The Actuary February/March 2016

64 Pages·2016·7.18 MB·English

THE
VOLUME 13 ISSUE 1
FEB
16
MAR
3 6 THE
VOLATILITY
REGIME
Why managed volatility funds
exacerbate equity markets correction
16 THE WAITING
GAME ... OVER?
Being a U.S. life insurer in a
low interest rate environment
24 THE FAR EAST:
STEPPING UP
Localized investment management
for insurers in Asia
44 FACTOR THAT
How global demographics affect the world of
macro-finance and investments
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THE
VOLUME 13 ISSUE 1
FEB
16
MAR
16 24 32 36
16 THE WAITING GAME … OVER?
The U.S. life insurance industry has felt the effects of the low
interest rate policy and is hoping for a “return to normalcy.”
By Mary Pat Campbell
24 THE FAR EAST: STEPPING UP
Localized investment management for burgeoning insurers
FEATURES in Asia.
By Fred Ngan, Michael Chan and Eric Forgy
32 HEDGE YOUR BETS
A European risk appetite perspective on optimal hedging
transactions for large life insurance liabilities.
By Aymeric Kalife and Saad Mouti
36 THE VOLATILITY REGIME
A look at why managed volatility funds exacerbate equity
markets correction.
By Marie-Laure Chandumont
44 FACTOR THAT
Global demographics affect the world of macro-finance and
investments in terms of both risks and returns.
By Amlan Roy
52 RACING TO THE TOP
Q&A with Milliman consultant Sarah Konrad Hinchey.
The Actuary welcomes both solicited and unsolicited submissions. The editors reserve the right to accept, reject or request changes to solicited and unsolicited submissions, as well as edit articles for length, basic syntax,
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CONTRIBUTING EDITORS
44 52
Richard Berger, FSA, EA, MAAA Albert Moore, ASA, MAAA
[email protected] [email protected]
Mark Birdsall, FSA, FCA, MAAA Jeffrey Schuman, FSA, MAAA
[email protected] [email protected]
Alan Cooke, FSA, FCIA, MAAA Achille Sime, FSA, CERA, MAAA, FIAF
[email protected] [email protected]
Carl Hansen, FSA, EA, FCA, MAAA Ksenia Whittal, FSA, MAAA
[email protected] [email protected]
Christine Hofbeck, FSA, MAAA Larry Zhao, FSA, CERA
[email protected] [email protected]
DEPARTMENTS
6 EDITORIAL Global Low Interest Rates: Hypotheses, implications and strategies
10 FROM THE PRESIDENT Embracing Diversity and Inclusion
12 AROUND THE GLOBE International Affairs: A roundup of news from the global community
14 NEW & NOTEWORTHY Change is Constant: Your source for industry briefings and SOA news
56 TOOLBOX Good to Know: Useful tools and resources for actuaries
58 INNOVATE Survival of the Fittest: A look at the evolving SOA Education system
60 RESEARCH Exploring New Actuarial Ideas and Applications Through Research
62 TAKE CHARGE Get Information on Professional Development Opportunities
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EZRA PENLAND WINTER ROLES
EZRA PENLAND WINTER ROLES
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INDIANA - LIFE MODELING ACTUARY
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NEW JERSEY - SENIOR HEALTH ACTUARY other assignments.
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foor rRec parsotginrga,m pmriicningg s,k pilrlos druecqtu direevde. lCopomste tnrte,n rde saenravliynsgis, ,r afitnea finlciniagl s pskroillgsr apmremfeinrrge de.x pMeurisetn hcaev.e at least three years of
afonrde coathsteirn ga,s spirgicnimnge,n ptsro. dPuroctm dineevnelto rpomlee wnti,t hreins eorrvginangi,z raattieo nfi.lings programming experience.
MASSACHUSETTS - PROPHET EXPERIENCE
and other assignments. Prominent role within organization.
CONNECTICUT - HEALTH PRICING ACTUARY FMoAr SPoSsAitCioHn U67S6E7T3T, Sa l-if eP aRcOtuParHyE wTit Eh XPProEpRheIEt sNoCftEware ex-
FCoOr NPoNsEitCioTnI 6C7U4T6 2-C H, Ea ACLoTnnHe cPtRicIuCt IinNsGur eArC hTaUs aAsRkeYd Ezra Fpeorri ePnocseit iiso ns o6u7g6h7t 3in, aB loifset oanc.t uFaSrAy wori tAhS PAr owpihthe t3 s toof t1w7a ryee aerxs- of
PFoenr lPaonsdi,t itohne 6L7ea4d6e2rC in, aA Cctounanrieacl tRiceuctr iunistmureenrt h, atos afisnkde da sEhzararp lpifeer iaecntcuea irsia sl oeuxgphetr iienn Bceo sist opnr.e FfeSrAre odr. RAeSmA owteit hro 3le t.o 17 years of
hPeeanlltahn dp,r itchineg L aecatduearr yin. CAoctmupareinasl aRteiocnru uitpm teon $t,1 t8o0 fiKn. dT ha issh FaSrpA life actuarial experience is preferred. Remote role.
CALIFORNIA - LONG TERM CARE ACTUARY
oher aAltShA p mricuisntg h aacvteu aseryv.e Craol myepaernss oatfi ohna nudps -too n$ 1h8e0alKth. Tinhsisu rFaSnAce FCoArL PIoFsOitiRoNn 6IA7 8-2 L5O, aN CGal iTfoErRniMa i nCsAuRreEr hAaCs TasUkAedR EYzra Pen-
porri cAiSngA emxupsetr iheanvcee .s Iemvemreadl yiaetaer sn eoefd h.ands-on health insurance lFaonrd P, tohseit iLoena d6e7r8 i2n5 A, cat uCaarliiaflo Rrneicar iunistmureenrt h, atos fiasnkde da sEeznraio Pr eanct-u-
pricing experience. Immediate need.
CALIFORNIA - MEDICARE PRICING EXPERIENCE alarniadl, atnhael yLseta odre rA iSnA A acctutuaarirayl. RCeocmrupietmnseanttio, tno u fipn tdo a$ 1se1n0ioKr. aLcotnug-
CFoArL PIoFsOitRioNn I6A7 8-0 M1,E aD CICalAifoRrEn iPa RinIsCuIrNerG is EsXeaPrcEhRinIgE NfoCr Ean taeriraml acnaarely ostr oarc cAidSeAn at catnuda rhye. aCltohm apcetunasraitailo enx uppe rtioe n$c1e1 p0rKef. eLrorendg.
AFoSrA P oors niteioanr- 6A7S8A0 a1c, tau aCrayl.i fRoernqiuai rienss u5r+er y iesa sresa orfc hhienagl tfho ra catnu arial Mterumst chaarvee o art a lcecaisdte fnotu arn yde haresa lothf eaxcptuearireianlc eex. pDeerpieanrctme epnret fiesr red.
eAxSpAe roier nnceea.r S-AomSAe Macetudaicrayr.e R perqicuiinregs e 5xp+e yreieanrcse o pf rheefealrtrhe da.ctuarial gMruoswt inhgav. eS QatL l eaansdt VfoBuAr yperoagrsr aomf mexinpge rsieknilclse .i dDeeapl.a Crtrmeaetnet aisn d
experience. Some Medicare pricing experience preferred. mgraoiwntianign. iSnQsuLr aanncde V mBoAd eplrso,g wraomrkm oinng p srikciilnlsg iadnedal .p Crordeuatcet danedve l-
MIDWEST USA - HEALTH PRICING ACTUARY ompaminetnaitn, ainss wurealln acse emxopdeerilesn, cweo srtku odnie ps raicnidn gs paencdi aplr pordoujectc tdse.vel-
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opment, as well as experience studies and special projects.
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ehxepaaltnhs iinosnu pralanncse. pMriecdinicga iadc toura Mrye. dAiScaAr/eF eSxAp.e Nriaetniocen aal pinlussu.rer has LMIIFDEW REESINTS UUSRAA -N CE PRICING EXPERIENCE
expansion plans. Medicaid or Medicare experience a plus. ALISFAE o Rr FESINA SacUtuRaAryN wCitEh PlifReI rCeIinNsGur aEnXceP EprRicIiEngN eCxEperience
GEORGIA - HEALTH AND WELFARE ACTUARY iAsS imA more dFiSaAte alyc tsuoaurgyh wt ibthy olifuer rMeiindswuersatn UceS pAr iccliinegn te fxopre Prioensicteio n
FGoErO PRosGitIioAn - 6 H75E6A5L,T aH h eAaNlthD a WndE bLeFnAefiRtEs aAcCtuTaUryA iRs Yneeded by
6is7 i5m9m0e. dAiaXtIeSly, PsooluygShyts bteym osu,r P Mroidpwheets to rU MSAG -clAieLnFtA f osro fPtowsaitrieo n
aFno rA Ptloasnittaio cno 6n7su5l6ti5n,g a g hroeaulpt.h T ahnids FbSenAe ofirt sA aScAt uwairlyl hisa vnee esduebd- by
e6x7p5e9r0ie.n AcXe IiSde, aPlo.lySystems, Prophet or MG-ALFA software
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experience ideal.
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spolamne d celsieignnt pmraonjeacgtesm, pelnatn r setsrpaotengsyib, irleitsieesr.ve analysis, as well as oFuSrA N oor rAthS AC alirfoel iancat uclaierinatl mfoor dPeolisnigti oanc t6u7ar6y8 i0s .s Ioduegahl t by
some client management responsibilities. coaunr dNidoarttehs C wairlol lhinaav ec lsieenvet rfaolr y Peoarssit oiofn m 6a7t6he8m0.a Itdiceaallly -complex
mcaonddeidliantge se xwpiellr iheanvcee .several years of mathematically-complex
modeling experience.
EZRA PENLAND
EZRA PENLAND
ACTUARIAL RECRUITMENT
ACTUARIAL RECRUITMENT
Over 40 Years of Industry Experience
Over 40 Years of Industry Experience
[phone]
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These Roles and Many Other Actuarial Jobs Can Be Found at EzraPenland.com
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EDITORIAL
Global low interest rates:
Hypotheses, implications
and strategies
BY LARRY ZHAO
ore than seven years after the onset of the The secular
M Larry Zhao, FSA, CERA, CFA, FRM, CMT,
global recession, sluggish economic growth stagnation hypoth-
Ph.D., is senior director, head of Hedging
persists across all developed economies. esis suggests that
Strategies, at AXA US in New York.
Interest rates around the world hover at an economy,
historically low levels. As of Oct. 1, 2015, the after a huge [email protected]
annual yield of 10-year government bonds was 2 percent in financial shock,
the United States, 0.5 percent in Germany, 0.3 percent in would experience
Japan and −0.2 percent in Switzerland, meaning the lenders inadequate aggregate demand for many years. Demographic
must pay the Swiss government to hold their money! shifts (aging and slow population growth), reduced capital
intensity (social media replacing steel-making), tepid private
WHY ARE INTEREST RATES SO LOW? capital investment and depressed household consumption
There are a few hypotheses as to why interest rates are so low: would chronically prevent the economy from reaching full
potential. If the return on capital is very low, then the real
➊| Federal Reserve Bank hypothesis interest rate needed to achieve equilibrium real interest
➋| Secular stagnation hypothesis rate (at full employment) will likely be very low as well.
➌| Global savings glut hypothesis The recent pattern of slow economic growth, low capital
spending, subdued household consumption, low inflation
The Fed hypothesis is intuitive, but in my opinion, the and low real interest rates is consistent with this hypothesis.
most unlikely. While the Fed sets the benchmark nominal However, skeptics point to its lack of international dimension.
short-term interest rate, and its monetary policy impacts Secular stagnation requires that capital returns be permanently
inflation and inflation expectation over longer terms, low everywhere, not just in the home economy. Availability of
its ability to affect medium- to long-term real (inflation- profitable capital investments globally should help defeat local
adjusted) interest rates is limited. The goal of the Fed’s secular stagnation because outflows of financial capital weaken
monetary policies was to bring the short-term home currency, promote exports and raise domestic
federal funds rate closer to market equilibrium. production, which helps the home economy reach full
If the Fed wants to artificially push interest employment and close the output gap.
rates below the market equilibrium rate (i.e., The global savings glut hypothesis, championed by
the cost of borrowing is below the investment former Fed Chairman Ben Bernanke, attributes
returns), the economy would overheat, the low global interest rates to a global excess of
leading to inflation. Seven years after the desired saving over desired investment, emanating
onset of quantitative easing (QE) programs, largely from China and other emerging Asian econ-
the inflation index in the United States is still omies, and oil producers such as Saudi Arabia, to
only 1.3 percent. reduce borrowing and build international reserves.
6 The Actuary theactuarymagazine.org
Ad_SOA-002_Pryor-Rev_SO15_fpb.pdf 1 8/10/15 2:30 PM
Ad_SOA-002_Pryor-Rev_SO15_fpb.pdf 1 8/10/15 2:30 PM
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For more than twenty five years,
Pauline Reimer, ASA, MAAA, has been
For fminodrien gth tahne trwigehnt tpyo fsiviteio ynesa rfos,r actuaries,
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EDITORIAL
WILL THE INTEREST RATES REMAIN LOW? that the yield of 10-year Treasury bonds is 2 percent, the
In the eurozone, Germany’s large and persistent trade implied term premium is only 0.45 percent, which is sub-
surplus puts the burden on less competitive trading stantially below the historical average of 1.6 percent.
countries to undergo painful fiscal austerity measures to The low-term premium reflects the market consensus
become more competitive. As the largest economy in the of low inflation risk and low uncertainty about likely
eurozone, Germany effectively relies on foreign rather future interest rates. In a low, stable inflation or disin-
than domestic demand. Today, the unemployment rate in flationary environment, holding longer-term bonds not
Germany is 4.5 percent, while the unemployment rate in only increases portfolio yields due to positive carry and
the ex-Germany eurozone is 13 percent. Because the rolldown, but it also reduces the diversified portfolio risk.
eurozone is short on aggregate demand, if Germany Holding longer-term bonds can also provide a hedge against
continues to pursue imbalanced export policies without deflation risk and meet new regulatory requirements for
taking large fiscal and structural measures to increase safe, liquid assets. With all of these benefits, investors should
domestic demand, the eurozone could fall into the secular be willing to accept low compensation yield for holding
stagnation trap. This implies the extremely low interest bonds rather than short-term securities or cash.
rates in the eurozone could persist for many years. Many actuaries worried that unconventional QE programs
In the United States, excessive savings are in decline had artificially inflated the U.S. equity markets, and
due to a variety of geopolitical and socioeconomic reasons: subsequent unwinding and eventual removal of the programs
would inevitably cause stock markets to crash. The excessive
➊| In China, the very high investment rate of the past 30 worry might be misplaced, for two main reasons:
years is not sustainable due to the exhaustion of the
reserve of farmers and a slowdown in the rate of ➊| As argued by Bernanke, the QE programs just helped
technological catch-up. Excessive supply, excessive return the stock market to its normal trend.
leverage in the private sector and irrational exuberance ➋| The dividend yield on Standard & Poor’s 500 index is on
in assets (stocks and housing) markets are the classic par with the 10-year Treasury yield. Any large decline of
patterns for recession in a capitalist market economy. the index price would only make its dividend yield more
After the recent stock market crash, Bank of China appealing relative to yields of Treasury bonds.
employed a small portion of its $2 trillion foreign
reserve to defend the depreciation of the yuan. However, for life insurance companies, persistent low
➋| Oil prices have dropped from more than $100 a barrel interest rates have created asset and liability mismatch
last year to about $40 a barrel, and remain low. The problems because their long-term liability assumptions are
excessive savings from oil producers are expected to greater than the current market yields. As higher-yielding
decline significantly. Saudi Arabia has to draw on its bonds mature and are replaced with lower-yielding bonds,
foreign reserve to support domestic social programs. the book yield of the investment portfolio will be insuffi-
➌| The current account balances among other emerging cient, and liabilities will grow due to carry.
economies started to decline a few years ago, and their
foreign reserves have stabilized and even started to STRATEGIES IN RESPONSE TO GLOBAL
decline moderately. LOW INTEREST RATES
To address the challenges to insurance companies world-
These factors, combined with sustainable U.S. growth wide created by the persistently low interest rates, we have
and a near full employment, may drive the real interest rate invited a few experts to present their strategies on how to
to escape the zero and start to normalize. cope with the complex issues facing investment actuaries
today in this issue of The Actuary. These authors are from
WHAT ARE THE IMPLICATIONS OF a large insurance asset management firm, a large European
LOW INTEREST RATES? insurer, an Asian consulting firm and two global investment
The long-term government bond has three components: banks. By combining opinions and insights from experts of
expected inflation, expectation of the future real short-term different practices, perspectives and geographies, we intend
interest rate and a term premium. In the United States, to offer a comprehensive view on this complicated, yet
inflation is about 1.3 percent. The short-term interest rate critical, issue.
is expected to remain low, at about 0.25 percent. Given
The views expressed are those of the author and do not reflect the views of AXA US.
8 The Actuary theactuarymagazine.org
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TW-Unify-Ad-The Actuary-NA-2015-43260-v2.indd 1 6/16/2015 1:45:04 PM
BY CRAIG W. REYNOLDS
Craig W. Reynolds, FSA,
MAAA, is president of the
Society of Actuaries.
H from the PRESIDENT
T
MI
S
N
O
HY
[email protected]
Twitter: @CraigWReynolds
Embracing diversity
and inclusion
he Society of Actuaries (SOA) is guided by right conditions are in place for each individual to achieve
T
the principles documented in our strategy his or her full potential.
map. The current version of our strategy map As I mentioned in my presidential address at the 2015 SOA
includes two key statements on which I would Annual Meeting and Exhibit, we will thrive as a profession
like to focus: by bringing different perspectives to the table and creating a
strong sense of camaraderie. The SOA has embarked on new
➊|P ROMOTE the value of SOA credentials … to attract activities to embrace diversity and inclusion among actuarial
the best candidates. candidates and members, but we need your help in achieving
➋| ATTRACT, nurture and retain volunteers and staff these efforts on behalf of the profession.
who bring diverse skills and perspectives. Last year, the SOA Actuarial Diversity Task Force
conducted an assessment of the current state of diversity
Both of these statements require the SOA leadership at the SOA and in the actuarial profession. A number
to think about diversity and inclusion. A workforce that of diversity programs exist for actuaries and other sci-
excludes underrepresented groups, even inadvertently, ence, technology, engineering and mathematics (STEM)
would leave behind some of the best candidates—candi- careers, and there have been a number of programs and
dates with skills, interests and talents that might otherwise activities on diversity. However, women and racial and
be missed. We must seek to attract the “best and brightest” ethnic minorities remain underrepresented in the actuarial
from all segments of the population and from a variety profession in the United States and Canada, and there is
of educational backgrounds, cultures and experiences. To an opportunity to do more in support of these and other
succeed in this effort, the SOA is making a commitment to underrepresented groups.
focus on diversity and inclusion in the profession. The task force evaluated employer-established diversity
It is important to understand what we mean by diversity programs, along with their successes and challenges. It also
and inclusion. Diversity means respect for and appreciation studied other professions and nonprofit association diver-
of differences in ethnicity, gender, age, national origin, dis- sity programs. All of this analysis was provided to the
ability, sexual orientation, education and religion. Inclusion SOA Board for consideration. This past October, the SOA
focuses on the needs of every individual and ensures that the Board approved the task force’s eight recommendations,
10 The Actuary theactuarymagazine.org