Hosted by SOA, presented by Scott D. Houghton, FSA, MAAA, Prudential, and AIG in January 2021.

OUR CONSORTIUM

Members play three distinct roles and combine our services into a holistic pragmatic solution aimed at meeting our client's unique transformation journey.

 

This is called an XY or scatter plot and what I would do is to do every different bond of every different bond rating.  And the different bond ratings, I would represent as different colors. So what you get is, since different bond ratings affect the yield, the riskier bonds get a higher yield. What you get when you do this with all the bonds is if you represent each bond rating with a color, you get a rainbow pattern.

So the different color bands represent different bond ratings. If there's outliers, we can see color spots that are out of place. They're in the wrong band, right.  We can see some isolated color spots, just like on this graph. You can see dots that are above or below them, the rest of them.

There's a couple things, you know, we can do if we see those outliers. Can try to dig into things a little bit and validate the model. Now this graph is the same concept of what I'm talking about except there's only one bond rating so sadly there's only one color on the graph today but the issue is that unlike a treasury, it's not a line. It's this kind of fuzzy band that we see up here. We want to use observable input.

So, is a single A rated bond observable? Well, the answer is yes. You know, sort of. What causes the width of this? Well, single A covers a range of credit risk. So there are sub ratings. A bond could be rated A1, A2, or A3. Or different rating agency, A+ or A-. There's also other risks besides the duration and credit rating that we talked about already.

Now you line challengers out there. You can't just take a pen, connect the dots along the top of the curve. You know this is GAAP now. The process is subject to controls, and it needs to be consistent each quarter and each reporting period.

We could make a justification for using something closer to the top of the range. I've mentioned if there's a reliability characteristic like liquidity, the keywords we want to remember in the guidance are just reliable information and observable input.

CONTACT US FOR MORE INFORMATION ON LDTI SERVICES

Nazir Valani, President & Co-Founder
nvalani@valaniglobal.com
+1.416.457.8622

Service Partners

With access to a global knowledge base and professional expertise, BDO offers extensive value to our clients across all segments of the insurance and financial services industry.

One of the largest independently owned management consulting firms that works with organizations across North America & the Caribbean with a focus on Financial Services and Insurance Industries.