Case Studies

MoSes

Multisegment Corporate Modeling

A leading multiline insurer wanted to improve its competitive advantage by improving the analysis and management of its product lines. The company worked with us to develop a flexible, extensible corporate financial model to integrate analysis across multiple business segments.

Because the company is large, its management was concerned that tying together analysis from diverse product groups into a multisegment corporate modeling projection system might prove difficult. The company’s blocks of business are so large that the work would typically be broken down into separate stand-alone applications. Management wanted the best of both worlds: powerful stochastic models with strong analytical capabilities that could be grouped into a flexible, extensible corporate modeling framework.

We assembled a team of consultants and software experts to work with a cross section of company stakeholders. This team designed the corporate framework that would best meet the company’s needs and tested the integrity of the design using a three-tier process focused on quality coding, accurate calculations and high-speed application performance.

Variable Annuity Hedging

A premier writer of variable annuity (VA) products with embedded guarantees uses its MoSes to calculate the sensitivity of these guarantees to market conditions, then uses this information to hedge these guarantees.

The volume of data processed in these hedging calculations is truly astounding. This company gets the work done in a timely manner by using distributed processing, splitting the projection task into smaller tasks and assigning them to hundreds of computers on a grid. The work is completed in a fraction of the time that would be required using other methods.

By hedging embedded guarantees, this VA writer is better able to manage short-term risk, such as GAAP earnings volatility and statutory surplus volatility. In the long term, hedging helps protect this company from the risk that either capital markets or contract-holder behavior greatly will deviate from what is expected.

Pricing Variable Annuities With Embedded Guarantees

A leading issuer of variable annuity products needed more sophisticated analysis to help price products with a guaranteed minimum accumulation benefit and a guaranteed minimum withdrawal benefit.

Our consultants have considerable experience in analyzing and modeling such guarantees and helped this company establish a pricing model using MoSes that can handle the nuances of product design and actuarial assumptions.

Replica

ICA Project Using Replicating Portfolios

AEGON wanted to streamline the ICA calculation process and in particular the multivariate capital analysis used for its with-profits funds. Replicating portfolios would allow AEGON to obtain a more accurate liability proxy and capital formula for significantly less work. Management would get access to results more quickly, as well as a more in-depth understanding of the drivers of capital for the with-profits funds.

AEGON UK initiated a project to develop a replicating portfolio model to support its ICA process. After a review of different providers in the market, the company chose Towers Watson to help with the project. Anne Baxter, Capital Management Actuary at AEGON said, Wyatt offered AEGON an opportunity to develop the replicating portfolio for our business in partnership. We were impressed with how transparent they were in explaining what their model was doing and a willingness to disclose information on their unique optimization algorithm."

The development of the replicating portfolio model for AEGON was conducted over a six-month period. Throughout the project, there were regular meetings to ensure AEGON was fully involved and had the opportunity to influence the development.

The replicating portfolio is being used successfully by AEGON to support its ICA process. Although the project officially ended, AEGON and Towers Watson continue to discuss ways to improve and refine the model. AEGON has broadened its use of the replicating portfolio tool to help in areas such as understanding the capital required under different investment strategies and monitoring its solvency position. "The project has been very successful," said Anne Baxter. "AEGON has a replicating portfolio tool that meets our specific needs and, as a result of the project, we have strengthened our working relationship with Watson Wyatt."

Pretium

Product Development and Pricing With Pretium

Towers Watson provided actuarial assistance to Chaucer in the development and pricing of its new motor product. We directed Chaucer staff to undertake analyses on historical data using Pretium and provided regular peer review of their work. In addition, we conducted a separate geographical spatial analysis to help Chaucer understand the extent to which risk varies across postcode (zipcode). This work involved applying our in-house spatial analysis techniques in order to band all postcodes into groups of similar risk. The methods included an analysis of various geodemographic factors from third party data providers in addition to the actual geophysical location, which were useful in describing how the risk varies by region.