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Hedge Projection Module (April, 2010)

Article Summary:

GGY proudly announces that the AXIS Hedge Projection Module is now available as part of AXIS 12.6 effective with the April, 2010 release. With this new module, you can simulate a dynamic hedging program within your financial projections of VA and Seg Fund business. Furthermore, the projected statutory reserves and required capital will also reflect the benefits of the projected hedging strategy. Fully integrated within AXIS, the Hedge Projection Module supports pricing, valuation and projection applications incorporating a variety of risks, building on existing AXIS annuity models and adding sophisticated hedge projection capabilities.

AXIS now addresses the market demand for an integrated solution that adds a robust, flexible hedging simulation option on to a proven actuarial modeling platform. Without giving up any flexibility in designing VA product features or any precision in the projection of the VA living and death benefit guarantees under foreseeable economic and policyholder behaviour scenarios, users can choose to model hedging as part of a detailed asset/liability projection or a full financial plan including projected reserves and capital requirements thus enabling you to fully evaluate the cost-benefit tradeoffs inherent in each strategy.

Risk analysis for the VA product involves more than a single risk. With AXIS you can investigate multiple risks in one single fully integrated model. The new Hedge Projection module offers a couple of ways of evaluating basis risk, for example, which reflects the risk that the appropriate hedge assets are not available or fail to track the change in exposure in the actual underlying funds. AXIS also has various ways of modeling dynamic policyholder behaviour assumptions within VA products that can respond to the modeled economic environment and that might magnify guarantee benefit risks and related hedge costs. In combination with existing asset and reinvestment strategy functionality, the introduction of the Hedge Projection module in the April 2010 release of AXIS 12.6 makes asset liability risk analysis more flexible and comprehensive than ever before.

Key elements in the new Hedge Projection Module functionality include:

  1. Features to define common approaches to most forms of guarantees including GMDBs, GMABs, GMWBs and GMIBs, and to identify separate cash flow streams from selected benefits for purposes of Greek calculations, needed for one or more hedging programs simultaneously.
  2. A built-in Asset Pricing Module which provides a user-customizable paradigm for pricing the associated option risks in hedge assets and annuity guarantees, and thus for calculating Greeks.
  3. An expanded economic scenario with multiple markets, each with volatility surface inputs, and powerful built-in scenario generators utilizing popular Risk Neutral ESG models.
  4. A sophisticated parameter-driven Hedging Strategy object that supports a variety of Greek matching strategies and can automatically solve for the optimum balance of complex hedge assets required to meet strategy objectives.
What are the possible uses of the Hedge Projection Module?

Building on the existing framework of powerful reporting tools covering single scenario projections and stochastic analysis, the user can easily display program specific cash flows and risk metrics, before and after hedging decisions, isolate the simulated hedge asset transactions at each rebalancing date, and build a statistical picture of the cost and reward implications of any strategy. No advanced programming or system coding skills are required.

The primary uses of the Hedge Projection Module will be to produce realistic financial plans under best estimate and chosen adverse scenarios, to perform evaluations and confirmation of hedge effectiveness supporting a “Clearly Defined Hedging Strategy”, to design and price new VA guarantees or overall product designs, and to evaluate and choose from alternative hedging strategies.

In combination with the new Hedge Projection Module, AXIS can be used to perform valuations under AG43 (VA-CARVM) and to support C3 Phase II risk analysis, as of the current date, with and without the impact of the current Hedging Strategy, as contemplated by US Statutory requirements. When using AXIS for financial projections, VA-CARVM and C3 Phase II calculations can be performed at selected future dates, consistent with the projected economic path, and those calculations can also reflect the benefits of the chosen hedging strategy.

With a robust Greek calculation capability, users may also find AXIS to be a useful validation tool for the complex hedging calculations currently performed by consultants or other in-house solutions.

What are the future plans for Hedging in AXIS?

While the current focus of the Hedge Projection Module is to supplement the functionality of AXIS for modeling VA and Seg Fund products, and thus support all of the traditional actuarial applications that AXIS has been known for, the basic components needed for hedge projection are expected to form the foundation in future for a Daily Hedging support capability and Hedge Strategy optimization tool, to be developed at a later date.

As with all AXIS functionality, the future development path will be strongly influenced by user feedback and requests. We invite investigation, trial and evaluation. Hedging functionality in AXIS will be extended first to support the additional needs identified by our clients.

What is needed to investigate the Hedge Projection Module?

AXIS Hedge Projection Module works in concert with the existing modules of AXIS used to model and project inforce VA business and the associated assets supporting it, and to perform stochastic processing needed for pricing and financial reporting of that business. Once all the required modules have been licensed and users trained to model the core products, then the AXIS Hedge Projection Module can be licensed on a trial basis with full training and support for its use. Due to the intensive stochastic analysis required, the hedge projection application will typically require server farms with the AXIS GridLink module installed to effectively manage the use of that hardware technology.

Current users of the Annuity Module of AXIS who would be interested in learning more about how the Hedge Projection Module introduces dynamic hedging strategy to existing AXIS models may find the attached document "Hedge Projection Module" helpful. 

Contact Trevor Howes at GGY to obtain any further information on the AXIS Hedge Projection Module or to arrange a personal demonstration and presentation.

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