Transcript Canadian Institute of Actuaries L’Institut canadien des

Canadian
Institute
of
Actuaries
L’Institut
canadien
des
actuaires
2007 Annual Meeting ● Assemblée annuelle 2007
Vancouver
2007 Annual Meeting
Assemblée annuelle 2007
PD39 – CLIFR II
Update on various CLIFR topics
• Group Education Note
• Segregated Fund Valuation Issues
• Calibration of Interest Rate Models
2007 Annual Meeting
Assemblée annuelle 2007
Valuation of Group Life and
Health Policy Liabilities
PD39 - CLIFR II
Current Status of Group
Education Note
2007 Annual Meeting
Assemblée annuelle 2007
•
•
Revising the May 2000 Research paper on
Group insurance valuation considerations
Plan to release as an Education Note
–
•
•
Fall 2007
Working Group has been reviewing over
2006-2007
Similar content to original Research paper
–
–
–
Updated to reflect current Standards
Updated to reflect current Group practices
Some additional sections added, to provide
guidance on CALM, impact of 3855
2007 Annual Meeting
Assemblée annuelle 2007
Scope
• Provides guidance to actuaries valuing
group life and health policy liabilities
– Includes supplemental information to the
Standards of Practice
• Application
– employee, association and creditor groups
• Benefits typically covered:
– short & long-term disability, medical & dental,
term life (including group conversion benefits),
other
• Various financial arrangements
– Refund Accounting,Hold Harmless, ASO, Other
Financial Arrangements
• Basic Premium
2007 Annual Meeting
Assemblée annuelle 2007
–
plans are typically yearly renewable term with no guarantee of renewability
• Fully Pooled
• Prospectively Rated
• Refund Accounting for larger groups
– ERR and deficit recovery
– Claims Fluctuation Reserves to stabilize premiums
– Policyholder valuation basis vs Insurer’s CGAAP valuation basis
• Retrospective Premium Arrangements
• Administrative Services Only
• Split Funded Arrangements
– Combinaton of insured plus ASO beyond specified maximum
• Hold Harmless Agreements
2007 Annual Meeting
Assemblée annuelle 2007
Challenges under CALM
• Variety of Benefits and Financial
Arrangements
• Customization in contracts
• TPAs – record keeping and administrative
practices vs valuation data requirements
• Refund Accounting for large groups
– Difference between statement and policyholder
valuation bases
• Lack of reliable experience data
• Materiality considerations
– Per group
– By line of business
– By company
2007 Annual Meeting
Assemblée annuelle 2007
CICA 3855
• Degree of mismatch (long term assets
supporting short term liabilities)
• Surplus implications
• ERR at market (e.g., maintain BV of ERR
and adjust for difference of excess of MV
over BV)
Term of the Liability
2007 Annual Meeting
Assemblée annuelle 2007
• SOP 2320.03
– the term of the liability should take account of any renewal, or
adjustment equivalent to renewal after the balance sheet date if
• the insurers discretion at that renewal is contractually constrained, and
• if the policy liabilities are larger as a result of taking account of that renewal.
• Differentiate between term of active lives and term
of claim liabilities
• Active Lives
– Next “rate adjustment date” or rate guarantee period (e.g., LTD
benefits)
– Actuary would be cautious if extending period reduces policy
liabilities and would select longer term if such action increases
policy liabilities.
• Claim Liabilities
– Extend to end of claim-paying period
LTD considerations
2007 Annual Meeting
Assemblée annuelle 2007
• Termination Rates : SOP 2350.14 to 2350.18
– 1987 Basic GLTD table
– Muirhead Table
– 1985 CIDA for individually underwritten business (e.g.,
association or creditor plans)
– CDT64 table is outdated and may not be appropriate
without significant modification.
• Benefit Offsets: e.g., CPP, QPP, SSDI and workers’
compensation
– Appropriate for the projected benefits to reflect offsets.
• COLA Provisions: e.g., % of CPI
• the assumptions for future CPI increases would be consistent
with the valuation interest rate scenario
LTD considerations
2007 Annual Meeting
Assemblée annuelle 2007
• Other considerations which complicate valuation:
–
–
–
–
Pending/Resisted/Suspended Claims
Recurrence of Disability (may be part of IBNR liability)
Claims Terminated But Not Reported
Rehabilitation/Partial Disability:
• Exercise caution in assuming that the most recent net benefit
is representative of longer term net benefit payments
– Unusual Financial Arrangements:
• e.g., ASO for a period of time (e.g., two years) after disability,
and insured thereafter.
• Given the complexity, the actuary may find it useful
to validate overall reasonableness of the resulting
liabilities by performing adequacy testing
– Note provides an example in Appendix 3.
Waiver of Premium
considerations
2007 Annual Meeting
Assemblée annuelle 2007
• Liability cash flows include
• projected death benefits on disabled lives, related expenses
and conversion costs to individual life insurance policies
• Modifications needed to 1970 Kreiger table
• typically involves substantially reducing the mortality
rates and increasing the recovery rates (at least for
durations 1 to 10 )
• Small insurers issues: consider using LTD valuation
assumptions
• Actuary would exercise caution in applying LTD tables since
the insurer’s definitions of disability, and therefore termination
experience, may potentially be significantly different for waiver
and LTD
Liabilities for unreported claims
2007 Annual Meeting
Assemblée annuelle 2007
• Liability for Claims Due and Unpaid
– represents an exact recognition for a known amount owing
but not paid
– Coordinate with liability for reported claims
• Incurred But Not Reported (IBNR) Claim
Liabilities
– Arise from lags in:
• reporting of claims to the insurer,
• recording by the insurer of claims which have been reported
(e.g., delay recording of disability claims incurred until the
end of the elimination period), and
• claims that will be appealed or litigated in the future.
– Note describes various factors that can affect claim lags.
Eg:
• level of claim processing backlog,
• changes in benefits or exposure,
• etc
Common IBNR methodologies
2007 Annual Meeting
Assemblée annuelle 2007
• Factor Method
– for benefits where there is a short lag or run-off period
(e.g., group term life insurance)
– Factors based on past experience as % premiums, paid
claims, liability, other
• Loss Ratio Method
– (AVG EP + AVG Reporting Lag) × Loss Ratio ×
Premiums inforce.
– If the information is available, valuation could be done
on seriatim basis considering for each group its own
elimination period, premiums paid or loss ratios.
– Suitable for cases where the recording of LTD claims is
delayed until after the elimination period.
• Lag or Development method :
– Development of paid claims by period of incurral and
payment, which is used to develop a claim run-off chart.
2007 Annual Meeting
Assemblée annuelle 2007
Liability for Future Claims
• Claims that have not been incurred as at the
valuation date but will be incurred before the end of
the term of the liability.
– Mostly significant for long premium rate guarantees on
LTD business
– The longer the term of the premium rate guarantee, the
more material is the exposure to risk of inadequate pricing
and to interest rate risk (e.g., LTD Benefits)
• Examples
– Paid-Up Life
– LTD:
• Need to consider incidence of disability rates
– Creditor Insurance
• Term of the liability is to the end of the insured loan and subject to
any renewal guarantees
• May exhibit individual and group characteristics
2007 Annual Meeting
Assemblée annuelle 2007
Liability for Future Experience
Rating Refunds
– In theory, need a group by group projection of
future refunds based on projected experience
– In practice, approximations often used
• relationship between reported policyholder reserves and the
corresponding statutory (GAAP) reserves
• policyholder reserves > GAAP reserves  excess margin
may generally be expected to be refunded to policyholder
• policyholder reserves < GAAP reserves  future deficits can
be expected to arise. May be partially recoverable if group
has hold harmless, CFR, or other risk sharing
• Interest adjustment to the ERR may be required if interest
credited on policyholder reserves does not equal the
policyholder valuation interest rate.
– May need additional provision if actuary has concerns
about the adequacy of risk charges
2007 Annual Meeting
Assemblée annuelle 2007
Treatment of Deficit Recoveries
• Deficit represents negative policyholder
experience balance net of any funds the
insurer has a contractual right to offset.
• Section 2130.29 - the actuary would test
the appropriateness and recoverability of
the receivable amount
• Note outlines specific considerations in
determining the amount of deficit deemed
recoverable
• In practice, recoverable deficits only
reflected to extent of collateral (Hold
Harmless, CFR, etc).
2007 Annual Meeting
Assemblée annuelle 2007
Asset Considerations
• Consider both invested and non-invested
assets (e.g., outstanding premiums or
recoverable deficits)
• The actuary would consider the likely timing
and expected payout of recoverable deficits
before considering this within the CALM
testing.
• Actuary may need to further allocate the
assets by benefit type to understand any
ALM issues that may arise. (e.g., LT assets
supporting IBNRs may create additional
volatility under 3855)
Other Considerations
2007 Annual Meeting
Assemblée annuelle 2007
•
•
•
•
•
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Provisions for ASO contracts
Stop Loss
DAC
Reinsurance
International Issues
Tax Issues
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the
Valuation of Segregated Fund
Products
PD39 - CLIFR II
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
• Sub-Committee of CLIFR formed late
in 2005
• Mandate
– Review areas where additional guidance
could be provided to ensure compliance
with standards and to narrow the range of
practice
• Expected Completion – Fall 2007
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Contents of note
– Methodology – Bifurcated versus Whole
Contract
– Term of the Liability
• Hedging
– DAC Recoverability Testing
– Level of Aggregation
– Discounting and C3 PfAD
– Policyholder Behaviour
– Provision for Adverse Deviation
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Methodology – Bifurcated vs. Whole Contract
– Bifurcated
• Revenue is allocated between recoverability
testing of the DAC and the liability for the
guarantee
• Allocation does not change from period to
period
• Policy liability for the guarantee is calculated
separately using revenue based on this
allocation
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Methodology – Bifurcated vs. Whole
Contract
– Bifurcated
• Allocation of revenue to the guarantee would
generally be related to the additional charge
priced into the product for the guarantee
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Methodology – Bifurcated vs. Whole
Contract
- Whole Contract
– Total policy liability is determined using all net cash
flows available
– Several Variations of method
– Some don’t consider DAC separately
» Could cause unamortized DAC to increase
» Inconsistent with Section 2320.24 of SOP
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Methodology – Bifurcated vs. Whole
Contract
- Whole Contract Approach – DAC Focus
• DAC is first tested to ensure recoverability using all fee
income
• In order to calculate the liability for the guarantees, the
DAC balance is added to the stochastic result
• Mathematically equivalent to backing out a PV of fee
income equal to the DAC balance
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Methodology – Bifurcated vs. Whole
Contract
- Under both methods
• If the DAC becomes unrecoverable it is written down to
the extent it is recoverable
• Future amortization is reduced accordingly and locked in
consistent with SOP Section 2320.24
• Once the DAC is written down it may not be written back
up
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Methodology – Considerations
– Total liability under Whole Contract method will be
less than or equal to that under the Bifurcated
method
– Whole Contract method will defer possible writing
down of the DAC as long as possible as the DAC
has first priority on future revenue.
– Once the liability for the guarantee has become
positive the liability may become more volatile
under the Whole Contract method as the allocation
of revenue can change period to period.
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Methodology – Considerations
• At this time CLIFR is not recommending one
method over the other
• Both methods consistent with standards
• Currently the whole contract method is more
commonly used
• Direction of international standards appears to
be toward bifurcated approach
• When the direction of international standards
becomes clearer we will move in that direction.
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Term of the Liability
– Section 2320.27
• “…the term of the liability ends at the balance sheet date
for….the general account portion of a deferred annuity
with segregated fund liabilities but without guarantees;”
– Section 2320.23
• “The actuary would extend such term solely to permit
recognition of cash flow to offset acquisition or similar
expenses whose recovery from cash flow that would
otherwise be beyond such term was contemplated by the
insurer in pricing…
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Term of the Liability
• Add Guarantee:
– 2320.22 => term ends at the earlier of:
• First renewal or adjustment date at or after B/S
date at which there is no constraint
• Renewal / adjustment date after the B/S date
which maximizes policy liabilities
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Term of the Liability – what to conclude
• CLIFR’s view is that term of the liability
– ends at the balance sheet date if the liability would
otherwise be negative and
– the term would be extended beyond the balance sheet date
to the date which maximizes the liability
– Corollary is that the liability for the guarantee is floored at
zero
• SOP implies the above interpretation applies only to contracts
with no material constraints
– Fully guaranteed contracts would have term equal to the life
of the contract
• CLIFR may recommend changes to the standards for
the fully guaranteed contracts
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Hedging
• Application of zero floor can disrupt the parity
between the asset and liability sides of the balance
sheet
– Hedge assets can start with fair value of zero but
this value will go up or down with market movement
– Change in fair market value of derivatives flows through
investment income and would be expected
to be offset by a change in the liability
– This balance can be disturbed by the zero floor on
the liability side
– Result can be inconsistent with direction of market
movement
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Hedging
• CLIFR believes it would be appropriate to consider
both sides of the balance sheet in this situation
• Negative liability could be acceptable subject to
constraints on the amount of profit capitalized,
consistent with unhedged position
• Situation viewed as an unforeseen situation in the
context of General Standards Section 1330.01
– “ Deviation from a particular recommendation or other
guidance in the standards is accepted actuarial practice for
an unusual or unforeseen situation for which the standards
are inappropriate.”
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
DAC Recoverability Testing
•
•
•
•
Should be tested at least annually
Assumptions should include margins
CTE level between CTE60 and CTE80
If full amount is not recoverable, actuary
– reduces unamortized DAC to recoverable amount
– reduces remaining future write-down amounts
proportionately
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
DAC Recoverability Testing
• Amortization period for DAC (length of writedown pattern)
– Should be consistent with the extended term for
DAC recoverability established at inception per
SOP Section 2320.24
– Once established it is locked in
– Extended term for DAC recoverability will differ
from the amortization period over time
• Extended term adjusts to reflect only enough revenue to
recover DAC
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Level of Aggregation
• SOP Section 2320.09 presents CALM as an
aggregate methodology
– “ The actuary would usually apply the Canadian asset liability
method to policies in groups which reflect the insurer’s asset
liability management practice for allocation of assets to
liabilities and investment strategy.”
• Section 2320.22 defines term of the liability at the
policy level
• Some judgment required
• Level of aggregation is an important consideration for
term of the liability / application of zero floor
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Level of Aggregation
• CLIFR’s view is that term of the liability can be applied
at the segment level
– Would have to test on an ongoing basis for term which
maximizes the liabilities
– Term could change more frequently if segment contains
diverse cohorts, e.g. when a block reaches maturity date
• For practical purposes may want to aggregate at a cohort level
where cohorts are homogeneous with respect to key risk
characteristics
– Finer splits into cohorts would be expected to increase total
liability
– Extreme case is seriatim level which would be inappropriate
• More work required on this
Considerations in the Valuation of Segregated
Fund Products
2007 Annual Meeting
Assemblée annuelle 2007
Discounting and C3 PfAD
• Using the CALM method for guarantee reserves likely
impractical
•Implies using stochastic or deterministic interest rate
scenarios along each stochastic guarantee test path
• Common approximation method is to use a discounted
cash flow method
• Discount rate should be related to current statement
value of supporting assets as reflected in current book
yield
• Under 3855, if assets are designated as Held for Trading
(HFT) yield would be reflective of fair value and
discount rate should be variable period to period
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Discounting and C3 PfAD
• C3 MfAD is usually estimated as an adjustment to the
Discount Rate
• Theoretically should be calculated or justified by
CALM testing reflecting reinvestment or disinvestment
exposure of liabilities and supporting assets
• In practice tested after the fact on representative cash
flows
• Often not a material issue because of the size of the
liabilities
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Policyholder Behaviour – Summary
• Policyholder behaviour an important assumption for
segregated funds:
–
–
–
–
Full and Partial Withdrawal
Resets
Fund transfers
Annuitizations if material
• Consider interrelationships, particularly reaction to the
scenario
– Must combine experience data with common sense / intuition
when modeling dynamic behaviour
– Consider higher MfADs for these
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Policyholder Behaviour – Guiding
Principles
• Option exercise correlated with in- the – moneyness
• Anti-selection
• Consider reasonable expectations
• PH sophistication & perceived financial
interest in policy
– < 100% efficiency
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Provision for Adverse Deviation
• The term of the liability for segregated fund products has
resulted in different interpretations as to the period over which
the calculation extends
• Distortions can result if related to general account liabilities
• SOP Section 1110.39: “Provision for adverse deviations is
the difference between the actual result of a calculation and
the corresponding result using best estimate assumptions.”
– This suggests there can be a PfAD only if there is a
difference between the actual reserve and the best
estimate reserve
2007 Annual Meeting
Assemblée annuelle 2007
Considerations in the Valuation of Segregated
Fund Products
Provision for Adverse Deviation
• Examples
– Recoverability margin for DAC would not be a PfAD
– If reserve for guarantees is floored at zero, difference
between this and calculated negative reserve would not
be a PfAD
– These amounts could be disclosed separately as
additional segregated fund margins
2007 Annual Meeting
Assemblée annuelle 2007
Calibration of Interest Rate
Models
VAL-2: CLIFR Part II - PD
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Agenda - Update from the Working Group
•
•
•
•
•
•
Recap Goals and Principles from Ottawa 2006
Derivation of Draft Initial Calibration Criteria
Model Testing
Immediate Next Steps - to complete for 2007
guidance
Beyond 2007
Questions
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Objective
It is desirable to have a set of calibration standards
that can be applied consistently to as wide a range of
interest-sensitive insurance and investment products
as possible, including both long and short term
products.
•
Mandate
•
The working group has been formed to investigate
and develop methodologies and standards for the
calibration of interest rate models for determining
policy liabilities to be held by life insurance
companies.
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
General Principles
•
Be sufficiently robust to narrow the range of
practice, but allow the actuary to apply
reasonable judgement to specific circumstances;
•
Be applied to the set of scenarios produced, not
to the model parameters or inputs;
•
Be applied to not only the near term, but also the
steady state portions of the scenarios produced;
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
General Principles (continued)
•
Be applied to more than one point on the yield
curve including a mix of short, medium, and
long-term points;
•
Promote the development of scenario sets that
measure exposure to yield curve shocks as well
as long-term paths of declining as well as rising
interest rates, consistent with history;
•
Look at average rate distributions corresponding
to extended periods of time as well as rate
distributions at selected points in time.
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Working Group Contacts
–
–
–
–
–
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Wally Bridel, Chair
Edward Astrachan
Michael Bean
David Campbell
Christian-Marc Panneton
Jason Wiebe
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Derivation of Initial Calibration Points
•
Long term horizon (steady state)
•
Review historical experience
•
Capture high and lows
•
Not limited only to Canadian historical
experience
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-6
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-7
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-9
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•
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nv
2007 Annual Meeting
Assemblée annuelle 2007
CLIFR Calibration of Interest Rate Models Working Group
Canadian Long rates - 1936-2007
GOC over 10 years
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2004-01
2000-01
1996-01
1992-01
1988-01
1984-01
1980-01
1976-01
1972-01
1968-01
1964-01
1960-01
1956-01
1952-01
15%
1948-01
20%
1944-01
1940-01
•
1936-01
2007 Annual Meeting
Assemblée annuelle 2007
CLIFR Calibration of Interest Rate Models Working Group
Canadian short rates - 1936-2007
25%
Canada - Historical Rates
3-Month T-Bills
GOC over 10 years
10%
5%
0%
CLIFR Calibration of Interest Rate Models Working Group
USA long rates - 1919-2007
U.S.A. - Historical Rates
18%
Moody's Seasoned AAA
30-Year Constant Maturity
16%
14%
12%
10%
8%
6%
4%
2%
2004-01
1999-01
1994-01
1989-01
1984-01
1979-01
1974-01
1969-01
1964-01
1959-01
1954-01
1949-01
1944-01
1939-01
1934-01
1929-01
1924-01
0%
1919-01
2007 Annual Meeting
Assemblée annuelle 2007
•
CLIFR Calibration of Interest Rate Models Working Group
USA short rates - 1857-2007
U.S.A. - Historical Rates
25%
Commercial Paper
20%
15%
10%
5%
07
20
97
19
87
19
77
19
67
19
57
19
47
19
37
19
27
19
17
19
07
19
97
18
87
18
77
18
67
18
57
0%
18
2007 Annual Meeting
Assemblée annuelle 2007
•
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Draft Calibration Criteria
Long horizon
Left tail
Right tail
Percentile
Long rate
2.5th
2.60%
5th
2.95%
10th
3.40%
90th
10.00%
95th
12.00%
97.5th
13.50%
Long horizon is 30-40 years.
Long rate is 20 year bond.
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Draft Calibration Criteria
Cumulative distribution function
GOC over 10 years: Jan '36 - Jan '07
100%
90%
80%
70%
60%
50%
Historical data
40%
Calibration Points
30%
20%
10%
0%
0%
5%
10%
15%
20%
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Model Testing
•
Testing different model forms (Vasicek, CIR,
Brennan-Schwartz, Multiplicative Shock)
•
Single and multiple regimes
•
Unconstrained and constrained
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Initial Results (preliminary)
•
Vasicek can be adjusted to satisfy calibration
points but presents undesirable features (simple
AR(1) model)
•
In general, single regime models can be
adjusted to meet calibration criteria
•
Reasonably parameterized regime switching
models can satisfy the calibration criteria
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Initial Results (preliminary)
Cumulative distribution function
GOC over 10 years: Jan '36 - Jan '07
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Historical data
Calibration Points
Vasicek Calibrated
CIR calibrated with reversion set at 15 yrs
Brennan-Schwartz calibrated with reversion set at 15 yrs
MS calibrated with reversion set at 15 yrs
0%
5%
10%
15%
20%
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Initial Results (preliminary)
•
Fatter low rate tail models (Vasicek and CIR
forms) appear to be constrained by the 10th and
97.5th percentiles
•
Thinner low rate tail models (Brennan-Schwartz
and Multiplicative Shock forms) appear to be
constrained by the 2.5th and 90th percentiles
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Initial Results (preliminary)
Criteria
1st perc.
2nd perc.
2.5th perc.
5th perc.
10th perc.
50th perc.
90th perc.
95th perc.
97.5th perc.
98th perc.
99th perc.
2.60%
2.95%
3.40%
10.00%
12.00%
13.50%
Vasicek
CIR - 15 yrs BS - 15 yrs MS - 15 yrs
0.14%
1.83%
2.30%
2.30%
0.99%
2.17%
2.52%
2.52%
1.29%
2.30%
2.60%
2.60%
2.27%
2.78%
2.90%
2.91%
3.40%
3.40%
3.28%
3.29%
7.39%
6.34%
5.47%
5.47%
11.39%
10.58%
10.00%
10.00%
12.52%
12.07%
12.18%
12.12%
13.50%
13.53%
14.63%
14.57%
13.79%
13.98%
15.55%
15.45%
14.64%
15.45%
18.59%
18.50%
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Initial Results (preliminary)
Left CTE(99%)
Left CTE(98%)
Left CTE(95%)
Left CTE(80%)
Left CTE(70%)
Left CTE(60%)
Right CTE(60%)
Right CTE(70%)
Right CTE(80%)
Right CTE(95%)
Right CTE(98%)
Right CTE(99%)
Vasicek
CIR - 15 yrs BS - 15 yrs MS - 15 yrs
-0.91%
1.50%
2.08%
2.09%
-0.15%
1.76%
2.25%
2.25%
0.97%
2.21%
2.54%
2.54%
3.03%
3.25%
3.21%
3.21%
3.78%
3.71%
3.52%
3.52%
4.38%
4.11%
3.80%
3.80%
10.40%
9.57%
9.12%
9.09%
11.00%
10.26%
9.99%
9.96%
11.75%
11.19%
11.26%
11.22%
13.82%
14.11%
16.26%
16.18%
14.94%
15.94%
20.31%
20.17%
15.70%
17.25%
23.81%
23.61%
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
CLIFR Goals
•
More in depth presentation at the AA Seminar
•
No changes anticipated to the 2007 Fall Letter
•
Develop an Educational Note in 2008
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Working Group Goals for 2007
•
Complete testing on long rate, long horizon
•
Determine calibration criteria for short and
medium rates at the long horizon
•
•
•
May be mix of quantitative and qualitative criteria
May be derived from model testing
Any other criteria necessary for the long horizon
•
•
Sustained highs and lows
Yield curve shape (positive, inverted, flat, humped)
CLIFR Calibration of Interest Rate Models Working Group
2007 Annual Meeting
Assemblée annuelle 2007
•
Beyond 2007
•
Prioritize next steps
•
•
•
USD at long horizon, or
Shorter horizons
Other.…
2007 Annual Meeting
Assemblée annuelle 2007
CLIFR Calibration of Interest Rate Models Working Group
Questions?