While most derivative market practitioners now value their OTC derivatives by discounting with Overnight Index Swap (OIS) rates, many insurers still use LIBOR-based discounting for both their hedging assets and liabilities. This can cause problems, as insurers using LIBOR discounting to value their hedge assets may not be able match their counterparty’s valuations. It also raises questions as to whether the insurer’s assets and liabilities have been valued “fairly,” from accounting and economic capital standpoints.

On the other hand, insurers who make the shift to OIS discounting face a different set of problems. Oftentimes, the asset side of the business makes the shift to OIS discounting but the liability side does not, leading to inconsistent valuations and mismatched risk and hedging calculations between the two sides of the business. And when an insurer adopts OIS discounting, it can have a major P&L impact when the entire asset and/or liability portfolio is revalued under the new regime.

So what is the right “risk-free rate” to use when valuing assets and liabilities? Is it reasonable – or even theoretically correct – to value extremely long-dated liabilities like Variable Annuities (VAs) or Equity Indexed Annuities (EIAs) using OIS discounting? Is it okay to switch to OIS discounting on the asset side but not the liability side? What do the accounting boards and regulators say?

On Wednesday, October 2, 2013 featured speakers Dr. Dan Cazacu of RGA Reinsurance and Anna Barbashova of Numerix discussed the issues surrounding the adoption of OIS discounting by insurers, including the theory, best practices and practical issues to consider when making the switch.

Dr. Cazacu and Ms. Barbashova reviewed the following topics:

  • Pre- and post-crisis risk-free rates and the shift to OIS discounting

  • Quantitative finance’s view of risk-free rates

  • Valuing assets used for hedging

  • Valuing liabilities

  • Consistency between assets and liabilities

  • Tail calculations

  • Accounting considerations

  • Regulatory considerations

  • Preparation for ORSA (Own Risk and Solvency Assessment)

To view the on-demand webinar, just register on the right side of this page.

Featured Speakers:
Dan Cazacu, PhD, CQF, Executive Director, Enterprise Risk Management, RGA Reinsurance
Dr. Cazacu is Executive Director, Enterprise Risk Management at RGA, where his responsibilities include quarterly risk reporting and RGA’s economic capital framework. With 15 years of insurance industry experience, he has spent much of his career managing Variable Annuity and Fixed Indexed Annuity hedging programs. Prior to RGA, Dr. Cazacu worked at ING and Protective Life in actuarial and quantitative roles. He obtained his PhD in Mathematics from the University of Missouri and he holds a Certificate in Quantitative Finance from Paul Wilmott.

Anna Barbashova, Business Analyst, Client Solutions Group, Numerix
Ms. Barbashova is a member of the Numerix Client Solutions team, focused on developing market initiatives and the implementation of market standards within Numerix’s core analytics platform – Numerix CrossAsset. Ms. Barbashova holds an MA in Financial Mathematics from Columbia University.

Moderator: Jim Jockle, Chief Marketing Officer
Mr. Jockle leads the company's global marketing efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to customers in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.

Prior to joining Numerix, he served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, Mr. Jockle built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. He also oversaw the brand development of a new company dedicated to the enhancement of credit derivative and structured-credit ratings, products and services. Prior to Fitch, Mr. Jockle was a member of the communications team at Moody's Investors Service.

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