Observations on emerging variable annuity statutory accounting results_FINAL

Financial Services
Observations on emerging
variable annuity statutory
accounting results
June 2010

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3Copyright © 2010 Oliver Wyman
Abstract
This white paper represents the findings from Phase 1 of the Variable
Annuity Statutory Framework Review Initiative (“VASFRI”), an effort
by Oliver Wyman to establish a fact base about the impact of Actuarial
Guideline XLIII (“AG43”) and C-3 Phase II RBC (“C3P2”) on capital and
reserve levels as well as associated risk management activities.
The primary goal of this study, based on the data from and
conversations with 12 of the largest variable annuity (“VA”)
writers in North America, was to substantiate evidence about the
framework’s “unintended consequences” with respect to increased
volatility in results, the counterintuitive manifestation of some risk
mitigation techniques under the framework, and a perceived high
degree of complexity. While evidence of these issues was already
pervasive, it was previously regarded as anecdotal and idiosyncratic.
Our systematic study confirms the existence of these issues as
an industry-wide, systemic challenge to VA writers and insurance
regulators. We believe that there is potential for adverse impact
on risk management incentives and greater opacity as opposed
to transparency of statutory balance sheets and the solvency of
individual insurers.
We recommend that a further study be commissioned that, over the
course of 2010, analyzes the root causes of the above observations
and seeks to identify modifications to the methodology, calculations
and/or framework that may provide a partial (or full) remedy to these
issues. Indeed, given the continued macroeconomic uncertainty, we
think that such a study should be pursued with some urgency.

4 Copyright © 2010 Oliver Wyman
Executive summary
C3P2 and AG43 represent an important step forward in the
implementation of Principles Based Reserving (PBR) and risk-based
capital for statutory accounting. Many years in the making, these
standards are the results of a significant effort by industry, academia,
actuarial bodies, and government authorities to develop more
appropriate reserving and capital standards for VA products with
guaranteed benefits.
One of the key challenges that these various stakeholders have faced
in developing the new standards is the high complexity of today’s VA
products. A wide variety of product designs offer significant benefits
by allowing policyholders to balance retirement income goals with
investment growth objectives, often through living benefit “riders”
that guarantee minimum benefit levels as a protection against market
uncertainty. Over the years, these guarantees have evolved rapidly.
As a result, different VA writers will generally have widely varying
product profiles and exposures (due to timing of past sales) in their
in‑force portfolios.
All of the large variable annuity writers have hedge programs in place
to ensure that they are prudently managing financial risk against
these diverse in-force books of business. While the degree of hedging
and types of strategies vary, these programs have been developed
and executed over a period of years. The risk mitigation strategies
primarily differ by the target exposure of the hedging activity (e.g.
rider-only versus whole contract), the valuation basis (e.g. US GAAP
versus other standards), the objective function (e.g. minimizing
accounting versus mark-to-market versus statutory volatility and/
or tail risk exposure), the techniques deployed (e.g. reinsurance,
static hedges, or dynamic strategies), the risk types being hedged
(e.g. equities, interest rates and currency exchange rates) and the
instruments employed (e.g. options, swaps and futures contracts).
Given the inherent complexities of the guaranteed benefits, the
diversity of product designs, the varieties of business mix, and the
multitude of risk management philosophies and techniques used,
it should not come as a surprise that the potential impact of the
reserving and capital standards is only now beginning to come into
sharper focus. Recent market events have also shed light on aspects
of the framework that may not have been thoroughly contemplated
in the development. As such, it is only natural and reasonable that

now, with the benefit of some experience, the standards be examined
more closely.
In preparation for the 12/31/2009 implementation of AG43, many
companies produced and analyzed shadow (test) results for the new
framework. Among other oddities, these results often displayed an
unintuitive impact of hedging through the market movements of
2008-2009. Oliver Wyman’s client work in this space has given us a
“front-line” view of issues relating to these unexpected and non-
intuitive results. These issues seem to represent real, unintended
consequences of the valuation and calculation framework.
Our analysis leads to the following observations:
„„ The impact of hedging on statutory results is often counter-
intuitive, with potential increases in reserve and sometimes
overall Total Asset Requirements (“TAR”) in response to risk
mitigation action
„„ The deterministic Standard Scenario (“SS”) floor dominates more
than may have been originally intended
„„ The sensitivity of the statutory results for a given book of business
is not aligned with the underlying risk fundamentals, and indeed
the response of reserves and capital levels to hedging under the
Standard Scenario can be diametrically opposed to the response
under the stochastic calculations
„„ The level and volatility of capital requirements have increased,
with the potential for undue, pro-cyclical changes in results
It is important to note that these issues are material and not mere
modeling artifacts. Moreover, they are experienced by a majority of
players in the industry. These manifestations have the potential to
produce some undesirable consequences – for example, changes to the
hedging strategy and/or increased appetite for higher cost engineered
solutions that might be inconsistent with the underlying risk
fundamentals or risk appetite of the company (e.g. reduced hedging
activity and thereby greater retained economic exposure). Changes
in hedging strategy extend in particular to exposures to interest rate
and implied volatility levels, but in some circumstances also apply to
equity performance risk.
In aggregate, these issues have produced some significant challenges
for senior company management in terms of reduced predictability
and much greater difficulty in understanding and explaining results.
By the same token, this greater complexity may not provide insurance

regulators with the right signals or information to facilitate the
discharge of their oversight and governance responsibilities.
We hope that our analyses of these matters will help facilitate future
investigation and refinements to the calculations/methodologies.
Clearly, the primary goal of continued study would be to improve AG43
and C3P2 as statutory valuation standards for VAs, but a secondary
benefit would be to allow these frameworks to serve as templates for
broader application (in concept) to other risks/product lines.

Key observations
1. Impact of hedging
As a prelude to further discussion, it is instructive to define what
might constitute an “intuitive” impact of hedging: At the most
fundamental level, assessed at a point in time, hedging strategies
should reduce tail risk, and thus required capital, and generally bring
greater stability to reported values. Notwithstanding the complexities
of the interaction of reserve and capital levels in the statutory
framework (e.g. impact of Standard Scenario floor, smoothing, hedge
effectiveness, etc.), two generic patterns of hedging impact emerge as
displayed in Exhibit 1.
Exhibit 1: Potential impact of hedging
Intuitive impact of hedging Unintuitive impact of hedging
Required
Capital
Reserves
TAR
Required
Capital
Reserves
Before inclusion
of hedge assets
After inclusion
of hedge assets
Before inclusion
of hedge assets
After inclusion
of hedge assets
TAR
An intuitive impact of hedging would be a decrease in required capital
(left chart), typically influenced by a lower TAR at the CTE1
(90%)
level. Whether the AG43 reserves themselves increase or decrease
after hedging (compared to unhedged values) depends on a complex
array of highly interactive elements, such as the hedging instruments
employed and the relationship between the valuation of assets under
a set of implied “risk neutral” capital markets scenarios and the
valuation of “tail exposure” under the “real world” (realistic) scenarios
required by the statutory valuation standard.
An unintuitive impact of hedging would be an increase in TAR (right
chart) or an increase in required capital occasioned by a decrease
in reserves.
Aside from the directional impact on reserves, we would expect
hedging to bring greater stability to the capital requirements
1 Conditional Tail Expectation, also called Tail Value-at-Risk (“TVAR”).

over time. Increases in or greater volatility of required capital
have ramifications above and beyond the immediate statutory
requirements due to the wide ranging use of the RBC ratio and the
“traditional” use of capital multiples (e.g. >350%).
With the above information as backdrop, our analysis examined the
actual (observed) effects of hedging for the companies participating in
the study. As shown2
in Exhibit 2, a full 1/3 of companies do not see a
hedging benefit, despite having fully developed, time-tested hedging
programs in place.
Exhibit 2: Impact of hedging on VA reserves & RBC at 12/31/2009
Normalized3
values in excess of Cash Surrender Value (“CSV”)
A B C D E F
G H I J K L M
53
73
47
37
90 85
10 15
100 108 100 99 100
72
4
100 83
46 53 61
39
74
47
67 62 68
85
100
85
54 31
39
19
26
25
33
11
32
100
72
Do not see hedging beneﬁt
Required
Capital
Reserves
TAP
Before
hedges
After
hedges
Specifically, reflecting the full interaction between the stochastic and
Standard Scenario floor requirements, we see from Exhibit 2 that:
„„ Four companies show stagnant or increased TAR as a result of
hedging activities
„„ Two companies show an increase in required capital
„„ Five companies show no required capital, before and after hedging
activities are reflected
These findings tend to suggest that the impact of hedging is at best
ambiguous and at worst detrimental to the overall statutory position.
The reasons for these observations are complex and inter-related.
2 While 12 companies participated, 13 results are shown since one company provided data
for two legal entities.
3 Pre-hedging TAR in excess of CSV, normalized to $100. Required capital is pre-smoothing
and pre-covariance adjustments.

A. Standard Scenario versus Conditional Tail
Expectation calculations
One core driving factor of both the unintuitive nature of some
observations as well as the asymmetric impact across the companies
surveyed is that equity hedging tends to increase stochastic results and
reduce the Standard Scenario values, as generalized in Exhibit 3.
Exhibit 3: Generalized impact of inclusion of hedges on statutory results
Standard Scenario Amount (SSA) Stochastic calculation (CTE Amount)
 Tends to reduce SSA
– Standard scenario requires drop in
equity markets, but flat interest rates
and implied volatility (for pricing
hedging instruments)
– Equity short positions benefit under
this scenario
 Increase/small change in CTE Amount
– Scenarios driving result likely change
– Instead of funding a loss due to
policyholder benefits in “down”
scenarios, the requirements are largely
determined by “up” markets where
hedge assets lose value
 Subject to interpretation – spirit of
guideline suggests that SSA should be
unaffected by interest rate hedges
 Variable impact across insurers. Some are
seeing benefits, but many do not
 Likely drivers of variability are interest
rate scenarios and modeling choices
 Differences in implied forward rates
versus long-term modeled can drive results
EquityhedgingInterestratehedging
Note: The above observations are relevant to both reserves and TAR. The exception are companies
without a Clearly Defined Hedging Strategy – for these companies the guidelines allow existing
hedges to be incorporated into the AG43 Standard Scenario, but not the C3P2 SS.
These observations are further illustrated in Exhibit 4, which shows
reserves and required capital under the “stochastic only” calculations
(i.e. ignoring the impact of the Standard Scenario). On this basis,
fully 2/3 of sampled companies do not see any material benefit from
hedging. Indeed, some see a remarkable increase in TAR and/or change
in balance sheet composition (i.e. reserves versus RBC).

Exhibit 4: Impact of hedging on “stochastic only” VA reserves & RBC
at 12/31/2009
Normalized4
values in excess of Cash Surrender Value (“CSV”)
46 53
54
31
48 39
52
19
42
29
58
40
47
78
53
6
73
218
27
57
8
43 346
98 97
2
A B C D E F
G H I J K L M
50
73
50
37
72 72
28 27
Do not see hedging beneﬁt Required
capital
Reserves
TAR
Before
hedges
After
hedges
73
134
27
77
86
23
23
Not
available
50
4950
52
B. Interplay of statutory and market
based valuations
Another factor is the structural difference between the real-world
statutory valuations required under AG43 and C3P2 relative to
market based valuations (both applied to the whole contract). The
complexity of the AG43 and C3P2 methodologies – especially the non-
linear components of the CTE calculations and the Greatest Present
Value (“GPV”) concept – make it very hard to study and understand
the dynamics, particularly when viewed in the context of an actual
book of business (i.e. a variety of product generations originated
over several years). To circumnavigate or reduce some of these
difficulties and promote clarity, we have analyzed a simple, theoretical
Guaranteed Minimum Accumulation Benefit (“GMAB”) product with
the S&P 500 index as the only separate account investment option. By
stipulating a policy that does not allow surrenders, the liability can be
perfectly cash flow matched by buying a European put option on the
same underlying for an identical term.
Exhibit 5 illustrates the results from the valuation of the resulting book
of business both for an unhedged base case and for the fully hedged
situation assuming varying levels of implied S&P 500 index volatility.
To simplify the presentation, the values are normalized so that the TAR
for the base unhedged position is $100. Further, the Standard Scenario
is ignored and only stochastic results are considered. For reference, the
price of the matching “put option” is also displayed.
4 Pre-hedging TAR in excess of CSV, normalized to $100. Required capital is pre-smoothing
and pre-covariance adjustments.

Exhibit 5: Stochastic statutory requirements for simple GMAB
Static hedge
Unhedged 30% vol
350
300
250
200
150
100
50
0
10% vol 15% vol 20% vol 25% vol 35% vol
Fully Hedged with European put option
 AG43 Reserves  Required Capital — Option Price
As can be clearly seen, AG43 reserves are affected by the implied
volatilities. In high implied volatility environments, companies might
be “better off” unwinding an existing hedge (i.e. recapture of surplus)
or not hedging in the first place, whereas in more benign (lower
volatility) environments, hedging improves the statutory position.
A company deciding not to hedge, or a company with an existing
hedge deciding to lay off its matched position, could see a TAR
reduction of ~50% if implied volatilities reached 25%. This incentive
skew can be attributed to the fact that changes in implied volatility
immediately affect current asset valuation, but indirectly influence
the valuation of regulatory reserves and capital through the “balance
sheet roll‑forward”.
C. Asymmetry across hedging strategies
Some insurers choose to employ static hedges: they acquire assets
that closely match the cash flow characteristics of the underlying
liabilities in all future market environments (experience deviations in
actuarial and behavioral assumptions being a significant form of basis
risk). Other insurers engage in dynamic hedging: they buy instruments
that match the local characteristics of the exposure. For small changes
in market risk drivers these instruments mimic the value sensitivities
of the liabilities. However, larger deviations in market conditions, as
well as the natural aging of the book of business give rise to a need to
rebalance the hedge portfolio over time.

In theory, a dynamic hedging strategy (typically, using shorter and/
or non-linear instruments) can mimic a more static approach with a
high degree of accuracy, provided that the portfolio rebalancing occurs
frequently enough to avoid the (potentially severe) effects of convexity.
While there are other reasons to consider static and dynamic hedging
strategies as imperfect equivalents (e.g. “jump risk”, operational risks,
risk of market disruptions, to name a few), the statutory framework
does not explicitly contemplate the scenarios that give rise to these
imperfections. As such, one could reasonably expect that a dynamic
replication of a static strategy would lead to similar results under
the statutory rules (ignoring experience deviations in the actuarial
and behavioral factors), the primary difference being in how implied
volatility affects the valuation.
Exhibit 6 extends our simplified GMAB example (again, ignoring
the Standard Scenario) to the case where a dynamic delta-hedging
strategy is employed using equity index futures. These results are
dramatically different from the static hedge case (see Exhibit 5) and
substantially less sensitive to implied market volatilities (as expected),
confirming our suspicion that AG43 (and C3P2) do not treat all hedging
instruments and strategies consistently. These findings are not mere
artifacts of the effectiveness factor assigned to a Clearly Defined
Hedging Strategy (“CDHS”) as “full effectiveness” was assumed for
purposes of illustration.
Exhibit 6: Stochastic statutory requirements for simple GMAB
Delta hedge
Unhedged 30% vol
350
300
250
200
150
100
50
0
10% vol 15% vol 20% vol 25% vol 35% vol
Dynamically Delta Hedged with S&P500 Index Futures
 AG43 Reserves  Required Capital

2. Dominance of the Standard Scenario
A comparison of Exhibit 2 to Exhibit 4 provides some clues5
as to the
dominance of the Standard Scenario since the latter graphic shows
results from the stochastic (CTE) calculations only. To provide further
insight as to the conservatism of the AG43 Standard Scenario, we
have calculated the CTE confidence level implied by the calculated
SS amount in reference to the distribution of stochastic results. As
Exhibit 7 clearly demonstrates, the SS amount oftentimes significantly
overshoots the CTE calculation, sometimes to the point of being
higher than even the TAR calculation at CTE(90%). While the results
presented are “post hedging”, substantially similar results hold
ignoring hedging altogether.
Exhibit 7: Equivalent CTE level of Standard Scenario Reserves –
Post hedging
Industry results as at 12/31/2009
1 2 3 4 5 6 7 8 9 10 11 12 13 14Company:
100 98
95 95
92 91
83
78
63 62
35
Stochastic = CTE70
It is certainly true that the Standard Scenario may serve as a useful
anchor point in AG43 and C3P2 for comparisons across insurers.
However, its absolute level should be viewed with some skepticism
in terms of reflecting a company’s true exposure. Indeed, since the
positive effects of dynamic hedging (a highly flexible form of hedging
adopted by many insurers) are largely not captured under the SS, and
given its dominance in the calculations, there could be temptation
to abandon (partly) a dynamic, economic focused strategy in favor
of more engineered (but not necessarily cheaper or more effective)
solutions. This is explored further in the next section.
5 Direct comparisons between these Exhibits are difficult since pre-hedging TAR (in excess
of CSV) is normalized to $100 in both cases. This was done to preserve the anonymity of
participating companies.

3. Sensitivity of statutory results to
underlying risk fundamentals
As an ingoing hypothesis, we posit that a robust solvency framework
should produce valuations that: (a) reflect the underlying exposure
(given the assumptions) at a desired level of confidence; and (b) are
appropriately, but not unduly, sensitive to changes in risk factors.
The measurements need not mirror more “economic” valuations, but
should not be unreasonably disconnected from theory. Finally, the
overall framework, despite its inherent complexity, should encourage
sound risk management and business practices and allow for some
degree of predictability and concise explanation.
A. Role of Greatest Present Value
(“GPV”) concept
The GPV concept is central to the stochastic calculations under AG43
and C3P2. In effect, the starting balance sheet (estimate) is “rolled
forward” to evaluate the (potential) future surplus positions along
each scenario and the greatest deficit (in present value terms) is
identified as the “required amount” (relative to starting assets) for
that path. Under the GPV paradigm, the scenarios which “enter the
tail calculations” in the CTE measure can change dramatically when
hedging, potentially causing tremendous instability in the results over
time. Exhibit 8 illustrates the concept for a single scenario.
Exhibit 8: Understanding GPV results along a sample stochastic scenario
Time
Marketindexlevel
A B
In this example, the market rises sharply over the near term (and
peaks at point A) and ultimately falls such that a modest claim is
payable6
at time B. On an unhedged basis, it is unlikely that this
scenario would enter the tail calculations; that is, it would not
generate a required amount in excess of CSV since sufficient fees
would be collected prior to payment of any guaranteed benefits.
6 The guaranteed benefits may not be “payable” in a single installment, but without loss of
generalization we can substitute their capitalized value at point B.

However, the situation can change considerably when hedging. Let us
return to our earlier GMAB example and suppose that the guaranteed
benefits are exactly “matched” using a European put option. In this
case, the hedge pays off at maturity and covers the cost of the claim,
resulting in no net liability. Nonetheless, the decline in the value of
the hedge portfolio (put option) over the near term (point A) causes a
deficiency in GPV terms that has the potential to create a significant
liability for the insurer. While this may not be wholly unexpected for
capital, further understanding the interactive effects of GPV, cash flow
obligations, scenario ranking and resultant instability would seem
warranted, particularly for statutory reserving.
B. Market risk sensitivity under SS versus
CTE measure
As previously discussed, the sensitivities of the Standard Scenario
and CTE measures to hedging actions do not just differ in magnitude,
but even in sign. This suggests a fundamental difference in sensitivity
to the underlying market risk factors. Exhibit 9 offers results for four
companies that quantified the sensitivity of the AG43 reserves to
an instantaneous 100 basis point increase in interest rates, thereby
providing insight into the differential impact between the two
calculations. This contrasts sharply with factual reality as there can be
only one economically correct answer; yet, here we have two statutory
results that point in opposite directions, and markedly so. This raises
the important question, which one is “right” for statutory purposes?
Certainly, the reaction of the SS results is another reason rho hedging
can be largely ineffective (or worse) in the statutory framework.

Exhibit 9: Interest rate sensitivity of AG43 reserves as at 12/31/2009
% change in reserve (in excess of CSV) for 100bps increase in interest rates
30%
Stochastic Amount
-30% -15% 0% 15%
% change in reserve
(in excess of CSV)
-30% -15% 0% 30%15%
Standard Scenario Amount
% change in reserve
(in excess of CSV)
Carrier
A
B
C
D
Rise in interest
rates decreases
Stochastic
reserves
Rise in interest
rates increases
Standard
Scenario
reserves
C. Reinsurance
The disparity in treatment between aggregate and individual7
reinsurance can lead to profound differences in results which are
often counter-intuitive. Exhibit 10 illustrates the differences in
sensitivity (of AG43 reserves) to changes in equity levels as a result
of applying aggregate or individual reinsurance (for otherwise
identical coverage terms). While there can be legitimate differences in
magnitude between the two forms of reinsurance, a change in the sign
of the slope is unexpected and can be traced back to the peculiarities
of the Standard Scenario definition and treatment of aggregate
reinsurance thereunder.
7 Individual reinsurance is characterized by those situations where the total premiums for
and the benefits of the reinsurance structure can be determined by applying the terms of
the contract to each covered policy and summing the results. By implication, reinsurance
that is not individual is “aggregate”.

Exhibit 10: AG43 reserves in excess over CSV
-30% 30%
350
300
250
200
150
100
50
0
0%-15% 15%
Aggregate reinsurance Individual reinsurance
AG43 reserves AG43 reserves
-30% 30%
350
300
250
200
150
100
50
0
0%-15% 15%
Change in equity level at valuation Change in equity level at valuation
— Stochastic – – Standard Scenario
D. Additional issues
There are other complicating factors that lead to unintuitive results,
such as the pre-tax versus post-tax definitions of AG43 and C3P2,
respectively, and the seriatim application of the Standard Scenario
under AG43 versus the C3P2 calculations. These items were beyond
the scope of what could reasonably be addressed in our study, but
they clearly contribute to results which are hard to predict and
difficult to explain.

4. Volatility and pro-cyclicality
The recent market turmoil has provided the industry with an
example of the sensitivity embedded in the statutory framework.
Leading up to year-end 2008, companies generally would have had
no capital requirements (in excess of CSV) due to the conservatism
in the statutory reserves and other factors (e.g. smoothing). However,
at year-end 2008, both reserve and capital requirements ballooned
despite the hedging programs in place, highlighting the extreme
market sensitivity of results. Should markets fall again, requirements
could rise steeply – however, a company that is hedging should not
see its “excess” capital position change materially. The sensitivity of
results to changes in external factors, relative to the underlying risk
fundamentals, is of key concern.
Furthermore, the volatility of capital requirements will be exacerbated
by the interplay between the different distributions used for AG43
versus C3P2 and the stochastic CTE requirements versus those of the
Standard Scenarios. This volatility creates significant management
challenges as well as communications hurdles. Further study is
needed to understand the potential volatility introduced by such
“pro‑cyclicality” and what sorts of dampening effects may be
reasonable without distorting the true nature of the long-term
exposure and the short term effects of liquidity.

Potential consequences
The potential for adverse consequences is both significant and real.
The impact of risk management practices on statutory results could
provide for an incentive to shift away from more “economic risk”
focused hedging strategies. It might even trigger greater demand
for “engineered” capital markets and reinsurance solutions, with an
attendant higher cost and potentially larger open exposures.
Potential future reactions to the current statutory framework may
include the unwinding of existing hedge positions, companies electing
not to pursue a CDHS when internal practices would otherwise
qualify with minimal adjustments, modifying hedging strategies to
provide better statutory results despite such changes possibly being
at odds with the underlying risk fundamentals and/or an increase in
mismatch tolerances beyond the current risk appetite.
Beyond the complexity in the calculations themselves, these issues
pose additional challenges for both companies and regulators
alike. Reduced predictability and increased difficulty in explaining
changes in statutory results mean that the values (and trend) may
be less effective in serving as an early warning indicator for solvency
purposes. Simply put, the signal-to-noise ratio may be too low and
the task of separating the ‘noise’ from the ‘signal’ too challenging
to achieve.

Recommended action
We believe the industry and regulators would be well-advised to
undertake a deeper investigation of the aforementioned issues with
the goal of pinpointing root causes, identifying potential immediate
refinements that eliminate or mitigate these issues, and submitting
these amendments for consideration by the NAIC by year-end 2010.
In many ways, the results of this study serve as a reminder of how
hard it is to predict the impact of a complex framework when
applied to a wide array of business and risk management practices.
Admittedly, much of the material presented herein focused on the
liability side of the balance sheet; a more fulsome analysis would
examine the full surplus account. Accordingly, careful, systematic
study of any proposed changes will be necessary to understand the
full ramifications in a variety of market conditions.
There are several reasons to conduct a prompt review. First, there
is a fundamental need for a robust framework to provide regulators
with the right signals to facilitate the discharge of their oversight
and governance duties. Second, the lessons learned from AG43 and
C-3 Phase II RBC can be applied more broadly to principles based
valuations for other products. Finally, the risk of a “W” shaped
recession continues to exist and significant national and global
macroeconomic imbalances have yet to unwind. While the issues are
material, and the causes may be deep, it appears that modest and
practical amendments can be instituted without overhauling the
valuation framework.

Oliver Wyman is recognized as a leading global management consultancy. Our consultants specialize by industry and
functional area, allowing clients to benefit from both deep sector knowledge and specialized expertise in strategy,
operations, risk management, organizational transformation and leadership development. The Financial Services
practice is further organized into global domains, which combine and exchange the firm’s intellectual capital
worldwide. As a result, we support our financial services clients with unmatched industry expertise and consulting
capabilities in Corporate & Institutional Banking, Retail & Business Banking, Wealth & Asset Management and
Insurance. In addition, we have built cross practice depth in Corporate Strategy, Strategic IT and Operations, Finance
and Risk, Private Equity and Mergers and Acquisitions. Oliver Wyman’s website address is www.oliverwyman.com.
Oliver Wyman’s Insurance practice operates broadly across three core areas: strategy, operations and finance, spanning
the entire activity chain - from product distribution, customer strategy, underwriting and pricing to risk, asset/liability
and claims management. Our client work encompasses the key issues confronting the property, casualty, life and health
insurance industry: strategy and growth, capital adequacy and productivity, distribution and marketing. We are also a
valued resource to regulators and other industry bodies shaping the future of the insurance sector.
Our Insurance practice consults extensively on issues related to variable annuities and other separate account (unit-
linked) products. We distinguish ourselves by bringing together three critical perspectives: a strategic and global
understanding of the major business trends in the industry, deep experience in capital market risks, and actuarial
expertise that provides a strong understanding of the nature of insurance liabilities. We work closely with our clients to
address the challenges of business strategy, risk and financial effectiveness - from market entry, product design/
pricing and distribution to risk management, capital usage and performance measurement. We also license our
proprietary industry-leading ATLAS software to insurers for the financial management of variable annuities.
Oliver Wyman is a part of MMC (Marsh & McLennan Companies). MMC is the premier global professional services firm
providing advice and solutions in risk, strategy and human capital. Through our market leading brands, colleagues in
more than 100 countries help clients identify, plan for and respond to critical business issues and risks. MMC is the
parent company of a number of the world’s leading risk experts and specialty consultants, including Marsh, the
insurance broker and risk advisor; Guy Carpenter, the risk and reinsurance specialist; Mercer, the provider of human
resources and related financial advice and services; Oliver Wyman, the management consultancy; and Kroll, the risk
consulting firm. MMC’s stock (ticker symbol: MMC) is listed on the New York, Chicago and London stock exchanges.
MMC’s website address is www.mmc.com.
About the authors
Geoffrey Hancock, FSA, FCIA, CERA is a Partner in the North America Insurance Practice.
Ramy Tadros is a Partner and Head of the North America Insurance Practice.
Kai Talarek is a Partner in the North America Insurance Practice.
Amal Rajwani is a Senior Engagement Manager in the North America Insurance Practice.

For more information please contact the marketing department by email at info-FS@oliverwyman.com or by
phone at one of the following locations:
North America EMEA Asia Pacific
+1 212 541 8100 +44 20 7333 8333 +65 6510 9700

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