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14th EAST ASIAN ACTUARIAL CONFERENCE Prepared by Seow Fan Chong, FSA

Building a Simplified Stochastic Asset Liability Model (ALM) for a Malaysian Participating Annuity Fund. 14th EAST ASIAN ACTUARIAL CONFERENCE Prepared by Seow Fan Chong, FSA. Simplified Stochastic ALM – Malaysian Annuity Fund.

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14th EAST ASIAN ACTUARIAL CONFERENCE Prepared by Seow Fan Chong, FSA

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  1. Building a Simplified StochasticAsset Liability Model (ALM) for a Malaysian Participating Annuity Fund 14th EAST ASIAN ACTUARIAL CONFERENCE Prepared by Seow Fan Chong, FSA

  2. Simplified Stochastic ALM – Malaysian Annuity Fund Lack of numerical demonstration of ALM for Asian insurance fund published Asian actuaries are increasingly required to use stochastic techniques in ALM Proprietary actuarial ALM software are complex and results difficult to verify Simplified stochastic ALM implemented in spreadsheet suffices for most Asian insurance companies Prepared by Seow Fan Chong, FSA

  3. Simplified Stochastic ALM – Malaysian Annuity Fund Outlines of Presentation Overview of the Building Process Key Features of a Typical Malaysian Participating Annuity Fund Projection of Liability Cash-Flow Simplified Stochastic Asset Models Parameters Estimation and Assumptions Simulation of Economic Series Results of Stochastic ALM Prepared by Seow Fan Chong, FSA

  4. Simplified Stochastic ALM – Malaysian Annuity Fund Overview of the Building Process Specify ALM Objectives Project Liability Cashflow Specify Stochastic Asset Models Estimate Parameters of Asset Models Simulate Economic Series Project Asset Cashflow and combine with Liability Cashflow Summarize Results as Balance Sheet and Profit & Loss Statement Prepared by Seow Fan Chong, FSA

  5. Simplified Stochastic ALM – Malaysian Annuity Fund Key Features of a Malaysian Annuity Product Single Premium Deferred Participating Annuity Entry Age: 19 to 54 Vesting Age: 55 Reversionary Bonus 2% pa Annuity Guaranteed 10 years Death before vesting: 10 years annuity certain Surrender before vesting: 10 years annuity certain Prepared by Seow Fan Chong, FSA

  6. Simplified Stochastic ALM – Malaysian Annuity Fund Liability Assumptions Expense – FY 1.5% SP; 5% Accrued Annuity Commission – 3.5% SP Lapse: 1-2 yr 20%; 3 to age 55 10%; 0% after Mortality: 70% M83/88 before 55; a(90) set back 2 years after 55 Investment Income Tax 8% Corporate Tax: 28% on transfer to shareholder Reserving Method: Modified Net Premium Reserving Basis: Interest 4.5% Solvency Margin: 4% reserve + 0.2% Sum At Risk Transfer to shareholder: 10% Cost of Bonus Prepared by Seow Fan Chong, FSA

  7. Simplified Stochastic ALM – Malaysian Annuity Fund Asset Models Inflation – One Factor Vasicek Model Real Interest – Two Factors Vasicek Model Equity – Regime Switching Lognormal Property - One Factor Vasicek Model Prepared by Seow Fan Chong, FSA

  8. Simplified Stochastic ALM – Malaysian Annuity Fund minf – long run mean inflation rate kinf– mean reversion speed inft – inflation rate at time t sinf – volatility of inflation rate einf – standard normal error term Inflation – One Factor Vasicek Model Prepared by Seow Fan Chong, FSA

  9. Simplified Stochastic ALM – Malaysian Annuity Fund Real Interest – Two Factors Vasicek Prepared by Seow Fan Chong, FSA

  10. Simplified Stochastic ALM – Malaysian Annuity Fund Real Interest – Two Factors Vasicek Prepared by Seow Fan Chong, FSA

  11. Simplified Stochastic ALM – Malaysian Annuity Fund rij = P[ rt+1 = j | rt = i ] i = 1,2, j = 1, 2 J = {m1, m2, s1, s2, r2,1, r1,2} Equity – Regime Switching LogNormal Prepared by Seow Fan Chong, FSA

  12. Simplified Stochastic ALM – Malaysian Annuity Fund mprop – long run mean property return kprop– mean reversion speed propt – property return at time t sprop – volatility of property return eprop – standard normal error term Property – One Factor Vasicek Model Prepared by Seow Fan Chong, FSA

  13. Simplified Stochastic ALM – Malaysian Annuity Fund Parameters Estimation - Inflation Prepared by Seow Fan Chong, FSA

  14. Simplified Stochastic ALM – Malaysian Annuity Fund Parameters Estimation - Inflation Prepared by Seow Fan Chong, FSA

  15. Simplified Stochastic ALM – Malaysian Annuity Fund Parameters Estimation – Interest Rates Prepared by Seow Fan Chong, FSA

  16. Simplified Stochastic ALM – Malaysian Annuity Fund Parameters Estimation – Interest Rates Prepared by Seow Fan Chong, FSA

  17. Simplified Stochastic ALM – Malaysian Annuity Fund Parameters Estimation – Equity Prepared by Seow Fan Chong, FSA

  18. Simplified Stochastic ALM – Malaysian Annuity Fund Parameters Estimation – Property Prepared by Seow Fan Chong, FSA

  19. Simplified Stochastic ALM – Malaysian Annuity Fund Parameters Estimation – Correlation Prepared by Seow Fan Chong, FSA

  20. Simplified Stochastic ALM – Malaysian Annuity Fund Simulation of Economic Series Prepared by Seow Fan Chong, FSA

  21. Simplified Stochastic ALM – Malaysian Annuity Fund Simulation of Economic Series Prepared by Seow Fan Chong, FSA

  22. Simplified Stochastic ALM – Malaysian Annuity Fund Selected Results of ALM Prepared by Seow Fan Chong, FSA

  23. Simplified Stochastic ALM – Malaysian Annuity Fund Selected Results of ALM Prepared by Seow Fan Chong, FSA

  24. Simplified Stochastic ALM – Malaysian Annuity Fund Selected Results of ALM Prepared by Seow Fan Chong, FSA

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