Risk and Regulation for Variable Annuities
Variable annuities are hybrid investments that have both securities and insurance features.
Financial institutions, especially insurance companies, need to design new types of variable annuities to meet regulatory requirements and provide new benefits (guarantees, tax effectiveness, flexibility).
For this reason, institutions are more interested than ever in having a quantitative approach towards managing their liabilities, which allows them to limit their exposure to market risk and develop hedging strategies for their assets and liabilities.
Overall, managing variable annuities requires a high level of risk management capabilities to monitor all of the diversity of risk.
As with any other organisation managing financial investments, insurance companies need to calculate hedging against a series of risks generated by different factors such as mortality, moneyness, equity risk and interest rate risk.
The complexities of these calculations mean that insurance companies increasingly require more powerful tools for modelling economic scenarios and risk profiles for policies, then the ability to propose hedging instruments and measure their effectiveness.
Our expertise
Until now, insurers have used a mix of basic standalone tools for different parts of this risk management and hedging calculation process. Risk sensitivity calculations are normally carried out in isolation of other systems in the front office, but do not flow straight through to middle and back office applications for portfolio management and booking hedges – opening up room for operational risk and errors.
Sophis is working with insurance companies to take a different approach. We provide a single, global system that can be used to support the whole process, from front to back office. Our system can be used to manage assets and liabilities for variable annuities and enables insurers to manage guaranteed minimum benefits, including GMDB, GMIB, GMWB, GWBL and GMAB.
This new approach offers one secure system that includes centralised data and a range of hedging instruments, including futures, options and FX. The hedge effectiveness calculation and the performance analysis offered by Sophis optimise the hedging strategy for insurance companies.
Sophis provides the flexible, secure, scalable technology platform that insurers need to model the huge complexity associated with variable annuities.
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| "It is vital to have the appropriate risk management and operational controls in place. We chose Sophis RISQUE because it offered proven technology and because the team was able to demonstrate insight into the challenges that our industry faces"
Frank Kusse, Member of the Management Board at Robeco |
| Anthos Asset Management upgrades its fund management activity to a centralised front-to-back system with Sophis VALUE |
