tests for cross currency exposures

• Producing scenarios for advanced indices

  • Bond funds with credit risk; target volatility strategies; capital protection overlays; the VIX index; currency-hedged equity funds

• Embedding risk-neutral ESGs in a nested stochastic framework

  • Dealing with computational challenges

Featured Speakers:
Alex Marion, Vice President, Product Management, Numerix
Alex Marion heads up insurance solutions for the Numerix Client Services group as VP of Product Management. In this role he works with clients developing comprehensive risk management solutions, leveraging powerful analytics and actuarial expertise. Mr. Marion and his team of actuaries and financial engineers provide solutions in dynamic hedging, economic scenario generation, asset liability management, nested stochastics, counterparty risk, and regulatory compliance.

Prior to joining Numerix, Mr. Marion served as a quantitative analyst for Phoenix Wealth Management where he developed a risk-neutral economic scenario generator with applications in VA and EIA dynamic hedging. Before Phoenix, Mr. Marion was a consultant with Milliman’s Financial Risk Management practice where he managed dynamic hedging strategies for insurers.