The issues surrounding valuing a variety of complex guarantees in investment accumulation products is a hot topic among financial institutions providing such guarantees. The Foundation sponsored a call for papers on this general topic with a $50,000 grant from Nationwide Financial Services matched by the Foundation.
The Scientific Committee accepted papers providing insight and empirical evidence on the following topics:
1. Financial Market Risks: Discontinuities or Catastrophes?
Papers address the risks to the insurance and mutual fund industries of catastrophic market failures. Investment strategies are formulated to produce meaningful results in terms of expected returns or levels of risk. For example, international diversification is often advocated as risk reduction technique and sometimes as a return enhancement technique.
On the other hand, portfolio insurance was advocated as a risk modification technique the use of which involved a slight decrease in expected return. Strategies and new products are often formulated to work over long periods of time and are tested using both historic data and more simulations. Yet, rarely is the truly disastrous event envisioned.
2. Effect of Distribution Channels on Policyholder Behavior/Persistency
Accepted papers address the risk to the insurance and mutual fund industry occurring in the relationship between distribution system compensation and product persistency.
3. Long-Term Liabilities, Options & Guarantees
Accepted papers address the risk to the insurance and mutual fund industry associated with long-term liabilities, options and guarantees. Accumulation products, especially those of insurance companies, often contain secondary guarantees that may become valuable in an environment of very low interest rates. Such guarantees include annuity purchase options with and without life contingencies, minimum rate guarantees, and allowances for additional premium payments.
4. Transfer Risk Models
Accepted papers address the risk to the insurance and mutual fund industry associated with the contract holder's right to transfer their risk. Variable fund products are often bundled with other fixed funds or lower risk variable fund products. This bundling widens the appeal of the product(s) to the contract holder, but creates new risks for the associated fund company, such as book value vs. market value losses. These risks are associated with the contract holder's right to transfer between the various bundled funds, as well as the right to exit the contract.
5. The Practical Aspects of Managing Annuity Blocks of Business
Accepted papers address the risk to the insurance and mutual fund industry associated with managing large annuity blocks of business. Despite a financial institution's best efforts to put in place the theoretical machinery to control investment risk in accumulation products, there are a number of real world, practical considerations which complicate the risk management
The Foundation will host a symposium to present the papers in January 1999, at Loews New York Hotel, New York City. Accepted papers will be published in a symposium proceedings in the summer of 1999.
