Grant: Discovery Grants Program - Individual

Actuaries are responsible for the financial security of millions of individual policyholders and pension plan members. The long term goal of my research is to blend actuarial science and financial mathematics to develop improved, innovative and implementable models and methods for the actuarial design and management of financial guarantees in life insurance and pension plans. Our methods will be scientifically and empirically validated, with an emphasis on practical application. The first area of focus is Variable Annuity (VA) insurance policies. VAs are popular in retirement planning in Canada, the US and parts of Asia. VA contracts look like mutual fund investments, but with complex guarantees that can be very difficult to measure and manage. Insurers have developed sophisticated partial hedging strategies which they must assess regularly, to ensure they have access to sufficient funds if economic conditions become adverse. This assessment involves a huge computational burden. We are developing methods to estimate the potential losses more efficiently, enabling more frequent monitoring of the risk development, and therefore allowing a more rapid response if it becomes necessary to change course. We will also examine available data on how policyholders use the options and guarantees embedded in their policies, to ensure that the guarantees are meeting the real needs of the policyholders.The second area of focus is the design and risk management of guarantees in retirement income systems. Retirement income may be provided through a defined benefit (DB) pension plan, or by converting liquid assets (from a defined contribution plan, or from personal savings) into income after retirement. We will look at the embedded options implicit in some pension designs, and develop better methods for valuation, hedging and funding the liabilities. We also assess whether the designs are fit for purpose. In the past two decades, there has been a transition of retirement planning from targeting income to targeting net assets at retirement. This creates a huge burden for most retirees, who do not have the financial sophistication to manage their assets through a potentially long retirement. We will investigate retiree attitudes to risk, quantitatively and qualitatively. We will use this information to design methods of converting liquid assets into retirement income in a way that meets retirees' real and perceived needs, and that also benefits society, by ensuring that individuals can retire comfortably, without exhausting their assets.Retirement income planning is a critical issue for Canada, following the decline of DB plans, the systemic failures of the 2007/9 financial crisis, the prolonged low interest rate environment, and increasing longevity of an aging population. Our applied research in innovative design and risk management of retirement income systems is both timely and important.