[ Pobierz całość w formacie PDF ]
.e., + or -) areignored in the scale.The company prefers to maintain a score of 3.5 or better quality for eachline of business.3.5.2 Market RiskSemi-annually within the term, UL and SPIA lines of business, the company measures theeffective duration of the assets and liabilities.If the asset and liability durations are furtherapart than 0.5, the asset portfolio is rebalanced such that its new effective duration equals thatof the liabilities.The VA hedging program uses a dynamic approach updated for market factors monthly and forinforce changes quarterly.The key risk measures are delta and rho, and the program updatesits equity and interest rate derivatives such that at least 80% of liability delta and rho arehedged.Vega is self-insured due to system complexity and the expense of implied volatilityhedges.Reports are produced and hedges adjusted approximately six-weeks following eachquarter end.The VA liability delta and rho measures are estimated from an actuarial projection model usinga home-grown computing platform.Actuarial assumptions are mostly updated annually, andare based on historical experience when possible, and pricing assumptions otherwise.Theinforce contract data comes from an extract from the contract administration system, and aresubsequently aggregated into modeling cells for computing efficiency.Model access andchanges to it are controlled, while its documentation is routinely updated.A modeling actuary from the valuation group prepares a quarterly report for the hedging group,who then passes along buy and sell instructions to their traders.After completing thetransactions, the traders confirm the trades in a report to the hedging group.3.5.3 Liquidity RiskThe liquidity policy requires SLIC to hold sufficient liquid assets to meet expected demands forcash in a unique liquidity stress-test scenario.The scenario focuses on a reputational liquiditycrisis basis where markets continue to operate normally and the liquidity crunch affects onlythe company.The liquidity stress test anticipates situations where the company s ability to sell39assets to meet cash needs from its liability products is hindered by the market taking advantageof the company during the crisis.In addition, testing periodically considers a systemic stressscenario where the entire market is not able to sell assets at a reasonable value.However,SLIC s liquidity policy does not require it to hold sufficient liquid assets to be able to meet cashdemands in such a scenario, since it expects regulatory relief in a systemic crisis.3.5.4 Operational RiskThe CRO will be responsible for collecting and disseminating risk information.A report will beprepared monthly and distributed to executive management.3.6 Economic Capital ModelSLIC has implemented an economic capital model tailored to its own company-specific risks.SLIC uses an internal economic capital model.The model targets a total economic capital levelthat is calibrated to an AA financial strength.SLIC defines the model economic capital requiredas being the capital required to protect SLIC s policyholders in order to meet all of their claimswith a confidence level of 99.0 percent over a one-year time horizon.The Statutory and Economic balance sheets are independent of each other.The amount ofassets assigned to a line of business is based on the required capital, either on an economicbasis or a statutory basis.That is, the assets backing the liabilities on an economic basis are notthe same as the assets allocated on a statutory basis.The intent of the economic capital model is to quantify the risks to the company s net equity(on a market-consistent basis) using a one-year 99.0% Value at Risk (VaR) measure.The modelquantifies exposure to interest rate risk, equity price risk, and credit risk.Interest rates are modeled stochastically using a single-factor model calibrated to monthlyhistorical data for 10-year US Treasury yields from 1994.Equity returns are modeledstochastically using a regime-switching lognormal distribution that is calibrated to thirty yearsof daily S&P 500 equity index returns.For the VA and its GMAB and GMWB, the VaR is calculated with liabilities net of hedging assetsand derivatives.Implied volatility is derived from current exchange-traded 10-year at-the-money equity floors.As an approximation, the test assumes expiring derivatives can bereplaced with current at-the-money instruments.For credit risk, the model assumes that existing investment grade fixed income assets are soldimmediately if they fall below investment grade.Therefore, the company does not quantify therisk of credit default or loss given default.Credit risk is modeled through the stochasticsimulation of credit ratings migration.The calibration uses ten years of historical data forcorporate bond ratings migrations and yield spreads.Since the company has a general buy andhold investment strategy, credit spreads are only considered to be a risk factor if and wheninvestment grade assets are downgraded below investment grade.SLIC calculates the risk offluctuations in market value due to credit spread movements in the absence of ratings40downgrades, but excludes the results since its statutory surplus is based upon asset book valueand it has a general buy and hold investment strategy.The Company is currently considering a few methodologies to capture insurance risk, but hasnot implemented anything to date.A full-blown stochastic-on-stochastic analysis may be toomuch of a load on the existing computer infrastructure, so less onerous methodologies arebeing studied.At this point, the Company does not have an operational risk model and, therefore, operationalrisk is estimated to be 10% of the fair value of liabilities, whose calculation excludes anyprovisions for this risk.Procedurally, each risk is calculated for each line of business.Each risk is then summed for thecompany.The risks are then aggregated using a correlation matrix derived from the prior tenyears of market movements.All negative correlations are floored at zero.Operational risks areassumed to have zero correlation with other factors.Diversification benefits are allocated backto the lines of business [ Pobierz całość w formacie PDF ]