hedging program for annuities and life insurance


Annuity Risk’s flagship Hedging Program provides a state-of-the-art annuity and IUL hedging solution and a toolset for post-hedge risk analysis. Issuers of equity-indexed annuities must hedge the risks emanating from derivatives embedded within their annuities.  Here, we use the term ‘hedging’ (present participle of the verb ‘hedge’) to refer to the act of buying derivatives (mostly call options and call spreads) from OTC Derivative Dealers or Exchanges.

Without delving much into the mechanics of hedging, we list here the main features and benefits of Annuity Risk’s Hedging Program.

Simplify Hedge Operations

The existing process of hedging at most insurers is very time-constrained, necessitating many data points, events, and actions to fall into place in a short order of time. This leaves practically no room for errors, bad data, or recalculations, turning this whole process a very stressful job. And even though most insurers hedge only once a week (or once a month), they find themselves needing to maintain whole teams of analysts and traders to cope up with the constraints and requirements of this process.

Remove Frictions in the Hedging Process

Policies are always in a state of flux, which makes it difficult for actuaries and risk managers to determine exactly how much policy balance (account balance or policy amount) they need to consider while purchasing derivatives. Moreover, as is often the case, thousands of newly issued and renewing policies need to be distilled down into a few trades. As such, risk managers face a complicated high dimensional optimization problem as they need to simultaneously solve for multiple factors (optimum ticket size, strike, counterparty allocation, persistence, etc.).

Life Insurance and Annuity Database

Robust Post-Hedge Analytics

As soon as the hedges are purchased, risk managers immediately need to start reconciling their hedges, comparing intended hedge specifications with those of actually purchased hedges, and assessing the impact of the realized deviations on the overall portfolio risk and hedging budget. Evidently, without post-hedge analytics, credited rates and option budgets cannot be determined.


Advanced Hedging Strategies

A purely static hedging strategy (OTC options only), compared to a mix of static and dynamic hedging, may seem to minimize risk sufficiently (and surely much less headache), but it is actually very expensive in the long run. Large annuity issuers employ advanced hedging strategies which essentially are a mix of static and dynamic hedging strategies. For small and mid-size issuers, keeping up with the complexity of dynamic hedging might be unfeasible since the expected savings may not be sufficient relative to the cost of building and maintaining an advanced hedging program.


Burden of Regulatory Reporting

Downstream risk analysis steps such as reconciliation and regulatory reporting, particularly hedge accounting and hedge effectiveness testing, can be quite cumbersome, drawing management’s attention away from other higher-value tasks such as product innovation, rates management, and investment management. The burden of regulatory reporting is particularly heavy for companies observing Sarbanes-Oxley (SOX) controls. 

Annuity Risk’s Hedging Program is built from the ground up for hedging risks associated with indexed annuities, multi-year guaranteed annuities (MYGAs) and indexed universal life insurance policies. The Hedging Program strengthens insurer’s the overall enterprise risk management program, maximizes savings, and enables a host of advanced pricing optimizations. Our toolsets provide a high level of granularity and thoroughness in risk analysis, covering dozens of viewpoints, while providing risk managers with unparalleled control in managing their derivative risk.

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